Chapter 14 Outline
A. Should the Government Borrow?
1. There are times when it may be desirable for the federal government to borrow.
a. It is desirable for the federal government to borrow if the money is spent on projects that will yield a flow of benefits in the future sufficient to repay the loan.
B. Repaying the Debt
1. Because the Treasury typically borrows to pay the portion of the national debt that matures, the national debt need not be repaid in the sense of ultimately being reduced to zero.
a. More important than reducing the debt to zero, is reducing deficits so that the debt becomes a smaller percentage of GDP.
C. The Burden of the Debt
1. So long as the debt is held domestically, repayment simply redistributes income among citizens.
a. Income is redistributed from taxpayers in general to debt holders.
b. Since taxpayers generally have lower incomes than debt holders, income is redistributed from lower-income to higher-income individuals.
2. The portion of the debt held by foreigners represents their potential claim against goods and services produced in the United States.
a. If foreigners use the dollars to purchase goods produced in the United States, a burden in imposed on both present and future generations because they will have fewer goods and services available to them.
3. If the debt causes interest rates to be higher than they otherwise would be, the nation's capital stock will grow less rapidly and output in the future will be lower than it otherwise would be.
a. In this instance, the debt imposes a burden on future generations as they will experience a lower standard of living.
4. In order to pay interest on the debt marginal tax rates are higher than they otherwise would be.
a. These higher marginal tax rates can reduce incentives to work, save, and invest, thereby reducing the nation's output and productive capacity and imposing a burden on present and future generations.
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