This is the first of the three courses part of the Globalization, Economic Growth and Stability Specialization. This course will employ a non-technical approach to analyze how governments use policy to influence a country's economy. Upon completing the course you should be able to discuss national debts and deficits, examine fiscal and monetary policy and their appropriateness to the situation of an economy, and anticipate the results of fiscal and monetary policies and structural reform on a country. These concepts will give you the tools to develop your own position in many current economic debates, such as fiscal stimulus vs. austerity, the merits of quantitative easing, the need for higher interest rates or the future growth path of many modern economies.
How Much Deficit is Too Much?
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来自 IE Business School 的课程
Understanding economic policymaking
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从本节课中
Deficits, Debts, Myths and Realities
Welcome to Module 3!
Now we know how fiscal policy is supposed to work in the economy, to close recessionary or inflationary gaps. In this module we will get into the nuts and bolts of deficits and debts in the real world and I am sure we will have some interesting follow-up discussions! How is it really used? What are government deficits and debts? When governments run deficits and need to borrow money, how and where do they do it? When are these deficits and debts more of a problem? This module will look at the US and other leading economies in recent years to answer these questions, clear up some common misconceptions, and point to what the most important concerns are with deficits and debts at the present time.
Good luck and see you online!
与讲师见面
Gayle AllardProfessor
Economics
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Having looked then, at how these bond debt markets work, all right.
And this is the foundation of the international financial system is all
these bonds that are out there and can be bought and sold.
And people can put their savings into them
and then obtain the money when they need them.
It's a very important instrument for our world.
Having looked at this, we want to come back to the theory
of fiscal policy and ask ourselves, how much debt is a problem?
How much deficit is a problem?
And again, we read in the papers, we become alarmed
about the size of the deficit in our different countries.
And it would make sense, if we could actually put
the numbers and the concepts into some sort of a context.
To see whether we have a problem or not, okay.
So just a few basic guidelines about how much deficit is too much.
Remember, what we were talking about last week and what we mentioned today.
That it's natural and even desirable for a country
to go into deficit at a time of recessionary gap.
It actually helps stimulate the economy and bring it back
up to potential so the first thing we can say is.
When does this deficit occur and why does it occur?
Is it occurring when the economy is in a moment of recessionary gap?
Then it may be okay.
In fact, it may be very positive.
In fact, think for just a moment.
Imagine that my economy is dropping into a recessionary gap And I'm seeing a
deficit occur automatically and I get worried and I try to get rid of it.
What will I have to do to get rid of that deficit?
Well, I'll have to cut government spending and raise taxes.
But if I do that what happens to my economy?
Well, aggregate demand declines and the recessionary gap gets bigger.
So in many ways it's better to have a deficit at
a moment of recessionary gap, and we shouldn't worry about it.
It's okay, it shows that we're doing the appropriate
things to try to bring the economy back to balance.
Now we've seen, for example, in the Euro Zone
a lot of the countries are called the periphery.
The countries around southern Europe and, and Ireland where,
as they dropped into crisis, their deficits got bigger, naturally.
And when markets became alarmed that they might not be
able to repay their total debt, interest rates went up.
It was too expensive to borrow, so
the governments began trying to cut their deficits.
So they didn't have to spend so much money on interest payments.
Well, if the governments try to cut those deficits when the
economy is down here in a recessionary gap the crisis gets worse.
Because they're cutting government spending, raising taxes,
and that's what all of those countries did.
This is one reason why the crisis in the Euro zone in
the peripheral countries has not been a normal recession, as we call it.
Which is a year or two of declining real GDP, it's actually been a depression.
Because we've had four, five, six years of declining GDP in these countries.
In large part because of the fiscal
policies they've followed which were not appropriate.
Okay?
So the first thing we want to ask ourselves is, when we are wondering
how much is too much, we ask ourselves why do we have this deficit.
When is it happening?
If its happening in a recessionary gap, it's okay.
If it's happening in an inflationary gap, we have a problem.
If we're seeing a deficit in an inflationary gap.
It probably means that we are not being very realistic
about how many taxes we need to cover our government spending.
Because even when the economy is above potential, we still
can't pay for all of our government spending through existing taxes.
Then that country has a structural deficit and it's debt will
go up year, after year, after year and probably become unsustainably high.
So, first of all when does the deficit occur?
Secondly, how much does it cost me to finance it?
All right.
If interest rates are low and I acquire more debt because I have a deficit.
Probably it's not going to be much of a burden for my country.
Interest rates out there in that secondary market and that primary market are low.
Doesn't cost me much.
Not much of a problem.
If interest rates, however, are high, then this deficit and
this debt immediately can become a burden for our economy.
We saw with Greece Spain, Portugal, Ireland, Italy, we
were looking at the spreads of their interest rates.
Or the risk premium of their interests rates over German rates.
In the period were we saw there interest rates were as low as German rates.
More deficit spending or more borrowing increase
of debt was not much of a problem.
Didn't cost them much.
But when their interest rates went up,
these governments found themselves with additional expenses.
30% more, 40% more in spending on interest payments in a given year.
And this is something that simply makes your
deficit bigger and bigger your debt bigger and bigger.
So, if it's expensive to borrow probably your deficit
needs to be reduced because of the, of the strain on your government resources.
Third, from whom can you borrow?
Okay?
So first, why are you borrowing or when are you borrowing?
All right?
Secondly, what does it cost you to borrow?
Thirdly, from whom can you borrow?
We said before that if you can borrow in your own currency, it's much better.
Than if you have to borrow from foreign institutions in a foreign currency.
Okay?
So, obviously any kind of public debt in your own currency is less onerous.
Less of a burden for you than borrowing a foreign currency.
Then we also want to ask ourselves how much debt do we have already?
Okay.
Think about the business cycle.
If things went in this ideal world where we
had deficits only when we were in recessionary gaps.
And then they turned into surpluses when we had inflationary gaps, then
when I'm in the recessionary gap, I have deficit my debt goes up.
But when I move into that inflationary gap, I have a surplus.
All right?
I take that extra money, I repay the debt that I
acquired during the recessionary gap and I don't have an additional burden.
We saw the picture of Denmark, a country with a very big
welfare state and we see that it's bringing down its debt over time.
So the debt is not much of a burden on the economy in terms
of what it costs me to pay interest on it and finance it, okay?
So, we want to know how big the country's
debt is already, additional borrowing will bring it up.
Will it bring it to a problematic level or not?
If my debt is already low, probably not.
If my debt is already high so I'm Japan or I'm
Italery, I'm Italy or I'm Greece and we are borrowing more.
We're moving up to higher levels and its going to be quite a burden on the economy.
So these are all things we need to ask ourselves.
When we're wondering whether the deficit we have is
a problem, whether the debt we have is a problem.
Another thing we also want to think about, specifically with debt.
Is we want to think about whether that number, debt divided by GDP, is
going up over time, if it's going down over time, or if it's stable.
Okay?
Again, in the example I just gave you.
If we have a deficit in recession, we borrow extra money, debt goes up.
We go into the inflationary gap.
We have a surplus.
We pay off that debt.
And it goes down.
So over time it's stable or declining, that's a good situation.
But if it's going up all the time we have a problem, okay?
What we also need to be aware of is that any debt has a cost to an economy.
All right?
Anytime that we have to pay interest payments on a debt,
we are taking tax revenues that could be used for something else.
They could be used for more research and development, for better
universities, for more expanded poverty programs, for better highways, all right?
And instead of doing those things, we're paying interest to bondholders.
So even if that interest payment is small, any debt
has what we call an opportunity cost for the economy.
And therefore, it should be avoided.
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