Download Ch. 10: National Debt

National Debt
Budget Deficit – The amount by
which expenditures exceed
revenues (G>T) - $186.5 Billion
(2007)
Budget Surplus – The amount
by which revenues exceed
expenditures (T>G)
National Debt: The total amount
owed by the federal government
It is the sum total of all budget
deficits we have run minus all
budget surpluses
National Debt as of 3/13/2008
$9,408,066,260,869.55
(That’s $9.4 Trillion), or
$31,000 per person in the US
Debt Held by the Public
$5.3 Trillion
Intergovernmental Holdings
$4.1 Trillion
Intergovernmental Holdings –
ex: Social Security Trust Fund
Debt Held by the Public
$5.2 Trillion Owned by:
Foreigners:
Local G:
Pension Funds:
Mutual Funds:
Insurance Co’s:
Banks:
$2.33 Trillion
$546 Billion
$364 Billion
$307 Billion
$164 Billion
$118 Billion
History of the Debt
Debt as a % of GDP
Japan
164%
Italy
106%
Euro Area
79%
US
64.8%
Switzerland
57%
UK
40%
Australia
9%
The impact of the national debt:
1. Higher debt levels will lead to
higher interest rates
a. hurts capital accumulation
b. hurts borrowers
2. Higher interest rates will lead to
higher interest payments on debt
3. Higher debt may lead to
higher taxes on future
generations
- if the debt is owed to
Americans, its repayment will
redistribute wealth within the
country
If the debt is owed to foreigners,
then wealth will be redistributed
out of the US
Notes on the debt:
1. We never have to pay off the
debt, per se
2. The burden of the debt on our
economy would be lowered if our
GDP grows faster than our debt
Debt to GDP in US
1945
1981
2005
121.2%
32.5%
64.8%
Graph of Debt to GDP
Current Budgets as a % of GDP
UK
-3.2%
US
-2.4%
Japan
-2.7%
Euro Area
-1.0%
Canada
+ .6%
Australia
+1.5%
Norway
+17.9%
Balanced Budget Amendment –
A change in the US constitution
to require that G=T every year
It would outlaw budget deficits
and budget surpluses.
It would also outlaw fiscal policy
It passed the US House in 1995
but failed in the US Senate
Most states have a balanced
budget requirement
It means that they have to cut
government spending when tax
revenues fall
Pros:
1. It would reduce the US
debt/GDP ratio over time
2. It would provide a fiscal
restraint for short-sighted
politicians
3. It requires politicians to
examine the full cost of their
spending policies
4. It would help the US increase
its overall savings rate
Cons:
1. It would outlaw fiscal policy
2. It could increase the volatility
of economic contractions and
expansions
3. It would not allow for
emergencies such as war
4. It would make debt for capital
purchases more difficult – not all
debt is equally bad