The United States began accumulating debt after independence.
The funds were obtained to help finance the Revolutionary War.
The United States often incurred debt but repaid it quickly.
The national debt increased due to the War of 1812.
The U.S. doesn't have an adequate source of tax revenues to acquire a army.
The national debt was $129 million by 1816.
It amounted to 13 percent of national income in 1816.
The U.S. government used budget surpluses to repay debt after the War of 1812.
The U.S. government was out of debt by 1835 because of these surpluses.
In 1835 and again in 1836, the government did not have a budget deficit.
There was no option of using the surplus to reduce the debt.
Congress decided to give the surplus funds to the states.
That was the last time the U.S. government was debt free.
There was a sudden increase in federal spending during the Mexican-American War.
The debt went up fourfold because of the deficits incurred to fight that war.
The debt was reduced over the next decade.
Both sides needed debt financing during the Civil War.
At the end of the Civil War, the North owed over $2 billion, or half of its national income.
Neither Confederate currency nor Confederate bonds had any value when the South lost.
The national debt was increased by the Spanish-American War.
World War I increased the national debt from 3 percent of national income in 1917 to 41 percent at the war's end.
The national debt fell in the 1920s because the federal government spent less money than it took in.
When the economy fell into the Great Depression, budget surpluses disappeared quickly.
During World War II, the national debt exploded because the government had to mobilize all available resources.
The availability of consumer goods was restricted by the U.S. government.
Consumers had little choice but to increase their savings.
People were encouraged by Uncle Sam to lend their money to the Treasury.
The national debt increased from 45 percent of GDP in 1940 to 125 percent in 1946.
During the Civil War years, the national debt exceeded 10 percent of GDP for the first time.
The 2001 caused further increases in the debt/GDP ratio.
The debt ratio increased during World War II.
European leaders forced the South to guarantee most of its loans with cotton.
When the South was unable to repay its debts, the cotton it held as a security could be sold.
Most holders of Confederate bonds received nothing.
The country's net debt has increased since it was founded.
The debt increase wasn't related to war.
The debt explosion of the 1980s was caused by recessions, massive tax cuts, and increased defense spending.
Reagan tax cuts and military build up caused the structural deficit to jump fourfold in 4 years, while the recessions caused big jumps in the cyclical deficit.
The trend continued in the early 1990s.
The first 2 years of the George H. Bush administration saw a sharp increase in discretionary federal spending.
Although taxes were raised and military spending was cut back, the structural deficit was not changed.
There was no chance of achieving smaller The U.S. National Debt Clock deficits.
The national debt increased by $1 trillion in 4 years.
The budget deficits of 1993-96 pushed the national debt to over $5 trillion.
After a couple of years of budget surplus, the accumulated debt increased.
The Bush tax cuts kicked in.
The national debt went up again as the structural deficit went up.
The debt was $9 trillion by 2007, which works out to $30,000 of debt for every U.S. citizen.
The national debt is frightening to the average citizen.
The U.S. Treasury issues bonds when it borrows money.
Bondholders have a claim to future payments.
They can sell their bonds in the bond market and convert that claim into cash.
The debt doubled in a decade.
Federal debt is owned by bondholders.
The fact that total bond assets equal total bond liabilities is meaningless to taxpayers who are confronted with $9 trillion of national debt and worry when they'll be able to repay it.
There is a fear that either the U.S. government or its taxpayers will be bankrupted by the national debt.
The figure shows who is the owner of the bonds.
50 percent of all outstanding Treasury bonds are held by federal agencies.
The Federal Reserve System acquires Treasury bonds in its monetary policy.
A trust fund balance is maintained by the Social Security Administration to cover shortfalls between payroll tax receipts and retirement benefits.
The majority of the balance is held in Treasury bonds.
One arm of the federal government owes another arm part of the national debt.
Social Security has been accumulating huge annual reserves in recent years and is now the largest single holder of the national debt.
7 percent of the national debt is held by state and local governments.
State and local governments use their budget surpluses to purchase Treasury bonds.
The national debt is owned by the private sector.
Private wealth can be found in the form of U.S. savings bonds or Treasury bonds.
Treasury bonds are insured by the U.S. government.
75 percent of the national debt is internal.
We owe most of the national debt to ourselves.
U.S. Treasury bonds are attractive to global participants debt because of their relative security, the interest they pay, and the general acceptability of dollar foreign households and institutions.
The total debt was issued earlier.
It's not clear how much of a burden the debt really is.
As debts have become due, the federal government has borrowed new funds to pay them off.
New bonds have been issued.
The ability of the U.S. Treasury to repay its debt raises an interesting question.
The national debt would grow forever.
There are two things that are worrying about this scenario.
It seems like a chain letter that promises to make everyone rich.
The chain requires that people hold large portions of their wealth in the form of Treasury bonds.
People worry about that.
Parents worry that the scheme might break down in the next generation, unfairly burdening their own children or grandchildren.
There are two flaws in this way of thinking.
The interest charges are related to the debt burden.
The real economic to future generations is overstated.
In FY 2007, the U.S. Treasury paid over $200 billion in interest charges.
Uncle Sam's spending purse may be pinched by the debt-servicing requirements, but the real economic consequences of interest payments are less known.
Most interest payments are made in the United States.
In many cases, the taxpayer and bondholder are the same person.
The income that leaks from the circular flow in the at www.treasurydirect.gov/instit/ form of taxes is used to pay for debt servicing.
There is no change in total income.
Debt servicing may not have an effect on demand.
Real resources of the economy are not affected by debt servicing.
Land, labor, and capital are required for the collection of additional taxes and the processing of interest payments.
The resources used for the processing of debt service are not worth much.
As a result of debt servicing, the amount of goods and services is virtually unchanged.
The true burden of the debt is shown by the concept of opportunity cost.
When real resources are used, opportunity costs are incurred.
The amount of that cost is determined by the other goods and services that could have been produced with those resources.
We have to look at what the debt financed to understand the true burden of the national debt.
The opportunity cost of the activities financed by the debt is the true burden of the debt.
We need to ask what the government did with the borrowed funds.
Suppose Congress borrows $10 billion to upgrade our naval forces.
The goods and services forgone in order to build more ships are the economic cost of the fleet upgrade.
The capital used to upgrade the fleet can't be used to make something else.
When Congress upgrades the fleet, we give up the chance to make another $10 billion worth of goods and services.
The method of government finance does not affect the economic cost of the naval build up.
Even if the government borrows $10 billion, the forgone civilian output will still be $10 billion.
The true burden of government activity is the opportunity cost of government purchases.
The decision to finance activity with debt doesn't change the cost.
The government might use debt financing to pay for increased transfer payments instead of buying real goods and services.
Transfer payments have few real costs.
Income transfers involve a redistribution of income from the taxpayer to the recipient.
The land, labor, and capital involved in the administrative process of making that transfer are the direct costs of those transfer payments.
The direct costs can be ignored.
The economy may suffer if taxpayers or transfer recipients respond to transfers by working, saving, or investing less.
The amount of income transferred is not a meaningful measure of economic burden.
The debt that originated in income transfers can't be seen as a unique burden.
The national debt poses no special burden to the economy, but the transactions it finances DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch DropCatch Deficit spending affects the mix of output.
Borrowing allows the federal government to bid for scarce resources.
Private investors and consumers will have less access to loanable funds.
The private sector gets squeezed when the deficit is larger.
Deficit financing allows the government to get more resources.
The deficits of the 1980s helped finance the military build up.
The result could have been financed with higher taxes.
Taxes are unpopular and more visible.
The federal government's claim on scarce resources is less apparent if they borrow rather than taxing.
Both financing methods allow the public sector to expand at the expense of the private sector.
The opportunity cost of the debt iscrowding out government activity.
How large that burden is depends on how many people are out of work and how they respond to government activity.
The opportunity cost is incurred if the military is upgraded this year.
While resources are being used by the military, we give up the chance to use them elsewhere.
When the debt is paid, the opportunity costs are incurred.
Next year's land, labor, and capital can be used for a variety of purposes.
No more resources will be allocated to that purpose once the military build up is over.
The real costs of government projects can't be delayed.
The debt can't be passed on to future generations.
Future generations will benefit from the sacrifice made today to build ships, parks, highways, dams, and other public-sector projects.
Future generations may benefit from current government spending, but they may be adversely affected by today's opportunity costs.
Private investment might be affected by government deficits.
Increased production possibilities and higher living standards can be achieved with investment.
If federal deficits and debt-servicing requirements crowd our private investment, the rate of economic growth will slow, leaving future generations with less productive capacity than they would otherwise have.
Their burden will be smaller than anticipated.
Tyson is worried about this type of cost.
There is no certainty that such crowding out will happen.
Private investment may be offset by public works that benefit future generations.
Even if the national debt slows private investment and economic growth, future generations may not suffer a net loss in welfare.
We're promoting more public-sector activity if we allow more deficit spending.
The more fundamental issue of private versus social values can be seen in the battles over deficits and debts.
The collection of taxes and the processing of interest payments take a lot of resources.
When we die, we leave behind not only the national debt, but also the bonds that represent ownership of that debt.
Only people who are alive and holding bonds at that time will receive interest payments if interest payments are made 30 years from now.
Future interest payments mean a redistribution of income among taxpayers and bondholders.
When our grandsons decide to pay off the debt, the same kind of redistribution occurs.
The debt will be paid off with tax revenues.
People holding Treasury bonds will get the debt payments.
There will be redistribution among people in the future.
It is difficult to pass the debt burden on to future generations because of the nature of opportunity costs.
The exception is external debt.
We increase our ability to consume, invest, and finance government activity when we borrow funds from abroad.
Our real income will exceed our production possibilities if we can buy imports with borrowed funds.
This opportunity cost is eliminated by external financing.
The imports aren't public-sector goods.
The free lunch appears to be offered by external financing.
If foreign lenders were willing to accumulate U.S. Treasury bonds, it would be a free lunch.
They would own stacks of paper and we would consume some of their output each year.
External financing imposes no real cost if outsiders are willing to hold U.S. bonds.
Goods and services are not given up to pay for the extra output.
Foreign investors may not be willing to hold U.S. bonds indefinitely.
They will eventually want to collect their bills.
They will use the proceeds from the sale of their bonds to buy U.S. goods and services.
The external debt was used to purchase imported goods and services.
Policy discussions overlook the differences between external and internal debts.
The only concern in policy debates is the size of the national debt.
Whether or not to limit or reduce the national debt is one of the key policy questions.
A balanced annual budget is the first step in debt reduction.
The Balanced Budget and Emergency Deficit Control Act of 1985 was the first attempt to force the federal budget into balance.
The Gramm- Rudman Act set a lower ceiling on each year's deficit until budget balance was achieved.
If Congress failed to keep the deficit below the ceiling, it called for automatic spending cuts.
Congress was required to eliminate the deficit from over $200 billion in FY 1985 to zero by 1991.
Congress wasn't willing to raise taxes enough to meet the targets.
The "automatic" mechanism for spending cuts was declared unconstitutional by the Supreme Court.
They acknowledged that they didn't have total control of the deficit.
There are limits on defense spending, discretionary domestic spending, deficit-reduction efforts, and the U.S. Congressional Budget Office.
The structural deficit was reduced by the Budget Enforcement Act.
The political pain associated with spending cuts and higher taxes was too great for elected officials to bear.
Bush's willingness to raise taxes hurt his reelection bid.
Democrats were criticized for reducing the growth of social programs.
Deficit ceilings were more political ornaments than budget mandates.
The Social Security Trust Fund is a major source of funding for the federal government.
The Trust Fund has paid out more in retirement benefits than it has collected in payroll taxes.
The Social Security Trust Fund is the largest creditor of the U.S. Treasury because all of the surpluses have been invested in Treasury securities.
The Trust Fund now holds nearly $2 trillion of Treasury securities.
The Trust Fund will acquire $2 trillion in Treasury securities.
Baby boomers are getting older.
Aging Baby Boomers are to blame for the Social Security Trust Fund's persistent surpluses.
Birthrates soared after World War II ended.
Baby Boomers are in their peak earning years and pay a lot of payroll taxes.
The Social Security Trust Fund has cash.
The fiscal outlook is not so bright as we look into the economy tomorrow.
The Baby Boomers are about to retire.
The budget of the Social Security Trust Fund will be thrown out of whack when Baby Boomers retire.
There are 3 tax-paying workers for every retiree today.
The worker-retiree ratio will decline by 2015.
There will be only 2 workers for every retiree by the year 2030.
A primary source of government financing will disappear when that happens.
If the U.S. Treasury pays all interest on bonds held by the Trust Fund, Social Security will be able to pay promised benefits.
The Baby Boomers wonder where the Treasury will get the funds to repay the Social Security Trust Fund.
There aren't many options.
To pay back Social Security loans, Congress will have to raise taxes, make cuts to other programs or increase budget deficits.
None of these options are attractive.
The budget squeeze created by the Social Security payback will limit the potential for discretionary fiscal policy.
It will be hard to cut taxes or increase government spending when GDP growth slows tomorrow.
Baby boomers worry that Congress might cut their retirement benefits.
The national debt is added to each year by a deficit.
The national policy and debt grew slowly until World War II and then sky in the economy.
The national debt has increased due to the reduction in the struc spending since 1980.
Automatic stabilizers increase federal spending and government spending.
The assets of the deficit are represented by every dollar of national debt.
LO1 to the people who hold Treasury bonds.
Government agencies hold crowd bonds, which are used to finance government expenditure.
As the economy approaches full institutions, the risk of holds, and U.S. banks, insurance companies, and other crowding out increases.
The activities financed by the debt are the real burden of the debt.
Economic growth may slow because of that cost.
The time when the activity takes place is LO2.
Crowding in refers to the increase in private-sector benefits of debt-financed activity.
Baby Boomers are reducing private-sector output.
It is possible to shift some of the real debt burden on to deficits if Social Security surpluses are transformed into it.
Deficit and debt ceilings are symbolic efforts to force consideration of real trade-offs, to restrain government spending, and to change the mix of output.
What should the government do with the budget?
Defense spending increased in 1940 to 3.
There are numerical and graphing problems in the Student Problem Set at the back of the book.
Monetary policy tries to control the amount of money in the economy.
Monetary policy tries to shift the aggregate demand curve in the desired direction by changing the money supply and interest rates.