Transcript 15.3 Federal Deficits and Federal Debt

15.3 Federal Deficits
and Federal Debt
Objectives
 Discuss why federal deficits have been
common since the Great Depression.
 Distinguish between crowding out and
crowding in.
 Discuss changes in the relative size of federal
debt since World War II.
 Explain who bears the burden of the federal
debt.
CONTEMPORARY ECONOMICS
© Thomson South-Western
15.3 Federal Deficits
and Federal Debt
Key Terms
 crowding out
 crowding in
CONTEMPORARY ECONOMICS
© Thomson South-Western
15.3 Federal Deficits and Federal Debt
SLIDE
3
Budget Deficits
Federal deficits over the years
Why is the budget usually in a deficit?
The surplus of 1998–2001
CONTEMPORARY ECONOMICS
© Thomson South-Western
15.3 Federal Deficits and Federal Debt
SLIDE
Federal Deficits and Surpluses
as Percent of GDP Since 1934
4
Between 1934 and 2007, the
federal budget was in deficit in all
but 12 years. The largest deficits
occurred during World War II.
Figure 15.4
CONTEMPORARY ECONOMICS
© Thomson South-Western
15.3 Federal Deficits and Federal Debt
SLIDE
5
Deficits and Interest Rates
Crowding out occurs when higher
government deficits drive up interest rates
and thereby reduce private investment.
Crowding in occurs when government
spending stimulates private investment in
an otherwise stagnant economy.
CONTEMPORARY ECONOMICS
© Thomson South-Western
15.3 Federal Deficits and Federal Debt
SLIDE
6
Investment Fluctuations
Investment fluctuates much more
from year to year than does GDP.
Figure 15.5
CONTEMPORARY ECONOMICS
© Thomson South-Western
15.3 Federal Deficits and Federal Debt
SLIDE
7
Federal Debt
Gross debt versus debt held by the public
Debt relative to GDP
CONTEMPORARY ECONOMICS
© Thomson South-Western
15.3 Federal Deficits and Federal Debt
SLIDE
Federal Debt Held by the Public as
Percent of GDP, 1940 to 2004
8
The federal debt held by the public
relative to GDP dropped by nearly
two-thirds between 1946 and 2007.
Figure 15.6
CONTEMPORARY ECONOMICS
© Thomson South-Western
15.3 Federal Deficits and Federal Debt
SLIDE
9
Economic Impact of the Debt
Debt and interest rates
Who bears the burden of the debt?
We owe it to ourselves
Foreign ownership of debt
CONTEMPORARY ECONOMICS
© Thomson South-Western