Deficits Surpluses and Debt The Public Debt Ownership

Deficits, Surpluses, and Debt The Public Debt Ownership of the Public Debt Substantive Issues The Crowding Out Effect Deficits and Surpluses 1992 -2012 Options for the Surpluses Key Terms Previous Slide End Show 18 - 1 Next Slide 18 CHAPTER Deficits, Surpluses, and the Public Debt Copyright Mc. Graw-Hill/Irwin, 2005

DEFICITS, SURPLUSES, AND DEBT Deficits, Surpluses, and Debt The Public Debt Ownership of the Public Debt Substantive Issues The Crowding Out Effect Deficits and Surpluses 1992 -2012 Options for the Surpluses Key Terms Previous Slide End Show 18 - 2 Next Slide Definitions: • Budget Deficit • Budget Surplus • National or Public Debt • U. S. Securities Budget Philosophies • Annually Balanced Budget • Cyclically Balanced Budget • Functional Finance Copyright Mc. Graw-Hill/Irwin, 2005

THE PUBLIC DEBT Facts and Figures: Deficits, Surpluses, and Debt The Public Debt Ownership of the Public Debt Substantive Issues The Crowding Out Effect Deficits and Surpluses 1992 -2012 Options for the Surpluses Key Terms Previous Slide End Show 18 - 3 Next Slide Causes: • Wars • Recessions • Lack of Fiscal Discipline Quantitative Aspects • Debt and GDP • International Comparisons • Interest Charges • Ownership Copyright Mc. Graw-Hill/Irwin, 2005

GLOBAL PERSPECTIVE Deficits, Surpluses, and Debt The Public Debt Ownership of the Public Debt Substantive Issues The Crowding Out Effect Deficits and Surpluses 1992 -2012 Options for the Surpluses Key Terms Previous Slide End Show 18 - 4 Next Slide Public Sector Debt as a percent of GDP, 2002 0 Japan Italy Belgium Canada France Spain Sweden Germany United States Netherlands United Kingdom Finland Denmark Australia Copyright Mc. Graw-Hill/Irwin, 2005 20 40 60 80 100 120 140 Source: Organization for Economic Cooperation and Development

Deficits, Surpluses, and Debt The Public Debt Ownership of the Public Debt Substantive Issues The Crowding Out Effect Deficits and Surpluses 1992 -2012 Options for the Surpluses Key Terms Previous Slide End Show 18 - 5 Next Slide THE PUBLIC DEBT Social Security Considerations • Social Security Trust Fund False Concerns • Bankruptcy • Refinancing • Taxation • Burdening Future Generations Copyright Mc. Graw-Hill/Irwin, 2005

PUBLIC DEBT OWNERSHIP, 2002 Deficits, Surpluses, and Debt The Public Debt Ownership of the Public Debt held U. S. Banks & Financial Other, Including Outside the Institutions State & Local Governments Federal Reserve & Federal Reserve Government Agencies 17% 11% Substantive Issues 10% The Crowding Out Effect Deficits and Surpluses 1992 -2012 18% Options for the Surpluses Key Terms Previous Slide End Show 18 - 6 U. S. Government Agencies 33% Foreign Ownership Next Slide U. S. Individuals Copyright Mc. Graw-Hill/Irwin, 2005 11% Debt held By Federal Reserve & Government Agencies

SUBSTANTIVE ISSUES Deficits, Surpluses, and Debt The Public Debt Ownership of the Public Debt Substantive Issues The Crowding Out Effect Deficits and Surpluses 1992 -2012 Options for the Surpluses Key Terms Previous Slide End Show 18 - 7 Next Slide • Income Distribution • Incentives • Foreign-Owned Public Debt • External Public Debt Copyright Mc. Graw-Hill/Irwin, 2005

SUBSTANTIVE ISSUES Deficits, Surpluses, and Debt The Public Debt Ownership of the Public Debt Substantive Issues The Crowding Out Effect Deficits and Surpluses 1992 -2012 Options for the Surpluses Key Terms Previous Slide End Show 18 - 8 Next Slide • Crowding Out and the Stock of Capital • Public Investment • Public-Private Complementarities Copyright Mc. Graw-Hill/Irwin, 2005

THE CROWDING OUT EFFECT 16 Ownership of the Public Debt Substantive Issues The Crowding Out Effect Deficits and Surpluses 1992 -2012 Options for the Surpluses Key Terms Previous Slide End Show 18 - 9 Next Slide Real interest rate (percent) Deficits, Surpluses, and Debt The Public Debt With a Deficit, An Increase in Investment Demand Causes… 14 12 10 8 6 4 2 Crowding Out Effect ID 2 ID 1 0 5 10 15 20 25 30 35 Investment (billions of dollars) Copyright Mc. Graw-Hill/Irwin, 2005 40

Deficits, Surpluses, and Debt DEFICITS AND SURPLUSES 1992 - 2012 $800 Ownership of the Public Debt Substantive Issues The Crowding Out Effect Deficits and Surpluses 1992 -2012 Options for the Surpluses Key Terms Previous Slide End Show 18 - 10 Next Slide Budget Deficits or Surpluses, Billions The Public Debt Actual Projected (as of May 2003) 700 600 500 400 300 200 100 0 -100 -200 -300 1992 1994 1996 Copyright Mc. Graw-Hill/Irwin, 2005 1998 2000 2002 2004 2006 2008 2010 2012 Source: Congressional Budget Office

OPTIONS FOR THE SURPLUSES Deficits, Surpluses, and Debt The Public Debt Ownership of the Public Debt Substantive Issues The Crowding Out Effect Deficits and Surpluses 1992 -2012 Options for the Surpluses Key Terms Previous Slide End Show 18 - 11 Next Slide • Pay Down the Public Debt • Cut Taxes • Increase Federal Expenditures • Back to Deficits in 2002 • Bush Tax Cuts of 2001 • The Economic Downturn • September 11, 2001 • Tax Cuts of 2003 Copyright Mc. Graw-Hill/Irwin, 2005

public debt U. S. Securities annually balanced budget cyclically balanced budget functional finance Social Security trust fund external public debt public investments Copyright Mc. Graw-Hill/Irwin, Inc. 2005 BACK END

Deficits, Surpluses, and Debt The Public Debt Ownership of the Public Debt Substantive Issues The Crowding Out Effect Deficits and Surpluses 1992 -2012 Options for the Surpluses Key Terms Previous Slide End Show 18 - 13 t x e N Disputes Over Macro Theory And Policy Next Slide Chapter 19 Copyright Mc. Graw-Hill/Irwin, 2005