The document discusses the U.S. budget situation and options for fiscal policy. It notes that while short-term deficits are not a major problem, medium-term deficits will likely require tax increases over the next decade and long-term deficits pose growing and unsustainable shortfalls. It outlines concerns about rising federal debt levels and fiscal problems in other countries as well. The document analyzes how the U.S. accumulated large budget deficits gradually and then suddenly due to economic changes, policy decisions, and the Great Recession. It projects ongoing large deficits and rising debt levels through 2020 under different policy scenarios and discusses the long-term fiscal challenges facing the country.
MTBiz is for you if you are looking for contemporary information on business, economy and especially on banking industry of Bangladesh. You would also find periodical information on Global Economy and Commodity Markets.
Charting the Financial Crisis: A Narrative eBookShavondaBrandon
The global financial crisis of 2007-2009 and subsequent Great Recession constituted the worst shocks to the United States economy in generations. Books have been and will be written about the housing bubble and bust, the financial panic that followed, the economic devastation that resulted, and the steps that various arms of the U.S. and foreign governments took to prevent the Great Depression 2.0. But the story can also be told graphically, as these charts aim to do.
What comes quickly into focus is that as the crisis intensified, so did the government’s response. Although the seeds of the harrowing events of 2007-2009 were sown over decades, and the U.S. government was initially slow to act, the combined efforts of the Federal Reserve, Treasury Department, and other agencies were ultimately forceful, flexible, and effective. Federal regulators greatly expanded their crisis management toolkit as the damage unfolded, moving from traditional and domestic measures to actions that were innovative and sometimes even international in reach. As panic spread, so too did their efforts broaden to quell it. In the end, the government was able to stabilize the system, re-start key financial markets, and limit the extent of the harm to the economy.
No collection of charts, even as extensive as this, can convey all the complexities and details of the crisis and the government’s interventions. But these figures capture the essential features of one of the worst episodes in American economic history and the ultimately successful, even if politically unpopular, government response.
On November 10, 2011, the chapter hosted Dr. Dick Stevie, Chief Economist for Duke Energy, and Dr. George Vredeveld, Alpaugh Professor of Economics at the University of Cincinnati and founder and Director of its Economics Center.
The global financial crisis of 2007-2009 and subsequent Great Recession constituted the worst shocks to the United States economy in generations. Books have been and will be written about the housing bubble and bust, the financial panic that followed, the economic devastation that resulted, and the steps that various arms of the U.S. and foreign governments took to prevent the Great Depression 2.0. But the story can also be told graphically, as these charts aim to do.
What comes quickly into focus is that as the crisis intensified, so did the government’s response. Although the seeds of the harrowing events of 2007-2009 were sown over decades, and the U.S. government was initially slow to act, the combined efforts of the Federal Reserve, Treasury Department, and other agencies were ultimately forceful, flexible, and effective. Federal regulators greatly expanded their crisis management toolkit as the damage unfolded, moving from traditional and domestic measures to actions that were innovative and sometimes even international in reach. As panic spread, so too did their efforts broaden to quell it. In the end, the government was able to stabilize the system, re-start key financial markets, and limit the extent of the harm to the economy.
No collection of charts, even as extensive as this, can convey all the complexities and details of the crisis and the government’s interventions. But these figures capture the essential features of one of the worst episodes in American economic history and the ultimately successful, even if politically unpopular, government response.
MTBiz is for you if you are looking for contemporary information on business, economy and especially on banking industry of Bangladesh. You would also find periodical information on Global Economy and Commodity Markets.
Charting the Financial Crisis: A Narrative eBookShavondaBrandon
The global financial crisis of 2007-2009 and subsequent Great Recession constituted the worst shocks to the United States economy in generations. Books have been and will be written about the housing bubble and bust, the financial panic that followed, the economic devastation that resulted, and the steps that various arms of the U.S. and foreign governments took to prevent the Great Depression 2.0. But the story can also be told graphically, as these charts aim to do.
What comes quickly into focus is that as the crisis intensified, so did the government’s response. Although the seeds of the harrowing events of 2007-2009 were sown over decades, and the U.S. government was initially slow to act, the combined efforts of the Federal Reserve, Treasury Department, and other agencies were ultimately forceful, flexible, and effective. Federal regulators greatly expanded their crisis management toolkit as the damage unfolded, moving from traditional and domestic measures to actions that were innovative and sometimes even international in reach. As panic spread, so too did their efforts broaden to quell it. In the end, the government was able to stabilize the system, re-start key financial markets, and limit the extent of the harm to the economy.
No collection of charts, even as extensive as this, can convey all the complexities and details of the crisis and the government’s interventions. But these figures capture the essential features of one of the worst episodes in American economic history and the ultimately successful, even if politically unpopular, government response.
On November 10, 2011, the chapter hosted Dr. Dick Stevie, Chief Economist for Duke Energy, and Dr. George Vredeveld, Alpaugh Professor of Economics at the University of Cincinnati and founder and Director of its Economics Center.
The global financial crisis of 2007-2009 and subsequent Great Recession constituted the worst shocks to the United States economy in generations. Books have been and will be written about the housing bubble and bust, the financial panic that followed, the economic devastation that resulted, and the steps that various arms of the U.S. and foreign governments took to prevent the Great Depression 2.0. But the story can also be told graphically, as these charts aim to do.
What comes quickly into focus is that as the crisis intensified, so did the government’s response. Although the seeds of the harrowing events of 2007-2009 were sown over decades, and the U.S. government was initially slow to act, the combined efforts of the Federal Reserve, Treasury Department, and other agencies were ultimately forceful, flexible, and effective. Federal regulators greatly expanded their crisis management toolkit as the damage unfolded, moving from traditional and domestic measures to actions that were innovative and sometimes even international in reach. As panic spread, so too did their efforts broaden to quell it. In the end, the government was able to stabilize the system, re-start key financial markets, and limit the extent of the harm to the economy.
No collection of charts, even as extensive as this, can convey all the complexities and details of the crisis and the government’s interventions. But these figures capture the essential features of one of the worst episodes in American economic history and the ultimately successful, even if politically unpopular, government response.
The major reasons for the recession that hit worldwide especially the US and Eurozone.
The subprime Crises, US housing Crisis with Facts and Figures and The Fix.
"Show me the incentive and I'll show you the outcome" – Veripath Farmland Funds Q4 Investor Letter: Investing in a World of Financial Repression, Negative Real Rates, Valuation “Challenges” and Inflationary Forces.
Do G7 governments have an incentive to attempt to keep inflation higher for longer and real rates lower for longer? Negative real rates across a broad spectrum of credit assets are a graphic sign that we inhabit a world of financial repression orchestrated by central banks at the formal/informal behest of sovereign borrowers. In a normally functioning market, lenders do not provide capital to borrowers for negative yields – i.e., they do not pay for the privilege of lending. It goes without saying we are not in a normally functioning market.
As the Chinese authorities inject a fresh $1trn in new credit in the first quarter of 2016, Economist Marcus Wright examines this latest development and what it means for China and the world economy.
IAR Public Policy Meetings, January 26, 2011.
Presented by Geoffrey J.D. Hewings, Director, Regional Economics Applications Laboratory - University of Illinois Institute of Government and Public Affairs
The Curious Case of Savings-Investment Gap and its Implications for IndiaAshutosh Bhargava
Their has been a remarkable shift in the savings-investment gap at the global level as well as in India. While this has had a tangible impact on global potential growth, the recovery is likely to differ from one country to another. In the Indian context, the recovery in trend growth is likely to be much higher than what is generally peceived and thus requires a more proactive response from policy makers, especially the monetary authorities.
Indian Economy: The Curious Case of Household Savings-Investment GapAshutosh Bhargava
The debate between former Federal Reserve Chairman Ben Bernanke and former US Treasury Secretary Lawrence Summers has rekindled interest on the topic of "Global Savings Glut". This article gives some interesting insights about the evolution of household savings in India and the way forward.
The major reasons for the recession that hit worldwide especially the US and Eurozone.
The subprime Crises, US housing Crisis with Facts and Figures and The Fix.
"Show me the incentive and I'll show you the outcome" – Veripath Farmland Funds Q4 Investor Letter: Investing in a World of Financial Repression, Negative Real Rates, Valuation “Challenges” and Inflationary Forces.
Do G7 governments have an incentive to attempt to keep inflation higher for longer and real rates lower for longer? Negative real rates across a broad spectrum of credit assets are a graphic sign that we inhabit a world of financial repression orchestrated by central banks at the formal/informal behest of sovereign borrowers. In a normally functioning market, lenders do not provide capital to borrowers for negative yields – i.e., they do not pay for the privilege of lending. It goes without saying we are not in a normally functioning market.
As the Chinese authorities inject a fresh $1trn in new credit in the first quarter of 2016, Economist Marcus Wright examines this latest development and what it means for China and the world economy.
IAR Public Policy Meetings, January 26, 2011.
Presented by Geoffrey J.D. Hewings, Director, Regional Economics Applications Laboratory - University of Illinois Institute of Government and Public Affairs
The Curious Case of Savings-Investment Gap and its Implications for IndiaAshutosh Bhargava
Their has been a remarkable shift in the savings-investment gap at the global level as well as in India. While this has had a tangible impact on global potential growth, the recovery is likely to differ from one country to another. In the Indian context, the recovery in trend growth is likely to be much higher than what is generally peceived and thus requires a more proactive response from policy makers, especially the monetary authorities.
Indian Economy: The Curious Case of Household Savings-Investment GapAshutosh Bhargava
The debate between former Federal Reserve Chairman Ben Bernanke and former US Treasury Secretary Lawrence Summers has rekindled interest on the topic of "Global Savings Glut". This article gives some interesting insights about the evolution of household savings in India and the way forward.
A detailed analysis of the prospects for the UK economy in 2012 from Geoff Riley at tutor2u. Among the key themes explored by Geoff are:
Are we already back in recession?
A damaging legacy from the slump
Have policies lost their effectiveness?
Macro fragility in a world of external shocks
A recent presentation about why economic growth in the US is slow and how budget deficits retard growth. Presented by Carlos Zarazaga, senior research economist of the Dallas Federal Reserve Bank. Part of DCFR's Series "M" on money issues, September 25th, 2012..
Breakfast with Matt Slaughter - The Global Economic Outlook: What's Next?tuckalumni
The Global Economic Outlook: What's Next?
Here in mid-2012, the global economy continues to expand but also to face significant risks. In Europe, the financial crisis of many banks and sovereigns has worsened in recent months. In the United States, growth in employment and output remain slow—and several difficult fiscal choices await the end of the year. Many BRIC-and-beyond countries continue to grow fast—but in China and India, most notably, growth has slowed the past year. This inaugural “Breakfast with Matt” will examine some of the main factors in the global economic outlook.
About Matthew Slaughter
Associate Dean for the MBA Program; Signal Companies Professor of Management
In addition to academic scholarship, Dean Slaughter writes general-interest items for the business and policy communities. Slaughter has also given speeches to and testified before both chambers of the U.S. Congress. His work and ideas have been widely featured in business media.
4th Qtr Year End 2011 Economic Review Feb 15 [Autosaved] [Autosaved]Gary Crosbie
2011 4th Qtr Economic Review
Economic Summary
Fed Policy
Bus Investment
Other Economic Indicators
Employment Analytics
“Falling Knife -1- Employment vs Skils”
“Falling Knife -2- The Great In-equality of Wages”
Thought Experiment
Market Forecast
Picks
Falling unemployment, declining inflation and stronger growth – a better picture for the UK in 2014? But can it last?
After several years of weak expansion, the UK economy is enjoying a relatively strong cyclical recovery
Can the UK continued to experience a recovery in output, jobs and investment?
Will the recovery be balanced and sustainable?
How resilient is the UK? What are some of the major threats to growth in 2014 and beyond?
Join us for the fourth quarter economic outlook webinar with Dr. Joe Webb, sponsored by MindfireInc. With an increasingly confused economic environment, Dr. Webb has the right prescription for navigating these rocky waters. Topics to be discussed include:
* The latest economy fun & games going into the election, and the first look at 2009's economy
* The print economy as the industry prepares for Graph Expo
* The latest survey of print businesses and their planned end-of-year actions
* Technology trends to watch for in 2009 and 2010
* Fall into Fall with Dr. Joe’s reading list
CBO regularly publishes economic projections that are consistent with current law—providing a basis for its estimates of federal revenues, outlays, deficits, and debt. A key element in CBO’s projections is its forecast of potential (maximum sustainable) output, which is based mainly on estimates of the potential labor force, the flow of services from the capital stock, and potential total factor productivity in the nonfarm business sector.
This presentation describes CBO’s most recent 10-year potential output projections. It also discusses possible underlying causes for the slowdown of growth in total factor productivity.
Presentation by Robert Shackleton, an analyst in CBO’s Macroeconomic Analysis Division, at the NABE Foundation’s 15th Annual Economic Measurement Seminar.
KI a INESS v spolupráci s ďalšími partnermi organizovali medzinárodnú
konferenciu v rámci Free Market Road Show 2012 na tému Európa na ceste do
nevoľníctva?, ktorá sa konala dňa 27. apríla 2012 v Bratislave. Pozrite si
prezentáciu Daneila Mitchella. Viac informácií na
www.konzervativizmus.sk.
Similar to Budget and-fiscal-policy-gale-5-12-10-2 (20)
1. The U.S. Budget and
Options for Fiscal Policy
William G. Gale
Brookings Institution/Tax Policy Center
The Mintz Economic Policy Seminar
C.D. Howe Institute
May 12, 2010
2. The Situation
• Huge short-term deficits.
– But they aren’t the real problem
• Large and growing medium-term deficits.
– Tax increases probably needed over the next decade
– In the meantime, deficits will reduce growth
• Growing and unsustainable long-term shortfalls.
– Will require controlling spending and increasing taxes
2
3. Increasingly Urgent Concerns
about Federal Debt
• Chinese officials have publicly questioned the
security of U.S. Treasury debt.
• Credit markets see a non-zero probability of
default on senior U.S. Treasury debt in the
next five years.
• Medicare trust fund to go bankrupt by 2017.
3
4. Fiscal Problems Elsewhere, Too
• Almost all states facing significant fiscal shortfalls.
– California in particular
• Europe has its own fiscal problems.
– S&P recently warned of a possible downgrade of UK debt
– UK’s debt trajectory not significantly worse than the US
– Greece, etc.
4
5. Outline
• Why and how does fiscal policy matter?
• How did we get here?
• Where are we headed?
• What should we do?
• The President’s Fiscal Commission.
5
7. Macroeconomic Growth: Two
different concepts
• In a weak economy, “growth” means reducing the output gap,
which occurs by raising aggregate demand.
• In a strong economy, “growth” means raising the economy's
capacity, which occurs by raising aggregate supply.
• In both cases, deficits work to raise aggregate demand and
reduce national saving.
– Those effects help an economy reduce an output gap.
– But they reduce an economy’s ability to expand capacity.
7
8. Deficits and Growth
In a Weak Economy
• In an economy where unemployment of workers is high and utilization of
existing capital (machines, etc.) is low, the economy is not producing as
much as it could.
• The primary goal of policy is get people back into the labor force and
capital in use again.
• Doing so raises GDP and hence is called "growth", but it is better thought
of as reducing the gap between potential output and actual output.
• KEY POINT: A budget deficit can help an economy with an output gap.
Higher government purchases spur demand by government; tax cuts can
spur demand by households. These changes raise the demand for workers
and the use of capital.
8
9. Deficits and Growth
in a Strong Economy
• If unemployment is low and capital utilization is high, then resources are
fully employed and the economy's output is at potential output.
• The goal of policy in this case is to raise the capacity of the economy –
more workers, better workers, more capital, better-applied capital, etc.
• Raising the capacity of the economy is economic growth.
• KEY POINT: In this case, a budget deficit hinders growth. The increase
in demand caused by the deficit can't be met on a sustained basis since
resources are already fully employed. Moreover, in order to finance
investments in more and better workers and capital, the economy needs
saving, and higher budget deficits represent lower government saving.
9
10. Consequences of Sustained Deficits –
The “Crisis” Scenario
• Sharp change in investor's attitudes and willingness to hold
U.S. government debt.
• Marked by some combination of:
– Higher interest rates
– Lower value of the dollar
– Sharp outflow of capital from the U.S.
• Will it happen? When? How?
– Could be triggered by any number of events.
– May never happen
– But even if a “crisis” is not likely, there is still a big problem….
10
11. Consequences of Sustained Deficits –
The Gradual Scenario
• Lower national saving, which leads to:
– Higher interest rates
– Less national investment
– Less future economic growth
– Lower future living standards
OR
• Significant capital inflows from abroad, which leads to:
– Less of an increase in interest rates
– Less of a decline in national investment
– BUT still leads to lower future living standards, because we effectively owe more to
other countries and have to pay it back
• KEY POINT: Lower future living standards = the burden on future generations.
11
12. Magnitudes
• Considerable variation in the literature.
Reasonable rules of thumb (for the US) are:
– Each percent-of-GDP in current unified deficits
reduces national saving by 0.5 to 0.8 percent of
GDP
– Each percent-of-GDP in anticipated future unified
deficits raises forward long-term interest rates by
25 - 35 basis points, and
– Each percent-of-GDP in projected future primary
deficits raises forward rates by 40 - 70 basis points
12
13. More on Magnitudes
• Calculations using a simple neoclassical
growth model or Ball-Mankiw “debt fairy”
calculations suggest that a sustained 1%-of-
GDP deficit:
– Reduces output by 1-2%; and
– Raises interest rates by 30-80 basis points.
14. How Did We Get Here?
From Ernest Hemingway, The Sun Also Rises
“How did you go bankrupt?” Bill asked.
14
15. How Did We Get Here?
From Ernest Hemingway, The Sun Also Rises
“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then
suddenly.”
15
16. Net Federal Debt, 2001 CBO Projections
90
80
70
P 60
D
G
f 50
o
t
n 40
e
c
r
e 30
P
20
10
0
-10
-20
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
16
17. Federal Deficit or Surplus, 2001 Projections and
Actual and Prospective Outcomes
8
6 January 2001 CBO Baseline Projections
4
P
D2
G
f
o0
t
n
e
c-2
r
e
P
-4
-6
-8
-10
Actual Projected
-12
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
17
18. Federal Deficit or Surplus, 2001 Projections and
Actual and Prospective Outcomes
8
6 January 2001 CBO Baseline Projections
4
P
D2
G
f
o0
t
n
e
c-2
r
e
P
-4 Observed Deficit or Surplus
-6
-8
-10
Actual Projected
-12
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
18
20. Federal Deficit or Surplus, 2001 Projections and
Actual and Prospective Outcomes
8
6 January 2001 CBO Baseline Projections
4
P
D2 Economic and Technical Changes
G
f
o0
Policy Changes
t
n
e
c-2
r
e
P
-4 Observed Deficit or Surplus
-6
-8
-10
Actual Projected
-12
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
20
21. Federal Deficit or Surplus, 2001 Projections and
Actual and Prospective Outcomes
8
6 January 2001 CBO Baseline Projections
4
P
D2 Economic and Technical Changes
G
f
o0
Policy Changes
t
n
e
c-2
r
e
P
-4 Observed Deficit or Surplus
-6
-8
-10
Actual Projected
-12
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
21
22. Federal Deficit or Surplus, 2001 Projections and
Actual and Prospective Outcomes
8
6 January 2001 CBO Baseline Projections
4
P
D2 Economic and Technical Changes
G
f
o0
Policy Changes
t
n
e
c-2
r
e
P
-4 Observed Deficit or Surplus
-6
-8
-10
Actual Projected
-12
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
22
23. Federal Deficit or Surplus, 2001 Projections and
Actual and Prospective Outcomes
8
6 January 2001 CBO Baseline Projections
4
P
D2 Economic and Technical Changes
G
f
o0
Policy Changes
t
n
e
c-2
r
e
P
-4 Observed Deficit or Surplus
-6
-8
-10
Actual Projected
-12
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
23
24. Net Federal Debt, 2001 and 2010 Projections
90
80
70
P 60
D
G
f 50
o
t
n 40
e
c
r
e 30
P CBO, Actual and Projected, March 2010
20
10
0
CBO, January 2001
-10
-20
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
24
26. Alternative Deficit Projections, 2010-2020
12
10
8
Percent of GDP
6
4
CBO Baseline
2
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Year
26
27. CBO Baseline
• Assumes current and future Congresses will do
nothing. Mechanical projection of current law.
• Assumes almost all tax provisions expire as
scheduled:
– 2001 and 2003 tax cuts
– “Regular” expiring tax provisions
– AMT patches
• Assumes discretionary spending will stay
constant in real terms.
27
28. Extended Policy
• Assumes current and future Congresses will act like previous
Congresses.
• Start with the CBO baseline adjusted for health care reform.
• Extend all non-stimulus expiring tax provisions.
• Allow non-stimulus, non-defense discretionary spending to
grow with inflation and population.
• Replace projected defense spending with Obama defense plan.
• Assume physician payments under Medicare will be frozen,
rather than cut.
28
29. Alternative Deficit Projections, 2010-2020
12
10
8
Extended Policy
Percent of GDP
6
4
CBO Baseline
2
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Year
29
30. Alternative Deficit Projections, 2010-2020
12
10
8
Percent of GDP
Extended Policy
6
Obama Policy
4
CBO Baseline
2
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Year
30
31. Net Federal Debt, 2001 and 2010 Projections
90
80 Obama Budget
70
P60
D CBO, Actual and Projected, March 2010
G
f 50
o
t
n 40
e
c
r
e 30
P
20
10
0
CBO, January 2001
-10
-20
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
31
32. Obama Policy in 2020
• The (full employment) deficit = 5.5% of GDP
– Highest FE deficit since WWII except for current episode
• Public debt = 90% of GDP (and rising)
– Highest level since 1947 (when it was falling)
• Spending will exceed 25% of GDP
– Highest level since WWII except for 2011
– Net interest will be 4.0% of GDP, highest level ever (and
larger than Defense or NDDS in 2020)
• Revenues will equal 19.5% of GDP
32
33. Economic Assumptions
• Budget figures depend critically on the economy.
• Global, financially-induced downturns:
– Tend to run a long time (slow recoveries)
– Tend to leave big and long-lasting revenue declines
– Tend to result in lower future output path
33
34. Political Assumptions
• The political assumptions built into the budget
forecast border on heroic.
– The stimulus package expires as scheduled
– NDDS falls substantially relative to GDP
– Difficult cuts in health care occur
– PAYGO is honored for a decade
34
37. The Fiscal Gap
• In dollar terms, the gap is the present value of the
difference between all expected future revenues and
expected future non-interest spending.
• Easier to understand as a share of GDP – the gap
equals the size of the immediate and permanent tax
increase or spending cut (or combination) that would
keep the debt/GDP ratio at the same level in the long-
term at is now.
37
38. Table 5
Fiscal Gaps
Baseline CBO Baseline Extended Policy Obama Policy
Through Through Through
Permanent Permanent Permanent
2085 2085 2085
As a Percent of GDP 4.60 6.40 7.21 9.07 6.35 8.16
In Trillions of
Present-Value
Dollars 34,964 92,668 54,794 131,245 48,216 118,161
Source: Authors' calculations
38
39. What Should We Do?
• Balancing recovery and fiscal discipline
• Medium-term (10-year) budget deficits
• Long-term deficits
39
40. What Should We Do?
Balancing Recovery and Fiscal
Discipline
• The dilemma:
– Recovery needs expansionary fiscal policy/bigger
deficits
– Discipline requires smaller deficits
• The risk:
– Impose fiscal discipline too soon and the economy
could tank again (e.g. US 1930s, Japan 1990s)
– Hold off too long and markets could get jittery
40
41. The Short-Term Solution
• Combine
– Fiscal expansion now
– Fiscal discipline over the next 5 years
• Would solve both problems at the same time
and would be more effective than either in
isolation.
41
42. What Should We Do?
The Next 10 Years
• Deficits of 5-7 percent of GDP and rising over
time under either Obama policy or extended
policy, even with full employment and
favorable political assumptions.
42
43. Spending Options
• In a typical year, more than 70% of federal spending
is on five programs:
– Defense
– Social Security
– Medicare
– Medicaid
– Net interest
• 65% in 2009 (because of TARP and stimulus)
• 74% in 2014 under Obama policy
• Rising to 78% by 2020 under Obama policy
43
44. Cutting Spending
• Will be difficult to cut any of the big 5
spending items significantly in this decade.
• Under Obama policy, other federal spending
will account for 6.0% of GDP in 2014 and
5.5% of GDP in 2020.
– Even enormous cuts in such spending will not
reduce the deficit much.
44
45. Health Care Reform
• CBO: Recent health care reform will reduce
deficit by about $150 billion over the next 10
years.
– These gains already included in the estimates
presented above.
45
46. Health Care Reform
• Legislation includes measures to slow cost
growth.
– These have to be sustained by future legislators
– Spending cuts will be harder to sustain if
underlying costs continue to grow
• Even if predictions hold, the remaining deficit
reduction task is harder, because potential
sources of revenue increases and spending cuts
have now been used to finance health.
46
47. Tax Increases
• It is difficult to see how the budget deficit can be
reduced to the 3 percent range or lower in the next
decade without significant tax increases.
• We need both better taxes and more taxes.
– Opportunity for reform
• Two strategies – not mutually exclusive
– Reform existing taxes
– Create new taxes
47
48. Change Existing Taxes
• Increase rates
• Broaden the tax base
– More conducive to economic growth than rate hikes
– Reduces distortions and special treatment
– Simpler
– Fairer
– Lots of revenue
48
49. Broadening the Base – Options
• Limiting itemized deductions
– Mortgage interest
– State and local taxes
– Charitable contributions
• Limit employer deductions for health
insurance
• Limit corporate tax loopholes and deductions
49
50. Energy Taxes?
• Cap & trade (with permits auctioned) or a carbon tax
would likely raise at most about 1% of GDP in
revenues if well designed.
– Most extant proposals imply smaller revenue yields.
• A European-style gas tax ($4-$5 per gallon) could
raise significant revenue.
– Roughly, each dollar of gas tax would raise 1% of GDP in
revenues
50
51. All Roads Point to a VAT
• It’s where the money is:
– Used in more than 100 countries, including all other
OECD countries
– Significant revenue source, much larger than could
be attained from income tax reform
– Exempts exports and capital income
– Is regressive
51
52. How a Typical VAT Works
• All sales by all businesses are taxable.
– Businesses pass on tax invoices to purchasers
• Registered VAT taxpayers claim credits for taxes
paid on their purchases.
• Exports are “zero-rated.”
– Exporters claim credits on purchases
• Imports are taxable.
– No credits on purchases from overseas
• Tax base equals domestic consumption.
52
53. Revenue Yield of a VAT
• Almost all OECD countries have rates between
15% and 22%.
– Scandinavian countries around 25%
– British Empire countries 6-13%, Japan 5%
• Rough rule of thumb in OECD countries: Each
percentage point on the VAT rate “yields”
between 0.3% and 0.4% of GDP in revenue.
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54. A VAT in the U.S.
• In the US, a 10% VAT
– …with a fairly broad base and
– …with a “demogrant” that compensates everyone on
consumption expenditures equal to the poverty level
– could raise 4.0 – 4.5 percent of GDP in revenues.
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55. What Should We Do?
The Long-Term
• Containing health care spending growth is
essential to long-term fiscal balance, in
addition to the changes discussed above.
• What is your number?
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56. Revenues and Expenditures as a Percent of GDP
30
Obama Policy Expenditures
Extended Policy Expenditures
28
CBO Baseline Expenditures
26
24
Percent of GDP
22
CBO Baseline Revenues
20
Obama Policy Revenues
18
Extended Policy Revenues
16
14
2009 2013 2017 2021 2025 2029 2033 2037 2041 2045 2049 2053 2057 2061 2065 2069 2073 2077 2081 2085
Year
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57. The Long-Term Gap is Huge Relative
to Typical Policy Changes
• The long-term gap = 6.3-8.2% of GDP.
• In 2009,
– Income tax revenues = 7.2% of GDP
– Corporate tax revenues = 1.2% of GDP
– Payroll tax revenues = 6.3% of GDP
– Defense spending = 5% of GDP
– NDDS = 4.7% of GDP
– Mandatory spending = 11% of GDP (in 2008)
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59. The Commission
• Final report due in December 2010
• 18 members
– 6 Obama appointees, politically diverse
– 6 Democratic Congressional appointees
– 6 Republican Congressional appointees
• Charged with eliminating the deficit other than interest
payments in/by 2015
– Would require a reduction in spending and/or increase in taxes of 2.2%
of GDP relative to the extended policy scenario and 1.4% of GDP
relative to the Obama policy scenario.
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60. The Commission
• The likelihood that:
– The Commission agrees on a plan that meets the deficit
target, AND
– Congress votes on the plan, AND
– Congress enacts the plan…
– …is small.
• Two key problems:
– No New Taxes coalition – 6 members have signed the
pledge, but the Commission needs 14 out of 18 votes
– The public is not ready to have this discussion and hence
not ready to support politicians who support deficit
reduction
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61. The Commission
• Still the Commission can do a lot of good
• Describe the problem clearly and show the
options
– “Show me the money”
• Begin the process of educating the public
– “You think we’re fighting. I think we’re finally
talking.”
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