1. Chapter 23
Federal Deficits and
the National Debt
• Key Concepts
• Summary
• Practice Quiz
• Internet Exercises
1
2. In this chapter, you will
learn to solve these
economic puzzles:
How does the anynational
Arepassing thego
thereSam debt
Aredebt of the United
we owns
Can Uncle the
Who
advantageschildren?
burdenbankrupt? to a
to ourdebt?
States compare to other
national debt?
national
countries?
2
3. What is the purpose
of this chapter?
To take a closer look at the
actual budgetary process
that creates and finances
our national debt
3
4. What are the four stages
of the Budget Process?
• Agency budget proposals
• Presidential budget
submission
• First budget resolution
• Second budget resolution
4
5. What is the Federal
Fiscal Year?
October 1 through
September 30
5
6. What is the
Federal Deficit?
How much money the
government borrows in
any given fiscal year
6
7. What is the
National Debt?
The total amount owed by
the federal government
to owners of government
securities
7
8. How does the U.S.
Treasury borrow money?
By selling Treasury bills,
notes, and bonds, promising
to make specified interest
payments and to repay the
loaned funds on a given date
8
9. Federal Expenditures
$1,600 and Tax Revenues
$1,400
$1,200 Billions of dollars Expenditures
$1,000
$800
$600
$400 Revenues
$200
Year
60 65 70 75 80 85 90 95 00
9
10. Federal Expenditures, Revenues, and
24 Deficits as a Percentage of GDP
23
Percentage of GDP
22
21
20 Federal
19 Deficit
18
17
Year
1985 1990 1995 2000
10
11. $+50 Surplus
0 Deficit
$-50 Billions of dollars
$-100
$-150
$-200
$-250
$-300 Federal Budget
Surpluses and Deficits
$-350
60 65 70 75 80 85 90 95 00
11
12. What has been done to
curb the National Debt?
• The Clinton plan
• Line-item veto
• Debt ceiling
12
13. What was the keystone of
the 1993 Clinton Deficit
Reduction Plan for Taxes?
• Raised the highest
marginal tax rate from
31% to 36%
• Increased tax on gasoline
by 4.3 cents per gallon
13
14. What was the keystone
of the 1993 Clinton
Deficit Reduction Plan
for Spending?
Reduced military spending
and and cut some
entitlements, including
Medicare, Medicaid, and
food stamps
14
15. What is a Debt Ceiling?
The legislated legal limit
on the national debt
15
16. What usually happens
when the Debt pushes
against the Ceiling?
Congress raises the
ceiling to accommodate
the budget deficit
16
17. $6 The National Debt
$5 Trillions of dollars
$4
$3 National debt
$2
$1
Year
30 40 50 60 70 80 90 00
17
18. The National Debt as
150 a Percentage of GDP
140 Percentage of GDP World War II
120
100 National debt/GDP
80
60
40
20 Year
30 40 50 60 70 80 90 00
18
19. What is the Internal
National Debt?
The portion of the
national debt owed to a
nation’s own citizens
19
20. What is the External
National Debt?
The portion of the
national debt owed
to foreign citizens
20
21. An International Comparison
of National Debt Ratios as a percentage of
120%
GDP, 1998
100%
Italy
80% Japan
Canada
60% France
U.S.
40% Germany
U.K.
20%
0%
21
22. Federal Net Interest as a
4.0% Percentage of GDP
3.5% Percentage of GDP
3.0%
2.5%
2.0%
1.5%
1.0%
.05%
Year
40 50 60 70 80 90 00
22
23. Ownership of the National Debt
1998
17% Public Sector
37%
Private Sector
46% Foreigners
23
24. What is the
Crowding-out Effect?
When federal government
borrowing increases
interest rates, the result is
lower consumption and
investments
24
25. Can the Government
go Bankrupt?
• Yes, it’s possible
• No, the debt need never
be paid off
25
26. Are we passing the Debt
Burden to our Children?
Yes, especially if it
continues to increase
No, not as long as the debt
is internally owned
26
27. Does Government
Borrowing Crowd Out
Private-sector Spending?
Yes, the more the government
borrows the less loanable
funds for everyone else
No, especially if it occurs
during economic downturns
27
28. Complete (AD1), Partial (AD`2),
and Zero (AD2) Crowding Out AS
200
E2
150 E`2
E1 AD2
100 AD`2
AD1
50 Full Employment
2 4 6 8 12
28
30. Key Concepts
• What is the Federal Deficit?
• What is the National Debt?
• How does the U.S. Treasury borrow money?
• What has been done to curb the National Debt?
• What is a Debt Ceiling?
30
31. Key Concepts cont.
• What is the Internal National Debt?
• What is the External National Debt?
• What is the Crowding-out Effect?
• Can the Government go Bankrupt?
• Are we passing the Debt Burden to our Childre
• Does Government Borrowing Crowd Out Priva
31
33. The national debt is the dollar
amount that the federal government
owes holders of government
securities. It is the cumulative sum
of past deficits. The U.S. Treasury
issues government securities to
finance the deficits. The debt has
more than tripled since 1980. The
debt ceiling is a method to restrict
the national debt.
33
34. $6 The National Debt
$5 Trillions of dollars
$4
$3 National debt
$2
$1
Year
30 40 50 60 70 80 90 00
34
35. Internal national debt is the
percentage of the national debt a
nation owes to its own citizens. In
1998, abut 83% of the national
debt was internally held by
individuals, banks, corporations,
insurance companies, and
government entities. The “we owe
it to ourselves” argument over
the debt is the U.S. citizens own
the bulk of the national debt.
35
36. External debt is a burden
because it is the portion of the
national debt a nation owes to
foreigners. The interest paid on
external debt transfers purchasing
power to other nations. In 1998,
approximately 17% of the national
debt was external.
36
37. Ownership of the National Debt
1998
17% Public Sector
37%
Private Sector
46% Foreigners
37
38. The crowding-out effect is a
burden of the national debt that
occurs when the government
borrows to finance its deficit,
causing the interest rate to rise. As
the interest rate rises, consumption
and business investment fall.
The burden of debt debate involves
controversial questions:
38
39. Can Uncle Sam GO Bankrupt?
The national debt is a lower
percentage of GDP today than at the
end of World War II. The U.S.
government will not go bankrupt
because it never has to pay off its
debt. When government securities
mature, the U.S. Treasury can
refinance or roll over the debt by
issuing new securities.
39
40. Are We Passing the Debt Burden to
Our Children? NO
One side of this argument is that the
debt is mostly internal, so financing a
deficit only involves exchanging old
bonds for new bonds among U.S.
citizens. The burden of the debt falls
only on the current generation when the
trade-off between public-sector goods
and private sector goods along the
production possibilities curve occurs.
40
41. Are We Passing the Debt Burden
to Our Children? YES
The sizeable external debt transfers
purchasing power to foreigners.
41
42. Does Government Borrowing Crowd
Out Private Sector Spending?
Keynesian theory assumes zero crowding
out when the federal government
increases spending in order to shift the
aggregate demand curve rightward. If
crowding out occurs, reduced private
spending offsets the multiplier effect of
increased government spending. As a
result, the expected magnitude of the
rightward shift in the aggregate demand
curve is partially or completely42
offset.
44. 1. During the late 1990’s, federal government
budget deficits
a. were completely removed.
b. dropped significantly from a high of $300
billion.
c. remained fairly stable at about $150 billion
per year.
d. exceeded $200 billion in each year.
B.
44
45. $+50 Surplus
0 Deficit
$-50 Billions of dollars
$-100
$-150
$-200
$-250
$-300 Federal Budget
Surpluses and Deficits
$-350
60 65 70 75 80 85 90 95 00
45
46. 2. The federal government finances a budget
deficit by
a. taxing businesses and households.
b. selling Treasury securities.
c. printing more money.
d. reducing its purchases of goods and services.
B. The U.S. Treasury borrows by selling
Treasury bill (T-bills), notes, and bonds
promising to make specified interest and
repay the loan on a given date.
46
47. 3. In 1998, the national debt was approximately
a. $60 billion.
b. $600 billion.
c. $6 trillion.
d. $5 trillion.
C.
47
48. $6 The National Debt
$5 Trillions of dollars
$4
$3 National debt
$2
$1
Year
30 40 50 60 70 80 90 00
48
49. 4. The national debt
a. doubled between 1950 and 1980, and by
1990, it was over four times its size in 1980.
b. doubled between 1950 and 1980 and
doubled again between 1980 and 1990.
c. stayed at approximately the same amount
between 1950 and 1980 and doubled between
1980 and 1990.
d. was four times larger in 1980 than it was in
1950 and then doubled between 1975 and
1990.
A.
49
50. $6 The National Debt
$5
Trillions of dollars
$4
$3 National debt
$2
$1
Year
30 40 50 60 70 80 90 00
50
51. 5. Which of the following countries has the
smallest national debt as a percentage of GDP?
a. Italy.
b. Canada.
c. United Kingdom.
d. Japan.
e. France.
C.
51
52. An International Comparison
of National Debt Ratios as a percentage of
120%
GDP, 1998
100%
Italy
80% Japan
Canada
60% France
U.S.
40% Germany
U.K.
20%
0%
52
53. 6. Which of the following is false?
a. The national debt’s size decreased
steadily after World War II until 1980
and then increased sharply each year.
b. The national debt increases in size
whenever the federal government has a
budget surplus.
c. The national debt is currently is about
the same size as it was during World War
II.
d. All of the above are false.
D.
53
54. 7. In 1998, how much of the U.S. national debt
was owed to foreigners?
a. About 2.5%.
b. About 17%.
c. About 31%.
d. About 59%.
B.
54
55. 8. Which of the following owns a portion of
the national debt?
a. Federal, state, and local governments.
b. Private U.S. citizens.
c. Banks.
d. Foreigners.
e. All of the above.
E. Treasury bills are widely held throughout
the public and private sectors both
domestically and overseas.
55
56. 9. The portion of the U.S. national debt held by
foreigners
a. represents a burden because it transfers
purchasing power from U.S. taxpayers to
other countries.
b. is an accounting entry that represents no
real burden.
c. decreased as a proportion of the total debt
during the 1980’s.
d. has been constant for many decades.
A. Approximately 17 percent of total U.S.
debt is external debt.
56
57. Ownership of the National Debt
1998
17% Public Sector
37%
Private Sector
46% Foreigners
57
58. 10. Which of the following statements about
crowding out is true?
a. It is caused by a budget surplus.
b. It is not caused by a budget deficit.
c. It cannot completely offset the multiplier
effect of deficit government spending.
d. It affects interest rates and, in turn,
consumption and investment spending.
D. The crowding-out effect is a reduction in
private spending caused by federal deficits
financed by U.S. Treasury borrowing.
58
59. 11. Which of the following statements about
crowding out is true?
a. It can completely offset the multiplier.
b. It is caused by a budget deficit.
c. It is not caused by a budget surplus.
d. All of the above are true.
D. If crowding out occurs, reduced private
spending offsets the multiplier effect of
increased government spending. The debt is
a summation of each years deficits and
therefore effects consumption and
investments. No crowding out occurs with
budget surpluses because the government is
not competing with consumers and investors
for available funds. 59
60. Internet Exercises
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the latest internet exercises
60
