1. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. Federal Budget Deficits, Surpluses, and the National Debt 15-1

2. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. 15-2Definitions Deficit –Spending > Revenue   Short run—Deficits may be necessary to stimulate the economy. Surplus—Revenue > Spending  Long run—Surpluses could provide savings for investment or reduce the national debt National (Federal) Debt—sum of all past deficits and surpluses

3. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. DEFICITS AND THE NATIONAL DEBT DEFICITS AND THE NATIONAL DEBT Right Now, the National Debt of the U.S. is this MUCH MUCH

4. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. 15-4 Structural and Passive Deficits Structural deficit – Deficit that would exist even if the economy were at its potential output. Passive deficit – Deficit that exists because the economy is operating below potential output. Full Employment Budget Observed deficit = structural deficit + passive deficit

5. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. 15-5 Nominal vs. Real Deficit Nominal deficit (observed deficit ) = Difference between spending and revenues Real deficit = Nominal deficit adjusted for inflation. The real deficit must be used to compare deficits from different years

6. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. U.S. Budget Deficits as Percentage of GDP Deficits as percentage of GDP 1900 1920 1940 1960 1980 2000 10 0 -10 -20 -30 17-6

7. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. 15-7 2007 Projections for the Budget Deficit or Surplus

8. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. 15-8 Financing the Deficit Federal government sells bonds to:  FED  Other federal agencies  Private Investors  Other Countries FED can print an unlimited amount of money to buy bonds  But too much money can cause inflation

9. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. 15-9 Ownership of the Debt

10. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. 15-10 Individual vs. Government Debt Individual debt must eventually be repaid. Government can print money to pay off debt. Most of the government’s debt is internal debt – debt owed to its agencies or to its citizens.  External debt – owed to individuals in foreign countries – is more like individual debt. Paying interest on internal debt redistributes income, but does not cause a net reduction in income in the population of the U.S.

11. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. Is the National Debt a Problem? 15-11

12. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. U.S. Debt as Percentage of GDP Debt as Percentage of GDP 1800 1840 1880 1920 1960 2000 100 75 50 25 17-12

13. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. U.S. Debt Compared to Foreign Countries’ Debt The U.S. debt does not appear so large when compared to the debts of some other countries in the early 2000s 17-13

14. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. Federal Interest Payments Relative to GDP Interest payments as percentage of GDP 1945 1955 1965 1975 1985 1995 2005 2010 3.5 3.0 2.5 2.0 1.5 1.0 0.5 High interest rates and large increases in debt Interest rates fell and surpluses reduced the total debt 17-14

15. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. Social Security/Medicare and the Deficit Social Security surpluses reduce the deficit No more surpluses after 2020 Increasing Medicare obligations 15-15

16. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. 15-16 Social Security Funded pension systems (TIAA/CREF) Pay-as-you-go systems (Social Security) Social Security solvent as long as these factors don’t change:  Population’s age distribution,  Annual death rate  % of population working

17. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. 15-17 Projection of Workers Compared to Retirees

18. McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. 15-18 Options to “Save Social Security” Policy changes  Increase taxes on those working.  Cut benefits  Make Social Security “means tested:  Increase taxes on Social Security Benefits  Increase the retirement age Privatization  Even less money to pay current benefits  Increased risk to individuals