Is govt investment productive for stud exam

1. Does Government “Investment”
Increase Long Term Growth?
0
And what about those deficits and the debt?

2. Increase Productivity and Living Stds?
1

3. Federal Deficits and Debt
 Note that our national income (output, Y) goes to
four categories, and the more G, the less of the
others. (remember, economics is about scarce
resources and tradeoffs. G may not be bad, but
there is a tradeoff.)
2

4. How Large are the Budget Deficits and
What is Their Effect?
3

6. Federal Debt

7. Federal Debt
How much we owe
How much we owe
others
Gap = how much we owe
ourselves (SS Trust fund)

8. How large is the Debt?
 There are different ways to measure federal debt
 Debt held by the public is ~ $16trillion
 Total debt (including that owed to social security
trust fund) is ~$20trillion
7

9. How Much is Too Much?
8

10. 9
The U.S. Government Debt
 The government finances deficits by borrowing
(selling government bonds).
 Persistent deficits lead to a rising govt debt.
 The ratio of govt debt to GDP is a useful
measure of the government’s indebtedness
 Historically, the debt-GDP ratio usually rises
during wartime and falls during peacetime – until
the early 1980s.

11. 0%
20%
40%
60%
80%
100%
120%
1790 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 2010
U.S. Government Debt
as a Percentage of GNP, 1790–2012
Revolutionary
War
Civil
War WW1
WW2
Financial
Crisis

12. Federal Debt as % of GDP

13. Savings and Investment
Chapter 13
12

14. Debt Forecast
13

15. Borrowers, you and the US
 US deficits and debt “could” continue indefinitely
 No reason the US ever has to pay it off
 “Could” continue to rollover
 Borrow to pay off last loan…
 You cannot borrow forever
 Try to finance a house at age 80
 What’s the difference
 Country assumed to be infinitely lived
 You are not…
 Works for US until lenders expect death of country or
government
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16. Why Do We Even Care?
15

17. 16

18. Different Kinds of Saving

20. 19

21.  Suppose GDP equals $10 trillion,
consumption equals $6.5 trillion,
the government spends $2 trillion
and has a budget deficit of $0.3 trillion.
 Find public saving, taxes, private saving,
national saving, and investment.
A. Calculations
20

22. Answers

23. C H A P T E R
The Market for Loanable Funds
13

25. Policies

26. Policy 1: Saving Incentive
 A saving incentive could be a tax break for
personal income taxes encouraging saving
 i.e. 401K, 403b, IRA, etc.
 Households will save more at every interest rate
 Savings accumulating in bank vaults

27. Policy 1: Saving Incentive

28. Policy 1: Saving Investment
 Supply of
loanable funds
has increased (S
shifted right)
 Bankers see a
vault full of cash!
 Lower the interest
rate (movement
along the demand
curve)
27

29. Policy 1: Saving Incentives

30. Policy 2: Investment Incentive
 An investment tax credit:
 Reduces the taxes of firms making investment
 An increase in the incentive to invest
 More firms want to invest
 Go to the bank to borrow…
29

31. Policy 2: Investment Incentive
30

32. Policy 2: Investment Incentive
 Demand for
loanable funds has
increased (D shifted
right)
 Bankers see a
crowd of potential
borrowers outside
the bank
 Raise the interest
rates (movement
along the supply
curve)
31
Source: boston.com

33. Policy 2: Investment Incentives

34. Use the loanable funds model to analyze
the effects of a government budget deficit:
 Draw the diagram showing the initial
equilibrium.
 Determine which curve shifts when the
government runs a budget deficit.
 Draw the new curve on your diagram.
 What happens to the equilibrium values of the
interest rate and investment?
Exercise
33

35. 34

36. 35
Budget Deficits, Crowding Out,
and Long-Run Growth
 Our analysis: Increase in budget deficit causes
fall in investment.
The govt borrows to finance its deficit,
leaving less funds available for investment.
 This is called crowding out.
 Recall from the preceding chapter: Investment
is important for long-run economic growth.
Hence, budget deficits reduce the economy’s
growth rate and future standard of living.

37. US Debt Clock
36
http://www.usdebtclock.org/index.html

38. 37
CONCLUSION
 Like many other markets, financial markets are
governed by the forces of supply and demand.
 One of the Ten Principles from Chapter 1:
Markets are usually a good way
to organize economic activity.
Financial markets help allocate the economy’s
scarce resources to their most efficient uses.