class: center, middle, inverse, title-slide # 4.7: Government Deficits & Debt ## ECON 410 · Public Economics · Spring 2020 ### Ryan Safner<br> Assistant Professor of Economics <br> <a href="mailto:safner@hood.edu"><i class="fa fa-paper-plane fa-fw"></i> safner@hood.edu</a> <br> <a href="https://github.com/ryansafner/publicS20"><i class="fa fa-github fa-fw"></i> ryansafner/publics20</a><br> <a href="https://publicS20.classes.ryansafner.com"> <i class="fa fa-globe fa-fw"></i> publicS20.classes.ryansafner.com</a><br> --- # Government Budget Constraint .pull-left[ .center[  ] ] .pull-right[ .hi[Government budget constraint]: `$$G = T + \Delta D + \Delta M$$` - Where: - G: government spending - T: tax revenue - `\(\Delta D\)`: change in government debt (bonds) held by the public - `\(\Delta M\)`: change in money supply ] --- # Government Budget Constraint .pull-left[ .center[  ] ] .pull-right[ .hi[Government budget constraint]: `$$G = T + \Delta D + \Delta M$$` - .hi-purple[Government budget surplus]: `\(G < T\)` - .hi-purple[Government budget deficit]: `\(G > T\)` ] --- # Government Budget Constraint .pull-left[ .center[  ] ] .pull-right[ - .hi-purple[Government budget deficit]: `\(G > T\)` Government *must* pay for excess spending by either: - .hi-purple[Debt finance] `\((+\Delta D)\)`: selling government bonds to the public (borrowing money) - .hi-purple[Inflationary finance] `\((+\Delta M)\)`: "printing" money for the government to spend (and causing inflation) ] --- # Adam Smith on Governments' "Juggling Trick" .left-column[ .center[  .smallest[ Adam Smith 1723-1790 ] ] ] .right-column[ .smaller[ > "When it becomes necessary for a state to declare itself bankrupt, in the same manner as when it becomes necessary for an individual to do so, a fair, open, and avowed bankruptcy is always the measure which is both least dishonourable to the debtor and least hurtful to the creditor. The honour of a state is surely very poorly provided for when, in order to cover the disgrace of a real bankruptcy, it has recourse to a juggling trick of this kind [borrowing money or its debasing currency], so easily seen through, and at the same time so extremely pernicious," (Book V, Chapter 3)" ] .source[Smith, Adam, 1776, [*An Enquiry into the Nature and Causes of the Wealth of Nations*](https://www.econlib.org/library/Smith/smWN.html)] ] --- # Government Deficits vs. Debt .pull-left[ .center[  ] ] .pull-right[ - Government deficits are a .hi[flow variable]: amount *added* per year - Government debt is a .hi-purple[stock variable]: *total* amount measured at a point in time - Deficit flows that are financed by government borrowing are added to the debt stock - Debt is the accumulated deficit ] --- # Government Spending and Revenues <img src="4.7-slides_files/figure-html/unnamed-chunk-2-1.png" width="864" style="display: block; margin: auto;" /> --- # Government Spending and Revenues (as % of GDP) <img src="4.7-slides_files/figure-html/unnamed-chunk-4-1.png" width="864" style="display: block; margin: auto;" /> --- # Government Budget Surplus or Deficit <img src="4.7-slides_files/figure-html/unnamed-chunk-6-1.png" width="864" style="display: block; margin: auto;" /> --- # Government Budget Surplus or Deficit <img src="4.7-slides_files/figure-html/unnamed-chunk-7-1.png" width="864" style="display: block; margin: auto;" /> --- # Government Budget Surplus or Deficit <img src="4.7-slides_files/figure-html/unnamed-chunk-8-1.png" width="864" style="display: block; margin: auto;" /> --- # Government Budget Surplus or Deficit (as % of GDP) <img src="4.7-slides_files/figure-html/unnamed-chunk-9-1.png" width="864" style="display: block; margin: auto;" /> --- # Total Public Debt <img src="4.7-slides_files/figure-html/unnamed-chunk-11-1.png" width="864" style="display: block; margin: auto;" /> --- # Total Public Debt as % of GDP <img src="4.7-slides_files/figure-html/unnamed-chunk-13-1.png" width="864" style="display: block; margin: auto;" /> --- # U.S. Debt Clock .center[ [](https://usdebtclock.org) ] --- # Debt as % of GDP Around the World .center[  ] --- class: inverse, center, middle # Causes of High Deficits and Debt --- # Mandatory vs. Discretionary Spending .pull-left[ .center[  ] ] .pull-right[ .smallest[ - Federal gov't spending can be broken into: - .hi[Mandatory spending]: federal programs that are *automatic* based on a defined benefit to an eligible person, doesn't require yearly appropriation by Congress - Often called .hi[entitlement spending] and .hi["off-budget spending"] - Social Security, Medicare, Medicaid - .hi-purple[Discretionary spending]: Congress specifically appropriates an amount of funding from the budget each year to each government agency - Defense and *everything else* ] ] --- # Mandatory vs. Discretionary Spending .center[ <iframe width="560" height="315" src="https://www.youtube.com/embed/0WUVliUcxgQ" frameborder="0" allow="accelerometer; autoplay; encrypted-media; gyroscope; picture-in-picture" allowfullscreen></iframe> ] --- # 2019 Federal Budget .center[  ] --- # Mandatory Spending .center[  ] --- # Mandatory Spending .center[  ] --- # Mandatory Spending: Social Security .center[  ] --- class: inverse, center, middle # Some Government Debt Concepts --- # Issuing New Government Debt .pull-left[ .center[  ] ] .pull-right[ - U.S. Department of the Treasury sells various .hi-purple[government bonds] (I.O.U.s) to - private investors (domestic & foreign) - other government agencies - Federal Reserve (in exchange for new currency - monetary policy) ] --- # Issuing New Government Debt .pull-left[ .center[  ] ] .pull-right[ - .hi-purple[Treasury bill ("Treasurys")]: maturity of `\(\leq 1\)` year - Zero-coupon bond: pays no interest, but sold at discount on face value - .hi-purple[Treasury note ("T-notes")]: maturity of 2-10 years - Coupon payments every 6 months - .hi-purple[Treasury bond ("T-bonds")]: maturity of 20-30 years - Same as T-note, longer maturity ] --- # Who Are the Bondholders? .pull-left[ .center[  ] ] .pull-right[ .center[  ] ] --- # Issuing New Government Debt .pull-left[ .center[  ] ] .pull-right[ - U.S. government debt is considered .hi-purple["risk-free"] because (it is widely believed that) the U.S. will never .hi-purple[default] on its payments to bondholders - U.S. government (unlike private companies!) can always raise taxes to pay its bondholders ] --- # Municipalities in Default .pull-left[ .center[ [](https://www.wsj.com/articles/SB10001424127887323993804578614144173709204#project%3DDETROIT0718%26articleTabs%3Dinteractive) ] ] .pull-right[ .center[ [](https://www.reuters.com/article/us-rhodeisland-centralfalls-idUSTRE7703ID20110801) ] ] --- # Debt Ceiling .pull-left[ .center[  ] ] .pull-right[ .center[ [](https://www.vox.com/policy-and-politics/2017/8/9/16112364/debt-ceiling-explained) ] ] --- # Politics of the Debt Ceiling .center[ <iframe width="560" height="315" src="https://www.youtube.com/embed/v5igKuNF1rI" frameborder="0" allow="accelerometer; autoplay; encrypted-media; gyroscope; picture-in-picture" allowfullscreen></iframe> ] --- # U.S. Loses Its Stellar Credit Rating (2011) .pull-left[ .center[  ] ] .pull-right[ .center[  U.S. Current Credit Ratings ] ] --- # (S&P) Credit Ratings on Government Debt Around the World .center[   ] --- class: inverse, center, middle # Debt & Political Incentives --- # Ricardian Equivalence .pull-left[ .center[  ] ] .pull-right[ .smallest[ - .hi[Ricardian equivalence]: hypothesis that consumers/taxpayers are future-oriented and internalize the government's budget constraint - Government spending increases today (or equivalently, tax cuts) imply that: - Government will, in the future, have to pay for the spending increase with either: - higher taxes - more debt - more inflation - Each of these methods impose burdens on consumers ] ] --- # Political Incentives .pull-left[ .center[  ] ] .pull-right[ .smaller[ - Politicians like to increase government spending (their constitutents like new programs and benefits) - To pay for them, consider the political incentives of: - raising taxes - issuing new bonds - "printing" more money - Rationally ignorant taxpayers and consumers hardly notice government debt or inflation, but *will* notice higher taxes ] ] --- # *Democracy in Deficit* .left-column[ .center[  .smallest[ L: James M. Buchanan (1919-2013) R: Richard E. Wagner (1941-) ] ] ] .right-column[ .smaller[ > "A nation cannot survive with political institutions that do not face up squarely to the essential fact of scarcity: It is simply impossible to promise more to one person without reducing that which is promised to others. And it is not possible to increase consumption today, at least without an increase in saving, without having less consumption tomorrow. Scarcity is indeed a fact of life, and political institutions that do not confront this fact threaten the existence of a prosperous and free society." ] .source[Buchanan, James M and Richard E Wagner, 1977, [*Democracy in Deficit: The Political Legacy of Lord Keynes*](https://www.econlib.org/library/Buchanan/buchCv8.html)] ] --- # *Democracy in Deficit* .left-column[ .center[  .smallest[ L: James M. Buchanan (1919-2013) R: Richard E. Wagner (1941-) ] ] ] .right-column[ .smallest[ > "What happened? Why does Camelot lie in ruin? Viet Nam and Watergate cannot explain everything forever. Intellectual error of monumental proportion has been made, and not exclusively by the ordinary politicians. Error also lies squarely with the economists. The academic scribbler of the past who must bear substantial responsibility is Lord Keynes himself, whose ideas were uncritically accepted by American establishment economists. The mounting historical evidence of the effects of these ideas cannot continue to be ignored. Keynesian economics has turned the politicians loose; it has destroyed the effective constraint on politicians' ordinary appetites. Armed with the Keynesian message, politicians can spend and spend without the apparent necessity to tax." ] .source[Buchanan, James M and Richard E Wagner, 1977, [*Democracy in Deficit: The Political Legacy of Lord Keynes*](https://www.econlib.org/library/Buchanan/buchCv8.html)] ] --- # Political Incentives .center[  ] --- # Political Incentives .pull-left[ .center[  ] ] .pull-right[ .center[  ] ] --- # Math Isn't a Partisan Issue .left-column[ .center[  ] ] .right-column[ > "The nation cannot continue to sustain the spending programs and policies of the past with the tax revenues it has been accustomed to paying. Citizens will either have to pay more for their government, accept less in government services and benefits, or both." (Congressional Budget Office, 2011) [Source](https://www.cbo.gov/publication/42761?index=12413) ] --- # What Economists Think .center[ [](http://www.igmchicago.org/surveys/taxes-and-mandatory-spending/) ] ] --- # It's Not Getting Any Better... .pull-left[ .center[  ] ] .pull-right[ .center[  ] ]