The Government Budget, the Public Debt, and Social Security
In Section 12-6, Figure 12-3 has been updated with new data, including the year 2006. The numerical
example in this section has also been changed to include the additional time periods 1997–2001 and
2002–07. In the 11th edition, he has expanded the discussion about the new empirical examples for the
periods 1997–2012 and 2002–07. In Subsection 12-6(b), “Categories of Spending,” he has updated
Figure 12-4 with new data. Another subsection from the 10th edition, “Tax Revenue Explosion and
Collapse, 1995–2005,” has been deleted.
Sections 12-7, 12-8, and 12-9 remain almost unchanged with some minor tweaking of words and
explanations. Figure 12-6, “Social Security Outlays, Revenues, and the Trust Fund,” has been updated
to include the year 2085, instead of 2080 as in the 10th edition.
The concluding Section 12-10 has gone through substantial changes as Gordon has enhanced the
discussion about the solutions of the Federal budget deficit.
Answers to Questions in Textbook
For stabilization, the policymaker’s goal is to control GDP so that
1.0. Economic growth is
concerned with the level of
. Assuming that stabilization policy is properly being conducted, then
the economy will grow at the same rate that
is growing. Even though the
either monetary or fiscal policy as equally well suited to stabilization policy, most economists now
feel it is more appropriate to use monetary policy for short-term stabilization purposes. This leaves
fiscal policy to be responsible for interest rates and, thus, indirectly responsible for economic
growth. For economic growth, the level of capital per capita and the level of productivity are crucial.
Policies designed to increase national saving (by increasing private saving and/or reducing the
government deficit) make available the funds necessary to finance domestic investment without
relying on foreign borrowing.
National saving is the sum of private saving by households and firms (
) and government saving,
or the budget surplus (
). The two main sources of economic growth of GDP per capita are
the autonomous factor (discussed in Chapter 9) and the growth of capital (including education and
training) per person. While it is true that the output-capital ratio, the depreciation rate, and the
population growth rate affect the amount of capital per person, these are normally considered beyond
the reach of policymakers. Thus, because the growth of capital per person is limited by the national
saving rate and the willingness of foreigners to lend to the domestic economy, the former becomes
an important policy tool in the attempt to increase economic growth. By increasing the amount of
national saving, either by stimulating private saving or by increasing the government surplus
(reducing the deficit), funds are made available for domestic private investment.