Chapter 14: Introduction
Deficits and Debt: What Legacy
This chapter covers the federal government's deficit and debt problems. After defining different types of deficits, the size of the deficit is discussed.
The effects of deficits are discussed. It is emphasized that the effects depend on the means by which the deficit is financed (issuing bonds versus issuing money) and whether the economy is at full employment.
After discussing the Gramm-Rudman-Hollings Act and considering the Bush and Clinton deficit reduction programs, we discuss a constitutional amendment that would require the federal government's budget be balanced annually.
The size of the national debt is also discussed. The effects of the debt are noted. It is concluded that concern about the debt is warranted, but not for some of the reasons commonly cited.
Finally, it is emphasized that few economists recommend ru~ning budget surpluses to reduce the debt. Instead, most economists favor significantly reducing or eliminating the deficit. If this can be accomplished, the debt will grow less rapidly than GDP and the debt will become relatively less important.

Instructional Objectives
After completing this chapter, your students should know:

1. The difference between structural and actual deficits and why economists are particularly concerned about structural deficits.
2. About recent trends in the federal government's deficit and debt.
3. That running deficits during recessions has some beneficial effects, but the justification disappears when the economy is at full employment.
4. That depending on the circumstances deficits can (1) cause inflation, (2) reduce the nation's growth rate because they raise interest rates and therefore lower investment, and (3) increase the balance-of-payments deficit by altering the value of the dollar.
5. That the effects of a deficit vary depending on whether it is financed by issuing bonds or by issuing money and whether the economy is at less than full employment or at full employment.
6. That substantial popular support exists for a constitutional amendment requiring that the federal government's budget be balanced each year, but that many economists do not favor such an amendment.
7. That the Gramm-Rudman-Hollings Act, until 1990, worked to reduce the deficit.
8. That the national debt has harmful effects both to present and future generations.
9. That most economists favor significantly reducing or eliminating the budget deficit so as to slow the increase in the national debt, rather than running budget surpluses to reduce it.

Terms from Previous Chapters
You should review the terms in this section at the beginning of your discussion of the chapter.

aggregate demand curve (Chapter 11)
aggregate supply curve (Chapter 11)
unemployment rate (Chapter 12)
recession (Chapter 11)
inflation (Chapter 13)
capital stock (Chapter 11)
fiscal policy (Chapter 11)
personal consumption expenditures (Chapter 11)
gross private domestic investment (Chapter 11)
exports (Chapter 11)
imports (Chapter 11)

Key Terms
These terms are introduced in this chapter:

budget deficit
budget surplus
structural deficit
actual deficit
loanable funds national debt

Additional References
In addition to the references in the text, instructors may wish to read or assign one or more of the following:

1. Mario I. Blejer and Adrienne Cheasty, 'The Measurement of Fiscal Deficits: Analytical and Technological Issues, Journal of Economic Literature 29 (December 1991), pp. 1644-1678.
2. James M. Buchanan and Richard E. Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes (New York: Academic Press, 1977).
3. Phillip Cagan, ed., Essays in Contemporary Economic Problems, 1985: The Economy in Deficit (Washington, D.C.: American Enterprise Institute, 1985).
4. K. Alec Chrystal and Daniel L. Thornton, 'The Macroeconomic Effects of Deficit Spending: A Review," Federal Reserve Bank of St. Louis, Review 70 (November/December 1988), pp. 48-60.
5. Robert Eisner, How Real Is the Federal Deficit? (New York: The Free Press, 1986).
6. "Will the Real Federal Deficit Stand Up?" Challenge 29 (May-June 1986), pp. 13-21.
7. __ and Paul J. Pieper, "A New View of the Federal Debt and Budget Deficits," American Economic Review 74 (March 1984), pp. 11-29.
8. Richard H. Fink and Jack C. High, eds, A Nation in Debt: Economists Debate the Federal Budget Deficit (Frederick, Md.: University Publications of America, Inc., 1987).
9. Daniel B. Suits and Ronald C. Fisher, "A Balanced Budget Constitutional Amendment: Economic Complexities and Uncertainties," National Tax Journal 38 (December 1985), pp. 467-477.
10. John C. Weicher, 'The Domestic Budget after Gramm-Rudman and after Reagan," in Phillip Cagan, ed., Deficits, Taxes, and Economic Adjustments (Washington, D.C.: American Enterprise Institute, 1987), pp. 243-273.
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