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Current time:0:00Total duration:15:20

Video transcript

in the last video we gave a basic outline of the different scenarios that might play out in 2013 or at least a different budgetary proposals on the table from the administration from the Republicans and what will happen if they don't come into agreement which was the fiscal cliff which is this fairly unusual situation where the both parties to the negotiation set up this thing that will automatically happen at the beginning of 2013 that it would be painful for both parties and the thinking being that it'll force them to come maybe to some type of an agreement sooner than later the fiscal cliff is what 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 is we touched it on the last video we'll go in more depth and this one is just as we are beginning to recover from our last recession it might not be useful for our economy to try to suck out half a trillion dollars so let's think about the different the different issues at play so right over here cups have some charts most of these are from the Congressional Budget Office and there's a bunch of assumptions that go into this and there many people who will debate the assumptions that they make but they at least directionally directionally show the right things so this right over here this first chart is compares deficits or surpluses and really ever since the early 2000s we've been running deficits and all and as we got into the the late I guess tens or you know 2008 2010 timeframe 2009 time frame as we went into a financial crisis when you go to the fight when the economy contracts you get hit in two ways when you think about deficit spending on one end you bring in less revenues the economy is shrinking and on the other end you have to spend more you have to give people more benefits more unemployment benefits things like that so what when you whenever you see the economy shrink you will see naturally all else all other things being equal you will see deficits increase and that's what you saw right over here and on top of that the government is trying to bail things out is putting doing 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 running significant significant deficits now what's interesting what's interesting is what's going to happen going forward and going forward there's two of these scenarios right here there is the CBO'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 and in 2013 deficit and so what you see here is that the deficits go down dramatically go down go down dramatically we start we have to borrow less on an annual 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 the 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 the fiscal cliff scenario actually looks pretty good hey look we have much much lower deficits in that scenario than if we were to continue if we were to continue the tax cuts and if we were to continue the spending so there that looks like like actually an argument for the fiscal cliff now let's look at this now this is we're gonna 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 projected in CBO's baseline and 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 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 world war two we had a lot of debt as a percentage of GDP see over here at the after after the end of World War two we start crossing over a hundred percent of GDP is our debt the aggregate amount that the government owns and then it owes and then it delivered and then you see this this rough trend roughly from the early 80s early eighties until now where we would have we'd have increasing increasing aggregate debt there was there were some moments in the late 90s early 2000s where we took it down very 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 continuing to do what we do today which is extend the tax cuts and continue to have roughly the same level of 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 passed those triggers within which the Bush era tax cuts expire and the the the spending cuts that are triggered by in the fiscal cliff scenario hit we run lower deficits and we actually see that debt as a percentage of GDP actually starts to go down which is a at least from a balance sheet perspective seems like a good thing so these first two charts say hey really maybe this fiscal cliff thing isn't so bad it will actually significantly lower the deficit on an annual basis and as a percentage of GDP we will as a country deal ever now let's think about the arguments why well maybe we don't want to be that aggressive when it comes to reducing our deficit or reducing our debt as a percentage of GDP this first chart right over here is is the it will read it right over here it's the percent of our population that is employed and you see write it so it's 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 end of 2008 you saw the percentage of our population that employed go down dramatically we kind of hit bottom over here and we're having a 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 a little bit of a lurch and most of most economists are predicting about on the order of a percent slower growth if the fiscal cliff scenario were to hit actually most economists is not not a percent they're actually expecting about a 2% hit to the economy if the fiscal cliff scenario would happen and rather from going from 1.7 percent growth we might go to negative a slight recession slight 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 this is the interest that the government is paying when it borrows money for ten years and one of the main arguments for paying down 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 be more and more scarce and interest rates will go up so a lot of borrowing could make interest rates go up and then the other idea is well if 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 there 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 and these are the see these are market driven numbers the Federal Reserve 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 the bond market and there's some very smart people who are living or who make their living investing in the bond markets one of the biggest markets if not the biggest is saying it's really not worried about deficits it's it has its 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 some form of deflation so this this super low bond yields right over here would be an argument that well 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 if you describe to that second point of view that okay yes we should be responsible we should start to look at 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 would want to do that possible possibly through spending cuts but also by maintaining some of the tax or letting some of the 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 it 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 taxpayers if you look at it on a historical basis it looks like it's relatively low it looks like it's relatively low and a lot of this comes out of the the idea that even though the marginal tax rates are higher than what you see here high high-income taxpayers 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 the more deductions and so that's why you have them paying and they're getting more sophisticated as time goes by and that's why you see trend this trend going down and so this could be an argument well at least relative to historical basis that this this category of folks might be able to afford to pay more there's also another argument in terms of kind of a stimulus argument or how to minimize impact on the economy that if you were to give if you were to give so if you have a dollar that you want to somehow stimulate the economy with well one the government could spend the money and there are many arguments very 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 you give it to the government they'll definitely spend it and then some so they'll definitely spend that dollar at least it will enter into the economy now if you give it to the middle class 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 it to someone affluent they are likely to save it now saving is not always a bad thing if you are if you are low on investment you need more savers if interest rates 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 would make sense that we would try to incent savers so if you have a situation of in the late 70s where you have inflation going through the roof you want people to actually invest more you want a higher supply of money makes complete sense to put more money in the hands of people who are likely to save and invest that money but here at least if you believe the bond market it looks like we have a demand problem that it's actually it's 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 get the get the the economy to run at its potential so a democratic argument would be look if we're gonna if we're gonna if we're gonna have this dollar the person that we're best off giving it to is the middle class or possibly to some degree the government because at least they will spend it it will help stimulate the economy it will go into savings but that doesn't seem like what what the government's 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 too you definitely need a government but they don't always spend money in the most efficient and even sometimes it leads to levels of corruption and oftentimes when you do something in the name of stimulus maybe maybe it might make sense to do it 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 and there's some argument for that if you look at if you look at outlays government expenditures as a percentage of GDP it does look like on a historic basis it is high now to some degree this is due because to the fact that we have entered into kind of a major recessionary phase you see that in all of the major recessions and all the rate 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 say in most 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 as you know 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 it's often being deployed in less than efficient ways so I will leave you there my intent really is not to sway you one way or the other but to really just hope that you have good information when you think about the issues surrounding the fiscal cliff