American Civics
More Fiscal Cliff Analysis A bit more in-depth analysis when thinking about the fiscal cliff.
⇐ Use this menu to view and help create subtitles for this video in many different languages.
You'll probably want to hide YouTube's captions if using these subtitles.
- In the last video, we gave a basic outline of the different scenarios that might play out in 2013
- or at least the different budgetary proposals on the table
- from the administration, from the Republicans
- and what will happen if they don't come to an agreement
- which is the Fiscal Cliff
- which is this fairly unusual situation where
- the both parties to the negotiations set up this thing
- that will automatically happen in the beginning of 2013
- then it would be painful for both parties
- and the thinking being, that it will maybe force them into some type of agreement sooner than later
- The fiscal cliff is something neither the Republicans or the administration want
- because it raises taxes, which the Republicans don't want
- and it reduces spending, which the president doesn't want
- and the core argument, and we touched it on the last video and we'll go in more depth in this one is,
- just as we are beginning to recover our last recession
- it might not be useful for our economy to suck out half a trillion dollars
- so let's think about the different issues at play
- so right over here- let's have some charts, most of these are from the congressional budget office
- and there are a bunch of assumptions that go into this
- and people will debate the assumptions that they make
- but they at least directionally show the right things
- So this right over here, this first chart
- is... compares deficits or surpluses
- and really ever since 2000s, we've been running deficits
- as we got into the late, I guess, 10s, or 2008, 2010 time frame, 2009 time frame
- as we went into a financial crisis
- When the economy contracts, you get hit in two ways
- when you think about deficit and spending
- On one end, you bring in less revenue
- the economy is shrinking
- on the other end, you have to spend more
- you have to give people more benefits
- more unemployment benefits, things like that
- so whenever you see the economy shrink,
- you will see naturally, (all other things being equal,)
- you will see deficit increase
- and that's what we saw right over here
- and on top of that, the government is trying to bail things out
- is putting stimulus spending and all that
- in order to minimize the effect of the deficit
- and that's why you see here, in 2008, 2009
- we started running significant, significant deficits.
- Now, what's interesting, is what's going to happen going foward.
- In going forward, there's two of these scenarios right here
- There is the CVO's baseline projection
- and then there's the alternative fiscal scenario
- and just to be clear where we are
- We are entering this phase, right over here
- in 2013
- and the baseline projection, is essentially if the government takes no more action
- And if the government takes no more action, then the fiscal cliff will be triggered.
- We will essentially have 500 billion less in 2013's deficit
- and so what you see here is the deficits go down dramatically
- go down dramatically
- we have to borrow less on an anunal basis.
- Now the alternative fiscal scenario
- is if the- is if we essentially continue-
- if we extend our existing spending,
- and if we continue to extend Bush era tax cuts,
- we go along this path.
- And so if you care a lot about deficits,
- the fiscal cliff scenario, which is this top line,
- this is actually the fiscal-
- let me write that in a color you can see-
- that's actually the fiscal cliff scenario
- and actually looks pretty good
- Hey, look! We have much much lower deficits in that scenario
- than if we were to continue the tax cuts
- and than if we were to continue the spending
- So there, that looks like an argument FOR the fiscal cliff.
- Now, let's look at this, now this is where we're going to talk about the "aggregate debt"
- When we say deficit, we're talking about the shortfall in a given year.
- The debt is the aggregate amount that the government owes
- so this is federal debt held by the public
- historically and as predicted in CBO's baseline
- and what a lot of what CBO, when they project,
- they can only do so much in projecting
- how good the economy might be, or how bad it might be,
- to a large degree, they extrapolate from where we are right now
- And right over here, you see debt as a percentage of GDP
- so you can imagine during World War II, we had a lot of debt as a percentage of GDP
- see over here after the end of World War II
- we started crossing over 100% of GDP is our debt-
- the aggregate amount that the government owes
- and then it de-levered, then you see this rough trend,
- roughly from the early 80s, until now, where we had increasing aggregate debt
- There was, there were some moments in the late 90s, early 2000s where we took it down
- very very strong economy, we started running surpluses,
- we started to pay down some of our debt
- but then we kind of hit back on this debt increasing trend-line
- And once again, if we continue, in the alternative fiscal scenario
- which is really continue to do what we do today
- which is extend the tax cuts, and continue to have roughly the same level spending
- you see that the debt only continues to increase
- only continues to increase
- In the baseline projection- this is actually the fiscal cliff scenario
- This is where no new legislation is passes
- Those triggers, in which the Bush era tax cuts expire
- and the spending cuts that are triggered by the fiscal cliff scenario hit
- we run lower deficits, and and we actually see the debt,
- as a percentage of GDP, actually starts to go down,
- which is, at least from a balance sheet perspective,
- seems like a good thing.
- So these fist two charts say,
- Hey! Well, maybe this fiscal cliff thing isn't so bad.
- The, well, actually will significantly lower the deficit on an annual basis,
- and as a percentage of GDP, we will, as a country, de-lever.
- Now let's think of the arguments why,
- well, maybe we don't want to be that aggressive
- when it come to reducing our deficit
- or reducing our debt as a percentage of GDP
- This first chart, right over here,
- is the- let me write over here-
- is the percent of our population that is employed.
- and you see right- and so its a proxy for employment or unemployment
- or in this case it's employment
- and you see we hit a major recession at the end of 2008
- We saw the percent of our population that is employed go down dramatically
- we kind of hit bottom over here,
- and we're having kind of a shaky, hopefully a shaky recovery
- right now it's not even clear how good that will be
- but hopefully we're having a shaky recovery of sorts
- and so just as we're starting to recover,
- it might not be helpful to take,
- essentially 500 billion dollars out of the economy
- in order to pay down debt
- so the fiscal cliff scenario might make us go back
- into a little bit of a lurch
- and most economists are projecting about, on the order of, a percent slower growth
- if the fiscal cliff scenario were to hit
- Actually, most economists- not a percent.
- They're actually expecting a two percent hit to the economy
- if the fiscal cliff scenario would happen
- and rather from 1.7 percent growth,
- we might go to negative, a slight recession- slight receding of the economy
- so that could be, that's obviously not a good scenario that we want to be in
- The other chart that I have right over here,
- these are yields on ten-year treasury notes
- this seems like a very technical thing to talk about
- but this is essentially the interest,
- one way to think about it is the interest that the government is paying when it is borrowing money for ten years
- And one of the main arguments for paying down debt
- is that if the government keeps borrowing money
- it's going to crowd out other borrowers
- it's going to make demand for money high
- and maybe the supply will become more and more scarce
- and interest rates will go up
- so a lot of borrowing can make interest rates go up
- and the other idea is, well, it there's a lot of just borrowing and spending going on
- and if we don't have a lot of productive capacity,
- it could also lead to inflation
- or maybe when the government has a huge debt
- they have an incentive to try to have inflationary policies
- so that in real terms, that debt seems to be less
- But when you look at the debt markets,
- these are market driven numbers-
- the federal government does not control ten-year yields-
- (the federal reserve controls short-term yields)
- you see that we have historically low interest rates
- so the bond market, there are some very smart people
- who are living or make their living investing in the bond markets
- one of the biggest markets if not the biggest
- It's saying that its not worried about deficits
- it's willing to lend to the US government at all time low interest rates
- it's not expecting any inflation
- if anything, the bond market is saying that the biggest risk in the economy is continued sluggish growth
- the biggest risk in the economy is maybe even some form of deflation
- So this super-low bond yield right over here would be an argument,
- that yeah, if you believe what the bond market is saying
- we, one definitely should not suck money out of the economy
- and the risks of maintaining high levels of debt
- might not be as high as some people are saying
- that you're not going to see interest rates and inflation go through the roof tomorrow
- Now, if you ascribe to the second point of view that
- ok, yes, we should be responsible, we should start to lower-
- at least minimum lower our deficit
- and over time, as a percentage of GDP, lower our debt,
- the other question is, "How do you do that?"
- The Republicans would want to do it mainly through spending cuts
- while the Democrats want to do that possibly through spending cuts
- but also by maintaining some of the tax,
- or letting some of that tax cuts on the wealthy expire
- and maybe even adding some other tax.
- And so these two charts inform some of those positions,
- and I'm trying to give as balanced of an approach as I can.
- So, for a Democrat, they might look at this chart right over here and they might say
- Well, look! Average tax rates for the highest income tax payers-
- if you look at it on a historical basis
- It looks like it is relatively low,
- and a lot of this comes from the idea
- that even though the marginal tax rates are higher than what you see here
- High income tax-payers, a lot of their income might be from capital gains,
- from dividends, those are taxed at 15%
- They also might have a more sophisticated accountants
- who can get them more deductions
- and that's why you have them paying-
- and they're getting more sophisticated as time goes by
- and that's why you see this trend going down
- and so this could be an argument, at least relative to historic basis
- that this category folks might be able to afford to pay more
- There's also another argument in terms of, kind of a stimulus arguement
- or how to minimize the impact on the economy
- that, if you were to give-
- so if you have a dollar, you want to somehow stimulate the economy with
- well one, the government would spend the money,
- and there're many arguments, there're many good arguments
- why the government is not always the most efficient spender of money
- and not always spending it in the best way
- but they will definitely spend it
- so you give it to the government, they'll definitely spend it and then some.
- So the'll definitely spend the dollar
- at least it will enter into the economy.
- now, if you give it to the middle class,
- they are also likely to spend it
- or to spend a good chunk of it, maybe save a little bit
- and the argument would be that if you give it to someone who's affluent
- If you give to someone affluent, they're likely to save it.
- Now, saving is not always a bad thing.
- If you are low on investment, you need more savers.
- If interest rates were going through the roof right over here,
- that means that we need- we don't have enough supply of money.
- In which case, it makes sense that we would try to incent savers.
- So if you have a situation of-
- In the late 70s, where you had inflation going through the roof
- You want people to actually invest more
- you want to higher supply of money
- makes complete sense to put more money in hands of people who are likely to save and invest that money.
- And here, at least if you believe the bond market,
- it looks like we have a demand problem
- its very cheap to get capital
- if anything, there's a surplus of capital out there
- but there's not enough demand in order for people to-
- I guess the economy to run at its potential.
- So a Democratic argument would be, look:
- If we're going to have this dollar,
- the person we're best off giving it to is the middle class
- or, possibly to some degree, the government
- because at least they will be spend it
- It will help stimulate the economy.
- Here, it would go into savings, but that doesn't seem like what the government needs right now.
- Now, the counter argument, that you might get from someone at the right,
- is that, first, the government is just hugely inefficient spender of capital
- and there's a lot of evidence to-
- you definitely need a government, but they don't always spend the money in the most efficient
- and even, sometimes it leads to levels of corruption
- and often times, when you do something in the name of stimulus
- maybe it might make sense to do in the short term,
- but once that program is in place,
- it's very hard to remove that program.
- People start to depend on it, even when you-
- when in theory, you don't need the stimulus anymore
- it's very hard to shrink the size of government.
- And so, there's some argument for that,
- if you look at outlays- government expenditure as a percentage of GDP,
- it does look like- on a historical basis, it is high.
- Now, to some degree, this is due to the fact that we have entered into kind of a major recessionary phase
- we see that in all the major recessions
- In all the major recessions, the government gets less revenue
- so the government gets less revenue, and has to do more outlays
- This happens in every- this happens- well, I would have to say, in most recessions
- and this happened in dramatic form
- where we started to have more outlays,
- we had, actually at this point we had wars that we were funding
- and we were doing these trillion-dollar stimulus packages
- and we had these trillion-dollar bailouts at the same time that the economy was
- the economy was receding right over here
- But just, when you look at this, it does look like the government spending,
- as a percentage of GDP, is at historical highs.
- And as we say, and, you know, as the argument would have it,
- it's very hard to get that to shrink even when it should be shrinking
- and it's often being deployed in less than efficient ways
- So I will leave you there
- My intent is really not to sway you in one way or the other
- but to really to just hope you have good information
- when you think about the issues surrounding
- the Fiscal Cliff.
Be specific, and indicate a time in the video:
At 5:31, how is the moon large enough to block the sun? Isn't the sun way larger?
|
Have something that's not a question about this content? |
This discussion area is not meant for answering homework questions.
Discuss the site
For general discussions about Khan Academy, visit our Reddit discussion page.
Flag inappropriate posts
Here are posts to avoid making. If you do encounter them, flag them for attention from our Guardians.
abuse
- disrespectful or offensive
- an advertisement
not helpful
- low quality
- not about the video topic
- soliciting votes or seeking badges
- a homework question
- a duplicate answer
- repeatedly making the same post
wrong category
- a tip or feedback in Questions
- a question in Tips & Feedback
- an answer that should be its own question
about the site
Share a tip
Suggest a fix
Have something that's not a tip or feedback about this content?
This discussion area is not meant for answering homework questions.