Download AGGREGATE DEMAND, AGGREGATE SUPPLY, AND MODERN …

15-1
Federal Budget Deficits,
Surpluses, and the National Debt
McGraw-Hill/Irwin
Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved.
15-2
Definitions
• Deficit –Spending > Revenue

 Short run—Deficits may be necessary to stimulate
the economy.
• Surplus—Revenue > Spending

 Long run—Surpluses could provide savings for
investment or reduce the national debt
• National (Federal) Debt—sum of all past
deficits and surpluses
McGraw-Hill/Irwin
Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved.
DEFICITS AND THE
NATIONAL DEBT
Right Now, the National Debt of the U.S.
is this MUCH
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Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved.
15-4
Structural and Passive Deficits
• Structural deficit
– Deficit that would exist
even if the economy were at its potential
output.
• Passive deficit – Deficit that exists because the
economy is operating below potential output.
• Full Employment Budget
• Observed deficit = structural deficit +
passive deficit
McGraw-Hill/Irwin
Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved.
15-5
Nominal vs. Real Deficit
• Nominal deficit (observed deficit ) = Difference
between spending and revenues
• Real deficit
= Nominal deficit adjusted for
inflation.
• The real deficit must be used to compare
deficits from different years
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Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved.
U.S. Budget Deficits as
Percentage of GDP
Deficits as percentage
of GDP
10
0
-10
-20
-30
1900
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1920
1940
1960
1980
2000
17-6
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15-7
2007 Projections for the Budget
Deficit or Surplus
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15-8
Financing the Deficit
• Federal government sells bonds to:
 FED
 Other federal agencies
 Private Investors
 Other Countries
• FED can print an unlimited amount of
money to buy bonds
 But too much money can cause inflation
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15-9
Ownership of the Debt
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15-10
Individual vs. Government Debt
• Individual debt must eventually be repaid.
• Government can print money to pay off debt.
• Most of the government’s debt is internal debt
– debt owed to its agencies or to its citizens.
 External debt – owed to individuals in foreign
countries – is more like individual debt.
• Paying interest on internal debt redistributes
income, but does not cause a net reduction in
income in the population of the U.S.
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15-11
Is the National Debt a
Problem?
McGraw-Hill/Irwin
Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved.
U.S. Debt as Percentage of
GDP
Debt as Percentage
of GDP
100
75
50
25
1800
McGraw-Hill/Irwin
1840
1880
1920
1960
2000
17-12
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U.S. Debt Compared to Foreign Countries’ Debt
The U.S. debt does not appear so
large when compared to the debts
of some other countries in the early
2000s
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17-13
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Federal Interest Payments
Relative to GDP
Interest payments as
percentage of GDP
3.5
Interest rates fell and
surpluses reduced the
total debt
High interest rates
and large
increases in debt
3.0
2.5
2.0
1.5
1.0
0.5
1945
1955
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1965
1975
1985
1995
2005
2010
17-14
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15-15
Social Security/Medicare
and the Deficit
Social Security surpluses reduce the
deficit
No more surpluses after 2020
Increasing Medicare obligations
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Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved.
15-16
Social Security
• Funded pension systems (TIAA/CREF)
• Pay-as-you-go systems (Social Security)
• Social Security solvent as long as these
factors don’t change:
 Population’s age distribution,
 Annual death rate
 % of population working
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Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved.
15-17
Projection of Workers
Compared to Retirees
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15-18
Options to
“Save Social Security”
• Policy changes
 Increase taxes on those working.
 Cut benefits
 Make Social Security “means tested:
 Increase taxes on Social Security Benefits
 Increase the retirement age
• Privatization
 Even less money to pay current benefits
 Increased risk to individuals
McGraw-Hill/Irwin
Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved.