Debts and deficits

Published on August 29, 2021   18 min
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Hi, my name is Mariano Torras, I'm Professor of Economics at Adelphi University in New York. We are going to be doing a lecture series on macroeconomics.
In the preceding lecture, we learned that if a government spends more money than it raises from taxes, it incurs a deficit. When it does so, the only way to finance the deficit is to borrow money. All national governments borrow money by issuing bonds of varying durations. The total of all the government bonds outstanding is the same thing as the nation's debt. A national debt is always a concern, since it requires the government to pay interest to its bondholders. As we saw earlier, the interest is a transfer payment that reduces the ability of the government to conduct its other functions,
but the importance of the size of the national debt is also sometimes overstated. We should always pay more attention to the debt as a percentage of GDP, rather than the absolute size of the debt, since the debt-to-GDP ratio gives us a sense of the ability of the country to service its debt. For example, the national debt of the United States is in the neighborhood of $25 trillion, which sounds like quite a lot of money. It is, of course, but its GDP is not much less, about $20 trillion. Japan in contrast, has a slightly smaller debt than the United States, but far less than half its GDP. This means that its debt/GDP ratio,