[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

the country must pay some of its national income each year to foreign investors as
interest on its borrowing. A surplus in a small open economy would have the opposite
effect, leading to a capital outflow.
That an increase in the fiscal deficit leaves private investment in the small open
economy unaffected might suggest that it has no long-term consequences for economic
growth. After all, since investment has not changed, the economy’s future stock of
capital is not reduced (as would happen in a closed economy with a deficit). Remember,
though, that borrowing from abroad is what keeps the level of investment from being
crowded out in the small open economy—it has a capital inflow. This borrowing will
need to be repaid in the future to the foreign investors, and that repayment will
render some of the income produced by the economy’s capital stock unavailable to
domestic residents.
ECONOMIC CONSEQUENCES OF DEFICITS
AND SURPLUSES
Those holding the traditional view conclude that deficits reduce future income, either
because lower private investment spending leads to a smaller stock of capital or because
foreign borrowing must be repaid. This analysis is incomplete, however, focusing only
on the costs of government borrowing. A complete evaluation of the government’s
budget must also consider the purposes to which the borrowed funds are put.
As we noted in Chapter 25, economists have traditionally assessed the wisdom
of government and individual borrowing by the same criterion: the purpose for
which the money is used. Just as it makes sense for individuals to borrow for purchases
that will be put to long-term use (a house, a car) or will lead to future gains
(e.g., a higher-paying job made possible by an advanced degree), so too countries
appropriately borrow to finance projects that will be used for many years (a road,
a school, industrial development). Similarly, taking on more debt than can be comfortably
paid off or borrowing to cover this year’s expenses creates real problems for
both individuals and countries.
In the United States, concern is growing that most government borrowing today
(as was true in the 1980s) is not being used for investment projects that will raise
future incomes. The expenditures now projected to boost future deficits are mainly
in the areas of Social Security and health care. Some health care spending can be
viewed as an investment, making individuals (and thus the economy) more productive
by improving their health. However, most goes to the elderly, who are no longer
in the labor force; these payments, like those from Social Security, are used to finance
consumption spending.
HOW FUTURE GENERATIONS ARE AFFECTED
BY GOVERNMENT DEBT
As a result of past borrowing, the U.S. government currently owes over $5 trillion,
or roughly $17,000 for every man, woman, and child in the nation. By borrowing
840 ∂ CHAPTER 38 CONTROVERSIES IN MACROECONOMIC POLICY