Economic Issues Volume One Deficit, Debt and the “Great Recession” © Christopher Productions,...

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

http://www.brillig.com/debt_clock/

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.


• 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.


• 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


• 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


• 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+


• 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

http://www.youtube.com/watch?v=7YiyjO3y3WA

http://www.youtube.com/watch?v=7YiyjO3y3WA

http://www.youtube.com/watch?v=JTzMqm2TwgE

http://www.youtube.com/watch?v=JTzMqm2TwgE

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

http://www.youtube.com/watch?v=yBC3XivM3eA

http://www.youtube.com/watch?v=yBC3XivM3eA

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


100 Dollars


100 Dollars


100 Dollars


100 Dollars

Federal Reserve Bank A

$400$200

Money supply = $400 held by Bank A


100 Dollars


100 Dollars


100 Dollars


100 Dollars


100 Dollars


$400$200

Fed buys a $100 bond from Bank A

$100


100 Dollars


100 Dollars


100 Dollars


100 Dollars


100 Dollars


$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

Economic Issues Volume One Deficit, Debt and the “Great Recession” © Christopher Productions,...

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Transcript of Economic Issues Volume One Deficit, Debt and the “Great Recession” © Christopher Productions,...