[MUSIC]. Welcome to The Power of Macroeconomics. Lecture Eight: Budget Deficits and the Public Debt. The purpose of this lesson is to examine the economic consequences of chronic budget deficits. And the potential dangers of an upward spiraling government debt. Historically, classical economics have argued that such budget deficits are bad, and should be avoided, except in wartime. In contrast, Keynesians believe that, at least during recessions, budget deficits are a necessary byproduct of an expansionary fiscal policy. Nonetheless, both classical and Keynesian economists agree that chronic budget deficits, such as the nation has been experiencing, are undesirable. The important policy question is this. How big a danger are these chronic deficits and a collateral soaring national debt? In this lesson, we are going to look at the dark side of using discretionary fiscal policy. The deficits and debt that can occur when the government uses the fiscal policy level to boost aggregate demand. To begin, let's put our discussion in its appropriate Keynesian context. As we have learned, Keynesian economics focuses on the use of fiscal policy to solve our macroeconomic problems. As we have also learned, the policy guidelines are quite simple. Use fiscal stimulus, increased government spending or tax cuts, to fight recession and unemployment. Use fiscal restraint, reduced spending, or increased taxes, to fight inflation. One problem with this Keynesian strategy, however, is that it implies that federal expenditures and receipts will not always be equal. Indeed, when the government engages in fiscal stimulus, it typically is engaging in deficit spending. A situation in which the government borrows funds to pay for spending that exceeds tax revenues. The size of the resulting budget deficit is captured in this formula. Budget deficit equals government spending minus tax revenues. More generally, a budget surplus occurs when all taxes and other revenues exceed government expenditures for the year. When revenues and expenditures are equal in the increasingly rare instance, the government has a balanced budget. Now, when the government incurs a budget deficit, it must borrow from the public to pay its bills. In this case, it issues bonds, and the government debt, or the national or public debt, as it is also called, is simply the total dollar value of the bonds owned by the public. Put another way, this debt is simply the accumulated budget deficits minus the accumulated surpluses. And, note that this debt is held, not only by banks, households, and businesses in the US but, also by foreign investors as well. Now here's the punchline. Whatever the merits of Keynesian economics, the practice of using discretionary fiscal policy has produced precious few budget surpluses since the 1930s. This has been especially true since the 1970s.
