Download - Economic Issues Volume One Deficit, Debt and the “Great Recession” © Christopher Productions, LLC
Economic IssuesVolume One
Deficit, Debt and the “Great Recession”
© Christopher Productions, LLC
2011 Fiscal Budget
$3,818,000,000,000.00• Expenditures = Revenue - balanced budget• Expenditures > Revenue = deficit
1992 - $290 billion2009 – $1.4 trillion - RECORD 2011 new record (est. $1.6 trillion)
• Expenditures < Revenue = surplus 19691998-01
Note: click above for actual debt
Federal Budget Fiscal Year 2011
Expenditures Revenues$0.0
$500.0
$1,000.0
$1,500.0
$2,000.0
$2,500.0
$3,000.0
$3,500.0
$4,000.0
$4,500.0
$3,818.8
$2,173.7
Billions
$1.6 T
Federal Expenditures• Defense - $768 billion• Social Security - $748 billion• Health (Medicare & Medicaid) - $745 billion• Income Security - $645 billion– Pensions– Unemployment– Disability– Public Assistance
• Interest – $430 billion• Other – $482 billion
Defense; 20.1%
Social Security;
19.6%
Health; 19.5%
Income Security;
16.9%
Interest; 11.3%
Other; 12.6%
Federal Expenditures• Entitlements– Social Security–Medicare–Medicaid– Government pensions– Unemployment compensation
• 55% of Federal Budget (almost $2.1 trillion)• Cut everything else would just about balance
the budget!
Federal Revenues• Personal Income Tax - $956 billion• Social Security/Medicare Tax - $806 billion• Corporate Income Tax - $198 billion• Excise Taxes - $67.3 billion– Tobacco – $17.5 billion– Alcohol – $9.2 billion– Gasoline – $37 billion
• Other – $141 billion– Estate - $18.8 billion– Custom/tariffs – $27 billion
Ind. In-
come; 44.0%
SS/Medi-care, 37.1%
Corp.; 9.1%
Excise, 3.4%Other, 6.4%
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
-$1,500.0
-$1,300.0
-$1,100.0
-$900.0
-$700.0
-$500.0
-$300.0
-$100.0
$100.0
$300.0
$500.0
$3-$3 -$23-$23-$15
-$6 -$53-$74
-$54-$59-$41-$74-$79-$128
-$208-$185-$212-$221
-$150-$155-$153
-$221-$269-$290
-$255-$203
-$164-$107
-$22$69
$126$236 $128
-$158 -$378-$413
-$319-$248
-$161-$459
-$1.4 T
-$1.3 T
-$1,645Graph 1: Federal Deficit/Surplus 1969-2011
(Bill
ions
)
$1.6 T
19801981198219831984198519861987198819891990199119921993199419951996199719981999200020012002200320042005200620072008200920100
2,000
4,000
6,000
8,000
10,000
12,000
14,000
$13.5 T
National Debt 1980-2010 $14.6 T*
* August 2011
Billions
What is wrong with Deficits?• Paying interest on the $14.6 trillion debt• Could spend $430 billion interest payments on
other programs/or tax cuts• Crowding out – government borrowing takes
from private sector• Vulnerable to other nations holding our debt –
they can impact our economy by selling it• Credit rating• international – strength of dollar• Federal Gov. – reduce credit rating? – i on bonds –
could cost billions more in interest payments
What is wrong with Deficits?• Paying interest on the $14.6 trillion debt• Could spend $430 billion…• Crowding out• Vulnerable to other nations holding our debt• Credit rating• international – strength of dollar• Federal Gov. – reduce credit rating? – i on bonds –
could cost billions more in interest payments
• Signal to the rest of the world we are not stable – weaken economy if foreigners invest less - Greece, Portugal, Spain and Ireland CRISIS!
Balancing the Budget
• Democrats – generally, want to raise taxes on rich/wealthy and save entitlement programs – especially “big three:” Social Security, Medicare (health care for elderly) and Medicaid (health care for the poor)
• Obama and House Democrats want to close loopholes for wealthy and return to Clinton era tax rate of 39.6% for top 2% of nation only (Bush II cut taxes on wealthy to top rate of 35% in 2001) – see next slide for tables
Tax Rates Clinton v. Bush IISingle Taxpayer U.S. Tax Brackets
1999 Rate 2011 Rate
Level 1 15% 10%
Level 2 28% 15%
Level 3 31% 25%
Level 4 36% 28%
Level 5 39.6% 33%
Level 6 35%
Balancing the Budget
• Republicans – generally, want to cut government spending and taxes. Many are anti-government. They want to privatize Social Security and cut other entitlement programs. Ryan Plan passed the House by only Republican votes – would change Medicare to voucher system
Projected S.S. & Health Care 1962-2082
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
$0
$100
$200
$300
$400
$500
$600
$700
$800
Medicaid & Medicare Combined 80-10
Was the fastest growing – actually fell in FY 2010 from 26% to 24% of totalbudget
$754 bFY 2010Billions
Balancing the Budget History• Reagan beat Carter in 1980, in part*, because
of his campaign against $79 billion deficit in 1979-80. (*many other issues in campaign)
• Reagan cut taxes huge in 1981 as part of economic theory (see ahead) and raised defense spending
• Record deficit in 1984 of $240 billion (almost $500 billion in 2010 dollars)
Balancing the Budget History• Bush I wins presidency on promise of “no new
taxes” and paints Dems as “tax and spend”• Bush I raised taxes in deal to cut deficit in 1991
and lost presidency in 1992 partly because of breaking promise on taxes
• 1992 Ross Perot received 19% of vote – sole issue balance budget. In 1992, $4 trillion debt and record $290 billion deficit that year.
Balancing the Budget History• Clinton raises taxes and cuts spending
(including defense and Medicare) in 1993 to cut deficit
• Democrats in Congress pass Clinton tax increases by one vote and they lost 1994 elections. Republicans held Congress for 12 years
• 1998 first surplus in 30 years.
Balancing the Budget History• Clinton raises taxes and cuts spending (including
defense and Medicare) in 1993 to cut deficit• Democrats in Congress pass Clinton tax increases
by one vote and they lost 1994 elections. Republicans held Congress for 12 years.
• Clinton wins 1996 reelection as big issue is saving Medicare from Republican attempted cuts and government shutdown of 1995
• 1998 first surplus in 30 years.
Balancing the Budget History• Bush II in 2000 runs on campaign of cutting
taxes to spur the economy – pushes Congress to biggest tax cuts in history – 2001 and 2003
• Starts Iraq/Afghanistan Wars• Passes Medicare prescription drug plan (called
Part D)• Largest deficits in history before recession
$459 billion 2007
Balancing the Budget History• Great Recession hits December 2007-?• Unemployment skyrockets 2008 - ?– Longest sustained high unemployment since 1930s
Dec-07
Feb-08
Apr-08
Jun-08
Aug-08
Oct-08
Dec-08
Feb-09
Apr-09
Jun-09
Aug-09
Oct-09
Dec-09
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
4%
5%
6%
7%
8%
9%
10%
11%
Recessions• Recessions have three characteristics:–High unemployment–High inventories–Negative or very low production of goods
and services (GDP)
Recession and Budget• Recessions = two part whammy to budget– #1 = Cuts in revenue – fewer people paying taxes
because of unemployment (lost 8.5 million jobs Dec. 07-Feb. 2010)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
$2,200
$2,400
$2,600
$2,800Change in employment by month in
100,000s
Federal Revenue in billions
Recession and Budget• Recessions = two part whammy to budget– # 2 = Increase in expenditures – more people on
unemployment and public assistance
2006 2007 2008 2009 2010 2011$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
$180,000
Federal Spending on unemployment compensation in millions
Fragile Economy and Spending Cuts• Most economists believe that cutting
government spending will lead to increased unemployment in fragile economy.
• Consumer spending is down – people save during recessions worry about losing their job
Fragile Economy and Tax Increases• Most economists believe that raising taxes on
everyone to balance budget is bad idea as it means less money for individuals to spend and hurts the economy. Consumer spending = 71% of economy in 2010
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
71%
12%
20%
-3%
Personal Consumption
Domestic Investment
Government Expenditures
Net Exports
Components of 2010 GDP (total output)
Fragile Economy and Tax Increases• Disagreement about raising taxes on wealthy.• Some economists argue no impact because
wealthy don’t spend very much of income as they have what they want.
• They save and invest additional income to make more money.
• So raising taxes won’t hurt consumer spending just savings and we have lots of investment money available now –
est. $2.5 trillion uninvested now
Debt Ceiling – 2011 Crisis
• Congress passed a law in 1917 limiting how much the federal government may borrow. Called debt ceiling.
• Congress extended debt ceiling to $14.294 on Feb. 14, 2010
• Federal government reached it in May 2011, but Treasury Dept. made temporary changes to extend to August 2, 2011 before ran out of money.
• Crisis – never has Congress not extended debt ceiling in the past.
Debt Ceiling – 2011 Crisis
• Republican-controlled House votes no to raising debt ceiling on May 17, 2011
• Tell President Obama and Senate (Dems have majority there) they will have to agree to big budget cuts to balance budget or House won’t raise debt ceiling.
Debt Ceiling – 2011 Crisis
• Consequences of not extending debt ceiling (continued)– Default on paying obligations (this is not new
spending – these are expenditures that Congress has already authorized)
– Investors quit buying U.S. Treasury Bonds (called securities or treasuries).
– To entice investors to buy securities Treasury has to pay higher interest rate on return of bonds
– It is estimated that 1% increase = $50 billion more in just paying higher interest rates on debt
Debt Ceiling – 2011 Crisis
• Consequences of not extending debt ceiling (some disagree but very few – no economists)– Higher interest rates will spread throughout
economy and consumer spending will fall more (also investment as it cost more to borrow money to invest).
– The rest of the world will see U.S. as unstable and will stop investing in U.S. hurting economy more
– Some economists predict could have led to a depression-level economic crisis
Debt Ceiling – 2011 Crisis• President and Dems say must increase taxes
on wealthy as part of deal – Obama gives in to raising tax rate up to Clinton-Era 39% and asks for closing loopholes on oil companies and owners of jets and big houses
• Republicans say no tax revenue increases at all, must be all spending cuts
Debt Ceiling – 2011 Crisis• Tea Party and Norquist Pledge – Tea Party, not one organized party but a patchwork
of many state and local groups that helped Republicans win control of House of Representatives in 2010 demands no new revenue or they will help beat any Republican that votes for tax changes that increase revenue
– Grover Norquist and Americans for Tax Reform have all Republicans sign pledge they will not raise taxes or revenue. Very influential in Republican Party
Debt Ceiling – 2011 Crisis
• Deal reached at last minute– $900 billion in cuts to government spending over
10 years – Creates “super committee” of 12 members of
Congress (six Republicans and six Democrats – three from each party in each house)
– They must cut an additional $1.2-$1.5 trillion by Nov. 23 and Congress pass by Dec. 23, 2011 or automatic cuts take place.
Debt Ceiling – 2011 Crisis• Automatic cuts - $1.2 trillion– Half in defense– Across the board in other areas including the “big
three”
• Critics say no real cuts in first portion of deal but significant cuts in “trigger” cuts (if Congress and President don’t act)
Debt Ceiling – 2011 Crisis• Credit rating – part of debate was that if
Congress didn’t raise debt ceiling the U.S. credit rating by three rating companies would go down and cause increase in interest rates and loss of faith in American treasuries
• Standard and Poors lower rating from AAA to AA+
Debt Ceiling – 2011 Crisis
• More bonds are bought as stock market goes for wild ride up and down week after rating change – Interest rates actually fall – 0% for one-month note on August 19, 2011
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
U.S. Bond rates on one-year notes January 3-August 19, 2011
What Does GDP Have To Do With It?
• 1 – GDP is important measure of how the economy is doing
• 2 – Government purchases are part of GDP
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
71%
12%
20%
-3%
Personal Consumption
Domestic Investment
Government Expenditures
Net Exports
Components of 2010 GDP (total output)
What Does GDP Have To Do With It?• Government purchases as part of GDP do not
equal government spending as percent of GDP.
• Government purchases are only goods and services the government buys – DOES NOT include transfer payments to citizens (Social Security and other income security payments)
• Government purchases = 20% of GDP and government spending = 25.3% of GDP in 2011 (estimate).
Recession
Expenditures/Revenue as Percent of GDP
19681969
19701971
19721973
19741975
19761977
19781979
19801981
19821983
19841985
19861987
19881989
19901991
19921993
19941995
19961997
19981999
20002001
20022003
20042005
20062007
20082009
201012.0
14.0
16.0
18.0
20.0
22.0
24.0
26.0
Expenditures Revenue
Recessions and GDP• Investment drops during recession – firms
stopping buying capital goods and building factories… this hurts the construction and manufacturing sectors of the economy.
• Firms don’t invest when economy is bad• 12% is the same level as 1991, 1982 and 1975,
all previous recessions• In 2005 & 2006 investment made up 17.2% of
GDP – the highest percent since the measure of GDP started in 1929.
Recessions and GDP• Government spending always goes up and
government revenue as percent of GDP always goes down in a recession.
• Learned earlier: – fewer people working means less income tax
(income tax and social security/Medicare tax = @80% of revenue and comes from paychecks of workers)
–More people drawing unemployment and other government programs to help poor and unemployed
Recession
Expenditures/Revenue as Percent of GDP
19681969
19701971
19721973
19741975
19761977
19781979
19801981
19821983
19841985
19861987
19881989
19901991
19921993
19941995
19961997
19981999
20002001
20022003
20042005
20062007
20082009
201012.0
14.0
16.0
18.0
20.0
22.0
24.0
26.0
ExpendituresRevenue
What Can We Do?
• Economists differ on whether the government can do anything or not.
• Most economists believe the government can lessen the recession.
• Some do not believe the government can do anything but make it worse
Keynesianism• Economist John Maynard Keynes addressed
the issue of recessions and the government during Great Depression.
• He wrote that the government could have a big impact on growing the economy through fiscal policy (government spending and taxation)
Keynesianism• Increase government spending on projects,
like roads, bridges, dams, airports (infrastructure) Roosevelt did CCC and WPA
Keynesianism• Increase transfer payments to the poor and
people who need money and will spend it – this will stimulate demand (people willing and ABLE to purchase goods and services)
Keynesianism• Lack of demand is the biggest problem in a
recession – there is no purchasing power of the middle/working class which spend most of money on consumption which grows economy and creates jobs
Keynesianism• Keynes believe that the government could
stimulate demand• Three types of demand– Consumer demand – 70%– Investment demand – this is businesses buying
goods and services to grow their firms - varies greatly
– Government demand – varies from 15-25% of economy
Keynesianism• Keynes believed that the government was the
spending of last resort (when consumer demand and investment demand down the government should increase its demand)
• Best government demand is either direct spending in the United States to hire workers or direct transfer of money to consumers who aren’t spending so they will– Unemployment compensation– Social Security was born as a way to give people money
to spend during Great Recession– Welfare programs – like food stamps (SNAP) and TANF
Keynesianism• Liberals and Keynesianism• Stimulus of 2009 (American
Recovery & Reinvestment Act – ARRA)– Almost $800 billion– Politics shifted most of money ARRA from
government spending to tax cuts (needed Republican support in Senate)
– Liberals believe tax cuts do less to grow the economy – main reason is that some of money people receive in tax cuts is saved and not spent to grow the economy
– ∆ income = ∆ spending and/or ∆ savings
Keynesianism• If change in income leads to more savings this
doesn’t create jobs – at least in short run. Conservatives say it leads to more investment which will create long run jobs.
• This is why government spending works better for stimulating the economy – 100% of government spending is spent.
• It will multiply through the economy faster and stronger to lead to growth (more consumption and jobs)
Keynesianism• Theory– Increase government spending – increase jobs– Increase jobs – increase income (money to spend)– Increase spending – increase aggregate demand
(AD)– Increase AD – grow economy more employment
Recession Back to full employment
Keynesianism and Liberals
• http://www.youtube.com/watch?v=7YiyjO3y3WA Krugman with Rachel Maddow
• http://www.youtube.com/watch?v=JTzMqm2TwgE Robert Reich on taxes for wealthy and economy
Problems with Keynesian School• Some philosophically opposed to government
spending & government interference in the economy
• Big deficits – Keynes argued government would pay them back during growth periods with higher taxes and more people working paying taxes
• People become dependent on programs and it is impossible to cut them later
• Politically it is impossible
to raise taxes
Supply Side Economics• Grew out of political movement of 1980 –
Reaganonomics or trickle-down• Theory is that the government shouldn’t
directly try to stimulate demand but should try to encourage an increase in supply
Supply Side Economics• Government should cut taxes on wealthy and
businesses to encourage them to invest – savings = investment = grow the economy
• Deregulation of business is important to allow them to invest more also
Supply Side Economics• Theory– Cut taxes on wealthy = +Savings– Savings = Investment (I)– +I = +Supply of all goods and services (AS)– +AS = growth in the economy
Supply Side Economics
• Theory– After new AS – demand for all goods and services
will increase (AD)– This will lead to more growth
Supply Side Economics
• http://www.youtube.com/watch?v=yBC3XivM3eA Why high taxes hurt economy – Laffer Curve
Problems w/ Supply Side Economics• Deficits – huge• Businesses won’t invest in
in a recession – can’t sell
what they have already• Firms may take tax cuts and
invest overseas – most did • Deregulation led to financial crisis which led
to Great Recession– Subprime mortgage crisis – bundling bad
mortgages to sell
Monetarism• Control money supply will control economy• When in a recession increase money supply• Federal Reserve System controls money
supply
Monetarism• Increase money supply:– Lower interest rates – more people borrow money
to buy big items like cars and houses plus more businesses borrow to invest
– Fed increases amount of money in circulation by buying back government bonds and injecting money into economy (see next slide)
United States Treasury Bill
100 Dollars
United States Treasury Bill
100 Dollars
United States Treasury Bill
100 Dollars
United States Treasury Bill
100 Dollars
United States Treasury Bill
100 Dollars
Federal Reserve Bank A
$400$200
Money supply = $400 held by Bank A
United States Treasury Bill
100 Dollars
United States Treasury Bill
100 Dollars
United States Treasury Bill
100 Dollars
United States Treasury Bill
100 Dollars
United States Treasury Bill
100 Dollars
Federal Reserve Bank A
$400$200
Fed buys a $100 bond from Bank A
$100
United States Treasury Bill
100 Dollars
United States Treasury Bill
100 Dollars
United States Treasury Bill
100 Dollars
United States Treasury Bill
100 Dollars
United States Treasury Bill
100 Dollars
Federal Reserve Bank A
$500$100
Money supply = $500 held by Banks to lend
Monetarism• Theory of monetarism– Increase money supply means more people buying
goods and businesses investing – Leads to more employment and more income and
more demand and grow economy
Recession Back to full employment
Weaknesses of Monetarism• May not work in recession• Lower interest rates doesn’t mean
people will borrow more money–Don’t have jobs or afraid of losing theirs
• Businesses will not invest when inventories are high – recession• Pushing on a string
Rational Expectations Theory• Rational Expectations Theory (RET)–Government/Fed intervention doesn’t work –
just higher deficits–Businesses and investors know what
government is doing an react in advance defeating any action by government–Should balance budget to strengthen faith in
government and economy allowing markets to work
Tea Party
• Tea Party (Parties)–Government spending and interfering in
economy is always bad–Private sector always knows what is best for
economy – not government–Starve the beast–Balance the budget now with huge cuts
Stimulus (ARRA)• ARRA - $800 billion• President– Saved 3 million jobs–Government (BEA) underestimated size of
recession originally – 5.1% decline from 2008-09 not 4.1% - also 2010 less growth by 1% then had projected
• Payroll tax holiday 2011 – Social Security tax from 6.2% to 4.2% of income - • Pres. wants to extend it 2012
Stimulus (ARRA)• ARRA - $800 billion• Conservatives/Tea Party–Didn’t create or save any jobs–Waste of money added to deficit
Stimulus (ARRA)
• ARRA - $800 billion• Liberals–Wasn’t big enough - $1.5 billion–Taxes less stimulative then spending–Payroll tax holiday is regressive tax
Paul Krugman Nobel Prize
Robert Reich