Chapter Thirteen: Module Summary -- Budget Deficits and the National Debt

  • A budget deficit is the amount by which the federal government's outlays exceed its revenue in a given year.

  • The national debt is the federal government's total indebtedness at a moment in time.

  • The national debt and budget deficits appear larger than they actually are for five reasons. First, much of the debt is owned by other branches of the federal government. Second, the deficit and national debt must be scaled by the country's GDP to put them in proper perspective. Third, many state and local governments run surpluses, offsetting some of the federal government debt. Finally, the accounting rules for the federal government are different than the rules for private businesses. The federal government does not depreciate its capital assets.

  • A structural deficit is the deficit that we would have if the economy were at full employment. A cyclical deficit is the portion of the deficit attributable to the business cycle. The two parts sum to equal the total deficit, Structural deficit + Cyclical deficit = total deficit.

  • In general, economists agree that cyclical deficits are good because they help to stabilize the business cycle.

  • Two common myths about the budget deficits and national debt are that the deficit imposes a net burden on future generations, and the debt will bankrupt the nation.

  • There are real economic costs from the running large deficits.

  • The crowding out of private investment occurs when the government competes for loanable funds with the private sector, driving up interest rates, and reducing private investment. This slows the rate of increase in our living standards.

  • Deficits redistribute income from all taxpayers to bond holders.

  • Deficits impose a net burden on future generations due to the foreign-owned portion of the debt whose interest income is taken out of the country.

  • Large deficits could be inflationary.

  • Large deficits lead to an international effect. Large deficits could lead to a strong dollar which hurts U.S. exports and makes imports in the U.S. more attractive, so net exports fall.

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