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Goals of economic policy 537

corporate bonds that provide businesses the money they need to expand, or you could

invest it publicly and buy government bonds that allow the government to spend your

$1,000 with the promise to pay it back later with interest. In the aggregate, this means

that if the government is borrowing $981 billion in a given year (like 2019), then that

$981 billion is not available for private borrowing that could go directly to creating more

jobs and generating economic growth. People may obviously choose to invest in private

debt, but U.S. government bonds are a very attractive investment option. They are seen

as the most secure investment in the world, so especially during times of economic

uncertainty, investors around the world buy U.S. bonds even if they pay a lower interest

rate than private debt.

Balance of Payments, or the Current Account

The balance of payments may sound like balanced budgets, but the two are completely

different: the latter has to do with the federal budget that we just discussed, while the

balance of payments concerns international monetary transactions. The broadest

measure of a nation’s balance of payments with the rest of the world is the current

account: the difference between a nation’s receipts (exports and money that Americans

earn on foreign investments) and its payments (imports and money that foreigners earn

on American investments). The aspect of the current account that gets the most political

attention is the trade deficit, the difference between imports and exports. The American

appetite for foreign goods is huge, and in recent years the United States has gone from

being the world’s largest creditor nation to being the world’s largest debtor nation.

There are differences of opinion over whether the United States’ debtor status

with respect to other countries is a problem. Most economists agree that if the current

account deficit is driven by more foreign investment in America than America has

invested overseas, there is no great cause for concern. Although some economists worry

about the increasing share of U.S. businesses and real estate owned by foreign investors,

overall this is simply evidence of the strength of the U.S. economy—that is, investors

think they can get a greater return on their investments in America than in other

countries. However, if the current account deficit is driven by the trade deficit, which is

based on consumption rather than investment, unsustainable longer-term economic

problems may be created. We discuss this topic more in the section on trade policy.^12

current account

The balance of a country’s receipts

and its payments in international

trade and investment.

trade deficit

A measure of how much more a nation

imports than it exports.

NUTS

& B O LT S

15.1

Deficits and Debt

Budget deficits and the federal debt are related concepts that are easily confused.

• A budget deficit occurs when tax revenue is not sufficient to cover government spending in a given year. If tax revenue is higher than spending,
  then there is a budget surplus.


• The federal debt is the total accumulation of all outstanding borrowing by the government.


• The concepts of deficit and debt are related because when the government runs a deficit it must borrow money to cover the gap. This borrowing
  then builds up the federal debt.
  You can think of this in terms of your own spending habits. Any time you spend more money in a given month than you earn, you are running
  a deficit. You must borrow money to make up that deficit from a bank, from your parents, or by running up the balance on your credit card. The
  accumulated sum of your monthly deficits is the total debt that you owe. However, there is one obvious point that should be made: you cannot print your
  own money, unlike the government!

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