Wednesday

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 9 The Real Economy in the Long Run

Chapter 26 of 36 Saving, Investment, and the Financial System

Section 23 of 24

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Figure 5 – The U.S. Government Debt

The U.S. federal government debt, shown here as a percentage of GDP, has varied throughout history.

Figure 5 shows the U.S. federal government debt since 1790 as a percentage of U.S. GDP.

The debt/GDP ratio has ranged from zero in 1836 to 107% in 1945.

Since the 1960s the ratio has mostly been between 30% and 40%.

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The primary cause of fluctuations in government debt is the huge expense of defense.

There are main two reasons debt financing of defense is considered an appropriate policy.

Debt financing of wars allows the government to keep tax rates level over time.

Without debt financing, tax rates would have to rise during wars causing a substantial decrease in economic efficiency.

Debt financing of defense shifts part of the cost of wars to future generations, they will have to pay off the government debt.

This is considered a fair distribution of the debt burden.

Future generations benefit when this generation fights a war to defend the nation.

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The large increase in government debt that occurred beginning in 1980 is one increase that did not result from war.

When President Ronald Reagan took office in 1981 his goals included reducing government spending and taxation.

He had much success cutting taxes but little success cutting government spending.

The result was a large budget deficit and increased debt/GDP ratio.

Government debt/GDP percentage rose from 26% in 1980 to 50% in 1993.

Government budget deficits by crowding out private investment borrowing

reduce national saving, investment, and long-run economic growth.

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In response to the 1980s rise in government debt, deficit reduction was a major goal of government when Bill Clinton became president in 1993.

Republicans took control of Congress in 1995.

As a result of their combined efforts the government budget deficit was substantially reduced, eventually generating a budget surplus in years 1999~2001.

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The debt/GDP ratio started rising again during the first years of the George W. Bush presidency and the budget surplus became a budget deficit.

There were three reasons for this early 2000s change from budget surplus to deficit

· President Bush signed into law several major tax cuts

· in 2001 there was a recession, decreasing tax revenue and increasing government spending

· the wars on terrorism and in Afghanistan and Iraq resulted in increased government spending

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there were three reasons for the change

henkō no riyū wa mittsu deshita

変更の理由は三つでした

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What has the U.S. federal government debt, GDP and debt percent of GDP been on January 1 on each of the last five years? ChatGPT: See Table B.