If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

Main content
Current time:0:00Total duration:12:02

Video transcript

there's been a lot of talk lately about the fiscal cliff which sounds very dramatic and what I wanted to do in this video is at least lay out the numbers so that we're all on the same page and then in the next few videos think about the implications or how the negotiations between the President and Congress might actually work out so the first thing to frame this conversation is just where the budget is right now and so let me draw a little graph so let me make this axis right over here represent our budget and I want to make it as big as possible so that we can get a little bit of granular detail on how much the budget might move based on how the negotiations work out so let's say that this line is roughly four trillion dollars long so that's four trillion then the halfway would be about two trillion and then in between two and four you got three trillion and then one trillion would be right over here one trillion and I'm going to do some bar charts to show the different the different scenarios and as I do this keep in mind the size of the US economy the US economy is approximately fifteen point five 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 let's start with the 2012 let's start with the 2012 budget so in 2012 the US government is spending three point six trillion dollars so let me make my graph a little bit more granular so this would be three point five so three point six is going to 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 all right there we go so that's expenditure now you are probably aware that we don't have all of the revenue we didn't bring in three point six trillion in taxes so this is right over here is three point six trillion our revenue that we get through tax revenue and other things is somewhat less it in 2012 was on the order of two point five trillion so I'll draw that right over here so two point five trillion I'll do it in this green color so this is how much revenue revenue was brought in so let me write this down this is two point five trillion now let's think about how much might get spent under the different scenarios so first I'll lay out a rough approximation of Obama's budget proposal for 2013 so Obama in 2013 so on the spending side he sees or he would like to see spending go up by two hundred billion so let's see this so on the spending side we're going to add two hundred billion in the next few videos we could talk about the pros and cons the arguments for and against something like that so let me draw that so relative relative to the three point six we're now at we are now at three point eight so this so you have a spending increase of so plus two hundred billion that gets us that gets us to three point eight billion in total expenditures if my best estimate of what the Republicans in Congress would want so let's right let's say Republican Republicans in 2013 is that they would actually ideally want spending cuts from these levels so let's draw that out and roughly on the order of about a hundred billion so roughly on the order of 100 billion they might even want more than that but let's just go with that for now so that gets us to a budget of three you point five trillion so that's about that right over there three three point five trillion so once again relative to relative to 2012 you're going down by a hundred billion let me make that clear you're going you're subtracting one hundred billion now in the fiscal cliff scenario the fiscal cliff scenario the spending will be similar to the Ione Republican ideal right over here so let me write this over your fiscal cliff fiscal cliff we are also spending we are cutting on the order of a hundred 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 they're Republicans who would agree and disagree with this but I'm trying to get my best sense of of kind of an aggregate view on things so the fiscal cliff we are also cutting spending by a hundred billion by one so we are cutting by a hundred billion now let's go to the revenue side of things and all of these scenarios for 2013 and just to be clear the fiscal cliff that's also for 2013 and all of these scenarios we get the same revenue from that we got in 2012 so let me draw that plus we get about another hundred billion from the growth in the economy as the economy grows and even if your tax rates are held completely constant you're going to get more revenue for the federal government so you get about a hundred billion you got about a hundred billion from the federal government and so that gets us to two point six trillion two point six trillion without without changing anything so let me just shade all of these in really fast so that takes us to two point six trillion so shade that at one and shade that one in and then shade that one in now as you've 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 $250,000 for a family but he would like to not extend the Bush tax cuts on the rich and he would 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 three hundred billion three hundred billion this is once again very rough there's probably 50 60 billion that I'm not fully accounting for but I'll give you the the rough picture so this is 300 billion and what Obama's doing here or what at least in the proposal as far as I could glean none of this is that simple what they're talking about right over here is extend tax cuts extend tax cuts for middle class for middle class which my best reading seems like we would lose a little under two hundred 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 then there are other tax increases and another like removing loopholes and whatever else that increase this to three hundred billion so let's compare the deficit let's compare the def so this gets us to in the Obama scenario we end up with two point nine two point nine trillion in revenues so let's compare what the deficit did from 2012 to Obama's budget plan so in 2012 if you take three point six trillion subtract out two point five trillion there is a gap there is 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 it be for 2013 well we're spending three point eight trillion we are getting two point nine trillion so you have a gap app of nine hundred billion nine hundred billion he so there is some deficit-reduction although the deficit is still quite large the deficit reductions two hundred million a hundred billion of that came from economic growth and then the rest is coming from or 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 two point six trillion in revenue and you have three point five trillion let me write this down you have three point five trillion in expenditure and once again you have on the order of a nine hundred billion nine hundred nine hundred billion nine hundred 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's investing in things that might help stimulate the economy or invest in America for the future and then he's 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 where you're spending a hundred billion less and then we are also letting all of the tax cuts for both the wealthy those who are earning at a family level more than two hundred fifty thousand and for the middle class we're letting them all expire and so you have the revenue increased by four hundred billion so this goes up by four hundred billion so plus four hundred billion and so that takes us roughly once against is all rough to about three trillion in revenue and three point five trillion in expenses and so your deficit under the fiscal cliff scenario the deficit is going to be five hundred billion dollars now you might say hey this is great everyone's talks about the deficit the deficit is a scary thing we are 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 a hundred billion through spending cuts and then a hundred bill 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's already a very precarious recovery that the recovery is really just starting the recovery is just starting to happen and if we were to suck all of this money out of the economy this that's what the argument would be then that might throw us into another recession or it might make the recovery that much weaker and the next few videos we'll discuss that a little bit more depth see what people are saying the impact might be and what the arguments might be in either case