How does federal government deficits and debt hurt the economy?
First, watch this short video:
Deficits & Debts: Crash Course Economics:
…
A budget deficit is the amount government spends more than tax revenue for a given year.
Debt is the total amount of deficits not yet repaid.
Year 1 deficit, government spending minus tax revenues = $50
Year 2 deficit = $100
Sum of the two deficits $50 + $100 = $150 government debt.
....
A government deficit hurts the economy in two ways:
1-reduces private investment
2-reduces government services and/or increases taxes including to pay down the debt
...
1-Per Figure 1, from Mankiw
Government borrowing to finance the deficit reduces the supply of loanable funds for others, government is getting the money not businesses and consumers.
The increased demand for money causes the interest rate to rise from 5% to 6%.
The higher interest rate reduces, “crowds out,” business and household investments.
The higher cost of borrowing reduces total borrowing from $1200 to $800.
The resulting lower amount of business investments reduces the size of the economy.
2-Per Figure 2
Deficits add to the overall debt.
The portion of government spending for interest payments on debt increases.
This results in
· reduced amount of government services
· increased taxation to maintain amount of current government services
In 2016, 7% of government spending went for interest on debt.
If there was no debt this amount could have been spent on government services.
…
Chris Edwards, Cato Institute:
“Sadly, policymakers spend on their favorite programs and act as if there won’t be harsh consequences to their profligacy.
But there will be.
Future living standards are being eroded as huge costs are being pushed to future generations.
The rising debt will eventually spark a damaging financial and economic crisis.”
The national debt percent of GDP is the most important number to consider.
Figure 3 shows this number has climbed from 40% to 130%.
If the yearly deficits decrease or GDP increases this number is reduced.
… …

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