Econ 2133 1st Edition Exam 2 Study Guide Lectures 4 9 National Debt stock concept sum total accumulation over time grand sum of outstanding treasury securities because they were issued and sold by treausury in past to finance past bedget deficits and haven t been paid back historical behavior relation to deficits and surpluses flow concepts current value what makes it go down and up asymmetry between deficits and surpluses for changing the debt definition What is the estimated federal budget deficit for this fiscal year Estimated federal budget 3 99 trillion budget for 2015 475 Billion is estimated federal budget deficit for 2015 below 3 and under 2 would be rad Debt 18 5 Trillion and rising because we have budget deficits Deficit is flow concept and deals with year to year changes annual budget deficit is the change in debt because flows make stocks change Higher deficits higher debtness which makes national debt go up Estimated federal budget deficit Deficits vs Surpluses Why are they asymmetric Because they have different implications towards the national debt A Deficits grow by 1 Borrowing goes up 2 Treasury will issue more government IOUs 3 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 Give a chance to lower it can do this 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 1980s EX 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 What governs the dynamic behavior of the debt to GDP ratio over time and what are the implications Deficit Debt Interest compared to the rate of economic growth Why is the debtto GDP ratio the most relevant measure of the impact of debt and deficits How has it behaved from 1940 until today Deficit debt interest rate of GDP can t do this forever Never know what could upset the economy and then it gets messy very quickly Can refinance national debt forever People really want to own our debt as long as our debt to gdp measure keeps decreasing as long as GDP keeps increasing faster than debt rate it s a measure of our credit worthiness C 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 D 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 E Other countries in debt a 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 reform c 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 matter In measuring economic impact of debt and deficits Stability of an income stream from fruits of labors for a country that s GDP Crowding out story and the negative impact of federal budget deficits Must show that deficits lead to higher interest rates and reduced corporate investment for deficits and debt to be a burden to future generations However deficits definitely mean higher future tax liabilities without any question What is the recent history of deficits and surpluses Top two reasons historically for deficits Not all borrowing is bad Why not Negative Effects of Debt Deficits Crowding out negative effects of deficits conventional wisdom Deficits mean a rise in demand for credit higher borrowing Increased demand implies higher price for borrowing Price of credit interest rate Deficits imply higher interest rates which crowds out private sector activity and reduces investment lower investment Lower investment implies slower future economic growth dirth of investment Which is huge problem because it s economics growth that pays the bills and offers economic opportunities 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 Counter Arguments 1 Debt GDP dynamically that matters Have budget deficits but if ratio is horizontal or falling then it doesn t matter because in comparison to economy our deficit is so small and therefore will most likely be able to pay it back 2 All borrowing is bad Good borrowing investment occurs which leads to growth then we can pay it back Also things that increase productivity of private resources because then we will have economic growth to pay it back EX Energy transmission electrical grid airports WWII Hardly burdened by this debt because it protected our freaking country No good deed goes unpunished Bush and Medicare Part D from 2000 2010 costs 1 Trillion Internet Department Defense developed it with borrowed funds Bad borrowing for consumption purposes 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