2. DeficitsSurpluses, National Debt Deficits, Surpluses, and the National Debt

3. Marriage License Tax Medicare Tax Personal Property Tax Property Tax Real Estate Tax Service Charge Tax Social Security Tax Road Usage Tax Sales Tax Recreational Vehicle Tax School Tax State Income Tax State Unemployment Tax (SUTA) Telephone Federal Excise Tax Telephone Federal Universal Service Fee Tax Telephone Federal, State and Local Surcharge Taxes Telephone Minimum Usage Surcharge Tax Telephone Recurring and Non-recurring Charges Tax Accounts Receivable Tax Building Permit Tax CDL license Tax Cigarette Tax Corporate Income Tax Dog License Tax Excise Taxes Federal Income Tax Federal Unemployment Tax (FUTA) Fishing License Tax Food License Tax Fuel Permit Tax Gasoline Tax (42 cents per gallon) Hunting License Tax Inheritance Tax Gross Receipts Tax Inventory Tax IRS Interest Charges IRS Penalties (tax on top of tax) Liquor Tax Luxury Taxes Workers Comp Tax Tax his car, Tax his gas, Find other ways To tax his ass Tax all he has Then let him know That you won't be done Till he has no dough. When he screams and hollers, Then tax him some more, Tax him till He's good and sore. Then tax his coffin, Tax his grave, Tax the sod in Which he's laid. Put these words upon his tomb, " T axes drove me to my doom..." When he's gone, Do not relax, Its time to apply The inheritance tax. Utility Taxes Vehicle License Registration tax Vehicle Sales Tax Watercraft Registration Tax Well Permit Tax   Tax his land,   Tax his bed,   Tax the table   At which he's fed.   Tax his tractor,   Tax his mule,   Teach him taxes   Are the rule.   Tax his cow,   Tax his goat,   Tax his pants,   Tax his coat.   Tax his ties,   Tax his shirt,   Tax his work,   Tax his dirt.   Tax his tobacco,   Tax his drink,   Tax him if he   Tries to think.   Tax his cigars,   Tax his beers,   If he cries, then   Tax his tears.   Telephone State & Local Tax   Telephone Usage Charge Tax   Utility Taxes

4. Chapter Objectives Chapter Objectives: difference between the budget deficit and public debt 1. Explain the difference between the budget deficit and public debt. three budget philosophies 2. Explain each of the three budget philosophies. Annually balanced budget A. Annually balanced budget Cyclically balanced budget B. Cyclically balanced budget, and Functional Finance C. Functional Finance principal causes of the public debt 3. Identify the principal causes of the public debt. A. Wartime financing B. Fighting recessions C. Tax cuts D. Lack of political will annual interest chargeson the debtwho holds the debt 4. Describe the annual interest charges on the debt, who holds the debt and the impact of accounting and inflation on the debt. absolute sizeof the debtrelative sizeas a % of GDP 5. State the absolute size of the debt and the relative size as a % of GDP. debt can also be consideredpublic credit 6. Explain why the debt can also be considered public credit. two widely held myths about the public debt 7. Identify and explain two widely held myths about the public debt. Going bankruptBurden on our grandchildren A. Going bankrupt B. Burden on our grandchildren effect of the debt on income distribution and Ig 8. Explain the effect of the debt on income distribution and Ig. debt higher interest rates mightdecrease net exports 9. Explain how the debt [& higher interest rates] might decrease net exports. 3 proposed remedies to reduce or to eliminate budget deficits 10. Explain 3 proposed remedies to reduce or to eliminate budget deficits. And the concept of “crowding-in”

6. 10% 8% 6% 4% 2% IGIGIGIG Real interest rate DIDIDIDI Investment (billions of dollars) [Incr G incr I.R. Decr Ig] 5 10 15 20 25 Crowding Out Effect AS AD 1 AD2 4%4%2%2%4%4%2%2% YRYRYRYR G Friedman Just follow the “monetary rule.” Y*Y*Y*Y* D1D1D1D1 D2D2D2D2 s 6%6%6%6% 10 % Quantity of LF F1F1F1F1 F2F2F2F2 PL Real I.R. Loanable Funds Market Market 15 In this case, it would be 100% “crowding out”. G can finance a deficit by: 1. Borrowing - this raises interest rates the LFM and “crowds out” investment. in the LFM and “crowds out” investment. 2. Money Creation - no “crowding out” so is more expansionary than borrowing. so is more expansionary than borrowing. 0

7. DI1DI1DI1DI1 Investment (billions of dollars) Real interest rate (%) 16141210 8 6 4 2 0 15 25 5 10 15 20 25 30 35 40 DI2DI2DI2DI2 AS AD 1 AD 2 YRYRYRYR Y*Y*Y*Y* G economy is operating well below its potentialincreased government spending But … if the economy is operating well below its potential, increased government spending could result in more jobs, more positive profit expectations, and a “crowding in” of Ig could result in more jobs, more positive profit expectations, and a “crowding in” of Ig.

8. How “Crowding In” Might Work “Crowding In” – potential for G spending to stimulate private investment in an otherwise sluggish economy. Crowding Outpassive fiscal policy “Crowding Out” represents argument for passive fiscal policy. Crowding In “Crowding In” would be an argument for active fiscal policy. below its potential If the economy is operating well below its potential, the additional fiscal stimulus provided by deficit spending could encourage firms to invest more. A G deficit could stimulate a weak economy, increasing AD & putting a “sunny face on business expectations.” As business expectations grow more favorable, firms could become more willing to invest. [thus, “crowding in” of investment] crowded restaurant If you have ever approached a crowded restaurant, you may not long wait have wanted to put up with the hassle of a long wait and were thus “crowded out.”large G deficits may drive up interest rates “crowded out.” Similarly, large G deficits may drive up interest rates and crowd out some investment. On the other hand, did you ever pass up a restaurant because the place seemed dead-it had few customers. Perhaps you wondered why so few people chose to eat there. With just a few more customers, you might have been willing to “crowd in.” Businesses may be reluctant to invest in a lifeless economy. Economic stimulus could encourage them to “crowd in.” “No one As Yoga Berra would say, “No one goes there any more. It’s too crowded.” Yoga also said, “If you come to a fork Yoga also said, “If you come to a fork in the road, take it.”

9. 1.Annually Balanced Budget 2.Cyclically Balanced Budget 3.Functional Finance

10. [A. Annually Balanced; B. Cyclically Balanced; C. Functional Finance] Economy Annually Balanced Budget earth orbits the sun Annually Balanced Budget – each time the earth orbits the sun we balance the budget should balance the budget. economic straitjacket This would put the G in an economic straitjacket as we couldn’t fight pouring water on recessions with deficit spending. This would be like pouring water on a drowning man. worship at the alter of a balanced a drowning man. We used to worship at the alter of a balanced budget budget prior to the Great Depression. 49 states require this. not be counter-cyclical Balancing the budget during a recession would not be counter-cyclical, pro-cyclical Increasing taxesworsen the but pro-cyclical. Increasing taxes during a recession would worsen the recession Running asurplus during boom timesgiving the recession. Running a surplus during boom times and giving the money back would be inflationary money back would be inflationary. “Earth Orbits Sun” “G”

11. AD 1 Balancing the Budget – during Recession [ Increase T or Decrease G - Procyclical AS PL 1 PL 2 YRYRYRYR Y*Y*Y*Y* PL 3 YRYRYRYR So, the fiscal actions to balance the budget decreases decreases, rather than increases AD increases AD, and is procyclicalcounter procyclical, not counter. AD 3 AD 2 Cut

12. AD 1 Balancing the Budget - during Inflation [Decrease T or Increase G - Procyclical ] AS PL 1 PL 3 Y*Y*Y*Y* YIYIYIYI YIYIYIYI PL 2 So, the fiscal actions to balance the budget increase increase, rather decrease AD than decrease AD, procyclical & is also procyclical, counte rather than counter. AD 3 AD 2

13. Recession “Tax cut” Inflation “Raise taxes” Cyclically Balanced Budgetdeficits during recessions Cyclically Balanced Budget – run deficits during recessions & surpluses during expansions surpluses during expansions so the budget is balanced not each year course of the business cycle but over the course of the business cycle. Economic wisdom tells us we deficits in lean yearssurpluses in fat years should have deficits in lean years and surpluses in fat years. There is nothing “sacred about 12 months asan accounting period.” nothing “sacred about 12 months as an accounting period.” counter-cyclical fiscal policybalance The government could conduct counter-cyclical fiscal policy and balance its budget over a period of years its budget over a period of years. The basic problem of this philosophy is that fluctuations are not usually symmetrical enough to ensure that the surplus will offset the deficit. “Deficit Spending” “Balanced” TaxCuts RaiseTaxes

14. Functional Finance balance the economy Functional Finance – balance the economy not the budget. annual or cyclically balanced budget is of secondary importance The annual or cyclically balanced budget is of secondary importance. The provide for non-inflationary, FE important thing is to provide for non-inflationary, FE & ensure the economy deficits surpluses produces its potential GDP. If there are chronic deficits or surpluses, so be it. Deficits are minor problemsinflationrecessions Deficits are minor problems, compared to inflation or recessions. U.S.Economy “Balance the economy, not the budget.”

15. The “Debt” and the “Deficit” Flow ($162 bil.) Stock ($9.4 trillion) Reasons for Debt 1. Lack of political will 2. Tax cuts 3. Recessions (transfers) 4. Wartime financing [ADD] Attention Deficit Disorder C ongressmen have trouble focusing attention on the deficit. 9.4 $ 9.4 $9.4 tril.

16. Per Capita Per Capita The Debt is increasing by $1 million per minute. The Debt is increasing by $1 million per minute. $33,000 9,9, 3,3, 3 1 4 0, 4 $1.58 billion per day is being added to the debt.

19. Yea! We don’t have to pay any federal income or SS taxes.

20. Three major sources of federal taxes(90%) a. Individual income a. Individual income taxes taxes b. Social Insurance b. Social Insurance c. Corporate income c. Corporate income taxes taxes 45%$1,096 37% $884 bil. 11% $261 B 7% $ 179 B Deficit $248 bil. We are paying about $1 trillion in taxes.

21. Interest [$243 ] Agriculture 90.9 Interest [$243 ] Commerce 6.7 Defense 527.6 Education, job train. 62.6 Energy, Environment 21.6 Health/Human SVC 699.0 Homeland Security 34.6 Housing/Urban Dev. 36.2 Interior 10.1 Justice, Law enforce 23.3 Labor 50.4 NASA 17.3 SEC & E xchange Com. 8.5 Corp Engineers 4.8 State 37.4 Social Security 655.5 Transportation 67.3 L egislative Branch 4.8 Treasury525.5 Judiciary 6.7 Veteran’s Affairs 84.4 Other agencies 148.7 2008 Federal Budget Proposal-$2.9 Tril. $67.3

22. Federal Spending in 2007, by Function

23. DEFICITS, SURPLUSES, AND DEBT  Definitions : G > T  Budget Deficit [G > T] T > G  Budget Surplus [T > G]  National or Public Debt  U.S. Securities

24. 1. Progressive 2. Proportional 3. Regressive

25. Single - no tax on 1 st tax on 1 st$7,825 35% 35% 33% 28% 25% 15% 10% $ 7,825 $164,550 $ 357,700 Standard Deduction [$5,350-dependent] 0 $78,850 $ 357,700+ $ 32,550 10% 15% 25% 28% 33% 35% 35% Marginal Tax Rates Flat Tax on Income: same % of income, different amounts, so Proportional Flat Tax on Products: same amount, different % of income, so Regressive I only have to pay the FICA tax. Progressive – takes a larger % from high income groups [$15,650-married filing jointly] [$15,650-married filing jointly] [$11,200-HH][7,825-single]

26. Layered Cake Our Progressive Tax System I s Like A Layered Cake 35% over $357,700 No tax on 1 st $7,825 10% up to $16,050 15% up to $29,700 25% up to $78,850 28 % up to $164,550 33% up to 357,700

27. Regressive– takes a larger % from low income groups Proportional & Regressive Taxes $100,000 Proportional – takes same 20% [not amount] from all income groups 20 % $30,000 $40,000 $50,000 30 % 10 % $30,000 $40,000 $50,000 Take that, you “low incomer.” Pay $20,000 Pay $10,000 [So, not same amount but same %, 20%] I’m a “low incomer.” Example: Medicare – 1.45% on all income earned. Example: Sales Tax

28. Toll Road Toll Road($1 per day) $10,000 $50,000 $200 $200 $200 $200 2%.4% Flat Tax on Income : s ame % of income, d ifferent amounts, so proportional. Flat Tax on Product : s ame amount, different % of income, so regressive. State 6.25% Excise Tax on Two Identical $ 20,000 Autos BO MO Flat Tax on Cigarettes Excise Flat Tax on Cigarettes [Excise ][$1.41 cents pack] [1 pack day] $10,000 $100,000 $515 $515 5%.5% Addicted $10,000 $100,000 $1,250 $1,250 $1,250 $1,250 12.5% 1.25%

29. $100 Spent On The Lottery $20,000 $100,000 [$100 Lottery] 5%.1% 5%.1% voluntary “The lottery tax is a voluntary regressivetax on morons regressive tax on morons.” What about the.20 a gallon gasoline tax? regressive So – all of these taxes were regressive. Property Tax of 2.5% on $100,000 Houses Property Tax of 2.5% on $100,000 Houses $25,000 $50,000 [100,000 house] [$100,000 house] [100,000 house] [$100,000 house] $2,500 $2,500 $2,500 $2,500 10% 5% Flat Tax on Income: same % of income, different amounts, so Proportional Flat Tax on Products: same amount, different % of income, so Regressive I played the lottery.”

30. TAX RATETAX RATE State (Cents per pack) RankState (Cents per pack) Rank Alabama(1) 16.547Nebraska6424 Alaska200 4Nevada3539 Arizona200 4New Hampshire5232 New Jersey 258 1 Arkansas(20) 5926New Jersey 258 1 California 8719New Mexico9118 Colorado 2043New York (1) 150 5 Connecticut200 3North Carolina3045 Delaware (3) 2441North Dakota4434 Florida 33.940Ohio5529 Georgia 3736Oklahoma2342 Hawaii (30130 7Oregon 128 8 Idaho 5727Pennsylvania 10012 Rhode Island 246 2 Illinois (1) 9817Rhode Island 246 2 Indiana 55.528South Carolina 751 Iowa 3637South Dakota5331 Kansas 2920Tennessee (1)(2)2048 Texas 141 11 Kentucky (2) 3046Texas 141 11 Louisiana 3637Utah 69.523 Maine2003Vermont 11910 Maryland10012Virginia (1) 3047 Massachusetts151 4Washington 203 3 Michigan200 5West Virginia5529 Minnesota 4833Wisconsin7721 Mississippi 1849Wyoming6025 Missouri (1) 1750Dist. Of Columbia 10012 U.S. Median90 Montana170 6U.S. Median90 Counties & cities may impose an additional tax on a pack of federal tax is 39 centsNYC cigarettes. Also, the federal tax is 39 cents. NYC has an pack price of $7.50 additional $1.50 for a total cigarette pack price of $7.50. 30 states have increased cigarette taxes since January 1, 2002 some twice. Every 10% increase reduces youth smoking by 7% and adult smoking by 2%. State Excise Tax on Cigarettes

31. If you inherit $2 million dollars this year, how much do you get to keep?

32. 2007 The Federal Estate Tax is disappearing. An estate is exempt from federal estate taxes if it’s below the following thresholds. The Tax will disappear in 2010, only to reappear in 2011. [tax of 55% on estates after the first million ] I f you live in one of the gold states, you might owe additional estate or inheritance taxes, even after the federal G’s death tax disappears. $2 M tax free 2008 2009 $2 M tax free $1 M tax free $3.5 M tax free No estate tax 2010 2011

33. Revenues of $2.407 Expenditures of $2.654 2006 [Deficit of $248 ] Last Surplus

34. Causes: Wars Recessions Tax Cuts Facts & Figures: N o political will F inancial Price Of War Total C ost p er ConflictCostPerson WW1 $125 bil. $2,489 WWII$600 bil. 20,388 Korea 336 bil. 2,266 Vietnam 494 bil. 2,204 Gulf War I 76 bil. 306 * Gulf War II 438 bil.* 536 * Cost over $12 billion a month The War in Iraq has cost $16,000 per family. 300,000 from the Afghanistan-Iraq wars suffer from PTSD [Post-Traumatic Stress Disorder] or major depression that will cause the nation over $6 billion over two years.

35. 2008 91% 35% 91% on income over $200,000

36. Top Marginal Tax Rates YearTax Rate 1900 No Tax 1914 1% [over $3,000] [Only 1 in 270 paid this tax at all] 1930 30% [1 in every 32 was now paying taxes] 1940 81% [1 in every 3 was paying taxes] 1943 *Paycheck withholding (by the boss) was launched to stop cheating. 1950 [over $200,000] 91% 1970 70% [E veryone was paying with taxable Y] 1980 70% 2000 39.6 % 2008 35 % Medicare tax Medicare tax – 1.45% for an individual [2.9% for self employed] for every dollar earned. Harrison Ford Harrison Ford – received $25 million for 20 days work on a movie. 1.45% of $ 25 million = $362,500 $725,000medicare tax x 2 = $725,000 medicare tax. [Over his 35 years on the Big Screen, his films grossed over $10 bil. Jim Carrey Jim Carrey – gets $20 million per movie, so his tax is $580,000. [1.45% of $20 million = $290,000 x 2 = $580,000.] [91% for dollars over $200,000]

37. Government Finance GLOBAL PERSPECTIVE Total Tax Revenue – Selected Nations Percent of Total Output-2004 Sweden Denmark Norway Finland France Italy United Kingdom Germany Canada Australia United States Japan South Korea 1020304050 Source: Organization for Economic Cooperation and Development 50.7 49.6 44.9 44.3 43.7 42.2 36.1 34.6 33.0 31.6 25.4 25.3 24.6

38. 37% 57% 68% 85% 97% 3.3% 100 % 90%80%70%60%40%30%20%10% Top1%Top5%Top10% Top25%Top50% Bottom5% 134 million filed tax returns but only 90 million paid any taxes. Our average tax rate was 14%. $61,000 and over $30,000 and over $99,000 and over $137,000 + $328 000 +

39. ten men go out for beerbill for all ten Suppose that every day, ten men go out for beer and the bill for all ten comes to $100paid their bill the way we pay our taxesgo like this to $100. If they paid their bill the way we pay our taxes, it would go like this: first four menwould pay nothing  The first four men (the poorest) would pay nothing. fifth would pay $1  The fifth would pay $1. sixth would pay $3  The sixth would pay $3. seventh would pay $7  The seventh would pay $7. eighth would pay $12  The eighth would pay $12. ninth would pay $18  The ninth would pay $18. tenth manwould pay $59  The tenth man (the richest) would pay $59. $20 divided by six is $3.33 They realized that $20 divided by six is $3.33. But if they subtracted that from fifth man and the sixth man would each end up everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer being paid to drink his beer. So, that's what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them reduce a curve. 'Since you are all such good customers, he said, 'I'm going to reduce the cost of your daily beer by $20Drinksfor the ten nowcost just $80 the cost of your daily beer by $20. Drinks for the ten now cost just $80. still wanted to pay their bill the way we pay our taxesfirst The group still wanted to pay their bill the way we pay our taxes so the first four menwould still drink for free divide four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide $20 windfall so that everyone would get his'fair share?' the $20 windfall so that everyone would get his 'fair share?'

40. reduce each man's bill by So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount fifth mannow paid nothing same amount, and he proceeded to work out the amounts each should pay.! And so: The fifth man, like the first four, now paid nothing (100% savings). sixth now paid $2instead of $333%savings  The sixth now paid $2 instead of $3 (33%savings). seventh now pay $5 instead of $728%savings  The seventh now pay $5 instead of $7 (28%savings). eighth now paid $9 instead of $1225% savings  The eighth now paid $9 instead of $12 (25% savings) ninth now paid $14 instead of $1822% savings  The ninth now paid $14 instead of $18 (22% savings) tenth now paid $49 instead of $5916% savings  The tenth now paid $49 instead of $59 (16% savings). 6 was better offfirst 4 continued to drink for free  Each of the 6 was better off than before. And the first 4 continued to drink for free. got a dollar out of the $20,'declared the sixth mantenth But once outside the restaurant, the men began to compare their savings. 'I only got a dollar out of the $20,'declared the sixth man. He pointed to the tenth man,' but he got $10!‘ fifth man. 'I only saved a dollar, too. It's unfair that 'Yeah, that's right,' exclaimed the fifth man. 'I only saved a dollar, too. It's unfair that he got ten times more than I!‘ 7 th man. 'Why should he get $10 back when I got only two? 'That's true!!' shouted the 7 th man. 'Why should he get $10 back when I got only two? first four men in unison. 'We The wealthy get all the breaks!' 'Wait a minute,' yelled the first four men in unison. 'We didn't get anything. The system exploits the poor!' nine men surrounded the tenth and beat him up didn't get anything. The system exploits the poor!' The nine men surrounded the tenth and beat him up. tenth man didn't show up for drinksnine sat down and had The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without himpay the bill beers without him. When it was time to pay the bill, they discovered something important. didn't have enough money between all of them for even half of the bill how our tax system works They didn't have enough money between all of them for even half of the bill! And that is how our tax system works. people who pay the highest taxes get the most benefit from a tax reductionTax them The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too muchthey just may not show up anymore too much, attack them for being wealthy, and they just may not show up anymore. In they might start drinking overseas where the atmosphere is somewhat friendlier fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

41. Highways [.20 a gallon] STATE AND LOCAL FINANCE State Expenditures Education Public Welfare Health and Hospitals Public Safety Education36% Health & Hospitals 8% PublicWelfare25% Public Safety 5% All Other 18% Highways 8%

42. Federal Expenditures Pensions and Income Security National Defense Health Interest on Public Debt Pensions & Income Security 35% NationalDefense 20% 20% Health 21% All Other 15% Interest 10% 2006 Data Total Expenditures $2,654 Billion

43. Federal Tax Revenues Personal Income Tax 46% PayrollTaxes38% Corporate Income Tax 8% All Other 4% Excise Taxes 4% Personal Income Tax Payroll Tax Corporate Income Taxes Excise Taxes 2006 Data Total Tax Revenues $2,407 billion

44. Property Taxes & Other Taxes Licenses and Others STATE AND LOCAL FINANCE State Revenues Corporate Income Tax Sales and Excise Tax Personal Income Tax Sales & Excise T axes 48% StatePersonal Income Tax 34% Corporate Income Tax 7% Licenses & Others 6% Property Taxes & Other Taxes 5%

45. States with No Income Tax (Red) *They tend to have more regressive tax systems.

46. State, City, and County Sales Tax

48. STATE AND LOCAL FINANCE Local Revenues Property Taxes 74% Personal & Corporate Income Taxes 6% All Other 4% Sales & Excise Taxes 16% Personal & Corporate Income Taxes Sales and Excise Taxes Property Taxes

49. National Debt History $9.4 Tril.

50. National Debt History [adjusted for inflation in 2000 dollars] $9.4 Tril. Except for WWII, the deficit stayed pretty constant for about 40 years until 1983

52. PUBLIC DEBT OWNERSHIP, 2006 [This is held both privately and publicly] 9% 42% 8% 25% 8% Debt held by the Fed & Gov. Agencies [51%] & Gov. Agencies [51%] Debt held outside the Federal Gov and Fed [49%] Federal Reserve U.S. Government Agencies Other, Including State & Local Governments U.S. Banks & Financial Institutions Foreign Ownership U.S. Individuals Foreigners hold $1.9 Trillion Japan-$582 B, China-$500 B, Britain-$266 B, OPEC-$126 B, S. K orea - $ 46 B, H. K ong–$ 56 B, T aiwan-$ 53 B, S ingapore- $ 24 B, T hailand -$13 B, & India- $ 13 B. World Total: $2,247 51% 49%

53. “no”entails three points The “no” answer entails three points. Refinancing 1. Refinancing – as portions of the debt fall due each month, the G does not cut G or raise T to retire the maturing bonds. refinances the debt It refinances the debt by selling new bonds and uses the proceeds to pay off holders of the maturing bonds. 2. Taxation 2. Taxation – if bankruptcy were imminent the G could always raise taxes. Creating Money inflationary 3. Creating Money – bankruptcy could be avoided by printing the money ( inflationary ). Economic Implications of the Debt: False Issues “G”“dies.” [The “G” doesn’t have to pay the entire debt off because it never “dies.”] “G”“rolling it over in perpetuity” [The “G” will live forever so it will keep “rolling it over in perpetuity”] Going Bankrupt? Shifting Burdens Shifting Burdens owes $33,000 Does every new born get slapped on the backside, then told he owes $33,000? 82% of the debt is owed to ourselvespublic debt is a Not quite. About 82% of the debt is owed to ourselves. Thus the public debt is a a public creditliability to the taxpayer asset to the people bondholders a public credit. It is a liability to the taxpayer but an asset to the people (bondholders). retiring the debt would amount to a large transfer paymentU.S. Therefore, retiring the debt would amount to a large transfer payment from U.S. citizens to U.S. citizens citizens to U.S. citizens. The repayment would entail no decrease in the economy’s babies who inherit $33,000 worth of debt will wealth or standard of living. So the babies who inherit $33,000 worth of debt will inherit almost that same amount inherit almost that same amount. Whew! $33,000 each. I’m not paying no $33,000.

54. Pay Down the Public DebtPay Down the Public Debt Reduce TaxesReduce Taxes Increase Government SpendingIncrease Government Spending B olster Social Security Trust FundB olster Social Security Trust Fund Combination of these PoliciesCombination of these Policies

56. Crowding-out Crowding-out effect in an Open Economy [Xn are crowded-out, decreasing AD] 1. Federal Government deficits 2. High real U.S. interest rates 3. Decline in domestic inv. (crowding-out) 4. Increased foreign demand for U.S. bonds 5. Increased U.S. external debt 6. Increased international value of dollar 7. U.S. Exports decrease 8. U.S. Imports increase 10. Trade deficits 9. Decrease in Xn decr AD

58. This is the way we used to get first cry out of a baby the first cry out of a baby. “You Now we tell them, “You owe$33,000.” owe $33,000.” (as their share of the National Debt ) We get the same result – their first cry their first cry; no more “Take that.” of that “Take that.” We no longer have to hit our newborn to get their first cry. “Take That! The Debt prevents me from having to do this.

59. Debt and Deficit NS 1-6 1. The (national debt/federal budget deficit) consists of the Federal government deficits & surpluses accumulation of all Federal government deficits & surpluses. subtracting 2. The (national debt/budget deficit) is found by subtracting “G” tax revenues from government spending “G” tax revenues from government spending in one year. National Debt 3. How much is the National Debt now? _________ annually balanced budget 4. If “G” adhered strictly to an annually balanced budget, G’s budget would tend to (stabilize/destabilize) the economy. increasing T during good timesdecreasing 5. The idea of increasing T during good times & decreasing them during bad times them during bad times [recessions] [over the course of the business cycle, the budget would be balanced] is the (annually/cyclical) balanced budget. functional finance 6. The philosophy of functional finance is the idea that the main function of the budget is to (stabilize/destabilize) the economy & balancing the budget every year is of (little/extreme) importance. $9.4 trillion

60. Debt and Deficit NS 7-11 Budget deficits 7. Budget deficits were smaller during the (1970s/1980s & early 1990s) 1980 & 1996 8. Between 1980 & 1996 the public debt (grew/did not grow) absolutely and as a percentage of GDP. largest proportion of the public debt 9. The largest proportion of the public debt is held by (foreigners/American public). Therefore we (can/can not) say the public debt is a public credit. “crowding-out effect” 10. The “crowding-out effect” suggests that increases in G spending financed thru borrowing will (increase/decrease) the interest rate and (increase/decrease) private investment. public debt imposes a burden on future generations 11. The most likely way the public debt imposes a burden on future generations is by reducing the current level of (employment/capital accumulation), thus giving us a smaller “national factory.”

61. Debt and Deficit NS 12-14 budget deficits 12. Large budget deficits (increase/decrease) domestic interest rates, (increase/decrease) the international value of the dollar, and (increase/decrease) American net exports which (enhance/diminishes) expansionary fiscal policy. line-item veto 13. The line-item veto would have permitted the president to (add/delete) individual projects and programs from larger appropriation bills. program designed to balance the budget 14. The (GDP/GNP/GRH) was a program designed to balance the budget.

62. Money, B anking, Money C reation, Monetary Policy, Extending AS, Macro D isputes, Debt and Deficit Money, B anking, Money C reation, Monetary Policy, Extending AS, Macro D isputes, Debt and Deficit

63. monetary rule 1. What is the monetary rule? 2. If a household spends $100,000 per year, & on average holds a money balance velocity of $20,000, their velocity of money is ____. o AS 1 PL1[3 % ] PL2[8 % ] Y1Y1Y1Y1 Y2Y2Y2Y2 a2a2a2a2 a1a1a1a1 AS 2 b1b1b1b1 LRAS H igher PL results in higher nominal wages & shifts SRAS left. Inflat.Gap Output & employment increased in the SR but not the LR. unanticipated 3. An unanticipated increase in PL will lead to (lower/higher) product prices, (decr/incr) in SR profits & a(an) (decr/incr) in unemp. in SR. unanticipatedincrease in 4. With the unanticipated increase in PL PL - output & employment did (incr/decr) SR in the SR but (decreased/increased/ LR stayed the same) in the LR. Increase the MS 3-5% a year 5 AD 1 AD 2

64. two main variants of the natural rate hypothesis 5. The two main variants of the natural rate hypothesis are (RATEX/Keynesian/Adaptive Expectations/Reaganomics). Monetaristsinvestment demand curve 6. According to the Monetarists, the investment demand curve money demand curve is more (flat/vertical) and the money demand curve is more (flat/vertical). prices are flexible but 7. Does the economy self-correct if prices are flexible but wages are not wages are not? _______ no Keynesian cause-effect chain Monetarist cause-effect chain

65. unanticipated 8. An unanticipated increase in AD would result in output SRLR (incr/decr/stay same) in SR, but (incr/decr/stay same) in LR. anticipated 9. An anticipated increase in AD would result in Y (incr/decr/ SRLR stay the same) in the SR and (incr/decr/stay the same) in the LR. o SRAS 1 PL 1[ 3 %] PL 2[ 6 %] Y1Y1Y1Y1 Y2Y2Y2Y2 E2E2E2E2 E1E1E1E1 SRAS 2 Price Level RDO Inflati.Gap Y & employment increased in the SR but not the LR. E3E3 LRAS AD 2 AD 1

66. 0 PL2[1%] YRYRYRYR AS 1 PL 1 [3%] Y*Y*Y*Y* a3a3a3a3 a1a1a1a1 AS 3 c1c1c1c1 LRAS Real domestic output Lower PL reduces nominal wages & shifts SRAS right. Recess.Gap Y & employment decreased in the SR but not the LR. LR decline in inflation 10. In the LR, a decline in inflation will (incr/decr/not affect) output & employment. decline in inflationanticipated 11. If decline in inflation is anticipated, Y/empl. SRLR will (increase/decrease/not change) in SR. [ or LR ] AD 1 AD 2

67. annually balanced budget is pro-cyclical recession 12. An annually balanced budget is pro-cyclical because tax revenue reductions associated with recession will require (increases/decreases) in G spending or increases in taxes. monetary policy during inflation 13. Proper monetary policy during inflation is (raise, raise, sell/ lower, lower, buy) Discount Rate, RR, & bonds. increase in the MS 14. A n increase in the MS will lead to a(an) (increase/decrease) in the interest rate & (decrease/increase) AD. “Crowding out” 15. “Crowding out” is something the Keynesians/Monetarists) believe strongly in. Selling bondsby the Fed 16. Selling bonds by the Fed would result in a (smaller/larger) MS and (lower/higher) interest rates. estimating your expenses$800 17. If you are estimating your expenses for the prom at $800, then you are using money as (unit of account/medium exchange/store of value). Foreign individuals and governments Public Debt 18. Foreign individuals and governments (hold/do not hold) most of the Public Debt.

68. Fiscal policy 19. Fiscal policy is thought to work best at fighting (inflation/ monetary policy depressions) and monetary policy is thought to work best at fighting (inflations/depressions). Laffer curve 20. The Laffer curve was a cornerstone of (RATEX/Supply-side/ Keynesians) economics. tight money cause-effect chain 21. The tight money cause-effect chain is (incr/decr) the MS, which would (incr/dec) the interest rate, which would (incr/decr) Ig, which would (incr/decr) AD and GDP. easy money cause-effectchain 22. The easy money cause-effect chain is (incr/decr) the MS, which would (incr/decr) the interest rate, which would (incr/decr) Ig, which would (incr/decr) AD and GDP advocates of monetary and fiscal policy 23. The (Monetarists/New Keynesians) are advocates of monetary and fiscal policy. easy money policydollar 24. An easy money policy will cause the dollar to (apprec/deprec) and cause American Xn to (incr/decr).

69. tight money policydollar net exports 25. A tight money policy will cause the dollar to (apprec/deprec) and cause American net exports to (increase/decrease). bank loan from the Fed 26. A bank loan from the Fed will (increase/decrease/not affect) RR, but (increase/decrease/not affect) ER and therefore TR. bank deposit by the public 27. A bank deposit by the public will (increase/decrease) RR,ER, & TR. RATEX 28. RATEX are strong advocates that the public’s expectations (strongly influence/negate) fiscal and monetary policy. intellectual roots of monetarism 29. The intellectual roots of monetarism are based on (Classical/Keynesian) economics. adherence with an annually balanced budget 30. An adherence with an annually balanced budget would (stabilize/destabilize) the economy. prices are not flexible recessionequilibrium price level 31. If there is a decrease in AD and prices are not flexible, the resulting recession will be worse because equilibrium price level will be (lower/higher) than with flexible prices. SRPC LRPC 32.In the SRPC, there (is a/is no) tradeoff between inflation & output, and in the LRPC there (is a/is no) tradeoff between inflation and unemployment. SRPCLRPCstabletraditional Phillips curve 33. T he (SRPC/LRPC) is consistent with the stable traditional Phillips curve.

70. Extra Practice MS = Currency + DD of PUBLIC RR is 25% Assets DD (Liabilities) TR[RR+ER]=$100 mil. $400 million TR[RR+ER]=$100 mil. $400 million 1. How much can this bank loan out? $______ Christina A. _________ bank DD 2. If Christina A. puts _________ in this bank (DD), $ ER will increase by $_______. $ 3. Possible Money Creation in the system could be $________. $ 4. Potential Total Money Supply could be as much as $_________. 0 7,500 30,000 40,000 $10,000

71. Extra Practice Extra Practice MS = Currency + DD of PUBLIC RR is 25% Assets DD (Liabilities) TR[RR+ER] = $100 mil. $400 million TR[RR+ER] = $100 mil. $400 million How much can Christina’s bank loan out? $______ 5. How much can Christina’s bank loan out? $______ Christina’s Bank Fed 6. If Christina’s Bank borrows $10,000 from the Fed $ ER will increase by $ _______. $ 7. Possible Money Creation in the system could be $_________. $ 8. Potential Total Money S upply could be as much as $ __________.Fed 0 10,000 40,000 40,000 Christina’s Bank

72. Fed 34. If the RR is 50% and the Fed buys $100 M of bonds from PUBLIC [Kate] MS the PUBLIC [Kate], then the MS is increased by _______. ER are increased by ______. PMC is _______. TMS would be ______. Collins Bank 35. RR is 40% and the Collins Bank borrows $100 M from the Fed Fed. As a result, RR are increased by ______. ER is increased by _______. PMC and TMS is increased by ________. bank DD $200,000 36. Your bank has DD of $200,000 and the RR is 50%. If RR and ER are equal, then TR are _______. Buzon Bank 37. The Buzon Bank has ER of $75,000 & DD is $100,000. I f the RR is 20%, TR are _________. Fed 38. RR is 10% & the Fed buys $10 million of bonds from the PUBLIC [Mary] MS PUBLIC [Mary]. T he MS is increased by _______. ER are increased by _______. PMC is _______. TMS would be _________. $100 M $50 M $100 M $200 M $100 M $250 M $200,000 $95,000 $10 M $9 M $90 M $100 M 0 Banks PUBLIC Fed

73. Fed 1. If the RR is 40% and the Fed buys $100 M of bonds from PUBLIC [Ann] MS the PUBLIC [Ann], then the MS is increased by _______. ER are increased by ______. PMC is _______. TMS would be ______. Boase Bank 2. RR is 50% and the Boase Bank borrows $100 M from the Fed Fed. As a result, RR are increased by ______. ER is increased by _______. PMC and TMS is increased by ________. bank DD $400,000 3. Your bank has DD of $400,000 and the RR is 25%. If RR and ER are equal, then TR are _______. Palmer Bank 4. The Palmer Bank has ER of $60,000 & DD is $200,000. If the RR is 20%, TR are _________. Fed 5. RR is 20% & the Fed buys $50 million of bonds from the PUBLIC [Marie] MS PUBLIC [Marie]. The MS is increased by _______. ER are increased by _______. PMC is _______. TMS would be _________. $100 M $60 M $150 M $250 M $100 M $200 M $200,000 $100,000 $50 M $40 M $200 M $250 M 0 Banks PUBLIC Fed

74. Money Creation Formulas Money Creation Formulas [ MS = Currency + DD of public ] No Public: [Fed gives $1.00 loan to a bank ] 1.ER x M M = PMC & TMS Public RR + ER = TR TR - RR = ER TR - ER = RR Public : Student deposits $1.00 in a bank ER [DD-RR] x M M = PMC 1. ER [DD-RR] x M M = PMC PMC + 1 st DD =TMS 2. PMC + 1 st DD =TMS Fed