OVERVIEW:

 In Part I of this exercise, you will
o explore current U.S. data about our nation’s federal budget deficit
o attempt (in a simulation exercise) to figure out how you would go about trying to balance the budget

 In Part II of this exercise, you will
o examine current data about the national debt of the U.S.
o consider to whether the national debt of the U.S. is a problem or not

PART I: Budget Deficits and Budget Surpluses (10 points)

Step 1: A nation has a federal budget deficit if spends more than it collects in tax revenues. A nation has a budget surplus if it spends less than it collects in tax revenues. To find data on the current state of the U.S. federal budget please go to the Congressional Budget Office (CBO) website (link below) Click the link entitled “10 Year Budget Projections” and then the latest month available. Once you do you have access to Excel files (select the most recent date/link) with the data from “CBO’s Baseline Budget Projections” (typically labeled Table 1) you need to fill in the blanks (click tab at bottom).
https://www.cbo.gov/about/products/budget-economic-data

1. Question 1: Last year¸ the federal government’s Total Revenues equaled \$____ billion, while their Total Outlays (spending) equaled \$______ billion. Thus, the U.S. federal budget ran a (budget Deficit / budget Surplus) equal to \$ __ billion.
2. Question 2: For this year, the CBO projects that the budget deficit will _ (increase / decrease) to a total of \$___ billion.

Step 2: Now look at the Historical Budget Data from the CBO
(Click above link and then the most recent year/link under Historical Budget Data to access “Revenues, Outlays, …”)

1. Question 1: In 2001, the U.S. economy went in recession and President Bush signed a tax cut law into effect. As a result, during the 2001-2003 period, federal tax revenues (increased / decreased) while federal outlays/expenditures (increased / decreased), thus causing the budget to move from a (surplus / deficit) of \$__ billion in 2000 to a (deficit / surplus) of \$____ billion in 2003.
(NOTE: For the deficit/surplus data, please use the data from the next-to-last column of the table.)
Step 3: If you were a policymaker in Washington, D.C. attempting to reduce the federal budget deficit and balance the budget, what programs would you cut, which programs would you spend more on, and what taxes would you increase/decrease? To see the current budget situation in detail and to consider what it would take to balanced the federal budget, please go to the budget simulator on the website http://crfb.org/stabilizethedebt/ {Or, if you have trouble, try https://bipartisanpolicy.org/press-release/interactive-budget-simulator/ and click on the second link for “Federal Balancing Act…” and then just describe or copy your results}
 Read the information on the first page of the site. When done with each page click on the “Next” icons. Click on the “i” for more information about each possible choice. Continue until you get to the page that gives you a “done” option.
 When you finished making your budget changes, click on the “done” button Check to see how you did.

 IMPORTANT: You must copy and paste your results page into the sheet you submit via Blackboard for this exercise. Or, you can summarize in writing how you did and what the results page told you. I expect to see your priorities for both taxation and spending!

Describe how you changed taxation and spending to help balance the budget here:

PART II: The National Debt (10 points)

Step 1: When the government runs a deficit, it must borrow money from the public (and some from government funds currently in surplus (e.g. the Social Security trust fund)) to pay for its excess spending. Additional deficits in following years lead to a larger accumulation of debt. The total amount owed by the government from years of overspending it called the national debt.

1. Question 1: Go to the Balance at https://www.thebalance.com/who-owns-the-u-s-national-debt-3306124 According to the data given there, the total “Debt Held by the Public” equals approximately \$_________ trillion. This is money owed to you and me (if we own Treasury securities), our pensions, foreigners, etc.
2. Question 2: Current surpluses in the Social Security Trust fund and other Government Trust Funds have been tapped to finance a significant fraction of this total debt (that is, the government is, essentially, writing itself an “IOU” to pay back these trust funds at a later date), so that the “Intragovernmental Debt” is approximately \$_______trillion.

Some of the major concerns raised about the U.S. debt including the increasing percent of the publicly-held debt owned by foreigners and the large interest payments on the debt that mean we can’t spend money on other social needs. Explore

1. Question 3: According to the data provided on this site, approximately % of the publicly-held national debt is owned by “foreigners,” with the two largest holders of U.S. government Treasury securities being the countries of _ & _. Foreign holdings of the public-held U.S. debt are at historic levels. (For updated, though less snappy/visual, data, see “current foreign ownership” at https://www.thebalance.com/who-owns-the-u-s-national-debt-3306124
2. Question 4: One of the most important costs of our national debt is the interest payment that must be made each year on this debt. Using data from http://www.pewresearch.org/fact-tank/2017/08/17/5-facts-about-the-national-debt-what-you-should-know/ (scroll down to the 4th fact), net interest on the publicly-held debt are estimated to equal \$______ billion, roughly _% of the federal budget. This spending on interest constitutes money that cannot be spent on other things (i.e. the opportunity cost); specifically, net interest on the debt typically totals more than the combined federal budget spending on energy, the environment, agriculture, veterans benefits, and education.

Step 3: While the total debt number above are quite large, they are potentially misleading if taken out of context. As an individual, you don’t just look at the total amount of your debt, but rather the size of your debt relative to your ability to repay that debt – this determines the “burden” of your debt. In the U.S., our national ability to support the debt is our national income, as measured by our nation’s Gross Domestic Product (fact 2 from the Pew Research site above site gives historical perspective on this).

1. Question 1: According to the Pew Research site (link above), the Publicly-Held U.S. Debt as a percentage of U.S. GDP is estimated to equal __%. Do you think this is still a rather manageable number? How would this now compare to other nations’ debt-to-GDP ratio? (see https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html and determine where the US would rank if you update the figure from 2017 to 2019 (swap the CIA figure to the Pew figure). Consider the fact that the aging baby-boomer population (along with relatively smaller groups of young workers) means, unless changed, the Social Security and Medicare systems will go from the current governmental trust fund surpluses into deficit; ceteris paribus, this could lead to significantly larger debt burdens unless spending cuts or tax hikes are enacted.

Step 2: Familiarize yourself with the recent GOP Tax Reform bill. See http://www.businessinsider.com/trump-gop-tax-reform-bill-impact-economy-business-debt-income-2017-12 for an overview, if you need one. How do you think this will affect the national debt going forward and why? What are your thoughts on the timing of this stimulus package, given where the economy was in the business cycle at the time? What has this done to our ability to handle the spending stimulus passed to prop up the economy during the current crisis? With GDP and tax revenues plummeting, and a \$2 trillion spending bill, what do you predict will happen to our national debt?

Step 4: Give me a summary of your reactions to what you learned by completing this assignment. ______________________________________________

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Sample Solution