Deficits and Debt

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  Forgive Us Our Debts

  The Intergenerational Dangers of Fiscal Irresponsibility

  • Andrew L. Yarrow(Author)
  • 2008(Publication Date)
  • Yale University Press

    (Publisher)

  Ever since the presidency of Ronald Reagan, growing Deficits and Debt have been the subjects of much political hand-wring-ing, and occasional constructive action. Bill Clinton, the Congress, and a strong economy conspired to give us four years of unexpected budget surpluses between  and  , but the turnaround from  ’s projected ten-year sur-pluses of $  .  trillion to the deficits of the early  s represents a staggeringly rapid deterioration of America’s fiscal position. While there are many causes of deficits—and their relative importance is fiercely debated—first things first: what are Deficits and Debt, and do they mat-ter? In this and the following chapters, I will look at the nature, scope, causes, and history of America’s national debt. I will explore the consequences of our fourteen-digit debt for the nation’s economy and for individuals, if we con-tinue on our current path of fiscal recklessness. I will examine the political tor-por that has allowed our debt to grow like some alien life form out of a  s science fiction movie. And finally, I will consider what politicians have done in the past and what could be done to rid our nation of its potentially ruinous debt. For governments, deficits represent the imbalance between revenues and spending, which requires borrowing money. They are a form of what econo-mists call “negative savings.” Debt is the accumulation of deficits, with a por-Why Deficits and Debt Are Growing 5 tion of the borrowed money owed to individuals, financial institutions, and other countries’ investors and financial institutions in the form of U.S. Trea-sury securities (T-bills, notes, bonds, and so on), and a portion owed to other U.S. government entities. Yet either form of debt represents money that is not being saved, not available to be spent on other things (be it a nation’s stronger defense or a household’s new car), and liable to interest payments.

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  What We Owe

  Truths, Myths, and Lies about Public Debt

  • Carlo Cottarelli(Author)
  • 2017(Publication Date)
  • Brookings Institution Press

    (Publisher)

  The imbalance between the government spending and its revenues (in the above household example, $10,000 in the first year and $10,500 in the second year) is called the government, or fiscal, deficit. The amount the government owes at the end of the year is the public, or sometimes government or national, debt (in the example above, $10,000 after one year and $20,500 after two years). It grows because the government has a deficit. Indeed, broadly speaking, public debt is the cumulative sum of all previous deficits. 1 Debt can go down in terms of dollars, or of whatever national currency, only if, in a given year, government revenues exceed government spending, in which case the government, instead of running a deficit, is running a surplus. So public debt goes up when there is a deficit and comes down when there is a surplus. If revenues and spending are equal, the government is running a balanced budget and the debt goes neither up nor down. One last definition: the primary deficit is the deficit net of interest payments. In the above household example, it is $10,000 in the first year as well as in the second year. It is unchanged because the amount of spending excluding interest payments (what economists call primary spending) does not change. This says that your deficit can go up even if your revenues and primary spending do not change. It goes up because interest payments accumulate and keep rising as long as debt rises, as credit card holders know very well. In modern times, governments, unlike households, do not typically borrow from banks. They borrow by selling securities to investors. The securities with a maturity of up to one year are often called Treasury bills, while other securities are referred to as government bonds, or take fancier names according to their specific features, for example, whether their yield is fixed or indexed to short-term interest rates or inflation

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  The Economics of Adjustment and Growth

  Second Edition

  • Pierre-Richard Agénor, Pierre-Richard Agénor(Authors)
  • 2004(Publication Date)
  • Harvard University Press

    (Publisher)

  Chapter 3 Fiscal Deficits, Public Debt, and the Current Account It is common to speak as though, when a Government pays its way by way of inflation, the people of the country avoid taxation . . . this is not so. What is raised by printing notes is just as much taken from the public as is a beer-duty or an income tax. What a Government spends the public pays for. There is no such a thing as an uncovered deficit. John Maynard Keynes, A Tract on Monetary Reform , 1923 (p. 62). Key constraints on fiscal policy and macroeconomic management in devel-oping countries are an inadequate tax base, a limited ability to collect taxes, reliance on money financing, and (in some cases) high levels of public debt. Administrative (and sometimes political) constraints on the ability of tax au-thorities to collect revenue have often led to the imposition of high tax rates on a narrow tax base. The consequences have often been endemic tax evasion and unbridled expansion of the informal economy. At times the high degree of re-liance on monetary financing of fiscal deficits in some countries has also resulted in macroeconomic instability, capital flight, and currency crises (see Chapter 8). High and growing levels of public debt exert pressure on real interest rates and have also led to financial volatility and macroeconomic instability. This chapter provides an overview of fiscal policy issues in developing coun-tries. Section 3.1 reviews the structure of public finances in these countries, focusing first on conventional (or explicit) sources of revenue and expenditure and subsequently on seigniorage and the inflation tax, as well as on quasi-fiscal activities. Section 3.2 examines the government budget constraint and the vari-ous ways in which fiscal deficits can be measured. Section 3.3 discusses a simple technique that has proved useful for assessing the medium-term stance of fiscal policy. The role of budget ceilings and fiscal transparency is examined in section 3.4.

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  How Real is the Federal Deficit?

  • Robert Eisner(Author)
  • 2010(Publication Date)
  • Free Press

    (Publisher)

  7

  Deficits and the Economy:The Theory, Part II

  WE HAVE SO FAR CONCENTRATED on a world in which full employment is assured—or assumed. This is a world where all who want to work are working, and are working as much as they want. It is a world where all that we can produce is produced. There is no problem of being able to sell our output. The way to increase production—and income—is therefore to increase our ability to produce, that is, to increase supply. And we have explored potential effects of deficits on supply—finding them somewhat more enigmatic than many chose to believe.

  But every businessman knows that getting the goods is only half the problem, if that much. What is critical is being able to sell what you can produce. For any single firm that is a problem of the demand for its products. For the economy as a whole it is a problem of total, or aggregate demand.

  It is here that we will find major effects of federal budget deficits and federal debt. They can have a significant impact on aggregate demand. This impact can be good or bad, depending on the situation of our changing, dynamic economy, and depending on just how large the Deficits and Debt really are. The latter issue brings to the fore some of the critical questions of measurement we have been discussing. But the first essential question is, however large the deficit or debt, what difference does it make? Why should the deficit—the difference between government expenditures and government tax revenues—matter?

  To answer this, we must build upon a body of theory and analysis well known to most economists, and indeed to a generation or two of survivors of freshman economics courses. We also have to be familiar with some of the recent reservations and objections to this theory and analysis. If we are convinced beforehand that the reservations and objections have been sufficient to negate the analysis, we have in effect decided that deficits do not matter. Those so convinced have perhaps read too far already, and might well pursue a more promising pastime. Those still concerned may want to plunge on with us into the theory.

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  Budget Deficits and Debt

  A Global Perspective

  • Siamack Shojai(Author)
  • 1999(Publication Date)
  • Praeger

    (Publisher)

  DEFICIT MEASUREMENT As discussed in Chapter 1, in order to assess the consequences of deficits, it is important to know how they are measured. As Eisner and Pieper (1984) and Eisner (1986, 1989) point out, a meaningful discussion of the impact of deficits requires an accurate measure of their size. For instance, it is important to know whether the deficit variable in question is the National Income Account (NIA) measure or the observed measure of deficits derived from the consolidated budget. Abizadeh and Yousefi (1988) posit that the empirical evidence on def- icits appears to be highly sensitive to the type of deficit measure used in various studies. Deficits may or may not have a bearing on the economy, depending on how they are defined. We might fail, for example, to make a distinction between active and passive deficits. The former arise, ceteris paribus, from legislated changes in spending or taxes. Passive deficits, in contrast, come about as a result of changes in the level of economic activity, prices, and interest rates (Tatom, 1984). It is also important to know whether we are concerned with actual or full employment deficits. The former is the observed difference between actual expenditures and revenues, whereas the latter refers to deficits that would prevail if the economy were operating at full employment (Morely, 1984). In much of deficit debate, the distinction between actual and full employment deficits is either ignored or blurred. An appropriate indicator of fiscal policy is the full employment deficit. The surge in the U.S. deficits in the 1980s, stemming from the unusual cyclical economic experience, gives credence to the importance of the full employment deficits. A Review of the Deficit and Inflation Debate 71 Some researchers (e.g., McMillan and Beard, 1982) use the absolute value of deficits as an independent variable in their analysis. As Domar (1993) points out, it is not the absolute level of deficits that matter but their relative size.

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  Do Deficits Matter?

  • Daniel Shaviro(Author)
  • 2008(Publication Date)
  • University of Chicago Press

    (Publisher)

  Economists began, and through the 1950s mostly continued, to subscribe to a “new orthodoxy” (Ferguson 1964),viewing deficits not merely as acceptable within prudent limits or under various narrow circumstances but rather as totally and without qualification unproblematical. Since the threat of default remained remote, attention focused in- stead on the claim by deficit opponents that public debt shifts the bur- den of paying for government spending to future generations, whereas THE DEBATE AMONG ECONOMISTS: THE 1770s THROUGH THE 1970s 37 the spending may mostly benefit current generations. The new ortho- doxy rejected this claim and held that debt financing, relative to tax financing, inherently creates no increased burden on future gener- ations and no transfer of the cost of government away from present generations. The no-burden, no-transfer orthodoxy had clear roots in earlier discussion among economists. Ricardo had originally noted that the real cost of a government expenditure is the resources it uses, as dis- tinct from the mode of financing. When the government borrows 20 million pounds to finance a year of war, “[tlhe real expense is the twenty millions, and not [the debt principal as such or] the interest which must be paid on it” (Ricardo 195 1, 1 :244).

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  Frontiers of Heterodox Macroeconomics

  • Philip Arestis, Malcolm Sawyer, Philip Arestis, Malcolm Sawyer(Authors)
  • 2019(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  The issue was expressed by Keynes (1980): “I recently read an interesting article by Lerner on deficit budgeting, in which he shows that, in fact, this does not mean an infinite increase in the national debt, since in course of time the interest on the previous debt takes the place of new debt which would otherwise be required. (He, of course, is thinking of a chronic deficiency of purchasing power rather than an intermittent one.) His argument is impeccable. But, heaven help anyone who tries to put it across the plain man at this stage of the evolution of our ideas” (p. 320: originally written in 1944). 8 Many of the responses to rising deficits after the global financial crisis may bear this out. The perceived necessity to reduce deficits was backed by arguments of ‘credit card maxed out’, ‘burden of debt for the next generation’, etc. Yet governments tend to run deficits (rather than surpluses) and have substantial public debts, which are, of course, the accumulation of deficits. There is something of a disjuncture between what governments often do (run budget deficits) and the political and social hostility to budget deficits. In many respects, advocacy of the use of fiscal policy, particularly when it involves increasing budget deficits, has fallen outside what can be termed the Overton window that described the range of ideas tolerated in public discourse. For much of the time, budget deficits falls outside the Overton window and those seeking to stimulate the economy dismissed as ‘deficit deniers’. The difficulties of advocating the use of budget positions for securing full employment have been clear over the past decade in response to the recession following the global financial crisis (and of course before). When money is to be created to spend on increasing public expenditure, the cry often goes up that it will be inflationary. There were similar responses to quantitative easing

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  Tackling Japan's Fiscal Challenges

  Strategies to Cope with High Public Debt and Population Aging

  • Keimei Kaizuka, Anne O. Krueger(Authors)
  • 2006(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  As those authors point out, the absence of a large impact of budget deficits on interest rates does not imply that the U.S. fiscal imbalance should not be a matter of concern. Engen and Hubbard did not investigate the degree to which federal borrowing might be offset by private domestic savings or inflows of foreign savings or both. Such factors interact with federal borrowing in ways that may have similar impacts on interest rates but different impacts on the economy as a whole. More important still, the measured government debt fails to include the large unfunded liabilities of federal programs for the elderly, principally social security and Medicare, totaling tens of trillions of dollars. The current path of U.S. entitlement spending will require large transfers of resources from younger to older cohorts. Holding the path of non- interest federal outlays constant, budget deficits represent higher future tax burdens to cover both these outlays plus interest expenses associated with the debt, which have adverse consequences for economic growth. The U.S. fiscal imbalance is almost entirely a story about Medicare and social security, requiring large reduction in the growth of promised benefits or unprecedented large increases in the U.S. tax burdens (see Gokhale and Smetters, 2003). Indeed, the Congressional Budget Office (2005, pp. 3-4) strikes a strongly cautionary tone: By 2050, government spending is projected to climb to well above its historic share of GDP; and considerably higher than the historical average share of revenue, which is about 18 percent. The levels of Overview of the Japanese Deficit Question 19 borrowing implied by that outlook could have a corrosive, or eventually, contractionary effect on productivity.

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  Markets Never Forget (But People Do)

  How Your Memory Is Costing You Money--and Why This Time Isn't Different

  • Kenneth L. Fisher, Lara W. Hoffmans(Authors)
  • 2011(Publication Date)
  • Wiley

    (Publisher)

  always think this time is different (see Chapter 1). This is the part where people can’t remember that just last month, last year, last decade, they had identical sets of concerns that failed to materialize or failed to be as big as feared. The fear the world is dangerously indebted is nothing new. Through history, individually, people run into trouble. Even disastrously! But societally, we carry on.

  This chapter focuses largely on government debt because it’s government debt people most fear will tank the economy, bring down stocks and leave the country a smoldering ruin. In this chapter, we address:

  • How people fear budget deficits, but history shows it’s the surpluses they should fear.
  • Looking at the long history of government debt helps put it in perspective.
  • Developed world defaults are incredibly rare; emerging world ones are not.

  Deficits Aren’t Bad, but Surpluses Will Kill You Fill in the blanks. Historically, US federal budget deficits have been ______ for stocks and surpluses _____.

  If you answered good and then bad , congratulations. You can skip the rest of this section. If you got that backward, read on.

  Politically, both parties attack deficits. They blame them on their opponents, on the previous administration, on anything but themselves. But if they understood some basic economic fundamentals, maybe they wouldn’t be so keen to deflect blame.

  Figure 5.1 shows the US federal budget balance as a percent of GDP. I’ve noted relative highs (budget surpluses) and lows (deficits). Then, Table 5.1 shows subsequent 12-, 24- and 36-month returns after relative peaks and troughs.

  Figure 5.1 US Federal Budget Balance as a Percent of GDP

  Sources: Global Financial Data, Inc., US Bureau of Economic Analysis as of 03/31/2011.

  Table 5.1 S&P 500 Returns Following Deficit and Surplus Peaks

  Sources: Global Financial Data, Inc., US Bureau of Economic Analysis, S&P 500 price returns, as of 03/31/2011.

  Reflexively, most expect stock returns to do much worse after very big deficits and much better after surpluses. An important lesson: Never reflexively believe anything! History, that useful lab, shows it’s actually the reverse. Twelve months after surplus peaks, stocks returned 1.3% on average. They returned just 0.1% cumulatively after 24 months and just 7.1% cumulatively after 36. And that’s not just a few big negatives dragging the averages down—there’s big return variability after big surpluses.

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  The United States as a Debtor Nation

  • William R. Cline(Author)
  • 2005(Publication Date)
  • Peterson Institute for International Economics

    (Publisher)

  For consistency, the price equation cumulates inflation for only one year as well. Finally, in the fiscal deficit (equation 4A.10), the contribution of interest on the debt is simply the interest rate as applied to debt at the end of the previous year. The CBO estimate of net interest for 2004 is $159 billion, and end-2003 federal debt in the hands of the public was $3.9 trillion. This is consistent with the 4.1 percent interest rate used here as the base year rate. 41 The term � DF is set at � $50 billion to adjust for the difference between the national accounts concept of government activity (federal, 40. The idea is that firms tend to hold on to workers during recessions but are slow to hire additional workers during expansion, so that employment varies less than proportionately with swings in output over the business cycle. 41. Note that this is the 10-year rate. Although the Taylor rule cited above applies to the short-term federal funds rate, the incremental coefficient � discussed above will apply to both the 10-year rate and the short-term policy rate if the yield curve remains unchanged. In practice, the yield curve is likely to flatten as the economy strengthens. US FISCAL IMBALANCE AND THE EXTERNAL DEFICIT 145

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