Chapter15 - Inthischapter,youwilllearn about the size of...

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slide 1 CHAPTER 15 Government Debt In this chapter, you will learn… about the size of the U.S. government’s debt, and how it compares to that of other countries problems measuring the budget deficit the traditional and Ricardian views of the government debt other perspectives on the debt
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Indebtedness of the world’s governments Indebtedness of the world’s governments Country Gov Debt (% of GDP) Country Gov Debt (% of GDP) Japan 159 U.S.A. 64 Italy 125 Sweden 62 Greece 108 Finland 53 Belgium 99 Norway 52 France 77 Denmark 50 Portugal 77 Spain 49 Germany 70 U.K. 47 Austria 69 Ireland 30 Canada 69 Korea 20 Netherlands 64 Australia 15
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slide 3 CHAPTER 15 Government Debt Ratio of U.S. govt debt to GDP 0 0.2 0.4 0.6 0.8 1 1.2 1791 1815 1839 1863 1887 1911 1935 1959 1983 2007 Revolutionary War Civil War WW1 WW2 Iraq War
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slide 4 CHAPTER 15 Government Debt The U.S. experience in recent years Early 1980s through early 1990s debt-GDP ratio: 25.5% in 1980, 48.9% in 1993 due to Reagan tax cuts, increases in defense spending & entitlements Early 1990s through 2000 $290b deficit in 1992, $236b surplus in 2000 debt-GDP ratio fell to 32.5% in 2000 due to rapid growth, stock market boom, tax hikes Since 2001 the return of huge deficits, due to Bush tax cuts, 2001 recession, Iraq war
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slide 5 CHAPTER 15 Government Debt The troubling fiscal outlook The U.S. population is aging. Health care costs are rising. Spending on entitlements like Social Security and Medicare is growing. Deficits and the debt are projected to significantly increase…
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slide 6 CHAPTER 15 Government Debt Percent of U.S. population age 65+ Percent of pop. 5 8 11 14 17 20 23 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 actual projected
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slide 7 CHAPTER 15 Government Debt U.S. government spending on Medicare  and Social Security Percent of GDP 0 2 4 6 8 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
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slide 8 CHAPTER 15 Government Debt CBO projected U.S. federal govt debt in  two scenarios Percent of GDP 0 50 100 150 200 250 300 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 optimistic scenario pessimisti c scenario
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slide 9 CHAPTER 15 Government Debt Problems measuring the deficit 1. Inflation 2. Capital assets 3. Uncounted liabilities 4. The business cycle
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slide 10 CHAPTER 15 Government Debt MEASUREMENT PROBLEM 1:   Inflation Suppose the real debt is constant, which implies a zero real deficit. In this case, the nominal debt D grows at the rate of inflation: D / D = π or D = π D The reported deficit (nominal) is π D even though the real deficit is zero. Hence, should subtract π D from the reported deficit to correct for inflation.
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slide 11 CHAPTER 15 Government Debt MEASUREMENT PROBLEM 1:   Inflation Correcting the deficit for inflation can make a huge difference, especially when inflation is high.
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