Download Federal Debt,Deficits,Social Security

Fiscal Policy and the
AD-AS Model
Expansionary Fiscal Policy
Full $20 Billion
Increase in
Aggregate Demand
Price Level
$5 Billion
Additional
Spending
AS
Recessions
Decrease
Aggregate
Demand
P1
AD1
AD2
$490
$510
Real Domestic Output, GDP
Fiscal Policy and the
AD-AS Model
Contractionary Fiscal Policy
Recessions
Decrease
Aggregate
Demand
$5 Billion
Initial Decrease
In Spending
Price Level
AS
Full $20 Billion
Decrease in
Aggregate Demand
P1
AD4
AD3
$510
$522
Real Domestic Output, GDP
Pop Quiz
1.
2.
3.
lower
To fight a recession, the government should ______
taxes and Increase
_____ government spending.
This expansionary policy could create a budget
Deficit
Increase
_________
and may __________interest
rates as the
government has to borrow more. This is known as the
Crowding out effect
_______________________.
Everybody knows that if interest rates go up this will
increase
__________
foreign financial investment in the U.S.
Appreciate
causing the dollar to _______________
in foreign
exchange markets and causing net exports to go
Down!
__________
Pop Quiz
1.
2.
3.
lower
To fight a recession, the government should ______
taxes and Increase
_____ government spending.
This expansionary policy could create a budget
Deficit
Increase
_________
and may __________interest
rates as the
government has to borrow more. This is known as the
Crowding out effect
_______________________.
Everybody knows that if interest rates go up this will
increase
__________
foreign financial investment in the U.S.
Appreciate
causing the dollar to _______________
in foreign
exchange markets and causing net exports to go
Down!
__________
Pop Quiz
1.
2.
3.
lower
To fight a recession, the government should ______
taxes and Increase
_____ government spending.
This expansionary policy could create a budget
Deficit
Increase
_________
and may __________interest
rates as the
government has to borrow more. This is known as the
Crowding out effect
_______________________.
Everybody knows that if interest rates go up this will
increase
__________
foreign financial investment in the U.S.
Appreciate
causing the dollar to _______________
in foreign
exchange markets and causing net exports to go
Down!
__________
Pop Quiz
1.
2.
3.
4.
increase taxes
To fight inflation, the government should ______
and decrease
_____ government spending.
This contractionary policy could create a budget
surplus
decrease
_________
and may __________interest
rates as the
down
demand for borrowed funds goes __________.
Everybody knows that if interest rates go down this will
decrease
__________
foreign financial investment in the U.S.
depreciate
causing the dollar to _______________
in foreign
exchange markets and causing net exports to go
Up.
__________
This net export effect (compliments/offsets) the
offsets
contractionary effort. _____________
“Ten Things To Know About The
Federal Budget”
1. The 2009 federal budget will start on
Oct. 1, 2008
______________
and end on
September 30, 2009
________________.
2. What do economists like to compare a
budget deficit to when determining its
relative size? The deficit as a percentage of GDP
3. Has federal spending grown in the last
50 years? Nominally yes, but is still between 18-20% of total spend
4.
According to the reading, what percent of federal
spending goes to defense? How much of our GDP
does that represent?
20% or 4 % of our GDP
5.
What trade-off is involved in the growing size of
entitlement programs?
Less discretionary spending
6.
What, if anything, is disturbing about financing some of
our debt with our buddies in China and Japan?
Factor income leaving the country/transfers economic
resources abroad
DEFICITS, SURPLUSES, AND DEBT
Definitions:
•Budget Deficit
•Budget Surplus
•National or Public Debt
•U.S. Securities
THE PUBLIC DEBT
Facts and Figures:
Causes:
• Wars
• Recessions
• Tax Cuts
Quantitative Aspects
• Debt and GDP
• International Comparisons
• Interest Charges
• Ownership
GLOBAL PERSPECTIVE
Public Sector Debt as a percent of GDP,
2000 0 20 40 60 80 100 120 140
Italy
Japan
Belgium
Canada
Spain
France
Germany
United States
Netherlands
Finland
Sweden
Denmark
United Kingdom
Australia
Source: Organization for Economic Cooperation and Development
THE PUBLIC DEBT
Social Security Considerations
• Social Security Trust Fund
False Concerns
• Bankruptcy
• Refinancing
• Taxation
• Burdening Future
Generations
OWNERSHIP OF THE PUBLIC DEBT
Debt held
Other, Including
U.S. Banks & Financial
Outside the Institutions
State & Local Governments
Federal
Reserve &
Federal Reserve
Government
Agencies
17%
13%
9%
U.S.
Government
Agencies
22%
28%
Foreign
Ownership
U.S. Individuals
11%
Debt held
By Federal
Reserve &
Government
Agencies
THE CROWDING OUT EFFECT
With a Deficit,
An Increase in
Investment
Demand Causes…
Real interest rate (percent)
16
14
12
10
8
6
4
2
Crowding
Out
Effect
ID2
ID1
0
5
10
15
20
25
30
35
Investment (billions of dollars)
40
DEFICITS AND SURPLUSES
1990 - 2010
Budget Deficits or Surpluses, Billions
$800
700
600
Actual
Projected (as of 2001)
500
400
300
200
100
0
-100
-200
-300
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Source: Economic Report of the President, 2001
Federal Budget Deficits and Surpluses
Actual and Projected, Fiscal 1992-2012
Actual
Projected
(as of March 2006)
Budget Deficit (-) or Surplus, Billions
$300
200
100
0
-100
-200
-300
-400
-500
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: Congressional Budget Office
Social Security Trust Fund
(social insecurity )
• Many claim Social
Security may go
bankrupt soon due to
• BABY BOOM
Retirement
1st Boomer
Retires
Ways to save Social Security
Ways to save social security
1. Delay Retirement
Age
2.

Means Test
Only give it to those
who need it
3. Raise the social
security tax
 currently 6.2%
4. Increase maximum
amount of income that
can be taxed
(cap)…currently the
income max is $97,500
5. Reduce Benefits
6. Privatize Accounts
Built-In Stability
Government Expenses, G
and Tax Revenues, T
T
Surplus
G
Deficit
GDP1 GDP2
GDP3
Real Domestic Output, GDP
Standardized Budget versus the Actual Budget
• The Standardized Budget…
• measures the Federal budget deficit or surplus that
would occur if the economy operated at full employment
throughout the year. (full employment budget)
• Cyclical deficits or surpluses are those that result from
changes in GDP. (actual deficits/surpluses that occur
automatically)
• Changes in the standardized deficit or surplus
indicate whether the government is engaging in
expansionary or contractionary fiscal policy.
• Changes in the actual budget deficit or surplus do not
since the deficits or surpluses can include cyclical
deficits or surpluses
Recent
U.S.
Fiscal
Policy
Federal Deficits and Surpluses – 1990 - 2005
as a Percentage of Potential GDP
(1)
Year
(2)
Actual
Deficit (-) or
Surplus (+)
(3)
Standardized
Deficit (-) or
Surplus (+)
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
-3.9%
-4.4%
-4.5%
-3.8%
-2.9%
-2.2%
-1.4%
-0.3%
+0.8%
+1.4%
+2.5%
+1.3%
-1.5%
-3.4%
-3.5%
-2.6%
-2.2%
-2.5%
-2.9%
-2.9%
-2.1%
-2.0%
-1.2%
-1.0%
-0.4%
+0.1%
+1.1%
+1.1%
-1.1%
-2.7%
-2.4%
-1.8%
Expansionary
Source: Congressional Budget Office