How to Deal with the Fiscal Cliff

How to Deal with the Fiscal Cliff A. Get Pushed B. Jump (at the Chance to Strike a "Grand Bargain") C. Step Back and Think Stephanie Kelton Associate Professor of Economics University of Missouri, Kansas City

The Push Would cut the 2013 deﬁcit almost in half -$487 billion

Too Much, Even for the Peterson Foundation• The Peterson Foundation warns that $487 is an amount “so large that it … will almost certainly push the economy back into recession.”• “What this economy needs is a plan that addresses the ﬁscal cliff by putting the budget on a sustainable course for the long term that is implemented gradually once the economy has recovered.”

Obamas Plan: A Big Jump?• How I see a second term (Des Moines Register)• "I am absolutely conﬁdent we can get the equivalent of a Grand Bargain...in the ﬁrst six months."• We can "meet the Bowles-Simpson target...and even more."• "I genuinely believe that one of the best things we can do for the economy is to settle this issue

Conundrum• Most economists agree that failure to reach a deal means recession• The business community agrees that ﬁscal stimulus boosts short-term economic growth and budget cuts hurt it• Pundits/public seem eager to see both sides come together• Jumping at the chance to strike a Grand Bargain is perceived as the best way to avoid recession and deal with our longer term "deﬁcit problem"

The Cliff Fiscal or Economic CBO Baseline Alternative Scenario Measure Federal deﬁcit in $641 billion $1,037 billion FY2013 Economic growth in -0.5% of GDP 1.7% of GDP FY2013Unemployment rate for 9.1% 8.0% Oct-Dec 2013 Public debt in 2022 58% of GDP 90% of GDP Public debt in 2035 84% of GDP 190% of GDP

Whats The Right Number?• CB&PP says, "there is no single magic number"• But... advocates $2 trillion in additional deficit reduction• This would stabilize debt at 73% of GDP over the next decade• Requires shrinking deficits to less than 3% of GDP• Under this plan, deficits would average 2.5% of GDP from 2018-2022

Deﬁcit Goals Under B-S

Government Balance (%GDP)Actual Projected Simpson-Bowles/Obama CB&PP

Which (If Any) of These AreReasonable Goals?

Putting the Deﬁcit in Context

Government Balance (%GDP)Actual Projected

Non-Government Balance (%GDP) Government Balance (%GDP)Actual Projected

Need To Step Back and Think

A Simple and Fundamental Accounting Truth Government Non-Government $$$ or

A Simple and Fundamental Accounting Truth G >T Government Non-Government $$$ or

A Simple and Fundamental Accounting Truth G >T Government Non-Government $$$ Their Deﬁcit is Our Surplus! or

A Simple and Fundamental Accounting Truth G >T Government Non-Government $$$ Their Deﬁcit is Our Surplus! or Their red ink is Our black ink!

Grand Bargain Means Austerity

But Arent We Broke?

The Issuer of the Currency Can Always Pay CLICK IMAGE TO VIEW VIDEO AT YouTube.com“[A] government cannot become insolvent with respect to obligations in its own currency. A ﬁat money system, like the ones we have today, can produce such claims without limit” ~Alan Greenspan, 1997

Its Time We Realized• The government is not like a household• The US$ comes from the US Government• Not revenue constrained (Greenspan)• Cant be forced to default CONGRESS• There is no economic reason for a Grand Bargain

We’re Living Way Below Our Means Output gap estimated at about $9 billion per day in lost

We Have Plenty of Capacity

We Have Millions of People Who Want to Contribute

We Have UsefulWork For them

Not Nearly Enough Jobs

"Companies are awash with cash. And what theyve beenmissing are enough customers out there to prompt demand and justify them investing in more plant and equipment." ~President Obama

Step Back and Think Italy Spain Greece Thank You @deﬁcitowl

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How to Deal with the Fiscal Cliff

by Umkc Economists on Nov 13, 2012

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