Deficits & Debts: Crash Course Economics #9

Summary

This Crash Course Economics episode delves into the nuances of national debt and deficits, clarifying their differences and implications. Using the hypothetical nation of Cliffordonia, the video illustrates how deficits accumulate into debt. It then examines the US's substantial debt, comparing it to GDP and other nations' debt-to-GDP ratios. The focus shifts to the concern over future spending, particularly on social security and healthcare, which are expected to increase with an aging population. The episode also discusses potential economic consequences of excessive borrowing, the role of the debt ceiling, and the importance of addressing the root causes of debt through sustainable fiscal policies.

Takeaways

• 📊 Deficit vs. Debt: A deficit occurs when government spending exceeds tax revenue in a year, leading to borrowing, while debt is the cumulative total of these deficits.
• 🏛️ Example of Cliffordonia: A hypothetical country used to illustrate how deficits accumulate into debt over time.
• 💵 US National Debt: The United States has the largest national debt, which is over 18 trillion dollars, a figure that can be difficult to comprehend due to its magnitude.
• 📈 Inflation Adjustment: When considering debt, it's important to adjust for inflation to understand its real value over time.
• 🌐 Debt-to-GDP Ratio: Economists often look at debt as a percentage of GDP to gauge a country's ability to manage its debt relative to its economic size and growth.
• 📊 Comparison with Other Nations: While the US has a high debt-to-GDP ratio, other developed countries have even higher ratios, with varying economic stability.
• 💼 Concerns About Future Borrowing: Economists are more worried about future borrowing due to increasing deficits driven by spending rather than a decrease in tax revenue.
• 👵👴 Major Spending Drivers: Social Security and healthcare programs, particularly for the elderly, are the largest recipients of federal spending and are projected to grow.
• 💡 Lenders and Borrowing: The ability to borrow is dependent on the availability of savings from lenders, which can be affected by government borrowing.
• 🇬🇷 Risks of Excessive Borrowing: High levels of debt can lead to a situation similar to Greece, where lenders may demand higher interest rates or stop lending altogether, risking default.
• 🚫 The Debt Ceiling: The US has a legislative limit on how much debt it can issue, but this does not address the underlying issues of spending and revenue.
• 🏥 Healthcare Costs: The growth in healthcare spending is a significant factor driving up the national debt, and any changes in this area could impact future debt levels.
• 🔑 Low Interest Rates: The US benefits from low interest rates on its loans, indicating confidence in its ability to repay and easing the burden of debt servicing.
• 🌟 Potential Positive Outlook: There are signs that healthcare cost growth may be slowing, which could improve long-term budget projections and reduce deficits.

Q & A

What is the main difference between a budget deficit and national debt?

A budget deficit occurs when the government spends more than its tax revenue in a given year, necessitating borrowing to cover the shortfall. National debt, on the other hand, is the cumulative total of all budget deficits over the years.

Can you explain how Cliffordonia's debt is calculated in the script?

Cliffordonia's debt is calculated by adding up all the yearly deficits. In the example, the first year's deficit is $100, and the second year's deficit is $200, resulting in a total debt of $300 at the end of the second year.

What is the current U.S. national debt as mentioned in the script?

The script mentions the U.S. national debt to be a little over 18 trillion dollars, with a specific figure of $18,236,176,274,963, although it humorously acknowledges the difficulty in keeping up with the exact number.

Why is it important to consider the debt as a percentage of GDP when analyzing a country's financial health?

Considering debt as a percentage of GDP is important because it provides a relative measure of the debt burden against the size of the economy. It helps to understand whether the debt is manageable relative to the economy's capacity to generate income.

What is the 'debt ceiling' and how does it relate to the U.S. government's borrowing?

The debt ceiling is a legislative limit on the amount of national debt that the U.S. Treasury can issue. It is intended to control the government's borrowing, but in reality, it often leads to political disputes without directly addressing the underlying issues of spending and revenue.

How does the script suggest that the U.S. government's debt is perceived by lenders?

The script indicates that both American and foreign lenders charge the U.S. government extremely low interest rates on its loans, suggesting confidence in the government's ability to repay and making it easier for the government to manage its debt.

What are the two main areas of federal spending that are expected to grow as Baby Boomers retire and live longer, according to the script?

The two main areas of federal spending that are expected to grow are Social Security and healthcare programs, with a significant portion going to retired people on Medicare.

Why might future healthcare costs potentially slow down, and what impact could this have on the U.S. budget?

The script suggests that there are signs that the growth in healthcare costs could be slowing, possibly due to changes in the way care is delivered or other factors. If this slowdown is confirmed, it could improve the long-term budget outlook by reducing the rate of increase in healthcare-related spending.

What are the potential consequences if a country's debt grows so large that lenders lose confidence in its ability to repay?

If a country's debt grows to a point where lenders lose confidence, they may stop lending or lend at higher interest rates. This could lead to a situation where the country struggles to repay its loans, potentially leading to a debt crisis, default, and severe economic repercussions.

How does the script use humor to discuss the complexity of the national debt and its potential impact?

The script uses humor by imagining extreme scenarios like a pandemic or zombie apocalypse to illustrate that while the national debt is a serious issue, it is also part of a broader context of unpredictable events that could overshadow economic concerns.

What does the script suggest as the most effective way to address the issue of national debt?

The script implies that addressing the national debt effectively requires a focus on the underlying causes, such as controlling spending and increasing revenue, rather than simply trying to limit the debt through arbitrary caps or other measures that do not address the root problems.

Outlines

00:00

💡 Understanding Deficits and National Debt

This paragraph introduces the topic of deficits and national debt, clarifying the difference between the two. A deficit occurs when a government's spending exceeds its tax revenue in a year, leading to borrowing to cover the shortfall. National debt is the cumulative total of these deficits over time. The script uses the hypothetical country of Cliffordonia to illustrate how deficits and debt accumulate, highlighting the challenges faced when tax revenue consistently falls short of expenditures. It also touches on the United States' significant national debt, emphasizing the importance of considering debt in relation to GDP and adjusting for inflation to understand its true scale.

05:05

🌐 Global Debt Comparisons and Future Concerns

The second paragraph delves into the comparison of the United States' debt-to-GDP ratio with other developed nations, noting that while the US has a high ratio, there are countries with even higher levels. It points out that economists are less concerned with existing debt and more with future borrowing, driven by projected spending on Social Security and healthcare programs due to an aging population. The paragraph also discusses the potential economic consequences of excessive government borrowing, such as crowding out private sector investments and the risk of a debt crisis similar to those experienced by Greece, Argentina, and Russia. It concludes with a look at the US debt ceiling and the futility of trying to control debt without addressing its root causes.

Keywords

💡Deficit

A deficit occurs when a government's expenditures exceed its revenue in a given fiscal year. In the video, the concept is introduced using the example of 'Cliffordonia,' where the government spends $500 with only $400 in tax revenue, resulting in a $100 deficit. The term is central to understanding the theme of government finance and is used to illustrate the difference between spending and revenue.

💡Debt

Debt refers to the accumulated total of yearly budget deficits. The script explains that debt is the sum of all past deficits, using the example of Cliffordonia accruing a debt of $300 over two years. The concept of debt is fundamental to the video's discussion on the implications of government borrowing and its long-term sustainability.

💡National Debt

National debt is the total amount of money that a nation owes, typically resulting from budget deficits. The video highlights the U.S. national debt, which is the largest in the world, and discusses its size and implications. The term is crucial for understanding the scale of a country's financial obligations and its potential impact on the economy.

💡Budget

A budget is a financial plan that outlines a government's projected revenues and expenditures. The video script differentiates between a deficit and a budget, emphasizing that a deficit arises when spending exceeds the budgeted revenue for a year. The concept of a budget is essential for discussing government financial planning and management.

💡Tax Revenue

Tax revenue is the money collected by a government from various taxes. In the script, Cliffordonia's government brings in $400 in tax revenue, which is less than its spending, leading to a deficit. Tax revenue is a key component of government budgets and is central to the video's discussion on government income and spending.

💡GDP

Gross Domestic Product (GDP) is the total value of goods and services produced over a period in a country. The video script suggests looking at debt as a percentage of GDP to understand a country's economic capacity to service its debt. GDP is used in the video to contextualize the size of the U.S. debt relative to its economic output.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, the purchasing power of currency is falling. The video mentions adjusting debt trends for inflation to reflect the real value of money over time. Inflation is important for understanding the real economic value of financial figures.

💡Debt-to-GDP Ratio

The debt-to-GDP ratio is a metric that compares a country's debt to its GDP, indicating the proportion of debt relative to the size of its economy. The video uses this ratio to compare the U.S. with other developed nations, showing that while the U.S. has a high debt, other countries have even higher ratios. This ratio is a key measure for assessing a country's fiscal health.

💡Social Security

Social Security is a government program that provides financial support to the elderly, disabled, and their dependents. The video script reveals that Social Security is one of the largest recipients of federal spending, accounting for about a quarter of the budget. The term is significant for understanding government spending priorities and the demographic pressures on fiscal policies.

💡Healthcare

Healthcare refers to the organized provision of medical services to individuals or communities through various health professionals and allied health fields. In the video, healthcare spending, particularly on programs like Medicare, is identified as a major driver of future deficits. The term is central to the discussion on the sustainability of government spending on health services.

💡Interest Rates

Interest rates are the percentage at which interest is paid by borrowers to lenders. The video discusses the potential impact of higher interest rates on government debt, suggesting that they could make it harder for the government to repay loans. Interest rates are a key factor in the cost of borrowing and the government's ability to manage its debt.

💡Default

Default is the failure to fulfill an obligation, typically the non-payment of a debt. The video uses the term to describe a situation where a government is unable to pay its bills, leading to significant economic repercussions. The concept of default is crucial for understanding the risks associated with excessive government borrowing.

💡Debt Ceiling

The debt ceiling is a legislative limit on the amount of national debt that a government can accumulate. The video script mentions the U.S. debt ceiling as a cap on borrowing, which is a point of contention in political discussions about fiscal responsibility. The term is important for understanding the constraints on government borrowing.

Highlights

Deficit and debt are not the same thing; a deficit is when government spending exceeds tax revenue in a year, leading to borrowing.

Debt is the accumulation of yearly budget deficits.

Cliffordonia example illustrates how deficits accumulate to form national debt.

The US has the largest national debt, over 18 trillion dollars.

Inflation adjustment is necessary when considering debt over time.

Debt should be viewed as a percentage of GDP to understand its impact.

US federal debt as a percentage of GDP has been rising.

Comparing US debt-to-GDP ratio to other developed nations shows varying economic stability.

Economists are more concerned about future borrowing than past debt.

Deficits are driven by the difference between federal spending and revenue.

Social Security and healthcare are the largest recipients of federal spending.

Defense and discretionary spending are projected to shrink as a percentage of GDP.

The debt ceiling is a legislative limit on US Treasury debt issuance.

The debt ceiling does not address the root causes of debt—spending and revenue.

Low interest rates on US loans indicate confidence in government repayment ability.

Slowing growth in healthcare costs could improve the long-term budget outlook.

The impact of national debt on the American way of life is complex and depends on various factors.

Crash Course Economics is funded through Patreon, allowing for voluntary financial support.

Transcripts

Hi, I'm Adrienne Hill. And I'm Jacob Clifford, and welcome to Crash Course Economics.

What's wrong with you?

Today we're talking about deficits and debt.

[Theme Music]

You've probably heard a lot about the national debt, so

what is it and where does it come from and is it a problem, and most importantly, should you even care?

First off, deficit and debt are not the same thing.

A budget deficit is when the government spends more than it bring in tax revenue in a given year.

Then it has to borrow money to cover that year's shortfall.

The debt is the accumulation of budget deficits.

For example, let's start a country called, I don't know, Cliffordonia. It's a pretty cool name.

In its first year, the Cliffordonian government brings in $400 of tax revenue,

and it spends $500, because starting a new country is kinda expensive. So in that year, the deficit is $100.

Then, in the next year it brings in $600 of tax revenue, but spends $800. That year's deficit is $200.

To calculate Cliffordonia's debt, add up all those yearly deficits.

So at the end of the second year, it has a debt of $300

-- $100 from the first year, and $200 from the second year.

Things are looking pretty tough for Cliffordonia. Not only is the nation in debt, it also has an average tax

revenue of only $500 a year. It's going to be difficult getting the space program off the ground at that rate.

Let's leave the plight of Cliffordonia behind for a moment and talk about the real world.

Specifically, let's talk about the United States, since it has the largest debt

-- hooray, America #1!

[LIBERTAGE]

So how big is the debt right now? $18,236,176,274,963 -- no, wait, $18,236,176,188 -- it's hard to keep up with,

but it's a little over 18 trillion dollars.

So the number sounds really, really high.

I have a hard enough time wrapping my head around millions and billions, not to mention trillions.

The debt seems especially high when you look at the trend over time.

First we need to adjust that trend for inflation because dollars today are not the same as dollars in the past.

Remember, we try to keep it real around here.

Second, we really should be looking at debt as a percent of GDP.

Why? Well suppose I owe $200 bucks, and a 6 year old owes $100.

Which of us will have a harder time paying it off?

Well, probably the 6 year old, because even though my actual debt number

is larger, I have a job. I have two jobs.

What's your allowance, you unemployed 6 year old?

In the same way, our GDP grows every year, due to population growth and productivity increases. And our ability to sustain debt grows along with our income.

So here is the US federal government debt as a percent of GDP.

As you can see, it's risen over the past several years, so, is that a bad thing?

Well, there's a couple ways to look at it.

First, compare the US to other developed nations.

The US has a higher debt-to-GDP than other countries,

but several other countries have a much higher ratio.

Some of these are in crisis, like Greece and Italy, but there are also countries that are stable, like Japan and France, that have much higher levels of debt than the US.

Second, most economists aren't concerned about the borrowing the US has done already, because they're too worried about the borrowing they're gonna do.

A lot of politicians and pundits have freaked out about this, while economists are focused on this.

All right, what we need to figure out is what's driving those huge deficits in coming decades.

Deficits are the difference between federal spending and revenue.

So let's look at those as a percent of GDP.

The problem isn't a drop off in tax revenue.

What economists are worried about is spending.

So let's look at where the government actually spends its money.

Conservatives might complain, "It's obvious, handouts!" Liberals will say, "It's obvious, defense!"

Well, they're both wrong.

So who's the biggest recipient of federal dollars?

Grandma and Grandpa.

The government spends about a quarter of the budget on Social Security, and another quarter on healthcare programs. A lot of that goes to retired people on Medicare.

They deserve it! They worked hard. And those are the programs that are expected to grow as Baby Boomers retire and live longer.

Defense and other discretionary programs are actually projected to shrink slightly as a percent of GDP.

We'll be making another video on these specific topics later, because we love making videos, but one thing is

for sure: US policy makers will be forced to make some hard decisions about these future unfunded liabilities.

So the answer is obviously to just keep borrowing more and more money, right?

Well, not necessarily. Let's go to the Thought Bubble.

First, to borrow, you need lenders -- people who have decided to save money and loan it out, rather than spend it on something else.

But there's a finite amount of money savers can lend, and most of that savings is borrowed by the private sector,

which is consumers that take out car loans, and businesses that pay for things like factories and computers.

Now, when the government runs a budget deficit, it borrows from that same pool of savings.

If the government continues to borrow, many economists worry that there'll be fewer loans available for businesses,

and that it'll hurt the long run growth of the economy.

The second worry is the Greece scenario. A country's debt could grow so large that savers, individuals,

and businesses in other continents might fear they'll never get paid back.

They could stop lending money entirely, or they can lend at higher interest rates.

Higher interest rates would make it harder to pay back the loan, which could likely lead to more debt,

and eventually the government would simply be unable to pay its bills.

That's called "default," and it's basically terrible for everyone - the investors who loaned the government

money lose billions, and the government loses all credibility, and it causes a massive recession.

That's what happened to Greece a few years ago, what happened to Argentina in 2001, Russia in 1998, and many other countries throughout history.

Thanks, Thought Bubble. Fortunately, the US has something called "the debt ceiling,"

which is a cap on how much debt the US Treasury can issue.

The US will never ever ever be able to borrow more than the ceiling, so debt can never get out of control!

Hmmm, no

Remember that debt comes from repeated deficits. Deficits come from spending higher than revenues.

The debt ceiling does nothing to cut spending or raise revenue.

It just gets politicians into a big fight every few months.

Basically, trying to cut the debt without raising revenue or cutting spending is like trying to lose weight by buying smaller clothes

instead of with diet or exercise. It doesn't work.

But there is good news for the US. First, both American and foreign lenders charge the US government extremely low interest on its loans.

That tells us they're confident in the government's ability to pay them back,

and the low interest rates actually make it easier for the government to pay.

Second, there are signs that the growth and healthcare costs could actually be slowing.

Now, it's too early to tell if this is true, but if it is, the long-run budget picture will be much better than what we've shown.

In fact, the projections for long run deficits and debt have already been revised downward. Go us!

So is all this debt going to destroy the American way of life?

Like most things in economics, and in Crash Course, the answer is complicated, and it depends a lot on what

you're looking at, as well as your political point of view. Looking at debt from the past or even the present is a

good way to have political arguments, but it may not be a great way to think about the future.

Right now healthcare spending is driving the debt higher, but if a massive pandemic kills off half the world, or there's a zombie apocalypse,

after an initial spike, those healthcare costs are gonna fall.

And frankly, in that case, the national debt and deficit spending will be the least of our worries.

On that cheery note, we've gotta stop. Thanks for watching; see ya next time.

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