More fiscal cliff analysis발음듣기
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More fiscal cliff analysis
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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,발음듣기
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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.발음듣기
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The fiscal cliff is something neither the Republicans or the administration want because it raises taxes, which the Republicans don't want,발음듣기
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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.발음듣기
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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.발음듣기
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So this right over here, this first chart is... compares deficits or surpluses and really ever since 2000s,발음듣기
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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.발음듣기
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When the economy contracts, you get hit in two ways when you think about deficit and spending.발음듣기
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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,)발음듣기
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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,발음듣기
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and that's why you see here, in 2008, 2009 we started running significant, significant deficits.발음듣기
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There is the CVO's baseline projection and then there's the alternative fiscal scenario and just to be clear where we are.발음듣기
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We are entering this phase, right over here in 2013 and the baseline projection, is essentially if the government takes no more action.발음듣기
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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 annual basis.발음듣기
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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.발음듣기
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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.발음듣기
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We have much lower deficits in that scenario than if we were to continue the tax cuts and than if we were to continue the spending.발음듣기
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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,발음듣기
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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.발음듣기
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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.발음듣기
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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.발음듣기
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There was, there were some moments in the late 90s, early 2000s where we took it down 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.발음듣기
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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.발음듣기
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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 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.발음듣기
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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.발음듣기
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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.발음듣기
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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.발음듣기
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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.발음듣기
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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,발음듣기
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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.발음듣기
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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.발음듣기
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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.발음듣기
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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.발음듣기
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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.발음듣기
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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.발음듣기
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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.발음듣기
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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).발음듣기
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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.발음듣기
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The bond market is saying that the biggest risk in the economy is continued sluggish growth.발음듣기
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That yeah, if you believe what the bond market is saying we, one definitely should not suck money out of the economy.발음듣기
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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.발음듣기
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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?"발음듣기
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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.발음듣기
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Average tax rates for the highest income tax payers- if you look at it on a historical basis.발음듣기
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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%.발음듣기
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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.발음듣기
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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.발음듣기
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There's also another argument in terms of, kind of a stimulus argument 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.발음듣기
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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.발음듣기
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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.발음듣기
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If interest rates were going through the roof right over here, that means that we need- we don't have enough supply of money.발음듣기
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So if you have a situation of- In the late 70s, where you had inflation going through the roof.발음듣기
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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.발음듣기
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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.발음듣기
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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.발음듣기
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Here, it would go into savings, but that doesn't seem like what the government needs right now.발음듣기
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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.발음듣기
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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.발음듣기
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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.발음듣기
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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.발음듣기
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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.발음듣기
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In all the major recessions, the government gets less revenue so the government gets less revenue, and has to do more outlays.발음듣기
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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.발음듣기
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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.발음듣기
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But just, when you look at this, it does look like the government spending, as a percentage of GDP, is at historical highs.발음듣기
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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.발음듣기
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