107) Why are large deficits so bad?

Because the money has to come from somewhere.

The deficit is financed by the government going to the investment and capital markets for loans. In effect the government competes with private industry for investment money. This produces two negative effects on the economy. First it forces up the interest rates and second it removes that same amount of money from the economy.

Every penny borrowed by the government is one less penny available to be used to start new businesses, expand a business, fund a loan for a new car or home, etc.

One (dangerous) way around this is to increase the supply of money to cover the amount of the deficit. The drawback to this is that the total value of the 'money supply' always has to equal the total value of the economy. If the amount of money in the economy increases faster than the economy grows - then the value of that money has to drop in order to remain in equilibrium with the economy. This is what causes inflation.

108) Defining surpluses and debt

When a government spends more than it collects in taxes, it borrows from the private sector to finance the budget deficit. The accumulation of past borrowing is the government debt. Debate about the appropriate amount of government debt in the United States is as old as the country itself. Alexander Hamilton believed that “a national debt, if it is not excessive, will be to us a national blessing,” whereas James Madison argued that “a public debt is a public curse.” Indeed, the location of the nation’s capital was chosen as part of a deal in which the federal government assumed the Revolutionary War debts of the states: because the Northern states had larger outstanding debts, the capital was located in the South.

Although attention to the government debt has waxed and waned over the years, it was especially intense during the last two decades of the twentieth century. Beginning in the early 1980s, the U.S. federal government began running large budget deficits—in part because of increased spending and in part because of reduced taxes. As a result, the government debt expressed as a percentage of GDP roughly doubled from 26 percent in 1980 to 50 percent in 1995. By the late 1990s, the budget deficit had come under control and had even turned into a budget surplus. Policymakers then turned to the question of how rapidly the debt should be paid off.

Government surplus (from a tax on a good) The total tax revenue earned by the government from sales of a good.

If a government collects more in taxes than it spends, it has a government budget surplus.

109) Differentiating between the Deficit and the Debt

The government takes in revenues, or receipts, through income taxes, social insurance taxes, etc.

The government also spends money every year (also known as outlays) on a variety of different things, including social security, defense spending, etc. etc.

If the government spends more than it takes in over the course of one year, then it has run a deficit. A deficit applies to just one year.

So, if the government takes in $10 trillion dollars but spends $13 trillion dollars in one year, then it has run a $3 trillion dollar deficit.

When the government runs a deficit, then it must borrow money to make up the difference.

A debt is completely different. Think of debt as accumulated deficits.

If the government has to borrow money every year, then its debt will continue to grow year-after-year. This debt does not disappear unless the government elects to try and pay it down (rare occurrence).

The debt usually grows year-after-year. With each additional deficit, the debt continues to grow.

Deficit=one year.

Debt=all money owed.