2. 18 - 1 Copyright McGraw-Hill/Irwin, 2005 Deficits, Surpluses, and Debt The Public Debt Ownership of the Public Debt Substantive Issues The Crowding Out Effect Deficits and Surpluses 1992-2012 Options for the Surpluses Key Terms Previous Slide Next Slide End Show Deficits, Surpluses, and the Public Debt 18 C H A P T E R

3. 18 - 2 Copyright McGraw-Hill/Irwin, 2005 Deficits, Surpluses, and Debt The Public Debt Ownership of the Public Debt Substantive Issues The Crowding Out Effect Deficits and Surpluses 1992-2012 Options for the Surpluses Key Terms Previous Slide Next Slide End Show DEFICITS, SURPLUSES, AND DEBT Definitions: Budget Deficit Budget Surplus National or Public Debt U.S. Securities Budget Philosophies Annually Balanced Budget Cyclically Balanced Budget Functional Finance

4. 18 - 3 Copyright McGraw-Hill/Irwin, 2005 Deficits, Surpluses, and Debt The Public Debt Ownership of the Public Debt Substantive Issues The Crowding Out Effect Deficits and Surpluses 1992-2012 Options for the Surpluses Key Terms Previous Slide Next Slide End Show Causes: Wars Recessions Lack of Fiscal Discipline THE PUBLIC DEBT Facts and Figures: Quantitative Aspects Debt and GDP International Comparisons Interest Charges Ownership

5. 18 - 4 Copyright McGraw-Hill/Irwin, 2005 Deficits, Surpluses, and Debt The Public Debt Ownership of the Public Debt Substantive Issues The Crowding Out Effect Deficits and Surpluses 1992-2012 Options for the Surpluses Key Terms Previous Slide Next Slide End Show 0 20 40 60 80 100 120 140 Japan Italy Belgium Canada France Spain Sweden Germany United States Netherlands United Kingdom Finland Denmark Australia GLOBAL PERSPECTIVE Public Sector Debt as a percent of GDP, 2002 Source: Organization for Economic Cooperation and Development

6. 18 - 5 Copyright McGraw-Hill/Irwin, 2005 Deficits, Surpluses, and Debt The Public Debt Ownership of the Public Debt Substantive Issues The Crowding Out Effect Deficits and Surpluses 1992-2012 Options for the Surpluses Key Terms Previous Slide Next Slide End Show Social Security Considerations Social Security Trust Fund THE PUBLIC DEBT False Concerns Bankruptcy Refinancing Taxation Burdening Future Generations

7. 18 - 6 Copyright McGraw-Hill/Irwin, 2005 Deficits, Surpluses, and Debt The Public Debt Ownership of the Public Debt Substantive Issues The Crowding Out Effect Deficits and Surpluses 1992-2012 Options for the Surpluses Key Terms Previous Slide Next Slide End Show PUBLIC DEBT OWNERSHIP, 2002 10% 33% 11% 18% 11% 17% Debt held By Federal Reserve & Government Agencies Debt held Outside the Federal Reserve & Government Agencies Federal Reserve U.S. Government Agencies Other, Including State & Local Governments U.S. Banks & Financial Institutions Foreign Ownership U.S. Individuals

8. 18 - 7 Copyright McGraw-Hill/Irwin, 2005 Deficits, Surpluses, and Debt The Public Debt Ownership of the Public Debt Substantive Issues The Crowding Out Effect Deficits and Surpluses 1992-2012 Options for the Surpluses Key Terms Previous Slide Next Slide End Show Income Distribution Incentives Foreign-Owned Public Debt External Public Debt SUBSTANTIVE ISSUES

9. 18 - 8 Copyright McGraw-Hill/Irwin, 2005 Deficits, Surpluses, and Debt The Public Debt Ownership of the Public Debt Substantive Issues The Crowding Out Effect Deficits and Surpluses 1992-2012 Options for the Surpluses Key Terms Previous Slide Next Slide End Show Crowding Out and the Stock of Capital Public Investment Public-Private Complementarities SUBSTANTIVE ISSUES

10. 18 - 9 Copyright McGraw-Hill/Irwin, 2005 Deficits, Surpluses, and Debt The Public Debt Ownership of the Public Debt Substantive Issues The Crowding Out Effect Deficits and Surpluses 1992-2012 Options for the Surpluses Key Terms Previous Slide Next Slide End Show I D1 Investment (billions of dollars) Real interest rate (percent) THE CROWDING OUT EFFECT With a Deficit, An Increase in Investment Demand Causes… 16 14 12 10 8 6 4 2 0 5 10 15 20 25 30 35 40 I D2 Crowding Out Effect

11. 18 - 10 Copyright McGraw-Hill/Irwin, 2005 Deficits, Surpluses, and Debt The Public Debt Ownership of the Public Debt Substantive Issues The Crowding Out Effect Deficits and Surpluses 1992-2012 Options for the Surpluses Key Terms Previous Slide Next Slide End Show DEFICITS AND SURPLUSES 1992 - 2012 Source: Congressional Budget Office $800 700 600 500 400 300 200 100 0 -100 -200 -300 Budget Deficits or Surpluses, Billions 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Actual Projected (as of May 2003)

12. 18 - 11 Copyright McGraw-Hill/Irwin, 2005 Deficits, Surpluses, and Debt The Public Debt Ownership of the Public Debt Substantive Issues The Crowding Out Effect Deficits and Surpluses 1992-2012 Options for the Surpluses Key Terms Previous Slide Next Slide End Show Pay Down the Public Debt Cut Taxes Increase Federal Expenditures Back to Deficits in 2002 Bush Tax Cuts of 2001 The Economic Downturn September 11, 2001 Tax Cuts of 2003 OPTIONS FOR THE SURPLUSES

13. public debt U.S. Securities annually balanced budget cyclically balanced budget functional finance Social Security trust fund external public debt public investments ENDBACK Copyright McGraw-Hill/Irwin, Inc. 2005

14. 18 - 13 Copyright McGraw-Hill/Irwin, 2005 Deficits, Surpluses, and Debt The Public Debt Ownership of the Public Debt Substantive Issues The Crowding Out Effect Deficits and Surpluses 1992-2012 Options for the Surpluses Key Terms Previous Slide Next Slide End Show Next Disputes Over Macro Theory And Policy Chapter 19