Econ 2133 1st Edition Lecture 9 Current Lecture A History of Deficit Federal Deficit to GDP 10 in 2009 Cannot consistently borrow 10 of your GDP 1945 1973 debt was rising because economy grew intensely golden age of capitalism Debt was growing more slowly than GDP economy so our debt was sustainable and became less of an economic factor over all time Get economy stabilized with massive govt spending then repeat what we did after WW2 Very little of budget during war was temporary due to war only entitlement was social security After war trimmed down budget and economy grew until 1973 Govt has never made interest rates so low Every 1 increase in interest rate 100B in interest payments B Taxing Prosperity 16th Amendment As low as 7 when started 94 in WW2 once you make over a certain dollar they take 94 cents of that dollar leaving you with 6 cents Now at 39 6 Income level of top 5 150 000 In order to generate more money government has value added tax everything you buy besides food of 24 Greece did this to have sales tax EX Bill of 100 at Red Lobster take 24 fed tax AND the state tax Avg citizen in European Union has same average income level as West Virginians poorer state Where s the money Entitlement spending going up and going up on the upper 40 Country with constant GDP debt ratio INSER FIGURE 2 C Government involvement to Debt GDP ratio Taxing and borrowing are effectively same thing what matters is just what you spend No right or wrong answer but got to cover your bases if you re going to spend it All that matters is how much govt spends not whether it s debts or deficits INSERT FIGURE 3 D Feds vs NC Feds can borrow for anything Entitlements roads bridges defense NC can borrow for deficits only For long term capital projects Vidant Hospital borrows 314 M 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 Bond Issue pay interest to bonds owners get cash to spend Building cancer center next to heart center F Negative Effects of Debt Deficits Crowding out negative effects of deficits conventional wisdom Deficits mean a rise in demand for credit Increased demand implies higher price Price of credit interest rate Deficits imply higher interest rates which crowds out private sector activity and reduces investment Lower investment implies lower future economic growth dirth of investment Also deficits mean increase future tax liabilities Problem because we spend the money today and pass on bill to future generations Then we have to pay it with a weaker economy Mortgaging the future of our grandchildren Walter Jones G Counter Arguments 1 Debt GDP dynamically that matters Have budget deficits but if ratio is horizontal or falling then it doesn t matter 2 All borrowing is bad Good borrowing investment occurs which leads to growth then we can pay it back WWII Internet Department Defense developed it with borrowed funds Bad borrowing for consumption purposes