Growth Implications of the Federal Deficit
The amount of federal debt held by the pub- lic is the sum total of all previous deficits minus any surpluses. Federal debt held by the public equals the value of outstanding Treasury bills, notes, bonds, U.S. savings bonds, and other financial obligations of the federal government that the Treasury sells to the public. Debt held by the public does not include debt held in government trust funds. This debt is owed by the government to itself, so economists generally use the debt held by the public as the economi- cally meaningful measure of the national debt. In 2001, government debt held by the public was roughly $5.8 trillion, or roughly $20,606 for every man, woman, and child in the United States. Of the many government activities that may affect future living standards, considerable attention has focused on the federal debt and the large and persistent federal budget deficits.
A. Explain how government debt and deficits can affect intergenerational equity and, under certain conditions, adversely affect the economy's productive capacity.
B. Explain why government debt and deficits may not affect intergenerational equity and adversely affect the economy's productive capacity.
C. Illustrate how balancing the budget might actually harm the economy, and why zero deficits are not a prerequisite to reducing the debt-to-GDP ratio.