Lecture 22 Government Debt

Question 1

amount of federal debt held by the public per person

Answer 1

$79k

Question 2

amount of federal debt held by the public per family of four

Answer 2

$320k

Question 3

government debt

Answer 3

the amount of money the federal government has borrowed to cover the outstanding balance of expenses incurred over time
if the government experiences reoccurring deficits, the government debt grows over time

Question 4

when does a budget deficit happen

Answer 4

when government spending exceeds revenue (tax receipts)

Question 5

how does the government pay for budget deficits

Answer 5

the government borrows by selling securities such as treasury bonds

Question 6

national debt

Answer 6

the accumulation of government borrowing along with the associated interest payments owed to the investors who purchased these securities

Question 7

economic growth and debt

Answer 7

economic growth increases the available resources, making it possible to sustain higher debt (more growth = more debt)

Question 8

debt/GDP ratio

Answer 8

growing absolute debt isn’t a concern because absolute debt is just a result of growth
a growing debt/GDP ratio can be a concern because a growing share of output must be devoted to paying interest

Question 9

intertemporal budget balancing

Answer 9

government’s budget deficits today must be offset by future budget surpluses
a flow budget constraint holds in each period

Question 10

intertemporal budget constraint

Answer 10

holds when we consolidate the flow budget constraints over all future periods
today’s debt level B1 linked to future primary surpluses T2-G2
the government’s budget must balance… but it balances in a present discounted value sense, not period by period
government must have future surpluses to pay off deficits today

Question 11

flow budget constraint equation

Answer 11

Gt + Trt + itBt = Tt + ΔBt+1
Gt = government purchases
Trt = transfer payments (social security, unemployment insurance…)
itBt = interest payments on existing debt Bt
Tt = taxes
ΔBt+1 = Bt+1 - Bt (new borrowing)

Question 12

primary deficit

Answer 12

spending - taxes
Gt - Tt

Question 13

total deficit

Answer 13

primary deficit plus interest payments
itBt + Gt - Tt

Question 14

when does government debt increase

Answer 14

Bt+1 > Bt
total deficit > 0

Question 15

when does government debt shrink

Answer 15

Bt+1 < Bt
total deficit < 0

Question 16

intertemporal budget constraint equation

Answer 16

(1 + i)B1 = T1 - G1 + (T2-G2)/(1+i)
value of debt = present discount value of primary surpluses

Question 17

congressional budget office (CBO)

Answer 17

bipartisan, federal agency that provides budget and economic information to congress

Question 18

CBO projections

Answer 18

population aging and rising health care costs boost primary deficits
net interest outlays double as a percentage of GDP over the projection period

Question 19

biggest items of future government outlays

Answer 19

1) social security/medicare (because of population aging: the number of participants in social security and medicare is projected to grow faster than the overall population)
2) interest payments

Question 20

what does the government spend money on?

Answer 20

1) mandatory spending
2) discretionary spending

Question 21

mandatory spending

Answer 21

mandated by existing laws (medicare, social security, medicaid…)

Question 22

discretionary spending

Answer 22

formally approved by congress and president (typically, 50% for national defense and the rest to other programs: transportation, education, housing, social services)

Question 23

rise in health care spending

Answer 23

costs: expensive medical technologies are raising expenditures, waste and fraud in the health system
rising demand for healthcare services
BUT: health spending is growing in virtually all rich countries

Question 24

rising demand for healthcare services

Answer 24

consumption is subject to diminishing returns, adding additional months of life is not subject to diminishing returns
more time to enjoy high incomes is increasingly valuable, thus health spending will rise by more than consumption
it might be optimal for health care expenditures (as a fraction of GDP!) to rise as economies get richer

Question 25

main entitlement programs in the US

Answer 25

1) social security, 4.8% of GDP
2) medicare, 3% of GDP (biggest item in decades to come)
3) medicaid, 2.4% of GDP