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1、MACROECONOMICS 2010 Worth Publishers, all rights reserved 2010 Worth Publishers, all rights reservedS E V E N T H E D I T I O NPowerPoint Slides by Ron CronovichN. Gregory MankiwC H A P T E RGovernment Debt and Budget Deficits16In this chapter, you will learn:about the size of the U.S. governments d
2、ebt, and how it compares to that of other countriesproblems measuring the budget deficitthe traditional and Ricardian views of the government debtother perspectives on the debtIndebtedness of the worlds governmentsCountryGov Debt (% of GDP)CountryGov Debt (% of GDP)Japan173U.K.59Italy113Netherlands5
3、5Greece101Norway46Belgium92Sweden45U.S.A.73Spain44France73Finland40Portugal71Ireland33Germany65Korea33Canada63Denmark28Austria63Australia14Ratio of U.S. govt debt to GDP1790181018301850187018901910193019501970199020100.00.20.40.60.81.01.2Revolutionary WarCivil WarWW1WW2Iraq War4CHAPTER 16 Government
4、 Debt and Budget DeficitsThe U.S. experience in recent yearsEarly 1980s through early 1990sdebt-GDP ratio: 25.5% in 1980, 48.9% in 1993due to Reagan tax cuts, increases in defense spending & entitlementsEarly 1990s through 2000$290b deficit in 1992, $236b surplus in 2000debt-GDP ratio fell to 32.5%
5、in 2000due to rapid growth, stock market boom, tax hikes5CHAPTER 16 Government Debt and Budget DeficitsThe U.S. experience in recent yearsEarly 2000sthe return of huge deficits, due to Bush tax cuts, 2001 recession, Iraq warThe 2008-2009 recessionfall in tax revenueshuge spending increases (bailouts
6、 of financial institutions and auto industry, stimulus package)6CHAPTER 16 Government Debt and Budget DeficitsThe troubling long-term fiscal outlookThe U.S. population is aging.Health care costs are rising. Spending on entitlements like Social Security and Medicare is growing.Deficits and the debt a
7、re projected to significantly increase7CHAPTER 16 Government Debt and Budget DeficitsPercent of U.S. population age 65+Percent of pop.58111417202319501960197019801990200020102020203020402050actualprojected8CHAPTER 16 Government Debt and Budget DeficitsU.S. government spending on Medicare and Social
8、SecurityPercent of GDP024681950195519601965197019751980198519901995200020059CHAPTER 16 Government Debt and Budget DeficitsCBO projected U.S. federal govt debt in two scenariosPercent of GDP0501001502002503002005201020152020202520302035204020452050optimistic scenariopessimistic scenario10CHAPTER 16 G
9、overnment Debt and Budget DeficitsProblems measuring the deficit1.Inflation2.Capital assets3.Uncounted liabilities4.The business cycle11CHAPTER 16 Government Debt and Budget DeficitsMEASUREMENT PROBLEM 1: InflationSuppose the real debt is constant, which implies a zero real deficit. In this case, th
10、e nominal debt D grows at the rate of inflation: D/D = or D = D The reported deficit (nominal) is D even though the real deficit is zero.Hence, should subtract D from the reported deficit to correct for inflation. 12CHAPTER 16 Government Debt and Budget DeficitsMEASUREMENT PROBLEM 1: InflationCorrec
11、ting the deficit for inflation can make a huge difference, especially when inflation is high. Example: In 1979,nominal deficit = $28 billioninflation = 8.6%debt = $495 billion D = 0.086 $495b = $43breal deficit = $28b $43b = $15b surplus13CHAPTER 16 Government Debt and Budget DeficitsMEASUREMENT PRO
12、BLEM 2: Capital AssetsCurrently, deficit = change in debtBetter, capital budgeting:deficit = (change in debt) (change in assets)EX: Suppose govt sells an office building and uses the proceeds to pay down the debt. under current system, deficit would fallunder capital budgeting, deficit unchanged, be
13、cause fall in debt is offset by a fall in assets.Problem w/ cap budgeting: Determining which govt expenditures count as capital expenditures. 14CHAPTER 16 Government Debt and Budget DeficitsMEASUREMENT PROBLEM 3: Uncounted liabilitiesCurrent measure of deficit omits important liabilities of the gove
14、rnment:future pension payments owed to current govt workersfuture Social Security paymentscontingent liabilities, e.g., covering federally insured deposits when banks fail(Hard to attach a dollar value to contingent liabilities, due to inherent uncertainty.)15CHAPTER 16 Government Debt and Budget De
15、ficitsCASE STUDY: Accounting for TARPTroubled Asset Relief Program (TARP):The U.S. Treasury gave money to help struggling banks. In return, the Treasury became part owner of the banks, will receive dividends, will eventually relinquish ownership when banks repay principal.16CHAPTER 16 Government Deb
16、t and Budget DeficitsCASE STUDY: Accounting for TARPShould the TARP outlays count toward the deficit? The U.S. Treasury considered TARP outlays to be expenditures that increased the deficit, and will consider bank repayments as revenues that will reduce the deficit. Congressional Budget Office (CBO)
17、 counted the net present value of the program outlays minus eventual repayments adjusted for the risk of non-repayment. This works out to 25 cents for each dollar spend on TARP. 17CHAPTER 16 Government Debt and Budget DeficitsMEASUREMENT PROBLEM 4: The business cycleThe deficit varies over the busin
18、ess cycle due to automatic stabilizers (unemployment insurance, the income tax system).These are not measurement errors, but do make it harder to judge fiscal policy stance.E.g., is an observed increase in deficit due to a downturn or an expansionary shift in fiscal policy?18CHAPTER 16 Government De
19、bt and Budget DeficitsMEASUREMENT PROBLEM 4: The business cycleSolution: cyclically adjusted budget deficit (aka “full-employment deficit”) based on estimates of what govt spending & revenues would be if economy were at the natural rates of output & unemployment. percentage of potential GDP196019651
20、97019751980198519901995200020052010-6-5-4-3-2-10123The actual and cyclically adjusted U.S. Federal budget surpluses/deficitsactualcyclically-adjusted20CHAPTER 16 Government Debt and Budget DeficitsThe bottom lineWe must exercise care when interpreting the reported deficit figures.21CHAPTER 16 Govern
21、ment Debt and Budget DeficitsIs the govt debt really a problem?Consider a tax cut with corresponding increase in the government debt. Two viewpoints:1.Traditional view2.Ricardian view22CHAPTER 16 Government Debt and Budget DeficitsThe traditional viewShort run: Y, uLong run: Y and u back at their na
22、tural rates closed economy: r, Iopen economy: , NX (or higher trade deficit)Very long run:slower growth until economy reaches new steady state with lower income per capita 23CHAPTER 16 Government Debt and Budget DeficitsThe Ricardian viewdue to David Ricardo (1820), more recently advanced by Robert
23、BarroAccording to Ricardian equivalence, a debt-financed tax cut has no effect on consumption, national saving, the real interest rate, investment, net exports, or real GDP, even in the short run. 24CHAPTER 16 Government Debt and Budget DeficitsThe logic of Ricardian EquivalenceConsumers are forward
24、-looking, know that a debt-financed tax cut today implies an increase in future taxes that is equal in present value to the tax cut.The tax cut does not make consumers better off, so they do not increase consumption spending. Instead, they save the full tax cut in order to repay the future tax liabi
25、lity.Result: Private saving rises by the amount public saving falls, leaving national saving unchanged. 25CHAPTER 16 Government Debt and Budget DeficitsProblems with Ricardian EquivalenceMyopia: Not all consumers think so far ahead, some see the tax cut as a windfall.Borrowing constraints: Some cons
26、umers cannot borrow enough to achieve their optimal consumption, so they spend a tax cut. Future generations: If consumers expect that the burden of repaying a tax cut will fall on future generations, then a tax cut now makes them feel better off, so they increase spending. 26CHAPTER 16 Government D
27、ebt and Budget DeficitsEvidence against Ricardian Equivalence?Early 1980s: Reagan tax cuts increased deficit. National saving fell, real interest rate rose, exchange rate appreciated, and NX fell.1992:Income tax withholding reduced to stimulate economy. This delayed taxes but didnt make consumers be
28、tter off.Almost half of consumers increased consumption. 27CHAPTER 16 Government Debt and Budget DeficitsEvidence against Ricardian Equivalence?Proponents of R.E. argue that the Reagan tax cuts did not provide a fair test of R.E.Consumers may have expected the debt to be repaid with future spending
29、cuts instead of future tax hikes.Private saving may have fallen for reasons other than the tax cut, such as optimism about the economy.Because the data is subject to different interpretations, both views of govt debt survive.28CHAPTER 16 Government Debt and Budget DeficitsOTHER PERSPECTIVES: Balance
30、d budgets vs. optimal fiscal policySome politicians have proposed amending the U.S. Constitution to require balanced federal govt budget every year. Many economists reject this proposal, arguing that deficit should be used to:stabilize output & employmentsmooth taxes in the face of fluctuating incom
31、eredistribute income across generations when appropriate29CHAPTER 16 Government Debt and Budget DeficitsOTHER PERSPECTIVES: Fiscal effects on monetary policyGovt deficits may be financed by printing moneyA high govt debt may be an incentive for policymakers to create inflation (to reduce real value
32、of debt at expense of bond holders)Fortunately:little evidence that the link between fiscal and monetary policy is important most governments know the folly of creating inflation most central banks have (at least some) political independence from fiscal policymakers30CHAPTER 16 Government Debt and B
33、udget DeficitsOTHER PERSPECTIVES: Debt and politics“Fiscal policy is not made by angels” N. Gregory Mankiw, p.487Some do not trust policymakers with deficit spending. They argue that:policymakers do not worry about true costs of their spending, since burden falls on future taxpayerssince future taxp
34、ayers cannot participate in the decision process, their interests may not be taken into accountThis is another reason for the proposals for a balanced budget amendment (discussed above). 31CHAPTER 16 Government Debt and Budget DeficitsOTHER PERSPECTIVES:International dimensionsGovt budget deficits c
35、an lead to trade deficits, which must be financed by borrowing from abroad.Large govt debt may increase the risk of capital flight, as foreign investors may perceive a greater risk of default.Large debt may reduce a countrys political clout in international affairs.32CHAPTER 16 Government Debt and B
36、udget DeficitsCASE STUDY:Inflation-indexed Treasury bondsStarting in 1997, the U.S. Treasury issued bonds with returns indexed to the CPI.Benefits:Removes inflation risk, the risk that inflation and hence real interest rate will turn out different than expected.May encourage private sector to issue
37、inflation-adjusted bonds.Provides a way to infer the expected rate of inflationCASE STUDY:Inflation-indexed Treasury bondspercent (annual rate)01234562003-01-032003-07-042004-01-022004-07-022004-12-312005-07-012005-12-302006-06-302006-12-292007-06-29rate on non-indexed bondimplied expected inflation
38、 raterate on indexed bondChapter Summary1.Relative to GDP, the U.S. governments debt is moderate compared to other countries2.Standard figures on the deficit are imperfect measures of fiscal policy because they:are not corrected for inflationdo not account for changes in govt assetsomit some liabili
39、ties (e.g., future pension payments to current workers)do not account for effects of business cyclesChapter Summary3.In the traditional view, a debt-financed tax cut increases consumption and reduces national saving. In a closed economy, this leads to higher interest rates, lower investment, and a l
40、ower long-run standard of living. In an open economy, it causes an exchange rate appreciation, a fall in net exports (or increase in the trade deficit). 4.The Ricardian view holds that debt-financed tax cuts do not affect consumption or national saving, and therefore do not affect interest rates, in
41、vestment, or net exports.Chapter Summary5.Most economists oppose a strict balanced budget rule, as it would hinder the use of fiscal policy to stabilize output, smooth taxes, or redistribute the tax burden across generations. 6.Government debt can have other effects:may lead to inflationpoliticians can shift burden of taxes from current to future generationsmay reduce countrys political clout in international affairs or scare foreign investors into pulling their capital out of the country
