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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.”
Obama's 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
      FY2013

Unemployment 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
What's 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 Are
Reasonable 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 Aren't 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
It's Time We Realized
• The government is not like a
  household

• The US$ comes from the US
  Government

• Not revenue constrained
  (Greenspan)

• Can't 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 Useful
Work For them
Not Nearly Enough Jobs
"Companies are awash with cash. And what they've been
missing 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

  • 1. 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
  • 2. The Push Would cut the 2013 deficit almost in half -$487 billion
  • 3. 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.”
  • 4. Obama's 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
  • 5. 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"
  • 6. 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 FY2013 Unemployment 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
  • 7. What's 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
  • 9. Government Balance (%GDP) Actual Projected Simpson-Bowles/Obama CB&PP
  • 10. Which (If Any) of These Are Reasonable Goals?
  • 11. Putting the Deficit in Context
  • 13. Non-Government Balance (%GDP) Government Balance (%GDP) Actual Projected
  • 14. Need To Step Back and Think
  • 15. A Simple and Fundamental Accounting Truth Government Non-Government $$$ or
  • 16. A Simple and Fundamental Accounting Truth G >T Government Non-Government $$$ or
  • 17. A Simple and Fundamental Accounting Truth G >T Government Non-Government $$$ Their Deficit is Our Surplus! or
  • 18. A Simple and Fundamental Accounting Truth G >T Government Non-Government $$$ Their Deficit is Our Surplus! or Their red ink is Our black ink!
  • 19. Grand Bargain Means Austerity
  • 20. But Aren't We Broke?
  • 21. 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
  • 22. It's Time We Realized • The government is not like a household • The US$ comes from the US Government • Not revenue constrained (Greenspan) • Can't be forced to default CONGRESS • There is no economic reason for a Grand Bargain
  • 23. We’re Living Way Below Our Means Output gap estimated at about $9 billion per day in lost
  • 24. We Have Plenty of Capacity
  • 25. We Have Millions of People Who Want to Contribute
  • 28. "Companies are awash with cash. And what they've been missing are enough customers out there to prompt demand and justify them investing in more plant and equipment." ~President Obama
  • 29. Step Back and Think Italy Spain Greece Thank You @deficitowl

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