Paying off externally held debt represents an outflow of wealth from the country. Paying off internally held debt is like the left hand paying the right hand dollars are redistributed, but there is no domestic loss of wealth.
A $10,000 debt is a problem for someone with no income it is not a significant burden on someone earning $100,000 per year. It is analogous to an individual household: the level of mortgage and other debt is only a problem if the household does not have sufficient income (GDP) to keep up with monthly payments. Debt as a percentage of GDP is more relevant because it is a better measure of an economy’s, or government’s ability to manage that debt. However, only a portion of that (58 percent in 2004) is held by the public the remaining 42 percent is held by the Federal government – the government owes the money to itself. debt represents the total amount of money the Federal government owes to the owners of government securities. debt and the debt held by the public? Why is the debt as percentage of GDP more relevant than the total debt? Contrast the effects of paying off an internally held debt and paying off an externally held debt. The end of the stock bubble was the end of the budget surpluses.Ĩ. Also previous administration tax cuts were very much secondary in this picture, as were wars and the Medicare drug plan. The ending of this bubble was the biggest factor turning the surplus into a deficit. This gave us a recession which, although officially short and mild, led to the longest period without net job creation since the Great Depression (until the current downturn). By the summer of 2002 stocks had fallen to roughly half of their peak values destroying $10 trillion in wealth. Bubbles are not sustainable, by definition. The budget surplus story was due to the stock bubble, not tax cuts and budget restraint.
A major advantage of the built in or automatic stabilizers series#
Why did the budget surpluses in 20 give way to a series of budget deficits beginning in 2002? Why did those deficits increase substantially beginning in 2008? The overall effect of a rise in G is therefore dampened/ muted as it gets crowded out by rising interest rates.ħ. G rises to raise GDP, but the simultaneous rise in interest rates cause a fall in investment.
if it is expected that tax rates will be lowered in future due to political considerations of winning an election, then a current policy of higher tax rates is not effective, making the fiscal policy weak.Ĭrowding out refers to the dampening of the effect of a rise in government expenditures on GDP. Expectations about future policy reversals keeping politics in mind can dent the effect of any announced policy. This decision maybe suboptimal for the economy, but optimal for the political party. It may take a decision that yields quicker results which it can show off to voters and get back into power. When this lag is large the government may not make a sound decision.
How might “politics” complicate fiscal policy? How might expectations of a near-term policy reversal weaken fiscal policy based on changes in tax rates? What is the crowdingout effect and why might it be relevant to fiscal policy?Ī time lag refers to the time it takes for a policy to take effect- the time between a policy measure is announced and its effects are visible. Briefly state and evaluate the problem of time lags in enacting and applying fiscal policy.
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