Economics 1 Slide Set 17: The Debt and the Outline: s and the National Debt Definitions: measuring the deficit and debt Historical facts Current Events: Tax cuts for the rich? What is fair? Social Security and the deficit. How are they related? University of North Carolina Chapel Hill The and the Debt Some Measurement Issues: The Structural Budget How large would the deficit have been if we were near full employment GDP? The amount by which the government's expenditures exceed its receipts during a year T - G - transfers If tax receipts greater than expenditures its called a surplus The Debt the total amount owed result of all past deficits and surpluses Tax revenue depends on income; the lower the income given rates and spending, the higher will be the deficit. Actual Full employment GDP Structural Econ 1 (17) Debt & _p.prz Page 1-4 John F. Stewart 3/3/5
Changes in the Nature of the and Debt Pre 1981 Real debt as proportion of GDP declining except during recessions (stabilization) and during wars Post 1981 swung from structural surplus to large structural deficit tax cuts spending on health care Late 199's revenue finally grew enough to balance budget structure surplus Bush 2 return of large structural deficits Billions of $ 3 2 1-1 -2-3 -4-5 -6 The Budget Source: CBO for recent figures of the US Kennedy/ Johnson -7 192 193 194 195 196 197 198 199 2 21 Nixon/ Ford Jimmy Carter Ronald Reagan George Bush Bill Clinton Bush 2 Historical s Source: CBO National Debt 25 JFK/Johnson 2 15 1 5-5 -1 1962 197 Revenue Outlays and s as % of GDP Nixon/Ford Carter 198 Reagan/ Bush 199 Clinton 2 22 28 Bush II 25 projected budget In raw nominal form $7.36 trillion $26,36 per man woman and child. National Debt of the US 12 1 Trillions of $ 8 6 4 2 Revenue On Bud Rev Outlay On budget Off budget 192 193 194 195 196 197 198 199 2 21 22 Econ 1 (17) Debt & _p.prz Page 5-8 John F. Stewart 3/3/5
National Debt 1915-1998 (Relative to GDP) Who do we owe? In raw nominal form $6.7 trillion $23,37 per man woman and child. As a percent of real GDP (after removing part government owes to itself) Ratio of Public Debt to GDP 1..67.5.33 World War II Great Depression World War I 1974-75 Recession 1981-82 Recession 1981-84 Tax cuts 1993 Budget Agreement 1915 1925 1935 1945 1955 1965 1975 1985 1995 Copyright 2 by Harcourt, Inc. All rights reserved. Social Security and Medicare source CBO Institutional Knowledge Social Security and How it works Budget deficits and surpluses "On" and "Off" budget. Social Security trust fund Econ 1 (17) Debt & _p.prz Page 9-12 John F. Stewart 3/3/5
On and Off budget surplus when Bush was elected Can We Afford This? How big is the "surplus" Prediction 21: Off budget surplus gone around 22 (in fact it was gone by 22) 4 3 2 1 156 billion $77 billion (tax rebate, corp tax shift, spending) 125 billion Source: OMB circa April 21-1 -2-3 -4-5 25 26 27 21 22 23 24 28 New Debt Social Security Surplus -615-639 On Budget Source: OMB Fall 23 Lets Just Cut Spending Where do we spend it 25 Government Spending 22 2 8.5% 7.3% 16.5% 15 1 Mandatory Domestic International Defense 5.3% 15.1% 1.7% 5 14.7% 21.8% 1962 1963 1964 1965 1966 1967 1968 1969 197 1971 1972 1973 1974 1975 1976 1977 1978 1979 198 1981 1982 1983 1984 1985 1986 1987 1988 1989 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 National defense Medicare Social security Income Security Other Human Resources Physical resources Net interest Other functions Econ 1 (17) Debt & _p.prz Page 13-16 John F. Stewart 3/3/5
Percent of Income paid in taxes (my estimates based on various sources) How People have done Gross Adjusted Income ~$2, ~$2, Federal Income Tax 16.% 27.5% Federal Excise 2.5%.5% State & Local 8.1% 9.6% Social Security 6.2% 2.6% Medicare 1.45% 1.45% Family Income Thousands $2 $15 $1 $5 Real Family Income 1967-1994 By income Quentile in 1994 dollars Total 34.25% 41.65% $ 1967 1968 1969 197 1971 1972 1973 1974 1975 1976 1977 1978 1979 198 1981 1982 1983 1984 1985 1986 1987 1988 1989 199 1991 1992 1993 1994 First Second Third Fourth Fifth Top 5% Monetization of Debt Crowding in and Crowding out If the Federal Reserve takes no countervailing actions, an expansionary fiscal policy that increases the budget deficit increases real GDP and prices causing an outward shift of the demand curve for money increasing interest rates If the Fed wants to keep interest rates down must expand money supply by buying bonds (i.e. turning the debt into money) this will further add to inflation Crowding out Crowding in Short and Long Run Effects of Increases Short run: increasing deficits shift demand out. Real GDP and Price level will increase. Long run: as real interest increases, investment will fall and over time supply will shift out by less. Price Level Price Level AD 1 AD 1 AD 2 AS AS Potential GDP Potential GDP Real GDP Real GDP Econ 1 (17) Debt & _p.prz Page 17-2 John F. Stewart 3/3/5