The Fiscal Cliff Sal compares the possible outcomes of the federal budget negotiations around the "fiscal cliff."
The Fiscal Cliff
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- There's been a lot of talk lately about the fiscal cliff
- which sounds very dramatic
- and what I want to do in this video is
- at least lay out the numbers so that we are all on the same page, and then
- in the next few videos
- think about the implications
- or how the negotiations between the President and the Congress might actually work out.
- so the first thing to frame this conversation is
- just where the budget is right now
- so let me draw a little graph
- so let me make this axis right over here represent our budget
- now I want to make this as big as possible
- so that we can get a little bit of granular detail
- on how much the budge might move based on how the negotiations work out
- so let's say that this line is roughly 4 trillion dollars long
- so that's 4 trillion, and half way would be about 2 trillion
- and between 2 and 4, you got 3 trillion
- then 1 trillion would be right over here.
- 1 trillion
- then I'm going to do some bar charts to show the different scenarios.
- and as I do this, keep in mind the size of the US economy
- the US economy is approximately 15.5 trillion dollars
- so that is roughly our GDP, depends on which year you're measuring
- but that gives us at least a frame of reference for
- what chunk of GDP we are talking about when we talk about the federal budget.
- So let's start with the 2012 budget.
- So in 2012, the US government is spending 3.6 trillion dollars.
- So let me make my graph a little more granular
- so this would be 3.5
- so 3.6 would be right around here.
- so let me draw that
- and I'll do it in... I'll do this purple color for the expenditures
- so this is how much the federal government
- spent, or I guess is spending in 2012
- so~ just like that
- Alright. There we go. So that's expenditures.
- Now, you are probably aware,
- that we don't have all of the revenue
- we didn't bring in 3.6 trillion in taxes,
- so this right over here is 3.6 trillion
- our revenue that we get through tax revenue and other things is somewhat less
- It in 2012 was on the order of 2.5 trillion.
- So I'll draw that right over here,
- so 2.5 trillion and I'll do it in this green color
- So this is how much revenue was brought in,
- so let me write this down.
- This is 2.5 trillion
- Now let's think about how much might get spent under the different scenarios.
- So first I'll layout a rough approximation of Obama's budget proposal for 2013.
- So Obama in 2013.
- So on the spending side,
- he sees, or would like to see spending go up by 200 billion
- so let's see this,
- so on the spending side, we're going to add 200 billion
- and in the next few videos, we could talk the pros and cons,
- the arguments for and against, something like that
- so let me draw that
- so relative to the 3.6, we're now at 3.8
- so this, you have a spending increase of...
- so plus 200 billion, that gets us to 3.8 trillion in total expenditures
- If my best estimate of what what the Republicans in Congress would want,
- so let's write... let's say Republican-
- Republicans in 2013 is that they would actually-
- ideally wants spending cuts from these levels
- so let's draw that out...
- and roughly on the order of about 100 billion
- so roughly on the order of 100 billion- and they might want even more than that
- but let's just go with that for now.
- So that gets us to a budget of 3.5 trillion.
- so that's about that right over there
- 3.5 trillion
- so once again, relative to 2012
- you're going down by 100 billion (let me make that clear)
- you're going- you're subtracting 100 billion
- now in the Fiscal Cliff scenario
- the Fiscal Cliff scenario, the spending will be similar to the Republican ideal right over here
- so let me write this right over here: Fiscal Cliff
- Fiscal cliff- we are also spending-
- we are cutting on the order of 100 billion in government expenditures
- so let's draw that
- so at least on the expenditure side-
- and these are all very rough
- I'm sure that there're Republicans who'd agree and disagree with this
- but I'm trying to get my best sense of...
- kind of an aggregate view on things
- so... the fiscal cliff- we are also cutting spending by 100 billion.
- by one- so we are cutting by 100 billion
- Now, let's go to the revenue side of things.
- In all these scenarios for 2013,
- and just to be clear, the fiscal cliff- that's also for 2013
- in all of these scenarios, we get the same revenue
- from... that we got in 2012- let me draw that
- plus we get another 100 billion from the growth in the economy
- As the economy grows, and if you're tax rates are completely constant
- you're also going to get more more revenue for the federal government
- so you get about 100 billion, you get 100 billion from the federal government
- so that get's us to 2.6 trillion,
- 2.6 trillion without changing anything
- so let me just shade all of these in really fast
- so that takes us to 2.6 trillion
- so let's shade that at one end
- shade that one end
- and then shade that one end.
- Now, as you probably heard on the news
- Obama would like to extend the Bush tax cuts for the middle class,
- and he considers the middle class those who are making less than 250 thousand dollars for a family
- but he would like to not extend the bush tax cuts on the ridge and like to actually include a few other tax increases also on the wealthy
- and so you would get an increase of revenue, under Obama's plan, of 300 billion
- 300 billion- and this is once again very rough
- there's probably 50, 60 billion that I'm not fully accounting for
- but it will give you the rough picture
- so this is 300 billion
- and what Obama's doing here
- or at least in the proposal, as far as I can gleam
- none of it is that simple
- what they're talking about right over here
- is extend the tax cuts for middle class
- ...for middle class...
- which my best reading seems like,
- we would lose a little under 200 billion of revenue
- but then we keep the tax cuts
- or we... we let the tax cuts on the wealthy expire
- so that gets us 200 of this
- \and there are other tax increases,
- and other (mumble) I guess removing loopholes
- and whatever else that increases this to 300 billion
- So let's compare the deficit
- let's compare the deficit, so this gets us to-
- in the Obama scenario we end up with 2.9 trillion in revenue
- So let's compare what the deficit did from 2012 to Obama's budget plan
- So in 2012 you take 3.6 billion and subtract out 2.5 trillion
- there's a gap of 1.1 trillion
- This is the deficit- this is how much the government has to borrow in 2012
- Under Obama's budget, what would be for 2013?
- Well, we're spending 3.8 trillion,
- we are getting 2.9 trillion
- so you have a gap of 900 billion.
- 900 billion
- He- so there is some deficit reduction
- although the deficit is still quite large
- the deficit reduction is 200 billion
- 100 billion of that came from economic growth
- and then the rest is coming from ... a good chunk of that is coming from increased taxes
- or letting- depending on how you view it- either increase taxes on the wealthy
- or not letting the tax cuts expire on the wealthy
- Now let's think about the Republican situation
- Well you have 2.6 trillion in revenue
- and you have 3.5 trillion (and let me write this down)
- you have 3.5 trillion in expenditure
- and once again you have on the order of 900 billion gap
- so in terms of deficit reduction, these things look pretty similar
- you have a very similar deficit
- Obama is increasing spending
- and he would argue that he is investing in things that might help stimulate the economy
- or invest in America for the future
- and then he is making it up by letting the tax cuts on the wealthy expire for the most part
- The Republicans want to cut spending
- but they're also letting the tax cuts continue
- so you essentially have the same level of deficit reduction
- Now, I think we are ready to talk about the Fiscal Cliff.
- The Fiscal Cliff- we're spending 100 billion less
- and then we're also letting all of the tax cuts for, both the wealthy-
- those ab- those who are earning at a family level of 250 thousand
- and for the middle-class; we're letting them all expire.
- And so, we have revenue increase by 400 billion.
- So this goes up by 400 billion.
- So plus 400 billion
- and so that takes us roughly- and once again this is all rough-
- to about 3 trillion in revenue, and 3.5 trillion in expenses
- and your deficit, under the Fiscal Cliff scenario
- the deficit is going to going to be 500 billion dollars
- Now you might say, Hey, this is great!
- When everyone talks about the deficit, deficit is a scary thing
- we're borrowing from the future, and all that
- Why are people so afraid of the Fiscal Cliff?
- The reality is, is that if you take 500 billion out of the economy
- so 100 billion through spending cuts
- and then 100- and then 400 billion from tax increases
- so the government is deleveraging
- but that money is being sucked out of the economy
- and you could argue that there's kind of a multiplier effect as well
- that that might endanger what is already a very precarious recovery
- that the recovery is really just starting to happen
- and if we were to suck all of the money out of the economy-
- that's what the argument would be-
- then that might throw us into another resession
- or that might make the recovery that much weaker
- in the next few videos, we'll discuss that in a little more depth
- see what people are saying the impact might be
- and what the argument might be in either case.
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