ECON 202 - PRINCIPLES OF ECONOMICS:

MACROECONOMICS

I. Definitions & Basics

Budget Deficit/Budget Surplus

National or Public Debt

Discretionary Spending

Automatic Stabilizers

Crowding In versus Crowding Out

Deficit spending is financed by the government borrowing funds from the private financial sector through the sales of government Treasury bonds.

II. Facts

A. Causes of Deficits

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 American Revolutionary War).

4. Post WWII era:

Wars and recessions account for all the periods of deficit spending (except the 1980's Reagan Era "Supply Side" tax cuts): Korean War, Viet Nam War, etc.

5. 1970 - 1980:

Small deficits begin to rise slightly & build-up in the1970's.

6. 1981 - 1992:

Small deficits continue due to recession in 1980-82.

Deficits & Debt triple due to Reagan era Supply-Side "Trickle-Down" 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 implemented as a method to force the US economy into crisis in order to achieve the political goal of cutting government programs (see David Stockman's account).

7. 1992 - 2002:

Surpluses due to 10-year expansion, and productivity-focused Supply-Side government support for high-tech infrastructure and research and development.

8. 2002 - present:

Deficits return in 2002, due to

- recession,

- Bush Admin. tax cuts,

- increased government spending on post-September 11 bailouts and security, Afghan & Iraq wars.

C. Myths:

1. The US Federal Government Budget is like a household or commercial budget, which must be balanced. So the government should be required to balance its budget.

NOT TRUE. The government budget is NOT the same as a household budget, since:

- The government can raise its income simply by raising taxes, households can't.

- The government can allow inflation to increase tax revenue

and reduce it's debt repayment, households can't.

- Neither households nor firms necessarily balance their budgets.

2. The federal government budget is like state government budgets. State governments balance their budgets, so the federal government ought to as well.

NOT TRUE. The federal deficit is partly due to the federal government's subsidies of state budgets.

 

3. US deficits are way too large and threaten the health of the US economy.

NOT TRUE. US deficits are not large by comparison to other developed nations.

 

4. The best way to evaluate a deficit or debt is to measure its total size, and its relative size as a percent of the GDP.

NOT TRUE. The best way to evaluate deficits is based upon the MC/MB of the specific expenditures and programs supported by the deficit:

Is the benefit of the funded program worth the cost of paying off the debt?

With respect to debts, the method used is to compare the value of the debt (liabilities) versus the value of assets:

Are assets large enough to payoff the debt?

 

5. Future generations of taxpayers should not be stuck paying off debt accumulated in the past.

NOT TRUE. It is appropriate for future generations to pay off debt accumulated in the past, when they were among or were the primary beneficiaries of the programs funded by the debt. . E.g. education, child health, infrastructure, etc.

6. The government debt puts the US in a vulnerable situation by being over-indebted to foreign countries.

NOT TRUE. U.S. government agencies (Federal, state, and local) own 52% of all of the Treasury bonds sold to finance the debt. Another 28% is owned by American citizens, banks, corporations, insurance companies, and other American firms. Only 20% of the debt is owed to foreign investors (both foreign private investors and foreign governments.

7. Debt/deficit ceilings (e.g. OR "kicker" law) are necessary to keep the government budget balanced.

NOT TRUE. Debt/Deficit ceilings have been ineffective & would remove a valuable economic policy tool if they were effective. Deficit/Debt ceilings are really just political mechanisms for forging compromises on how to use budget surpluses or deficits.