1. 15.3 Federal Deficits and Federal Debt
CONTEMPORARY ECONOMICS
11/9/2018
15.3 Federal Deficits and Federal Debt
Objectives
Discuss why federal deficits have been common since the Great Depression.
Distinguish between crowding out and crowding in.
Discuss changes in the relative size of federal debt since World War II.
Explain who bears the burden of the federal debt.
LESSON 15.3

2. 15.3 Federal Deficits and Federal Debt
Key Terms
crowding out
crowding in

3. Budget Deficits Federal deficits over the years
15.3 Federal Deficits and Federal Debt
Budget Deficits
Federal deficits over the years
Why is the budget usually in a deficit?
The surplus of 1998–2001

4. Federal Deficits and Surpluses as Percent of GDP Since 1934
15.3 Federal Deficits and Federal Debt
Federal Deficits and Surpluses as Percent of GDP Since 1934
Between 1934 and 2007, the federal budget was in deficit in all but 12 years. The largest deficits occurred during World War II.
Figure 15.4

5. Deficits and Interest Rates
15.3 Federal Deficits and Federal Debt
Deficits and Interest Rates
Crowding out occurs when higher government deficits drive up interest rates and thereby reduce private investment.
Crowding in occurs when government spending stimulates private investment in an otherwise stagnant economy.

6. Investment Fluctuations
15.3 Federal Deficits and Federal Debt
Investment Fluctuations
Investment fluctuates much more from year to year than does GDP.
Figure 15.5

7. Federal Debt Gross debt versus debt held by the public
15.3 Federal Deficits and Federal Debt
Federal Debt
Gross debt versus debt held by the public
Debt relative to GDP

8. Federal Debt Held by the Public as Percent of GDP, 1940 to 2004
15.3 Federal Deficits and Federal Debt
Federal Debt Held by the Public as Percent of GDP, 1940 to 2004
The federal debt held by the public relative to GDP dropped by nearly two-thirds between 1946 and 2007.
Figure 15.6

9. Economic Impact of the Debt
15.3 Federal Deficits and Federal Debt
Economic Impact of the Debt
Debt and interest rates
Who bears the burden of the debt?
We owe it to ourselves
Foreign ownership of debt