Econ 2133 1st Edition Lecture 9Current LectureA. 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 1973Govt 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 2C. Government involvement to Debt/ GDP ratio- Taxing and borrowing are effectively same thing, what matters is just what you spendNo 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 3D. 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 MThese 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 matter2. “All borrowing is bad”- Good borrowing = investment occurs which leads to growth, then we can pay it back WWIIInternet: Department Defense developed it with borrowed funds - Bad borrowing = for consumption