Transcript Lecture 17 Powerpoint

PART IV Further Macroeconomics Issues
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PART IV Further Macroeconomics Issues
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Debts and Deficits
• Deficits (or Surpluses) are the difference
between government spending (G) and
government revenue (T) in a year
• The National Debt is the sum of all past
deficits and surpluses
It’s a Fertile Ground for
Misinformation and Paranoia
• People hate personal debt
• Mistaken analogies between household
debt and national debt
• Nowhere is hysteria more evident than in
graphs of the facts
Use “Emergency” Colors
Scale it so it looks
like a rocket taking off
Another
Use the word “DEATH”
Actually, That Last Slide Had Some Good
Info
• The importance of looking at debt as a percent of GDP
• The long historical view and debt peaks in the past
• We never did “pay down” the highest debt/GDP ratio of
all
• You can reduce debt/GDP two ways!
The basic debt dynamic
equation
• Debt = This year’s deficit plus the sum of ALL
past deficits and surpluses
• Put another way, Debt this year equals debt last
year plus interest on that debt plus/minus any
new borrowing/repayment this year (the deficit
or surplus)
When is Debt/GDP Growing?
• Debt/GDP is the important variable
• A million dollar debt is a lot to me but not
to Bill Gates
• Debt relative to GDP can go down by
– Paying down the debt
– Increasing GDP faster than the debt
When is Debt/GDP Growing?
• So if GDP growth is faster than debt
growth, Debt/GDP goes down
• If GDP growth rate is the same as the
interest rate then debt/GDP remains
constant
Some Important Implications
• One important way to reduce Debt/GDP is
to invest in capital so GDP grows faster
• Trying to reduce Debt/GDP by cutting
spending (and therefore the deficit) has a
built-in problem – When you cut spending
the economy slows down and this tends to
increase the deficit again.
Government Deficit Issues
Deficit Targeting
Gramm-Rudman-Hollings Act Passed by the U.S. Congress and
signed by President Reagan in 1986, this law set out to reduce the
federal deficit by $36 billion per year, with a deficit of zero slated for 1991.
PART IV Further Macroeconomics Issues
 FIGURE 15.6 Deficit Reduction Targets under
Gramm-Rudman-Hollings
The GRH legislation, passed in 1986, set out to
lower the federal deficit by $36 billion per year.
If the plan had worked, a zero deficit would have
been achieved by 1991.
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Government Deficit Issues
Deficit Targeting
PART IV Further Macroeconomics Issues
automatic stabilizers Revenue and expenditure
items in the federal budget that automatically change
with the economy in such a way as to stabilize GDP.
automatic destabilizers Revenue and expenditure
items in the federal budget that automatically change
with the economy in such a way as to destabilize GDP.
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Government Deficit Issues
 FIGURE 15.7 Deficit Targeting as an Automatic Destabilizer
Deficit targeting changes the way the economy responds to negative
demand shocks because it does not allow the deficit to increase.
The result is a smaller deficit but a larger decline in income than
would have otherwise occurred.
PART IV Further Macroeconomics Issues
Deficit Targeting
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Government Deficit Issues
Deficit Targeting
Deficit targeting has undesirable macroeconomic consequences.
It requires cuts in spending or increases in taxes at times when the
economy is already experiencing problems.
PART IV Further Macroeconomics Issues
Locking in spending cuts or tax increases during periods of negative
demand shocks is not a good way to manage the economy.
Moving forward, policy makers around the globe will have to devise
other methods to control growing structural deficits.
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PART IV Further Macroeconomics Issues
Who Do We Owe it To?
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PART IV Further Macroeconomics Issues
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PART IV Further Macroeconomics Issues
Effects of the Debt
-
Crowding out reduces private investment
-
Debt finance of public investment or consumption?
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Longer term redistributions
-
From tax payers to bondholders
From tax payers to foreigners (out of our circular flow
- of income and into theirs)
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