The document discusses government debt and deficits. It notes that government spending reduces other categories like consumption. It provides data showing US debt held by the public is around $16 trillion and total debt is $20 trillion. Historically, the debt to GDP ratio rises during wars and falls during peacetime. Large and persistent deficits can lead to continually rising government debt. Government budget deficits decrease investment by "crowding out" private investment, which can reduce long term economic growth.

1. Does Government “Investment”
Increase Long Term Growth?
0
And what about those deficits and the debt?

2. Increase Productivity and Living Stds?
1

3. Federal Deficits and Debt
 Note that our national income (output, Y) goes to
four categories, and the more G, the less of the
others. (remember, economics is about scarce
resources and tradeoffs. G may not be bad, but
there is a tradeoff.)
2

4. How Large are the Budget Deficits and
What is Their Effect?
3

6. Federal Debt

7. Federal Debt
How much we owe
How much we owe
others
Gap = how much we owe
ourselves (SS Trust fund)

8. How large is the Debt?
 There are different ways to measure federal debt
 Debt held by the public is ~ $16trillion
 Total debt (including that owed to social security
trust fund) is ~$20trillion
7

9. How Much is Too Much?
8

10. 9
The U.S. Government Debt
 The government finances deficits by borrowing
(selling government bonds).
 Persistent deficits lead to a rising govt debt.
 The ratio of govt debt to GDP is a useful
measure of the government’s indebtedness
 Historically, the debt-GDP ratio usually rises
during wartime and falls during peacetime – until
the early 1980s.

11. 0%
20%
40%
60%
80%
100%
120%
1790 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 2010
U.S. Government Debt
as a Percentage of GNP, 1790–2012
Revolutionary
War
Civil
War WW1
WW2
Financial
Crisis

12. Federal Debt as % of GDP

13. Savings and Investment
Chapter 13
12

14. Debt Forecast
13

15. Borrowers, you and the US
 US deficits and debt “could” continue indefinitely
 No reason the US ever has to pay it off
 “Could” continue to rollover
 Borrow to pay off last loan…
 You cannot borrow forever
 Try to finance a house at age 80
 What’s the difference
 Country assumed to be infinitely lived
 You are not…
 Works for US until lenders expect death of country or
government
14

16. Why Do We Even Care?
15

17. 16

18. Different Kinds of Saving

20. 19

21.  Suppose GDP equals $10 trillion,
consumption equals $6.5 trillion,
the government spends $2 trillion
and has a budget deficit of $0.3 trillion.
 Find public saving, taxes, private saving,
national saving, and investment.
A. Calculations
20

22. Answers

23. C H A P T E R
The Market for Loanable Funds
13

25. Policies

26. Policy 1: Saving Incentive
 A saving incentive could be a tax break for
personal income taxes encouraging saving
 i.e. 401K, 403b, IRA, etc.
 Households will save more at every interest rate
 Savings accumulating in bank vaults

27. Policy 1: Saving Incentive

28. Policy 1: Saving Investment
 Supply of
loanable funds
has increased (S
shifted right)
 Bankers see a
vault full of cash!
 Lower the interest
rate (movement
along the demand
curve)
27

29. Policy 1: Saving Incentives

30. Policy 2: Investment Incentive
 An investment tax credit:
 Reduces the taxes of firms making investment
 An increase in the incentive to invest
 More firms want to invest
 Go to the bank to borrow…
29

31. Policy 2: Investment Incentive
30

32. Policy 2: Investment Incentive
 Demand for
loanable funds has
increased (D shifted
right)
 Bankers see a
crowd of potential
borrowers outside
the bank
 Raise the interest
rates (movement
along the supply
curve)
31
Source: boston.com

33. Policy 2: Investment Incentives

34. Use the loanable funds model to analyze
the effects of a government budget deficit:
 Draw the diagram showing the initial
equilibrium.
 Determine which curve shifts when the
government runs a budget deficit.
 Draw the new curve on your diagram.
 What happens to the equilibrium values of the
interest rate and investment?
Exercise
33

35. 34

36. 35
Budget Deficits, Crowding Out,
and Long-Run Growth
 Our analysis: Increase in budget deficit causes
fall in investment.
The govt borrows to finance its deficit,
leaving less funds available for investment.
 This is called crowding out.
 Recall from the preceding chapter: Investment
is important for long-run economic growth.
Hence, budget deficits reduce the economy’s
growth rate and future standard of living.

37. US Debt Clock
36
http://www.usdebtclock.org/index.html

38. 37
CONCLUSION
 Like many other markets, financial markets are
governed by the forces of supply and demand.
 One of the Ten Principles from Chapter 1:
Markets are usually a good way
to organize economic activity.
Financial markets help allocate the economy’s
scarce resources to their most efficient uses.