it ballooned to over 4 percent, topping out at 290 billion dollars in 1992. Three main culprits were responsible for the growing deficit:
1. Tax decreases. The ratio of tax revenue to GDP is about 30 percent in the United States, the lowest of all OECD countries. Canada's ratio is about 40 percent, and Sweden's is about 50 percent.
2. Growing entitlement expenditures. Social Security and Medicare expenditures cannot easily be controlled because anyone eligible is entitled to coverage. As our population ages, spending in these two categories continually increases, with politicians refusing to increase taxes to pay for it.
3. Higher interest payments. Because of higher interest rates and a higher national debt, interest payments as a fraction of government spending have jumped from about 9 percent to about 13 percent. Recent decreases in interest rates have alleviated this burden considerably.
Because each year a dollar of budget deficit increases the national debt by a dollar, deficits have caused growth in the national debt that has many worried about our future. Even though the budget position moved into surplus in the late 1990s (the 1998 surplus of $69 billion was the first surplus since 1969), this issue remains a fundamental policy concern.
Upon completion of this chapter you should
know what's involved in calculating the structural deficit, a deficit measure designed to provide a more accurate view of the extent to which we should worry about the size of the deficit; and
recognize the circumstances in which an increase in the national debt can be viewed as a burden on future generations.
14.1 Implications of Budget Deficits
Budget deficits carry both costs and benefits for the economy. Any assessment of their desirability must weigh these costs and benefits carefully.
1. Lower unemployment. Allowing budget deficits permits Keynesian fiscal policy (as described in chapter 4) to keep the economy closer to full employment than might otherwise be the case. Movements into recession are automatically dampened if recession-induced decreases in tax revenues and increases in unemployment insurance payments are permitted to create a deficit. Output lost as a result of unemployment above its nat-
