Growing National Debt Should we be worried?

Federal Deficit Federal Debt Leads to a larger $16.7 Trillion

Joe & Bob “It’s not only what you owe”

Deficit & Debt relative to GDP Current Deficit = 1.3 Trillion (2012 numbers) Current Debt = 16.7 Trillion Current GDP = 15.8 Trillion Deficit as % of GDP = 8.0% of GDP –Highest since World War II –Recent high (1983) 6% of GDP Debt as % of GDP =105.0% of GDP –Highest ever (1946) was 120% of GDP

NATIONAL DEBT AS % OF GDP Debt: 16.7 Trillion GDP 15.8 Trillion 105 % GDP.

Interest Rates Interest rates are the price of borrowing money –There are short term & long term interest rates –The Federal Reserve only controls short term interest rates Government Bonds represent long term interest rates –the interest rate Government borrows money at! Low interest rates are critical for a healthy economy –As interest rates ↑ => cost of borrowing money ↑ => GDP falls

Crowding Out Handout

Economic Theory of: “Crowding Out” More Gov’t Deficit Spending Leads to Rising Federal Debt Gov’t must sell more bonds (borrow more $) Forces long term Interest Rates Higher (crowds out private investor—they borrow less money for investments because interest rates are higher) GDP falls => could lead to recession

Has the Rising Debt hurt the U.S. ? Has Crowding Out Occurred? 10-Year Gov’t Bond Interest Rate No! U.S. interest rates are historically low! Short Run analysis:

Structural deficit: occurs with the economy at full potential output (peak of business cycle, high GDP) Cyclical deficit: Portion of deficit attributable to a slowdown in the business cycle (during recession) 2-Types of Deficits Structural Deficits are significantly more problematic than Cyclical Deficits They do not go away when the economy improves

Analyzing Deficits Summary Debt & Deficit should be viewed as % GDP –This allows you to compare past deficits Deficits can place upward pressure on long term interest rates –This is known as crowding out Today’s Deficit is primarily a structural deficit –Entitlement spending must be addressed to correct it

Changing Entitlements Social Security, Medicare & Medicaid Social Security Medicare

Balancing the Budget? “The only real question” is whether adjustments to taxes and spending will come from a “careful and deliberative process” or from a “rapid and painful response to a looming or actual fiscal crisis,” Ben Bernanke Chairmen of Federal Reserve 2010

. Debt as a % of GDP

Reading: Greece & Austerity?

U.S. Debt in Comparison Greece 125% of GDP Italy 115% of GDP European Union (EU) debt limit of 60% Japan 180% of GDP –Japanese citizens save money => so they buy Japanese Gov’t Bonds –No crowding out!

Growth of Entitlements *Current services estimate. Source: Budget of the United States Government, FY 2005, Office of Management and Budget. Defense Social Security Net interest Medicare & Medicaid All other spending * 9% 19%..