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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Deficits And Debt Chapter 19
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Laugher Curve How many neoclassical economists does it take to change a lightbulb?
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Laugher Curve How many neoclassical economists does it take to change a lightbulb? It depends on the wage rate.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Chapter Objectives u Define the terms deficit and debt.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Chapter Objectives u Define the terms deficit and debt. u State why economists focus on financial health rather than on deficits.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Chapter Objectives u Explain why, in an expanding economy, a government can run a limited, but continual, deficit without serious concern about the consequences.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Chapter Objectives u Differentiate between a real deficit and a nominal deficit.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Chapter Objectives u Explain why, even though the real budget deficit of the United States is much lower than the nominal deficit, there is still reason for concern about the deficit.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Chapter Objectives u Explain why there are alternative reasonable views about the deficit.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill U.S. Government Deficits and Debt u Introductory Definitions
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill U.S. Government Deficits and Debt u Introductory Definitions l A deficit is a shortfall of incoming revenues under outgoing payments—it is a flow concept.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill U.S. Government Deficits and Debt u Introductory Definitions l If revenues exceed payment, you are running a surplus.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill U.S. Government Deficits and Debt u Introductory Definitions l If revenues exceed payment, you are running a surplus. l If the opposite happens, you are running a deficit.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill U.S. Government Deficits and Debt u Introductory Definitions l Debt is accumulated deficits minus accumulated surpluses—it is a stock concept.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill U.S. Government Deficits and Debt u Introductory Definitions l As debt accumulates, governments must borrow to pay the interest.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill U.S. Government Deficits and Debt u Why has the U.S. consistently run deficits since World War II?
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill U.S. Government Deficits and Debt u Why has the U.S. consistently run deficits since World War II? l The reason is a change in macroeconomic policy regimes—the general set of rules that governs the monetary and fiscal policies that a nation follows.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill U.S. Government Deficits and Debt u Why has the U.S. consistently run deficits since World War II? l Keynesians, in arguing in favor of deficit spending, removed its stigma.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill U.S. Government Deficits and Debt u Why has the U.S. consistently run deficits since World War II? l As deficits grew, they were blamed for its growth.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill U.S. Government Deficits and Debt u Why has the U.S. consistently run deficits since World War II? l The modern Classical supply-side regime of the 1980s, resulted in even greater deficits than those run up by the Keynesians.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill U.S. Government Deficits and Debt u The public dislikes both deficits and debt.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill U.S. Government Deficits and Debt u The public dislikes both deficits and debt. l The Gramm-Rudman-Hollings Act of 1985 established mandatory deficit targets for the U.S. in an effort to meet public demands for their elimination.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill U.S. Government Deficits and Debt u The public dislikes both deficits and debt. l Since the law proved ineffective, the Budget Enforcement Act of 1990 was enacted.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill U.S. Government Deficits and Debt u The public dislikes both deficits and debt. l The Budget Enforcement Act of 1990 put caps on certain aspects of federal spending, and established a pay-as-you-go test for new spending or tax cuts.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill U.S. Government Deficits and Debt u The public dislikes both deficits and debt. l Up until 1996, any new legislation, except for emergencies, must be accompanied by offsetting tax increases or spending cuts.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill U.S. Government Deficits and Debt u The public dislikes both deficits and debt. l As these laws, and others proved weak, some politicians demanded a balanced budget amendment to the Constitution.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill U.S. Government Deficits and Debt u The public dislikes both deficits and debt. l It was felt that without the amendment, American politics lacks the political will to prevent deficit spending.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill U. S. Budget Deficits
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill U. S. Government Debt 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Years 19501960197019801990 2000 2010 $5,500
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Arbitrariness in Defining Deficits
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Arbitrariness in Defining Deficits l How one defines a revenue and an expenditure is crucial.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Arbitrariness in Defining Deficits l Should capital equipment be charged off completely the year it was bought or be depreciated over its useful life?
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Arbitrariness in Defining Deficits l Should the gain in the market value of an issued U.S. government obligation be counted as additional revenue or ignored?
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Arbitrariness in Defining Deficits l Putting aside the issue of “cooking the books,” reasonable people can disagree on how to handle government revenue and expenditures.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Deficits As a Summary Measure
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Deficits As a Summary Measure l The deficit is a summary measure of the financial health of the economy—a single figure.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Deficits As a Summary Measure l Therefore, to understand the summary, you must understand the logic used to calculate it.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u The Need to Judge Deficits Relative to Assets
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u The Need to Judge Deficits Relative to Assets l Debt, being a summary measure of a nation’s accumulated deficits, has even more problems than deficits.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u The Need to Judge Deficits Relative to Assets l Debt is only half the picture—the other half being assets.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u The Need to Judge Deficits Relative to Assets l Debt must be judged in its relation to assets.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Arbitrariness in Defining Debt
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Arbitrariness in Defining Debt l Assets and debt are subject to varying definitions.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Arbitrariness in Defining Debt l There is no perfectly objective and universal way of defining how debt and assets should be valued.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Difference Between Individual and Government Debt
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Difference Between Individual and Government Debt l Government debt is different than an individual’s debt.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Difference Between Individual and Government Debt l Since government is ongoing, it never has to settle its accounts as when an individual dies.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Difference Between Individual and Government Debt l Governments can pay off debt by creating money.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Difference Between Individual and Government Debt l Much of government debt is internal government debt, debt owed to its own citizens.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Difference Between Individual and Government Debt l This means that the government must collect taxes to pay the debt which is giving to the debt holders as income.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Difference Between Individual and Government Debt l Not counting the distribution effects (the same people may not be involved) the nation is neither richer nor poorer.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Difference Between Individual and Government Debt l External government debt on the other hand is debt owed individuals in foreign nations.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Difference Between Individual and Government Debt l Paying interest on it means a net reduction in domestic income.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Deficits, Debt, and Debt Service Relative to GDP
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Deficits, Debt, and Debt Service Relative to GDP l Government deficits and debt relative to GDP is less alarming compared to government deficits and debt in absolute terms.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Deficits, Debt, and Debt Service Relative to GDP l Measuring deficits and debt relative to GDP highlights a nation’s productive capacity relative to debt management.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Deficits, Debt, and Debt Service Relative to GDP l Although the absolute size of the deficits and debt have grown since World War II, their importance relative to GDP have not.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Budget Deficits as a Percentage of GDP Years Deficits as percentage of GDP 10 0 –10 –20 –30 1900191019201930194019501960197019801990
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Debt as a Percentage of GDP Debt as percentage of GDP 1980 100 75 50 25 0 Years 1800182018401860188019001920194019602000
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Economists are also concerned about the interest rate paid on debt.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Economists are also concerned about the interest rate paid on debt. l Debt service is the interest rate on debt times the total debt.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Economists are also concerned about the interest rate paid on debt. l Debt service as payment for past expenditures puts a burden on future generations.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Economists are also concerned about the interest rate paid on debt. l Debt service payments relative to GDP suggests that it is a greater problem than the debt/GDP measure, but less of a problem than absolute debt.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Economists’ Way of Looking at Deficits and Debt u Economists are also concerned about the interest rate paid on debt. l The U.S. can actually afford more debt since U.S. government securities are considered the safest in the world.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Federal Interest Payments Relative to GDP
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits u Structural Deficits, Cycles and Growth
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits u Structural Deficits, Cycles and Growth l As aggregate income increases, tax revenues increase and the deficit declines.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits u Structural Deficits, Cycles and Growth l As aggregate income increases, tax revenues increase and the deficit declines. l The opposite occurs as aggregate income falls.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits u Structural Deficits, Cycles and Growth l The structural deficit is the deficit that would remain when these cyclical elements have been netted out.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits u Structural Deficits, Cycles and Growth l The structural deficit is the deficit that would remain when these cyclical elements have been netted out. l This would result in an economy at its potential income.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits u Real Growth and the Deficit
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits u Real Growth and the Deficit
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits u Real Growth and the Deficit l Some argue that as long as the economy is growing in real terms, and the debt/GDP ratio is maintained, the debt can grow without deleterious effects.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits u Real Growth and the Deficit l Others argue that the debt-GDP ratio is already too high and should be brought down.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits u Inflation, Debt, and the Real Deficit
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits u Inflation, Debt, and the Real Deficit l Inflation wipes out debt.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits u Inflation, Debt, and the Real Deficit l The larger the debt and the larger the inflation, the more debt will be eliminated with inflation.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits u Inflation, Debt, and the Real Deficit l If inflation is wiping out debt, and the deficit is equal to the increases in debt from one year to the next, inflation also affects the deficit.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits u Inflation, Debt, and the Real Deficit l A nominal deficit is the deficit determined by looking at the difference between expenditures and receipts.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits u Inflation, Debt, and the Real Deficit l A real deficit is the nominal deficit adjusted for inflation’s effect on the debt.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits u Inflation, Debt, and the Real Deficit l A real deficit is the nominal deficit adjusted for inflation’s effect on the debt. real deficit = nominal deficit - (inflation x total debt)
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits u Inflation, Debt, and Nominal Deficits
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits u Inflation, Debt, and Nominal Deficits l Inflation wipes out debt, and that fact must be considered when evaluating the effect of a deficit.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits u Inflation, Debt, and Nominal Deficits l Inflation is not a costless answer to eliminating debt.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits u Inflation, Debt, and Nominal Deficits l The government’s gain from an inflation is the private bond holder’s loss from inflation.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits u Nominal and Real Interest Rates and Deficits
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits u Nominal and Real Interest Rates and Deficits l Expectations of inflation push up the nominal interest rate and cause bond holders to demand an inflation premium on their bonds.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits u Nominal and Real Interest Rates and Deficits l Future expectations of inflation causes the real interest rate to be different form the nominal interest rate.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits u Nominal and Real Interest Rates and Deficits l If bond holders don’t lose when they make a full adjustment for expected inflation, government cannot win.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill GDP Growth Reduces Problems Posed by Deficits u Nominal and Real Interest Rates and Deficits l With full adjustments in expectations, creditors don’t lose. See numerical example on page 473 of the textbook.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Summary to This Point u Deficits are summary measures of the state of the economy.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Summary to This Point u Deficits are summary measures of the state of the economy. u They are dependent on the accounting procedures used.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Summary to This Point u It is the financial health of the economy, not the deficit, with which we should be concerned.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Summary to This Point u Deficits and debt should be viewed relative to GDP to determine their importance.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Summary to This Point u The real deficit is the nominal deficit adjusted for the inflation reduction in the real debt.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Reasons for Concern About Budget Deficits u The U.S. does not include many government obligations.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Reasons for Concern About Budget Deficits u The U.S. does not include many government obligations. l The U.S. uses a cash flow accounting system—an accounting system entering expenses and revenues only when cash is received or paid out.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Reasons for Concern About Budget Deficits u The U.S. does not include many government obligations. l The cash flow accounting system leads to a number of distortions in the budget and deficit.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Reasons for Concern About Budget Deficits u The U.S. does not include many government obligations. l A number of government obligations do not show up as part of the deficit.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Reasons for Concern About Budget Deficits u The government uses accounting tricks to make the deficit look smaller.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Reasons for Concern About Budget Deficits u The government uses accounting tricks to make the deficit look smaller. l In the S&L bailout, the government increased insurance fees on member institutions and counted them as revenue.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Reasons for Concern About Budget Deficits u The government uses accounting tricks to make the deficit look smaller. l Since they were not nearly enough to cover the costs, the government sold special bonds which were not counted as expenditures.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Reasons for Concern About Budget Deficits u The government uses accounting tricks to make the deficit look smaller. l These are called off-budget expenditures, expenditures of money that are not counted as expenditures in the budget.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Social Security Retirement System u Funded and Unfunded Retirement Systems
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Social Security Retirement System u Funded and Unfunded Retirement Systems l A funded pension system is one in which money is collected and invested in a special fund from which pension payments are made.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Social Security Retirement System u Funded and Unfunded Retirement Systems l An unfunded pension system is one in which pensions are paid from current revenues.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Social Security Retirement System u Funded and Unfunded Retirement Systems l The social security system is largely an unfunded pension system.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Social Security Retirement System u Funded and Unfunded Retirement Systems l The problem with this is that there is no trust fund of assets earning interest to cover future payments.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Social Security Retirement System u A Potential Problem With Unfunded Systems
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Social Security Retirement System u A Potential Problem With Unfunded Systems l The potential problem is that the amount paid out exceeds the amount paid in.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Social Security Retirement System u A Potential Problem With Unfunded Systems l As long as each succeeding generation remains about the same size, the process works.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Social Security Retirement System u A Potential Problem With Unfunded Systems l If there is a baby boom generation, followed by normal-sized generations, when the baby boomers begin to retire, there is not enough money being paid into the system to sustain them. l There are a number of ways to deal with this. u Partially fund the system. u Raise the retirement age.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Social Security Retirement System u Social Security and the Budget Deficit l The government responded to the unfunded social security system by raising the retirement age slightly and legislating a large increase in the rate of social security contributions.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Social Security Retirement System u A Potential Problem With Unfunded Systems l The tax increase was to fund a large trust fund.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Social Security Retirement System u A Potential Problem With Unfunded Systems l Unfortunately, deficit spending grew apace so the government was forced to finance the trust fund by issuing bonds as a promise to pay for funding the trust fund.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Social Security Retirement System u An Alternative
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Social Security Retirement System u An Alternative l Raise the eligibility age so that by 2010, it will stand at 70 years.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Social Security Retirement System u An Alternative l Lower the current social security tax rates by 10 percent.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Social Security Retirement System u An Alternative l The effect would be an increase in the current budget deficit accompanied by an increase in U.S. financial strength.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Deficit Debate: Wolves, Pussycats, or Termites u Three Alternative Views of the Deficit
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Deficit Debate: Wolves, Pussycats, or Termites u Three Alternative Views of the Deficit l The wolf-at-the-door group believes that the deficit will bring about imminent doom.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Deficit Debate: Wolves, Pussycats, or Termites u Three Alternative Views of the Deficit l The wolf-at-the-door group believes that the deficit will bring about imminent doom. l Few economists belong to this group.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Deficit Debate: Wolves, Pussycats, or Termites u Three Alternative Views of the Deficit l The domesticated-pussycat group believes that the deficit does not matter.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Deficit Debate: Wolves, Pussycats, or Termites u Three Alternative Views of the Deficit l The domesticated-pussycat group believes that the deficit does not matter. l A small but vocal group belong to this group.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Deficit Debate: Wolves, Pussycats, or Termites u Three Alternative Views of the Deficit l The termites-in-the-basement group believes that continuing deficits will cause serious problems in the long run.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Deficit Debate: Wolves, Pussycats, or Termites u Three Alternative Views of the Deficit l The termites-in-the-basement group believes that continuing deficits will cause serious problems in the long run. l The largest number of economists belong to this group.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Deficit Debate: Wolves, Pussycats, or Termites u Who’s Right?
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Deficit Debate: Wolves, Pussycats, or Termites u Who’s Right?
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Deficit Debate: Wolves, Pussycats, or Termites u Who’s Right? l The Proxmire letter mirrors the views of most lay people’s views of the deficit.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Deficit Debate: Wolves, Pussycats, or Termites u Who’s Right? l Eisner’s response represents the views of liberal Keynesian economists, of which he is one.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Deficit Debate: Wolves, Pussycats, or Termites u Who’s Right? l Some Classical economists believe deficits don’t matter because people are rational and fully discount future tax payments deficits would entail.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Deficit Debate: Wolves, Pussycats, or Termites u Who’s Right? l The Modigliani/Solow response to Eisner argues that the deficits are gnawing away at the structure of the economy.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Deficit Debate: Wolves, Pussycats, or Termites u Who’s Right? l The economy is fundamentally sick and using slick accounting Band-Aids will not cure the illness.
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© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Comparisons of Government Debt to GDP
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