Principles of Economics- Mankiw (5th) 778

Principles of Economics- Mankiw (5th) 778 - 804 PA R T T H...

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804 PART THIRTEEN FINAL THOUGHTS year, then nominal income grows at a rate of 5 percent per year. The government debt, therefore, can rise by 5 percent per year without increasing the ratio of debt to income. In 1999 the federal government debt was $3.7 trillion; 5 percent of this figure is $165 billion. As long as the federal budget deficit is smaller than $165 bil- lion, the policy is sustainable. There will never be any day of reckoning that forces the budget deficits to end or the economy to collapse. If moderate budget deficits are sustainable, there is no need for the govern- ment to maintain budget surpluses. Let’s put this excess of revenue over spending to better use. The government could use these funds to pay for valuable govern- ment programs, such as increased funding for education. Or it could use them to finance a tax cut. In the late 1990s taxes reached an historic high as a percentage of GDP, so there is every reason to suppose that the deadweight losses of taxation reached an historic high as well. If all these taxes aren’t needed for current spend-
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