Substantive Issues relating to the DebtThis is a featured page

Income distribution:
  • Distribution of ownership of gov. securities - highly uneven
    • Ownership of public debt (stocks & bonds) concentrated in wealthier groups
  • However, since the Federal tax system is only slightly progressive, payment of interest on the public debt mildly increases income inequality
  • Income is transferred from people who have lower incomes to higher-income bondholders
    • This redistribution is undesirable as greater income equality is one of society's goals

Incentives:
  • The interest charge for debts must be paid out of tax revenues
  • Higher taxes dampen incentives to bear risk, to innovate, to invest, and to work.
  • A large public debt may reduce economic growth

Foreign-owned public debt:
  • Internally owed debt - 75% of debt (in year 2005) is not considered an economic burden because the U.S government owes the money to U.S Securities. In other words, the debt is 'to ourselves'.
    • Note: of this 75%, 51% is held by the Federal government and Reserve. The other 24% is held by state/local governments, U.S. financial institutions, and U.S. individuals.
  • Externally owed debt -Foreign-owed public debt IS an economic burden. Government can't create new bonds to pay off old ones, they have to repay the debt with goods, services, or money.
    • Wealth transfered from home nation to foreign nations
      For instance, 30% of America's debt is in the hands of China, through bonds

Crowding-out effect:
  • Increased government spending --> Government is already in debt and needs to take out more loans--> GDP INCREASES...but -->less excess reserves for banks to loan out--> real interest rates increase --> less private investment spending and consumption -->GDP DECREASES
  • a burden to future generations in the form of lower GDP and a potentially lower standard of living by passing on to them a smaller stock of capital goods
    • The crowding out effect causes a leftward movement along the investment demand curve (might cancel out the increase of AD)
  • Public investments + public-private complementarities -offset net econ. burden shifted to future generations




ElaineLung
ElaineLung 		Latest page update: made by ElaineLung , Mar 17 2008, 11:01 AM EDT (about this update About This Update ElaineLung People aren't reading the book carefully. It makes me angry. - ElaineLung

29 words added
2 words deleted

view changes
- complete history)
Keyword tags: None
More Info: links to this page

Threads for this page

There are no threads for this page.  Be the first to start a new thread.