merged

the current government spending and passing the burden on to future generations? To an extent,
deficit spending does create a burden on future generations. But the burden of deficit spending
also falls on the current generation.
The Burden on the Current Generation
The current generation bears the burden of deficit spending to the extent that private
consumption is crowded out by increased government use of resources. The basic economic
problem is scarcity. Deficit spending allows the government to use a larger share of the limited
resources. This leaves fewer resources for the private sector (consumption and investment).
Deficit spending increases the government’s demand for loanable funds, driving up interest rates.
The higher interest rates will reduce consumption. To the extent that consumption is crowded out,
the current generation bears the burden of deficit spending.
The Burden on Future Generations
The burden of deficit spending also falls on future generations, in two ways. As mentioned above,
deficit spending drives up interest rates. The higher interest rates will reduce investment. The
reduction in investment in the present will lead to slower economic growth in the future. Thus,
future generations will experience a lower standard of living because deficit spending reduces
current investment. Any government spending will tend to crowd out private spending
(consumption and investment). But paying for government spending with deficits will crowd out
investment more than would occur with a balanced budget. If the government has a balanced
budget, tax revenues must equal government expenditures. Taxation tends to crowd out
consumption more severely than it does investment. When the government deficit spends, the
increase in interest rates tends to crowd out investment more severely than it does consumption.
Thus, deficit spending creates a burden on future generations to the extent that deficit spending
favors current consumption rather than investment.
The second way that deficit spending creates a burden on future generations is if the deficit
spending is financed by foreign creditors. The budget deficit is financed primarily by internal
borrowing (about 66% of the national debt is financed by borrowing from American creditors).
This internal borrowing does not increase total resources available. It shifts resources from the
private sector to the public sector.
But the budget deficit is also financed by external borrowing (about 34% of the national debt is
financed by borrowing from foreign creditors). This external borrowing amounts to borrowing
resources from other economies. When the external borrowing is repaid, fewer resources will be
available to the domestic economy. Thus, deficit spending creates a burden on future generations
to the extent that the deficit spending is financed by foreign creditors. (The data on external debt
is from the U.S. Treasury Department, as of 08/14.)
Appendix: Future Social Security and Medicare Spending
Social security and Medicare are two of the largest federal government spending programs.
Spending on social security and Medicare has increased tremendously in recent decades.
Example 15: Medicare spending increased from $6 billion in 1970 to $498 billion in 2013. Social
Security benefits increased from $30 billion to $814 billion over that same time.
Spending on social security and Medicare is likely to continue to increase rapidly in coming years
for three reasons:
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
1. Increase in life expectancy. Life expectancy in the U.S. was about 61 years in 1935 (when
the social security system was created). Today it is about 79 years. A 65-year-old American
today has a remaining life expectancy of about 19 years. An increase in life expectancy means
that a growing percentage of the population will be eligible for social security and Medicare.
13 - 9 Taxes, Deficits, and the National Debt