曼昆第10版讲义mankiw10e-irm-ch17

|CHAPTER17 GovernmentDebtandBudgetDeficits

LectureNotes|

CHAPTER17

GovernmentDebtandBudgetDeficits

NotestotheInstructor

ChapterSummary

ThischapterbeginswithananalysisofthesizeoftheU.S.governmentdebtandtheoutlookforthedebt.Itthendiscussesproblemsinaccuratelymeasuringthedeficitandthedebt.Thelastthreesectionsconcentrateontheeffectsofthegovernmentdebtontheeconomy,lookingattheeffectsthroughthetraditionalviewandtheRicardianview,alongwithotherperspectives.

Comments

AswiththematerialonstabilizationpolicyinChapter16,studentsfindthestudyofgovernmentdebttobequiterelevantforunderstandingthedebatesconcerningeconomicpolicythatarefrequentlycoveredinthenewsmedia.Thechapterincludesasectionthatdiscussesbalancedbudgetsandoptimalfiscalpolicy—helpingstudentsunderstandwhydeficitsmightsometimesbebeneficial.Thecasestudyaboutthefiscalfutureconsidersthereasonsbehindthetroublinglong-termbudgetoutlook.Thechapteralsointroducestheroleofdebtinrecentfinancialcrises,atopiccoveredmorecompletelyinChapter18.

Thischapterprovidesaparticularlygoodopportunitytoreviewandbringtogetherothermaterialinthetextbook(inparticular,short-runandlong-runcrowdingoutandtheimplicationsforcapitalaccumulationandgrowth).Thematerialcanbecoveredinonelecture.

Istressthedistinctionbetweenthedebtandthedeficitasanimportantpieceofmacroeconomicliteracyandencouragestudentstolistenfortheall-too-commonconfusiononthistopic.Aftercoveringthematerialinthischapter,IfinditinterestingtoaskstudentswhattheythinkaboutRicardianequivalenceandwhicharguments(fororagainst)theyfindmostcompelling.

UseoftheEWebsite

GototheEwebsiteanddownloadannualdataoverthepast20yearsfortheGDPpriceindexandthefederaldebtoutstanding(intheflowoffundsdata).ComputetheinflationratefromtheGDPpriceindex.Usetheinflationratealongwiththedebtoutstandingtocomputethecomponentofinterestonthedebtthatisduetoinflation.Nowdownloadthefederalgovernmentbudgetdeficitoverthepast20years.Subtracttheinflationcomponentfromthedeficittoarriveatanadjusteddeficit.Assesshowthisadjustmentchangesthepatternofthedeficitoverthisperiod.

ChapterSupplements

Thischapterincludesthefollowingsupplements:

17-1 DebtandDeficits:TheData

17-2 HowImportantIsCrowdingOut?(CaseStudy)

17-3 StructuralandCyclicalDeficits

17-4 GenerationalAccounting

17-5 TheGovernmentBudgetConstraint

17-6 BorrowingConstraintsUsingtheFisherDiagram

17-7 SocialSecurityBenefitsandRicardianEquivalence

17-8 IsEverythingNeutral?

17-9 DoesAltruismMatter?

17-10 UnpleasantMonetaristArithmetic

17-11 InflationIndexedBondsandExpectedInflation

17-12 AdditionalReadings

LectureNotes

Introduction

Oneimportantcontroversyinmacroeconomicsconcernstheroleandsignificanceofgovernmentdebt.GovernmentdeficitsandgovernmentdebtmovedtotheforefrontofU.S.economicandpoliticaldebateinthe1980s,asthefederalgovernmentincreaseditsdebtatarateunprecedentedinpeacetime.Morerecently,duringthe2000s,thereemergenceoflargedeficitsonceagainputthisissueatthetopofthepolicyagenda.

17-1 TheSizeoftheGovernmentDebt

ThenetdebtoftheU.S.federalgovernmentwasabout81percentofGDPin2016.Thiswaswellbelowthe125percentshareofGDPforJapan’sdebtbutlargerthanthe5.5percentshareofGDPforSwitzerland’sdebt.Relativetoothercountries,theU.S.debtisroughlyinthemiddleofthepack.Anotherwaytoviewitssizeistonotethatin2016,the$14.2trilliondebtheldbythepublicamountedto$44,000foreachofthe323millionpeopleintheUnitedStates.Giventhattheaverageperson’slifetimeearningsareabout$2million,apercapitadebtof$44,000doesnotappearoverwhelming.

Table17-1

Figure17-1

Anotherimportantfeatureofthedebtisthatovertimeitssizehasfluctuatedgreatly.Debthastypicallyrisenduringwarsandfallenduringpeacetime.AttheendofWorldWarII,forexample,thedebtheldbythepublicreachedthehistorichighof106percentofGDPandthenfellsharplyoverthesubsequentdecades.Amajorexceptiontothispatternwasthelargeincreaseinthedebtduringthe1980sandearly1990s.

ThedebtdeclinedasashareofGDPduringthelate1990sasthebudgetswungfromdeficitintosurplusduetotaxincreases,spendingrestraint,andstrongeconomicgrowth.Recession,taxcuts,andtwowarsreversedthistrend,andthedebtbegantoriseagainasashareofGDPduringtheearlyandmid-2000s.Thedebtthengrewsharplyfrom2008to2011asaresultofthedeeprecessionthatbeganinlate2007andthelargefiscalstimulusplanthatCongressadoptedtopropuptheeconomy.AstheeconomyrecoveredfromtheGreatRecession,thebudgetdeficitdeclined,andtheincreaseinthedebt-to-GDPratioslowed.ButtheslowdownindebtaccumulationappearedtobetemporaryassomeobserversworriedthatthetaxcutpassedbyCongressandsignedintolawbyPresidentTrumpinlate2017wouldleadtoarisingtrajectoryforgovernmentdebtinfutureyears.

CaseStudy:TheTroublingLong-TermOutlookforFiscalPolicy

Supplement17-1,“DebtandDeficits:TheData”

Supplement17-2,“HowImportantIsCrowdingOut?”

Thelong-termbudgetoutlookisdistressing.AccordingtotheCongressionalBudgetOffice(CBO),spendingonprogramsfortheelderlyoverthenextseveraldecadesisprojectedtoincreasemorerapidlythantherevenuessupportingtheseprograms,leadingtorisingdeficitsand,thus,anaccumulatingfederaldebt.Inparticular,spendingonSocialSecurity,Medicare,andMedicaidhasrisenfromlessthan1percentofGDPin1950toover10percenttodayandisprojectedtogrowfurtheroverthenexthalfcentury.Theprojectedincreaseinspendingisduetotheagingofthepopulationaslifeexpectancyhasrisenandfertilityrateshavedeclined.Inaddition,technologicaladvancesinhealthcarethatimproveandextendpeople’slivesalsopushupwardthecostofhealthcareprograms.CBOforecastsshowthefederaldebtasashareofGDPrisingtohistorichighsbythelatterpartofthiscentury.

Long-termforecasts,likeanyotherforecasts,involvemuchuncertainty.Smallchangesinassumptionsaboutdemographictrendsoreconomicperformancecanleadtolargechangesinprojectedoutcomesfordeficitsmanydecadesinthefuture.Furthermore,theCBO’slong-termprojectionassumesthatcurrentpoliciesremainunchanged—whichisnotlikelytooccurinthefaceofintensifyingpressuretoaddresstheproblemoflong-termfiscalimbalances.Ofcourse,addressingtheproblemiseasierifitisdonesoonerratherthanlater.

17-2 MeasurementProblems

Somedisagreementsaboutfiscalpolicyarisebecauseofdifficultiesinobtaininganaccurateandeconomicallymeaningfulmeasureofthedeficit.Therearemanysubtletiesandarcanedetailsofgovernmentfinancialstatistics.Hereweconsiderfourparticularlyimportantmeasurementproblems.

Problem1:Inflation

Thedeficitasusuallymeasuredisnotadjustedforinflation.Partofthedeficitisinterestpaymentsonthegovernmentdebt.BytheFisherequation,theseinterestpaymentsequaliD=(r+π)D.TherealinterestpaymentsareequaltorD,sothedeficitisoverstatedbyanamountequaltoπD.Wheninflationishigh,thisoverstatementcanbelarge:in1979,forexample,inflationwas8.6percentandthedebtwas$495billion,implyingthatthedeficitwasoverstatedbyabout$43billion.Correctedforinflation,thereportedbudgetdeficitof$28billionturnsintoabudgetsurplusof$15billion.

Problem2:CapitalAssets

Thegovernment’sbudgetdeficit,asusuallymeasured,accountsonlyforchangesinthegovernment’sliabilitiesandnotforchangesinthegovernment’sassets.Thus,ifthegovernmentweretosellanationalparktodevelopersandusetherevenuetoreduceitsdebt(liabilities),thebudgetdeficitwouldbelower.Inthiscase,however,thereductioninthedeficitdoesnotmeanthegovernmenthasshiftedtoamoreresponsiblefiscalpolicy.Capitalbudgeting,bycontrast,wouldmeasurethebudgetdeficitasthechangeinliabilitiesminusthechangeinassets.Undercapitalbudgeting,thesaleofthenationalparkwouldhavenoeffectonthebudgetdeficit.Whilesuperiorinprinciple,capitalbudgetingisverydifficultinpracticebecauseofdifficultiesindecidingexactlywhatsalesandexpendituresshouldbecountedaschangesinthegovernment’sstockofassets.

Problem3:UncountedLiabilities

Certainliabilitiesofthegovernment,suchasgovernmentemployeepensionsandaccumulatedSocialSecuritybenefits,areexcludedincalculationofthedeficit.Thisisaparticularprobleminthecaseofcontingentliabilities,suchasfederaldepositinsurance,thatarepaidonlyifcertainprespecifiedevents(forexample,abankfailure)occur.

Problem4:TheBusinessCycle

Supplement17-3,“StructuralandCyclicalDeficits”

Automaticchangesinthedeficitoccurduetothedirectioninwhichtheeconomyisgoing.Duringarecession,forexample,thebudgetdeficitrisesduetodepressedtaxrevenueandincreasedgovernmentspending.Thesechangesmakeitmoredifficulttousethedeficittomonitorfiscalpolicybecauseoneneedstoknowifariseorfallinthedeficithasoccurredbecauseofapolicychangeorbecauseofeconomicgrowthordecline.Acyclicallyadjustedbudgetdeficitisbasedonestimatesofwhatgovernmentspendingandtaxrevenuewouldbeiftheeconomywereoperatingatitsnaturalrateofoutputandemployment.

SummingUp

Supplement17-4,“GenerationalAccounting”

Thesemeasurementproblemsmakethetaskofassessinggovernmentfiscalpolicydifficult.Theonlysafelessonisthatanysimplestatistic,suchasthegovernmentdeficit,providesonlyoneimperfectpieceofinformationaboutthestateofthegovernment’sfinances.Moregenerally,goodeconomicanalysisrequiresunderstandingthatalldataareimperfect.

17-3 TheTraditionalViewofGovernmentDebt

WebeginourtheoreticalanalysiswithadiscussionofthestandardIS–LMviewofthedeficit.Anincreaseinthedeficitmeanseitherlowertaxesorelseincreasesingovernmentexpendituresortransferpayments.Alloftheseimplyhigherspending,eitherdirectlyorthroughtheireffectondisposableincome.Hence,increasesinthedeficitareexpansionaryandareassociatedwithoutwardshiftsoftheIScurve.Intheshortrun,therefore,increasesinthedeficitleadtohigherinterestratesandahigherGDP.ThehigherGDPisdirectlytheresultoftheincreaseinspending.ThehigherinterestratesarisebecauseincreasedGDPincreasesthetransactionsdemandformoney,thuspushingupinterestratesandreducinginvestment.Thisisthecrowding-outeffect.Itisimportantwhenmoneydemandisinsensitivetointerestratesandinvestmentissensitivetointerestrates.Also,higherinterestratesleadtoacapitalinflow,causinganappreciationoftheexchangerateandcrowdingoutofnetexports.

Thisanalysisimplicitlymakesanassumptionthatdeficitsarefinancedbyborrowing.IfthedeficitwereinsteadtobefinancedbyincreasedM,wewouldseeoutwardshiftsofboththeISandLMcurves.

Inthelongrun,afterpriceadjustmentreturnstheeconomytofullemployment,wefindfurthercrowdingout.Increasesinthepricelevelreducetherealmoneysupply,pushinginterestratesandtheexchangerateupfurtherandthusfurtherdecreasinginvestmentandnetexports.Inthelongrun,weseecompletecrowdingout:privatespendingisreducedbyanamountexactlyequaltotheincreasedgovernmentspending.

FYI:TaxesandIncentives

Thetextbookrepresentsthetaxsystemwithasinglevariable,T,treatingtaxesasasimplelump-sumamount.Butinreality,weneedtoconsiderhowtaxrevenueisactuallyraised.Thefieldofpublicfinancespendsagooddealoftimeaddressingthebenefitsandcostsofalternativetypesoftaxes.Animportantconclusionisthattaxeshaveeffectsoneconomicincentives.Whenpeoplearetaxedonincomefromworking,theyhavelessincentivetowork,andwhentheyaretaxedonincomefromcapital,theyhavelessincentivetoinvest.Accordingly,changesintaxesleadtochangesinincentives,andthismayhaveeffectsontheoveralleconomy.Inparticular,areductionintaxesmayencouragemoreworkandinvestment,therebyincreasingaggregatesupply.Supply-sidersbelievethattheseeffectsarelargeenoughtopayforthemselvesthroughincreasedtaxrevenue.Economistsagreethattaxesaffectincentivesandthatincentivesaffectaggregatesupply,butmostdonotbelievethattaxcuts,ingeneral,payforthemselves.Discussionsinrecentyearsabouttaxreform,includingthepossibilityofmovingtoaconsumptiontax,havecenteredonreducingthedisincentiveeffectsoftaxes.

17-4 TheRicardianViewofGovernmentDebt

Thereisnotuniversalagreementonthisreasoning.SomeeconomistshavearguedthatthelogicbehindtheIS–LMmodelissubstantiallyflawedandthatweshouldnotexpecttoseecrowdingout,norshouldweexpecttoseedeficitshavinganysubstantialimpactontheeconomy.ThemainargumentisknownasRicardianequivalence,sonamedbecausethebasicideawasfirstnotedbythenineteenth-centuryBritisheconomistDavidRicardo.ThecurrentroleofthistheoryinmacroeconomicdebateisprincipallytheresultofworkbyeconomistRobertBarro.

TheBasicLogicofRicardianEquivalence

Ricardianequivalencearguesthattheeffectsontheeconomyarethesamewhethergovernmentexpendituresarefinancedbytaxesorbyborrowing(hencethetermequivalence).Stateddifferently,Ricardianequivalencearguesthatadebt-financedtaxcutshouldhavenoeffectontheeconomy.Thisisinstarkcontrasttothestandardview,inwhichthetwotypesoffinancingarenotequivalentatall.Theessenceofthisargumentisthatconsumersunderstandthegovernment’sintertemporalbudgetconstraint.Ifthegovernmentcutstaxesandissuesmorebondstoday,itiscommittingitselftohighertaxesinthefuture.Rationalhouseholdswillrealizethathighertaxesareultimatelynecessaryandsowillsavethetaxcuttodayinanticipationoftheirfuturetaxliability.Changesinprivatesavingwillexactlyoffsetanychangesinpublicsaving.

Ricardianequivalencedoesnotimplythatgovernmentexpenditureshavenoeffectontheeconomy.Ingeneral,changesingovernmentspending,financedeitherbytaxationorborrowing,willhavesignificantrealeffects.Ricardianequivalenceisastatementabouttwodifferentwaysoffinancingagivenamountofspending.

ConsumersandFutureTaxes

Supplement17-5,“TheGovernmentBudgetConstraint”

ForRicardianequivalencetohold,consumersmustbeforward-lookingsothatfuturetaxliabilitieshavealargeeffectoncurrentconsumption.Thereareanumberofreasonswhythismaynotbeso.

MyopiaOneobviouspossibilityisthatRicardianequivalenceassumestoomuchrationality;itmaybethatpeopledonottakeaccountofthegovernmentbudgetdeficitwhenmakingtheirconsumption/savingdecisions.

Supplement17-6,“BorrowingConstraintsUsingtheFisherDiagram”

Supplement17-7,“SocialSecurityBenefitsandRicardianEquivalence”

BorrowingConstraintsRicardianequivalencebreaksdownifindividualsfaceborrowingconstraints.Aliquidity-constrainedindividualconsumesallherincomeandwouldconsumemoreifshewereabletoborrow.Ifthegovernmentcutshertaxes,thensheisabletoincreaseherconsumptionandsowillnotsavethetaxcut,incontrasttothepredictionsofRicardianequivalence.

CaseStudy:GeorgeH.W.Bush’sWithholdingExperiment

Inhis1992StateoftheUnionaddress,PresidentGeorgeH.W.Bushreducedincometaxwithholding.Thestatedintentionwastoavoidoverwithholding,thusensuringthatworkerswerepaidmorenowbutwouldreceivelowerrefundswhentheyeventuallysubmittedtheirincometaxes.SuchapolicycanbeviewedasasimpletestofRicardianequivalence:workersknewthattheircurrenttaxpaymentswerelowerbutthattheirfuturepayments(thenextApril15)wouldbehigherbyanequalamount.Asurveyconductedafterthispolicywasannouncedfoundthat43percentofconsumersplannedtoaltertheirconsumption;thatis,theyplannedtobehaveinanon-Ricardianway.

FutureGenerationsInreality,individuals’andgovernments’decisionsaremadeoverlongtimehorizons.Itisnotthecasethatifthegovernmentcutstaxesthisyear,itwillhavetoraisethemnextyear.Thegovernmentbudgetconstraintmerelytellsusthatiftaxesarecutthisyear,thegovernmentwillhavetoraisetaxesatsomeunspecifiedfuturedate.Itcouldbenextyear,itcouldbe20yearsfromnow,itcouldbe200yearsfromnow.So,dowecareiftheU.S.governmentwillhavetoraisetaxesintheyear2212?Wewon’tbearoundtoworryaboutit.

Supplement17-8,“IsEverythingNeutral?”

TheeconomistRobertBarrohasarguedthatwemightindeedcare.Hesuggeststhatifpeoplecareabouttheirchildren’swelfare,thenRicardianequivalencecouldoperatethroughbequests.Ifthegovernmentcutstaxestoday,thecurrentgenerationmaynotfacehighertaxesinthefuture,butfuturegenerationsmight.Anindividual’staxcuttodaymaymeanataxincreaseforhergreat-great-great-grandchildren.Now,ifeveryparentcaresaboutherchildren,then,byimplication,everyparentalsocaresindirectlyabouthergrandchildren.(Notethatyoudon’thavetocaredirectlyaboutyourgrandchildrenforthisargumenttowork.)Ineffect,Barrosuggeststhatwethinknotintermsofindividualsbutratherintermsofdynastiesstretchingintothefuture.Theresultisthat,eventhoughpeopledie,theymaybehaveasiftheyweregoingtoliveforever.

Supplement17-9,“DoesAltruismMatter?”

Theargumentiselegantbuthardlycompelling.Manyauthorshavenotedproblemswithit.Mostoftheobjectionsarelesselegantbutnonethelessimportant.Forexample,somepeopledonothavechildrenso,forthem,thetaxcutisastraightgain.Moreover,evenpeoplewhodohavechildrenmaynotwishtobequeathanythingtothem.

MakingaChoice

ThedebateoverRicardianequivalenceisimportantbecausethetwoviewsofgovernmentdebthaveverydifferentimplicationsforeconomicpolicymaking.IfRicardianequivalenceholds,thenthegovernmentcannotusetaxcutsfinancedbydebttostimulatetheeconomy,sinceconsumersalwaysviewthesecutsastransitory.Atthesametime,taxcutsdonotleadtocrowdingoutofinvestment,sinceRicardianequivalenceimpliesthatreducedgovernmentsavingisoffsetbyincreasedprivatesaving.Traditionaleconomistsareworriedabouttheeffectsofcurrentdeficitsonourfuturestandardofliving,whereaseconomistswhoholdtheRicardianviewregardconcernaboutthedeficitasmisplaced.

FYI:RicardoonRicardianEquivalence

Inan1820article,“EssayontheFundingSystem,”DavidRicardoposestheargumentthatbearshisname:Ricardianequivalence.Ricardo,however,actuallyrejectedthenotionthatpeoplewouldconsiderdebtfinancetobeasburdensomeascurrenttaxes.HetodaywoulddisagreewithwhathasbecomeknownasRicardianequivalence.

17-5 OtherPerspectivesonGovernmentDebt

ThissectionpresentsfouradditionalperspectivesontheeffectsofgovernmentdebtthatcanmodifyeitherthetraditionalorRicardianview.

BalancedBudgetsVersusOptimalFiscalPolicy

Somecommentatorsandpoliticiansadvocateaconstitutionalbalanced-budgetamendment,requiringthefederalgovernmenttobeinbudgetbalanceatalltimes.Sucharulehassuperficialappealasameanstoavoidlargefederaldeficits.Mosteconomistsdonotsupportthisidea,however.Onereasonisthatbudgetdeficitsandsurplusesariseinpartbecauseoftheautomaticstabilizersdiscussedearlier.Iftheeconomygoesintoarecession,taxrevenuesgodown,andtransfersincrease.ThusTfalls,increasingthedeficit.Abalanced-budgetamendmentwouldeliminatesuchautomaticstabilizersandsoexacerbateeconomicfluctuations.Second,publicfinanceteachesthatthedistortionaryeffectsoftaxationareminimizedbysmoothtaxrates.Abalanced-budgetrequirementwouldforcethegovernmenttoincreasetaxeswhenexpenditureswerehighorrevenueswerelowandsomightincreasedistortions.Finally,deficitsandsurplusesareameansofintergenerationalredistribution.Ifpolicymakerswishtopursuedistributionalgoalsacrossgenerations,thenbudgetdeficitsandsurplusesareanaturaltool.

FiscalEffectsonMonetaryPolicy

Supplement17-10,“UnpleasantMonetaristArithmetic”

Accordingtothisview,governmentdebtaffectsinflationexpectationsbecauseahighlevelofdebtmayencourageagovernmenttoresorttoinflationtoreducetherealvalueofthedebt.Thereislittleevidence,however,ofalinkbetweeninflationandthelevelofdebtindevelopedcountries.Therearethreeexplanationsforthislackofevidence.First,mostgovernmentshavenothadproblemsfinancingdeficitsbysellingdebtandhencehavenotneededtoresorttoinflationaryfinance.Second,centralbanksresistpoliticalpressuresforexpansionarymonetarypolicytoreducetherealvalueofthedebt.Third,evenmostpoliticiansacknowledgethatinflationisapoorsolutionforfiscalproblems.

DebtandthePoliticalProcess

TheeconomistKnutWicksellinthenineteenthcenturywasthefirsttoarticulatetheideathatdeficitfinancehidesthecostsofthefiscaldecisionsmadebypoliticiansbypushingthecostontofuturetaxpayers.Mostrecently,JamesBuchananandRichardWagnerhavenotedthatdeficitfinancegivestheillusionthatonecanget“somethingfornothing.”(NotethatifRicardianequivalenceholds,individualswillrejectthisidea.)MartinFeldsteinnotesthatonlytherequirementofabalancedbudgetforcesgovernmenttodetermineifthebenefitsofspendingjustifythecosts.

Economistswhosupporttheseideasfavorabalanced-budgetamendmentthatwouldallowthegovernmenttorundeficitsonlyintimesofwarordepressions.Othersarguethatsuchapolicywouldundulylimiteconomicpolicy.

InternationalDimensions

Supplement17-11,“InflationIndexedBondsandExpectedInflation”

Supplement5-12,“U.S.TreasuryIssuesIndexedBonds”

Highlevelsofgovernmentdebtmayincreasethelikelihoodofdefault.Suchapossibilitycanresultinasuddenlossofinvestorconfidence,leadingtoawithdrawalofcapitalandacollapseintheforeignexchangevalueofthecurrencyinconjunctionwithariseininterestrates.Whilethepossibilityofdefaultmaybeinsignificantformostadvancedeconomies,thesameisnottruefortherestoftheworld.SeveralLatinAmericancountriesdefaultedontheirdebtsinthe1980s,asdidRussiain1998.Andin2011,itappearedthatGreece,anadvancedeconomyandmemberoftheeuroarea,waslikelytodefaultonitsdebt.

Anotherargumentisthatanation’spoliticalcloutinworldaffairsistiedtoitsstatusasacreditornation.Totheextentthatgovernmentdeficitsreducenationalsavingandresultinborrowingfromabroad,acountryislesslikelytobeabletoinfluenceworldaffairs.WhilethetheorymayexplaintheemergenceoftheUnitedStatesasaworldpower,itfailstoexplainthecontinueddominanceoftheUnitedStatesdespiteitsroleasadebtornation.

17-6 Conclusion

Theprominenceoffiscalpolicyissuesinthepoliticalarenaensuresthateconomistsandpolicymakerswillcontinuetodebatetheshort-andlong-termeffectsofdeficitsanddebtontheeconomy.

ADDITIONALCASESTUDY

17-1 DebtandDeficits:TheData

Thefederalgovernmentreceivesrevenuefromtaxes(principallyincometaxes,corporatetaxes,andSocialSecuritycontributions)andspendsonnationaldefenseandotherpurchases,transferpayments,andinterestpaymentsonthenationaldebt.Table1providesrevenuesandexpendituresfor2016(inbillionsofdollars).ThesedataarecalculatedonaNationalIncomeandProductAccountbasisthatexcludesgovernmentinvestmentexpenditures.

Table1 FederalReceiptsandExpenditures

Incometaxes

1,541

SocialSecurity

1,230

Other(includingcorporate)

681

Totalreceipts

3,452

Totalconsumptionexpenditures

965

Transferpayments

2,648

Interestpayments

475

OtherSubsidiestogovernmententerprisesandwageaccrualslessdisbursements.

61

Totalcurrentexpenditures

4,149

Deficit

697

Source:DepartmentofCommerce,BureauofEconomicAnalysis.

Table2(onthenextpage)providesdataonthefederalbudgetdeficitandfederaldebtheldbythepublicforfiscalyears1980–2017(inbillionsofdollars).ThedebtdatadifferfromthoseinTable17-1inthetext.Table2presentsdataonafiscalyearbasis,whereasTable17-1ofthetextandTable1inthissupplementpresentdataforthecalendaryear.

Table2 FederalBudgetDeficitandDebt

FiscalYear

Deficit(–)/Surplus(+)

Debt

Debt/GDP(%)

1980

–74

712

25

1981

–79

789

25

1982

–128

925

28

1983

–208

1,137

31

1984

–185

1,307

32

1985

–212

1,507

35

1986

–221

1,741

38

1987

–150

1,890

39

1988

–155

2,052

39

1989

–153

2,191

39

1990

–221

2,412

40

1991

–269

2,689

44

1992

–290

3,000

46

1993

–255

3,248

47

1994

–203

3,433

47

1995

–164

3,604

47

1996

–108

3,734

46

1997

–22

3,772

44

1998

69

3,721

41

1999

126

3,632

38

2000

236

3,410

33

2001

128

3,320

31

2002

–158

3,540

32

2003

–378

3,913

34

2004

–413

4,296

35

2005

–318

4,592

35

2006

–248

4,829

35

2007

–161

5,035

35

2008

–459

5,803

39

2009

–1,413

7,545

52

2010

–1,294

9,019

60

2011

–1,300

10,128

65

2012

–1,087

11,281

70

2013

–680

11,983

71

2014

–485

12,780

73

2015

–439

13,117

72

2016

–585

14,168

76

2017

–666

14,667

76

Source:DepartmentoftheTreasuryandDepartmentofCommerce,BureauofEconomicAnalysis.

Note:Debtisendoffiscalyear.

CASESTUDYEXTENSION

17-2 HowImportantIsCrowdingOut?

Projectionsoffuturedeficitsshouldtakeintoaccountthecrowding-outeffectofexpansionaryfiscalpolicies.Boththedirectriseininterestratesandthedampeningeffectonoutputtendtoincreasethedeficit.Thisoccursbecausehigherinterestratesincreasethecostoffinancingexistingdebt,andlessexpansioninoutput(andincomes)meanslowertaxesthanotherwise.

AstheIS–LManalysisindicates,expansionarygovernmentpolicy(runningdeficits)shiftstheIScurve