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How to Deal with the Fiscal Cliff


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Proposal for ways to deal with the fiscal cliff.

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How to Deal with the Fiscal Cliff

  1. 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. 2. The Push Would cut the 2013 deficit almost in half -$487 billion
  3. 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. 4. 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 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. 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. 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 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
  7. 7. 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
  8. 8. Deficit Goals Under B-S
  9. 9. Government Balance (%GDP)Actual Projected Simpson-Bowles/Obama CB&PP
  10. 10. Which (If Any) of These AreReasonable Goals?
  11. 11. Putting the Deficit in Context
  12. 12. Government Balance (%GDP)Actual Projected
  13. 13. Non-Government Balance (%GDP) Government Balance (%GDP)Actual Projected
  14. 14. Need To Step Back and Think
  15. 15. A Simple and Fundamental Accounting Truth Government Non-Government $$$ or
  16. 16. A Simple and Fundamental Accounting Truth G >T Government Non-Government $$$ or
  17. 17. A Simple and Fundamental Accounting Truth G >T Government Non-Government $$$ Their Deficit is Our Surplus! or
  18. 18. A Simple and Fundamental Accounting Truth G >T Government Non-Government $$$ Their Deficit is Our Surplus! or Their red ink is Our black ink!
  19. 19. Grand Bargain Means Austerity
  20. 20. But Arent We Broke?
  21. 21. The Issuer of the Currency Can Always Pay CLICK IMAGE TO VIEW VIDEO AT“[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. 22. 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
  23. 23. We’re Living Way Below Our Means Output gap estimated at about $9 billion per day in lost
  24. 24. We Have Plenty of Capacity
  25. 25. We Have Millions of People Who Want to Contribute
  26. 26. We Have UsefulWork For them
  27. 27. Not Nearly Enough Jobs
  28. 28. "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
  29. 29. Step Back and Think Italy Spain Greece Thank You @deficitowl