I. Definitions & Basics

Budget Deficit/Budget Surplus National or Public Debt

Discretionary Spending

Automatic Stabilizers

II. Facts

A. Causes

1. Wars

2. Recessions

Tax Revenue Drops Gov't.Spending Increases (automatic stabilizers)

3. Discretionary Expansionary Fiscal Policy

B. History

1. Prior to Great Depression: Deficits oscillated with surpluses and balances. Debt was less than 5% of GDP.

2. During Great Depression: Hoover balances budget (cuts gov't. spending in '30 - '32), this worsens the depression. Roosevelt runs major deficits with major anti-poverty, back-to-work programs, e.g. the Civilian Conservation Corps (CCC), the Work Projects Administration (WPA), unemployment insurance, social security, et cetera.

 

3. WWII military spending accelerates US gov't. deficit spending and debt to highest levels ever (a possible exception is the US Revolutionary War).

 

4. Post WWII era: wars and recessions account for all the periods of deficit spending except the 1980's Reagan Era S.S. tax cuts and the 2002 G.W. Bush tax cuts.

5. In the 1970's small deficits begin to rise slightly & build-up.

6. 1980's: Deficits & Debt triples due to Reagan era Supply-Side Tax cuts which were not matched with equivalent spending cuts. This is the largest deficit & debt increase in US history due to discretionary fiscal policy. It was also intentionally promoted as a method to force the US economy into crisis in order to achieve the political goal of cutting gov't programs.

7. 1990's: Surpluses due to 10 year expansion; increased productivity due to computerization; increased international trade due to miniaturization of electronic components; and reduction in the relative size of the public sector.

C. Myths:

1. The US National Budget is like a household or commercial budget.

2. US deficits are large by comparison.

3. Evaluate deficits based up MC/MB & assets vs. debt.

4. Burden on future generations.

5. Who owns the debt?

6. Debt/deficit ceilings (OR "kicker" law) are good economic tools to

manage deficit spending and expansion of the debt.