Page 778 - The Principle of Economics

800 PART THIRTEEN
FINAL THOUGHTS
“MY SHARE OF THE GOVERNMENT DEBT IS $14,000.”
the Federal Reserve, argued forcefully in his book Hard Heads, Soft Hearts that policymakers should not make this choice:
The costs that attend the low and moderate inflation rates experienced in the United States and in other industrial countries appear to be quite modest—more like a bad cold than a cancer on society. . . . As rational individuals, we do not volunteer for a lobotomy to cure a head cold. Yet, as a collectivity, we routinely prescribe the economic equivalent of lobotomy (high unemployment) as a cure for the inflationary cold.
Blinder concludes that it is better to learn to live with moderate inflation.
QUICK QUIZ: Explain the costs and benefits of reducing inflation to zero. Which are temporary and which are permanent?
SHOULD FISCAL POLICYMAKERS REDUCE THE GOVERNMENT DEBT?
Perhaps the most persistent macroeconomic debate in recent years has been over the finances of the federal government. Throughout most of the 1980s and 1990s, the U.S. federal government spent more than it collected in tax revenue and fi- nanced this budget deficit by issuing government debt. When we studied financial markets in Chapter 25, we saw how budget deficits affect saving, investment, and interest rates.
This situation reversed itself in the late 1990s, when a combination of tax hikes, spending cuts, and strong economic growth eliminated the government’s budget deficit and even produced a small budget surplus. Our fourth debate concerns whether fiscal policymakers should use this budget surplus to reduce the govern- ment debt. The alternative is to eliminate the budget surplus by cutting taxes or increasing spending.
PRO: POLICYMAKERS SHOULD REDUCE THE GOVERNMENT DEBT
The U.S. federal government is far more indebted today than it was two decades ago. In 1980, the federal debt was $710 billion; in 1999, it was $3.7 trillion. If we di- vide today’s debt by the size of the population, we learn that each person’s share of the government debt is about $14,000.
The most direct effect of the government debt is to place a burden on future generations of taxpayers. When these debts and accumulated interest come due, future taxpayers will face a difficult choice. They can pay higher taxes, enjoy less government spending, or both, in order to make resources available to pay off the debt and accumulated interest. Or they can delay the day of reckoning and put the government into even deeper debt by borrowing once again to pay off the old debt and interest. In essence, when the government runs a budget deficit and issues government debt, it allows current taxpayers to pass the bill for some of their