1. D EFICIT VS. D EBT F LOW VS. S TOCK Chapter 15 part 3

2. Defining Debt and Assets  Debt is accumulated deficits minus accumulated surpluses Debt is a stock, defined at a point in time

3. D EFICITS AND SURPLUSES ARE FLOW CONCEPTS, DEFINED FOR A PERIOD OF TIME

4. Debt is a stock, defined at a point in time

5. Debt  Debt is accumulated deficits minus accumulated surpluses Debt is a stock, defined at a point in time Debt = Accumulated Deficits + Accumulated Surpluses

6. Deficit Increases the Debt Surpluses Reduce the Debt

7. If a country has more surpluses than deficits, the accumulated surpluses minus accumulated deficits are a part of its assets

8. Defining Surpluses and Debt A surplus is an excess of revenues over payments. A deficit is a shortfall of revenues over payments.

9. The Definition of Debt and Assets Debt is accumulated deficits minus accumulated surpluses. Deficits and surpluses are flow concepts. Debt is a stock concept.

10. Long-Run Implications  U.S. government budget accounting is calculated on the basis of fiscal years.  Persistent budget deficits have long- run consequences because they lead to an increase in public debt.

11. A String of Deficits

12. The U.S. Government Has Always Been in Debt Except 1835-36: Debt Free! – The U.S. was completely out of debt by 1835. The Mexican-American War (1846-48) caused a four-fold increase in the debt

13. The Public Debt Differentiating between the Deficit and the Debt – The deficit occurs when federal government spending is greater than tax revenue – The debt is the cumulative total of all the federal budget deficits less any surpluses Suppose that our deficit declined one year from $200 billion to $150 billion The national debt would still go up by $150 billion So every year that we have a deficit – even a declining one – the national debt will go up 12-48 Copyright  2002 by The McGraw-Hill Companies, Inc. All rights reserved.

14. The Public Debt 12-49 Copyright  2002 by The McGraw-Hill Companies, Inc. All rights reserved. National Debt, 1975-2000 Economic Report of the President, 2000

15. How it works? The U.S. Treasury must sell new bonds to pay for a deficit and refinance previously issued bonds as they come due

16. Debt Management  Debt, as a summary measure of a nation’s financial situation, needs to be judged in relation to a nation’s assets  When the government runs a deficit, it might be spending on projects that increase its assets  If the assets are valued at more than their costs, then the deficit is making society better off

17. Debt Federal Reserve (9%) © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Foreign individuals and firms (25%) U.S. individuals and firms (24%) U.S. government agencies (42%)

18. Ownership of the Debt Other U.S. government trust funds, 12% Social Security trust fund, 18% Federal Reserve, 11% In 2012

19. Difference Between Individual and Government Debt 1.The government lives forever; people don’t 2.The government can print money to pay its debt; people can’t 3.Government owes much of its debt to itself (to its own citizens) Internal debt is government debt owed to other governmental agencies or to its own citizens External debt is government debt owed to individuals in foreign countries

20. The government lives forever; people don’t 1 The government can print money to pay its debt; people can’t 2 Government owes much of its debt to itself (to its own citizens) 3 Difference Between Individual and Government Debt

21. Internal debt is government debt owed to other governmental agencies or to its own citizens External debt is government debt owed to individuals in foreign countries External Debt is more like individual debt

22. U.S. Budget Deficits as Percentage of GDP Deficits as percentage of GDP 1900 1920 1940 1960 1980 2000 2020 10 0 -10 -20 -30 Deficits and debt relative to GDP provide measures of a country’s ability to pay off a deficit and service its debt

23. U.S. Debt as Percentage of GDP Debt as Percentage of GDP 1800 1840 1880 1920 1960 2000 ‘20 100 75 50 25

24. Ignore the Absolute Figure when it comes to Deficit and Debt!

25. Measure Deficit and Debt as a Percentage of GDP!

26. Debt / GDP = Debt to GDP Ratio

27. R EAD THE SECTION ON THE D EBT B URDEN

28. 82% 80% 68% 52% 42% 37% 23% U.S. Debt Compared to Foreign Debt Debt as a Percentage of GDP The U.S. debt does not appear so large when compared to the debts of some other countries in the early 2000s

29. Federal Interest Payments Relative to GDP Interest payments as percentage of GDP 1945 1955 1965 1975 1985 1995 2005 2015 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

30. Chapter Summary  A deficit is a shortfall of revenues under payments  A surplus is the excess of revenues over payments  Debt is accumulated deficits minus accumulated surpluses  Deficits and surpluses are summary measures of a budget  A cyclical deficit is that part of the deficit that exists because the economy is below or above potential output  A structural deficit is that part of a budget deficit that would exist even if the economy were at its potential level of output

31. Chapter Summary  A real deficit is a nominal deficit adjusted for the effect of inflation  A country’s debt must be judged in relation to its assets  Government debt and individual debt differ  Deficits, surpluses, and debt should be viewed relative to GDP because this ratio better measures the government’s ability to handle the deficit and pay off the debt  Since 2008, the U.S. has run significant deficits and the debt-to- GDP ratio has risen to over 100 percent