Lecture Issues in economics today - Chapter 10

When you finish this chapter, you should: Define the key terms of economics and opportunity cost and understand how a production possibilities frontier exemplifies the trade-offs that exist in life, distinguish between increasing and constant opportunity cost and understand why each might happen in the real world, analyze an argument by thinking economically, while recognizing and avoiding logical traps.
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Lecture Issues in economics today - Chapter 10 Chapter 10 Federal Deficits, Surpluses, and the National Debt McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Chapter Outline • Surpluses, Deficits, and the Debt: Definition and History • How Economists See the Debt • Who Owns the Debt • A Balanced Budget Amendment • Projections of the Future McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Surpluses, Deficits, and the Debt: Definitions • Budget Deficit: the amount by which expenditures exceed revenues • Budget Surplus: the amount by which revenues exceed expenditures • National Debt: the total amount owed by the federal government McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Off vs. On Budget • Off-budget: parts of the budget designated by Congress as separate from the normal budget. Programs that operate with their own revenue sources and have trust funds; Social Security, Medicare, and the Post Office are examples. • On-budget: parts of the budget that rely entirely or mostly on general revenue. McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. History of Deficits, Surpluses, and the National Debt • Revolutionary War debt $75 million • Closest budget to balance (no deficit or surplus) was $3800 in 1835 • There were more years of surplus than deficit between 1791 and 1836 resulting in a national debt of only $37,000 • Civil War debt reached $2 billion • From 1865 to 1930 the debt reached $50 billion • By 1946 (the end of WWII) the debt was $250 billion • By 2000 the debt was $5.6 trillion McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Accounting for Inflation • All figures for deficits, surpluses, and the national debt must be adjusted for inflation. • The Real Deficit or Real Surplus measures the deficit or surplus in constant dollars McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. B i l i o n 1 9 9 2 D o l a rs Real Deficit/Surplus Real Deficit/Sur Total and Off Budget 200 100 0 -100 Total -200 -300 off budg -400 -500 1940195019601970198019902000 Year McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Debt and the Ability to Pay It • Economists insist that the absolute magnitude of the debt is less important than a nation’s ability to pay it. • The measure that does this is the Deficit/GDP ratio McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Deficit/GDP Deficit/GDP 1940-1999 D e f ic it / G D P 0.05 0 -0.05 -0.1 -0.15 -0.2 -0.25 -0.3 -0.35 1940 1945 1950 1955 1960 1965 1970 19751980 1985 1990 1995 Year Total McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Surpluses of the late 1990s • Surpluses were generated over the late 1990s as a result of – High GDP growth that resulted in high tax revenues – Peace Dividend: money that was freed up for other spending priorities when the Cold War was over – Rapid increases in capital gains tax revenue from a booming stock market McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. How Economists See the Deficit and Debt • Separating the Operating and Capital Budgets – Operating Budget: part of the federal budget devoted to spending on goods and services that will be used in the current year – Capital Budget: part of the federal budget devoted to ...