1. CONTEMPORARY ECONOMICS© Thomson South-Western 15.3Federal Deficits and Federal Debt  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. Objectives

2. CONTEMPORARY ECONOMICS© Thomson South-Western 15.3Federal Deficits and Federal Debt  crowding out  crowding in Key Terms

3. CONTEMPORARY ECONOMICS© Thomson South-Western 15.3 Federal Deficits and Federal Debt SLIDE 3 Budget Deficits Federal deficits over the years Why is the budget usually in a deficit? The surplus of 1998–2001

4. CONTEMPORARY ECONOMICS© Thomson South-Western 15.3 Federal Deficits and Federal Debt SLIDE 4 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. CONTEMPORARY ECONOMICS© Thomson South-Western 15.3 Federal Deficits and Federal Debt SLIDE 5 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. CONTEMPORARY ECONOMICS© Thomson South-Western 15.3 Federal Deficits and Federal Debt SLIDE 6 Investment Fluctuations Figure 15.5 Investment fluctuates much more from year to year than does GDP.

7. CONTEMPORARY ECONOMICS© Thomson South-Western 15.3 Federal Deficits and Federal Debt SLIDE 7 Federal Debt Gross debt versus debt held by the public Debt relative to GDP

8. CONTEMPORARY ECONOMICS© Thomson South-Western 15.3 Federal Deficits and Federal Debt SLIDE 8 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. CONTEMPORARY ECONOMICS© Thomson South-Western 15.3 Federal Deficits and Federal Debt SLIDE 9 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