The document discusses different options for dealing with the upcoming "fiscal cliff" in the US: A) getting pushed over the cliff through abrupt spending cuts and tax increases, B) jumping at the chance to strike a "Grand Bargain" through a large deficit reduction deal, or C) stepping back to think about the issues and consider alternative approaches. It argues that options A and B could harm the economy in the short-run and that there is no economic reason to rush into a large deficit reduction given that the US government has fiscal space as the issuer of the currency.

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

8. Deficit Goals Under B-S

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

12. Government Balance (%GDP)
Actual Projected

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

26. We Have Useful
Work For them

27. Not Nearly Enough Jobs

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