Econ 2133 1st Edition Lecture 8 Current LectureI. Deficits vs. Surpluses - Why are they asymmetric? - Because they have different implications towards the national debtA. Deficits grow by: 1. Borrowing goes up 2. Treasury will issue more government IOUs3. National debt increases B. Surpluses (Had surpluses in 1998, 1999, and 2000 where there was more money than the govt knew how to spend)Surpluses grow by:1. Increase Spending (can always do this)2. Cut taxes and give it back to the people! 3. Pay back some of the national debt (paid back 350 billion $ from 1998-2000) - SO Treasury purchased outstanding debt which made the national debt go down C. Historically Speaking Deficits increase by: 1. Wars (greatest and fastest accumulation of debt) – WW1, WW2, Iraq (1 Trillion $) 2. Recessions (deficits are counter cyclical to Business Cycle) 3. Entitlements (relatively new compared to the others) - Deficit didn’t start to take off until beginning of 1980sEX) FY 2010 – Fed Deficit = $1.4 Trillion (because budget deficits grow during recessions and Great Recession was 2007-2009) - Would have had to raise personal income taxes by $1.4 Trillion, everyone would have to pay DOUBLE taxes to just balance budget - National debt rises by $1.4 Trillion so does deficit D. What about paying back the national debt? Need $18.5 Trillion in budget surpluses, either by taxes or other means E. Financial Government Activity2 options:1. Tax2. Borrow If govt wants to spend 1$ right now:a. Gave govt 1$ in tax now, paid my obligation for this FY b. Borrow $1 for 1 year = 1 note (10% to borrow), so govt goes to tax payers and ask for $1.10 to pay for everything! c. Roll over debt, so borrowed to pay 1.10$ and now paying compound interest on that which now = $1.20 d. Another roll over = $1.33e. Now increasing (compounded) to $1.46f. In order to break chain MUST pay interest, debt will grow but not exponentially DEFICITS ARE JUST DELAYED TAXATION These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- Taxes now or Taxes later, if we are going to spend the $ we might as well pay the bill. - Because tax paying public is fiduciary agents to the government (treasury gets money from individuals incomes, American tax paying public has responsibility to pay back debt)- 1% increase in interest rates is another $100B in interest payments - Our budget deficit was larger than almost every GDP of every country besides China F. Deficit: GDP Ratio- Important to measure as ratio to GDP (our actual economy) to track actual progress of debt- 13% GDP deficit could not be sustained- 3% or lower GDP deficit ratio could be sustained (friendly) because it is such a small percentage of overall economy that it’s fine! G. Example: Trying to Buy a House ; Debt v income - Debt (what do you owe?) - Tells us how much of what you make that is locked in and committed - Mortgage broker looks at debt to income ratio = credit worthiness - Say Credit Worthiness = 0.3, so 30% of income is tied up but that’s it so can handle a mortgage - Say Credit Worthiness = 0.8, so 80% of income is tied up so it cannot handle mortgage - Income (what do you make) H. Other countries in debta. Japan - #1 in Debt - Debt/ GDP = 250% - “Dearth of Births” federal policy to get paid time off from work to conceive b. Greece - #2 in Debt- Debt/ GDP = 170%- GDP decreased 25% since 2008 with NO chance at reformc. USE - #3 in Debt- Debt/ GDP = 110% What if we just kept accumulating deficits- If debt increases by 10% and GDP increased by 7% then debt becomes so small it doesn’t even