Isues in economics today 6th by guell chapter12

Chapter 12 Federal Deficits, Surpluses, and the National Debt... Chapter Outline• Surpluses, Deficits, and the Debt: Definition and History • How Economists See the Debt • Who Owns the

Chapter 12 Federal Deficits, Surpluses, and the National

Debt

Chapter Outline

• Surpluses, Deficits, and the

Debt: Definition and History

• How Economists See the Debt

• Who Owns the Debt

• A Balanced Budget Amendment

• Projections of the Future

Surpluses, Deficits, and the

Debt: Definitions

• Budget Deficit: the amount by

which expenditures exceed

revenues

• Budget Surplus: the amount by

which revenues exceed

expenditures

• National Debt: the total amount

owed by the federal government

Off vs On Budget

• Off-budget: parts of the budget

designated by Congress as separate from

the normal budget Programs that

operate with their own revenue sources

and have trust funds; Social Security,

Medicare, and the Post Office are

examples.

• On-budget: parts of the budget that

rely entirely or mostly on general

revenue.

History of Deficits, Surpluses,

and the National Debt

surplus) was $3800 in 1835

deficit between 1791 and 1836 resulting in

a national debt of only $37,000

Accounting for Inflation

• All figures for deficits,

surpluses, and the national

debt must be adjusted for

inflation

• The Real Deficit or Real

Surplus measures the deficit

or surplus in constant dollars

Real Deficit/Surplus

Debt and the Ability to Pay It

• Economists insist that the

absolute magnitude of the

debt is less important than a nation’s ability to pay it.

• The measure that does this

is the Deficit/GDP ratio

Deficit/GDP

Surpluses of the late 1990s

• Surpluses were generated over the

late 1990s as a result of

• High GDP growth that resulted in high

tax revenues

• Peace Dividend: money that was

freed up for other spending priorities

when the Cold War was over

• Rapid increases in capital gains tax

revenue from a booming stock market

How Economists See the Deficit and Debt

• Operating Budget: part of the federal budget

devoted to spending on goods and services that will

be used in the current year

• Capital Budget: part of the federal budget devoted

to spending on goods that will last several years

• Cyclical Deficit: That part of the deficit attributable

to the economy’s not being at full employment

• Structural Deficit: That part of the deficit that

would remain even if the economy were at full

employment

• Functional Finance: that part of the deficit

attributable to the “stimulus package” useful and

label it functional finance.

The Debt as a Percentage of GDP

• If government runs a deficit in one

generation to finance a project where the benefits accrue to a later generation that

is paying the interest on that debt then

the net tax rate does not change.

Who Owns The Debt

• The Fed buys Federal Debt as a means of

getting new money into the money supply.

Who Holds Federal Debt

Externally Held Debt

A Balance Budget Amendment

• Proponents argue that a BBA is

necessary to keep a current

generation from borrowing more

than is optimal.

• A majority of economists do not

favor such an amendment

because it would be Procyclical

• good times would be even better

and bad times even worse

Figure 5 Built-In Stabilizers

RGD P

AS Price Level

RGD P

AS Price Level

Projections for the Future

the White House) and the Congressional

Budget Office each produce a projection of the 10 year budget picture using

assumptions of economic growth.

beyond the near term because

Congress will not change current law.

CBO Projections