The evolution of federal budget surpluses and deficits in the U.S. since 1970.

Natalia Smirnova, University of Connecticut,
Author Profile

Summary

Students analyze the United States federal budget surplus/deficit as a fraction of gross domestic product (GDP) and discuss the evolution of federal budget surpluses and deficits since 1970. Students propose federal debt reduction measures.

Context for Use

● Is the activity appropriate for principles courses, intermediate courses, or selective elective courses?

This activity is appropriate for Principles of Economics, Introductory Macroeconomics, elective Public Finance.

● What prior student knowledge is required?

Use of FRED; understanding of the difference public debt and deficit; understanding of deficit and surplus; understanding of the concept of business cycles.

● Are there class size limitations?

No.

● How much time is needed for the activity? Does it extend across more than one class period?

One class period of 50 minutes is enough for the discussion.

● Is this activity connected to another TBL activity? If so, please provide a link to that activity. For example, is this activity part of a group of activities within a single TBL module?

1. This activity could be self-standing.
2. This activity could be an extension of the GDP components activity (https://serc.carleton.edu/econ/tbl-econ/activities/234583.html).
3. This could be an extension of the U.S. Fiscal Policy between 1991 and 2001 activity (https://serc.carleton.edu/econ/tbl-econ/activities/233478.html).
4. This activity could be an extension of the U.S. Fiscal Policy between 2002 and 2019 activity (https://serc.carleton.edu/econ/tbl-econ/activities/233477.html).

Overview

Students compute the United States federal budget surplus/deficit as a fraction of gross domestic product (GDP) and discuss the evolution of federal budget surpluses and deficits since 1970.
Students will be able to answer the following questions:
1. How has the United States federal budget surplus or deficit, as a fraction of GDP, changed over the last 50 years?
2. What fiscal policy proposals could be implemented to reduce the federal debt.

Expected Student Learning Outcomes

Students will be able to answer the following questions:
1. How has the United States federal budget surplus or deficit, as a fraction of GDP, changed over the last 50 years?
2. What fiscal policy tools could be used to reduce the federal debt?

Information Given to Students

Before we begin the activity, please create the graph on Federal Surplus/Deficit of the U.S.
1) At the FRED homepage, type "Federal Surplus or Deficit as Percent of Gross Domestic Product" in the search box.
2) Select the series Federal Surplus or Deficit (-) as Percent of Gross Domestic Product, Not Seasonally Adjusted, Annual (FYFSGDA188S).
3) Limit the range of the data to start at 1967-06-12 to facilitate the visual interpretation of the series.
4) Observe the dynamics of the United States federal budget as a percent of GDP. For this activity, observe the changes of federal budget surpluses and deficits with business cycles since 1970 and respond to the following scenario.

Your team is the economic research staff at the Office of Management and Budget (OMB). You are tasked with making a recommendation regarding whether and how to reduce the size of the federal debt during the current economic expansion.

Use the information from the graph "Federal Surplus or Deficit as Percent of Gross Domestic Product" you created and your understanding of economics to recommend and defend one of the following policy actions.

Policy Options:

A. During current economic expansion, the OMB should recommend a substantial increase in taxes in order to boost government revenues.
B. Since the economy is doing well, the OMB should recommend the reduction of federal spending which will help to reduce the budget deficit.
C. In order to reduce the federal debt, the OMB should recommend the increase of the debt service expenditure with the goal to pay down as much debt as possible during the current economic expansion.
D. Since the current expansion is the longest on record, the OMB should recommend being cautious with the budget this year as we prepare for a recession. Cautious means keeping revenues and expenditures projections the same as last year.

Teaching Notes and Tips

● What prefatory remarks should set up the application exercise?

This activity will demonstrate the dynamics of United States federal budget deficits/surpluses from 1970 till present. It is connected to the topic of business cycles and to the topic of public finance, i.e. federal budget allocation.

● Does facilitating the team work require any special action?

Make sure that students know how to obtain the graph on FRED.

Graph literacy.

● What kinds of follow-up questions are recommended for facilitating the debriefing conversation among team reporters? In particular, how might the instructor get teams to evaluate which answer is the best, provide the analytical support for the team answers, identify what information would enable an economist to decide between alternative answers?

1) What would be the consequence for federal government budget of the policy you are recommending?
2) What would be the consequence for the federal debt accumulation of the policy you are recommending?
3) Instructor could push the teams to dig deeper into the reasons of the changes in deficits/surpluses through particular business cycles. If the graph is extended to 1937, the relationship between business cycles and federal budget deficits/surpluses could be analyzed further. For example, for 1940th federal budget deficit the reason was the WWII, for 2000s deficit, the reason was the Great Recession. The discussion questions could be: "How were those compared to each other in terms of the magnitude?"
"What are the reasons for the budget surplus in 1990th?"

● What points should be emphasized in the instructor's summary remarks to conclude the exercise?

In conclusion, observe the current situation with the federal budget surplus/deficit. Contemplate the reasons for the current situation.

Assessment

Students should be able to:
1) Understand how the United States federal budget surplus or deficit, as a fraction of GDP, has changed over the last 50 years.
2) Identify how the dynamics of federal budget surplus or deficit relate to the business cycle.
3) Hypothesize the reasons for federal budget surplus or deficit within particular business cycles.
4) Make policy recommendations to decrease the U.S. federal debt.

References and Resources

FRED: https://fred.stlouisfed.org/series/FYFSGDA188S

Reference my GDP activity (https://serc.carleton.edu/econ/tbl-econ/activities/234583.html).
Reference my Fiscal policy 1991-2001 activity (https://serc.carleton.edu/econ/tbl-econ/activities/233478.html).
Reference my Fiscal policy 2002-2019 activity (https://serc.carleton.edu/econ/tbl-econ/activities/233477.html).

Hyman, David N. 2014. Public Finance: A Contemporary Application of Theory to Policy. 11th edition. Cengage Learning, USA.

Asarta, Carlos and Roger Butters. 2018. Principles of Economics, 2nd Edition, McGraw-Hill. Instructor resources for this text contain ideas of teaching economics with FRED. I used these ideas to create this AE.