Chapter 14: Deficit Spending and Public Debt

Deficit- when government spends more than it collects taxes.

2016-deficit was around $0.5 trillion.
Public Debt is the accumulation of deficit–19 trillion.

Government finances its borrowings.

Why so much deficit? – Fed spending has increased because of wars, recession, lower
taxes, etc.

- Federal government debt = Public Debt + Government Agencies

- Net Public Debt = Public Debt – Government Agency Debt
- Interest on Public Debt is 13% of Budget.
- We don’t pay down the principal- only Interest payment.
- Percentage of National Debt to GDP currently- 19T/19T=100%

Can we pay off the Debt?

There are several options:
1. Every citizen pays $60,000.
2. Reduce government spending. (will take years)
3. Increase taxes. (will take years)
We will never pay off out the Debt.

Who owns the Debt?

US – 50%
Foreigners – 50%

Grounding Out
Sometime government spending has no effect on the growth of the economy.
Trade Deficit and Budget Deficit

GDP=C+I+G+(X-M)
Large trade deficit tends to accompany large budget deficit.

1. Link between US Trade Deficit and Budget Deficit

By virtue of trade deficit, foreigners have accumulated US dollars and
purchased US assets.

2. Why two deficits are related?

Part of deficits are financed from abroad-When US runs large deficits, foreign
dollar holders spend money more on US government securities, bonds, and less
on US goods and services or our export. The effect is to increase Trade Deficit
further which impacts GDP.

Macroeconomic effect of Budget Deficit

Short-run- when in recession-to stimulate demand

1. lower taxes
2. increased government spending
as a result – more deficit