1. 18 - 1
Copyright McGraw-Hill/Irwin, 2002
Deficits, Surpluses,
and Debt
The Public Debt
Ownership of the
Public Debt
Substantive Issues
The Crowding Out
Effect
Deficits and
Surpluses 1990-2010
Options for the
Surpluses
Key Terms
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Deficits,
Surpluses,
and the
Public Debt
18C H A P T E R
2. 18 - 2
Copyright McGraw-Hill/Irwin, 2002
Deficits, Surpluses,
and Debt
The Public Debt
Ownership of the
Public Debt
Substantive Issues
The Crowding Out
Effect
Deficits and
Surpluses 1990-2010
Options for the
Surpluses
Key Terms
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DEFICITS, SURPLUSES, AND DEBT
Definitions:
•Budget Deficit
•Budget Surplus
•National or Public Debt
•U.S. Securities
Budget Philosophies
•Annually Balanced Budget
•Cyclically Balanced Budget
•Functional Finance
3. 18 - 3
Copyright McGraw-Hill/Irwin, 2002
Deficits, Surpluses,
and Debt
The Public Debt
Ownership of the
Public Debt
Substantive Issues
The Crowding Out
Effect
Deficits and
Surpluses 1990-2010
Options for the
Surpluses
Key Terms
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Causes:
• Wars
• Recessions
• Tax Cuts
THE PUBLIC DEBT
Facts and Figures:
Quantitative Aspects
• Debt and GDP
• International Comparisons
• Interest Charges
• Ownership
4. 18 - 4
Copyright McGraw-Hill/Irwin, 2002
Deficits, Surpluses,
and Debt
The Public Debt
Ownership of the
Public Debt
Substantive Issues
The Crowding Out
Effect
Deficits and
Surpluses 1990-2010
Options for the
Surpluses
Key Terms
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0 20 40 60 80 100 120 140
Italy
Japan
Belgium
Canada
Spain
France
Germany
United States
Netherlands
Finland
Sweden
Denmark
United Kingdom
Australia
GLOBAL PERSPECTIVE
Public Sector Debt as a percent of GDP,
2000
Source: Organization for Economic Cooperation and Development
5. 18 - 5
Copyright McGraw-Hill/Irwin, 2002
Deficits, Surpluses,
and Debt
The Public Debt
Ownership of the
Public Debt
Substantive Issues
The Crowding Out
Effect
Deficits and
Surpluses 1990-2010
Options for the
Surpluses
Key Terms
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Social Security Considerations
• Social Security Trust Fund
THE PUBLIC DEBT
False Concerns
• Bankruptcy
• Refinancing
• Taxation
• Burdening Future
Generations
6. 18 - 6
Copyright McGraw-Hill/Irwin, 2002
Deficits, Surpluses,
and Debt
The Public Debt
Ownership of the
Public Debt
Substantive Issues
The Crowding Out
Effect
Deficits and
Surpluses 1990-2010
Options for the
Surpluses
Key Terms
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OWNERSHIP OF THE PUBLIC DEBT
9%
28%
11%
22%
13%
17%
Debt held
By Federal
Reserve &
Government
Agencies
Debt held
Outside the
Federal
Reserve &
Government
Agencies
Federal Reserve
U.S.
Government
Agencies
Other, Including
State & Local Governments
U.S. Banks & Financial
Institutions
Foreign
Ownership
U.S. Individuals
7. 18 - 7
Copyright McGraw-Hill/Irwin, 2002
Deficits, Surpluses,
and Debt
The Public Debt
Ownership of the
Public Debt
Substantive Issues
The Crowding Out
Effect
Deficits and
Surpluses 1990-2010
Options for the
Surpluses
Key Terms
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•Income Distribution
•Incentives
•Foreign-Owned
Public Debt
•External Public Debt
SUBSTANTIVE ISSUES
8. 18 - 8
Copyright McGraw-Hill/Irwin, 2002
Deficits, Surpluses,
and Debt
The Public Debt
Ownership of the
Public Debt
Substantive Issues
The Crowding Out
Effect
Deficits and
Surpluses 1990-2010
Options for the
Surpluses
Key Terms
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•Crowding Out and
the Stock of Capital
•Public Investment
•Public-Private
Complementarities
SUBSTANTIVE ISSUES
9. 18 - 9
Copyright McGraw-Hill/Irwin, 2002
Deficits, Surpluses,
and Debt
The Public Debt
Ownership of the
Public Debt
Substantive Issues
The Crowding Out
Effect
Deficits and
Surpluses 1990-2010
Options for the
Surpluses
Key Terms
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ID1
Investment (billions of dollars)
Realinterestrate(percent)
THE CROWDING OUT EFFECT
With a Deficit,
An Increase in
Investment
Demand Causes…
16
14
12
10
8
6
4
2
0
5 10 15 20 25 30 35 40
ID2
Crowding
Out
Effect
10. 18 - 10
Copyright McGraw-Hill/Irwin, 2002
Deficits, Surpluses,
and Debt
The Public Debt
Ownership of the
Public Debt
Substantive Issues
The Crowding Out
Effect
Deficits and
Surpluses 1990-2010
Options for the
Surpluses
Key Terms
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DEFICITS AND SURPLUSES
1990 - 2010
Source: Economic Report of the President, 2001
$800
700
600
500
400
300
200
100
0
-100
-200
-300
BudgetDeficitsorSurpluses,Billions
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Actual
Projected (as of 2001)
11. 18 - 11
Copyright McGraw-Hill/Irwin, 2002
Deficits, Surpluses,
and Debt
The Public Debt
Ownership of the
Public Debt
Substantive Issues
The Crowding Out
Effect
Deficits and
Surpluses 1990-2010
Options for the
Surpluses
Key Terms
Previous
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•Pay Down the Public
Debt
•Reduce Taxes
•Increase Government
Expenditures
•Bolster the Social
Security Trust Fund
•Combinations of Policies
OPTIONS FOR THE SURPLUSES
12. 18 - 12
Copyright McGraw-Hill/Irwin, 2002
Deficits, Surpluses,
and Debt
The Public Debt
Ownership of the
Public Debt
Substantive Issues
The Crowding Out
Effect
Deficits and
Surpluses 1990-2010
Options for the
Surpluses
Key Terms
Previous
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Next
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End
Show
•Pay Down the Public
Debt
•Reduce Taxes
•Increase Government
Expenditures
•Bolster the Social
Security Trust Fund
•Combinations of Policies
OPTIONS FOR THE SURPLUSES
CHAPTER
CONCLUSIONS
13. public debt
U.S. Securities
annually balanced budget
cyclically balanced budget
functional finance
social security trust fund
external public debt
public investments
ENDBACKCopyright McGraw-Hill/Irwin 2002
14. 18 - 14
Copyright McGraw-Hill/Irwin, 2002
Deficits, Surpluses,
and Debt
The Public Debt
Ownership of the
Public Debt
Substantive Issues
The Crowding Out
Effect
Deficits and
Surpluses 1990-2010
Options for the
Surpluses
Key Terms
Previous
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Next
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Next Disputes Over
Macro Theory
And Policy
Chapter 19