Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
ECN202: Macroeconomics 1990s:Budget Deficits, Clinton, and the New Economy "You mean to tell me that the success of the program and my reelection hinges on the Federal Reserve and a bunch of fucking bond traders." 1990s The 1990s opened with voters turning on a president and electing a virtually unknown Southerner. They did it in 1976, but this time it was different. Talk of a “malaise” enveloping the country then was replaced by talk of a booming economy creating distance between the US and its closest competitors. The US was ground zero in the Information Revolution that would really flatten the world in which it was the sole superpower. Gloom and doom talk was replaced by talk of a "New Economy” of uninterrupted economic growth without inflation, and a booming stock market reflected the confidence. And Clinton managed to pull off what today seems unimaginable – he turned a massive budget deficit into a surplus which is the focus of the 1990s. Here we look closely at the government’s finances, the role Alan Greenspan played in the Clinton’s budget turnaround, and the government’s role in setting the stage for the Great Recession that would dominate the 2000s. As usual, we’ll start with a few headlines from the times. In the news 1. 2. 3. 4. “Hard times again?" “An unprecedented slowdown?” “1990s survival guide: Expectations are lower and anxiety higher as everybody worries about his job.” “What’s wrong with the economy?” “The Depression of the 1990s-It’s already here.” "U.S. Economy Roars Ahead; Inflation Low; Third-Quarter Growth Revised Upward to 5.5%" 7. "Internet's E-conomy Gets Real; New Business Math Gains Solid Ground" 8. "The Internet Economy: the World's Next Growth Engine" 9. "A new economy for the New World?" 10. "How real is the new economy" 11. "America's puzzling economy” 5. 6. A primer on finances You do not need to be an accountant to understand the basics of government finances. In fact, there are many similarities. The financial condition of the government, like your financial position, is summarized in income and balance sheet statements. The income statement records the money coming in and the money going out for a specified period of time. If the money coming in is less than the money going out, we have a deficit that must be financed by borrowing. If the money coming in greater than the money going out, we have a surplus that means there is savings. If the income statement is a moving picture of what is earned and spent, the balance sheet is a snapshot of net worth - the difference between the value of what is owned and the value of what is owed, which is called debt. So far this discussion could have been your finances, or the government’s so keep this in mind as we examine the government’s finances. Government finances In the following slide you will see graphical version of the government’s finances. The government’s income statement is called the budget, and we even have a government agency devoted to keeping the books – the Office of Management and Budget (OMB) that is the source of most of the data in this unit. The government gets its money from taxes and fees (receipts) and spends it on a wide array of goods and services (outlays). At the present time Outlays > Receipts so the government is running a budget deficit. Where you might go to the bank to finance a deficit, the government issues bonds (US Treasuries) that investors buy. The investors get the bonds with a promise to redeem them at a specified date in the future (6-months and 10years are two examples) and the government gets the money to pay its bills. If we add up all of the bonds that are in the hands of investors, we have the national debt. Taxes & fees Government Budget Deficit Sells Bonds Gets $s Investors Capital Mkt. Outlays Government Bonds Above is an image of a US Savings Bond. This is an example of the bonds issued by the government. Today investors all over the world buy these bonds, but in WW II when the government ran HUGE deficits it ran promotional campaigns with posters such as this one to get Americans to buy bonds. It also helped that some goods were rationed so people had limited uses for their funds. How big is the government budget? There are many #s out there, so here we try to separate out the good from the bad US Government Outlays & Receipts ($billions) Outlays 4,000 3,500 3,000 Here is what the books say – and you can see how the numbers keep rising. If you look carefully you can also see a few “special” times. Take out that pen and write down what you see. 2,500 What are these? 2,000 Receipts 1,500 1,000 500 0 1950 What are these? 1960 1970 1980 1990 2000 2010 US Government Outlays & Receipts ($billions) 4,000 3,500 3,000 Outlays Here is the list – match them up 1.Reagan income tax cut 2.Bush income tax cut 3.Obama payroll tax cut 4.Obama stimulus 5.Clinton budget surplus 6.Budget deficits 2,500 What are these? 2,000 Receipts 1,500 1,000 500 0 1950 What are these? 1960 1970 1980 1990 2000 2010 But These are not really the most important numbers because they do not account for Price Level (CPI) 250 200 Rising prices 150 100 50 0 1950 1960 1970 1980 1990 2000 2010 US Population 350,000 300,000 250,000 More people 200,000 150,000 100,000 50,000 0 1940 1950 1960 1970 1980 1990 2000 2010 GDP 16,000 14,000 12,000 Bigger economy 10,000 8,000 6,000 4,000 2,000 0 1960 1970 1980 1990 2000 2010 So We here are some alternative measures that account for those numbers Real Outlays & Receipts ($billions) 4,500 4,000 3,500 3,000 Outlays We could adjust for the number of people = per capita outlays and receipts. We did adjust for inflation – real outlays and receipts – and it looks pretty much the same except the slope is smaller reflecting rising prices 2,500 2,000 Receipts 1,500 1,000 500 0 1970 1980 1990 2000 2010 Federal Outlays & Receipts / GDP 50.0 45.0 We can adjust for size of the economy – Outlays/GDP and Receipts/GDP 40.0 35.0 30.0 Outlays 25.0 20.0 15.0 Receipts 10.0 5.0 0.0 1930 1950 1970 1990 2010 An important classification: Discretionary and Nondiscretionary spending Federal outlays can be decomposed into discretionary and nondiscretionary spending, an important distinction when thinking about balancing the budget. Discretionary spending is spending that is specified in annual appropriations authorized by Congress and includes most of the military spending. Nondiscretionary spending is spending that is mandatory for those entitled to the payments and includes unemployment benefits (entitled by one’s unemployment status) and Social Security benefits (entitled by one’s age). As you see in the following slide, there has been a significant change in the composition of spending, which is an important source of disagreement between Republicans who want to limit entitlement (nondiscretionary) spending, and Democrats who do not. Discretionary Share Outlays 80.0 Question: In 2012 federal outlays were $3.5 trillion and the budget deficit was $1.3 trillion. If the entire budget deficit was to be eliminated by cuts to only discretionary spending, how much of discretionary spending would need to be cut? 70.0 60.0 50.0 40.0 30.0 20.0 10.0 Since discretionary spending equals about 1/3rd of spending so it would equal about $1.2 trillion so you would need to eliminate virtually all of discretionary spending 0.0 1960 1970 1980 1990 2000 2010 2020 What about those imbalances? Budget Surplus/Deficit (millions $s) 400,000 200,000 0 1920 1940 1960 1980 -200,000 -400,000 -600,000 -800,000 -1,000,000 Here are the actual numbers and you can barely see the WW II and the Reagan deficits. You can certainly see the Obama deficits that are the biggest ever! -1,200,000 -1,400,000 -1,600,000 Or are they since they have not been adjusted yet either. 2000 2020 Real Federal Deficit (Million $s) 400,000 200,000 0 1900 1920 1940 1960 1980 (200,000) (400,000) (600,000) (800,000) (1,000,000) (1,200,000) (1,400,000) (1,600,000) Here are the numbers adjusted for inflation and you can see WW II more clearly and the Reagan deficits 2000 Federal Deficit / GDP 10.0 5.0 0.0 1930 -5.0 1950 1970 1990 2010 -10.0 -15.0 -20.0 -25.0 -30.0 -35.0 Here are the numbers adjusted for the size of the economy and things look VERY different. Now you can see WW II, the Reagan deficits, the Clinton surplus, and Obama’s deficit that was large, but not unprecedented. It was, however, the biggest peacetime deficit, about twice the size of the largest depression deficit. A “peculiarity”: On and Off-Budgets When we talk about the federal governments budgets, there are actually two separate parts. One (on-budget) measures the government’s general operating outlays and receipts, while the other (off-budget) measures the government’s receipts and outlays for Social Security. As you can see in the following slide, since Reagan’s time the government runs surpluses in Social Security to build up assets to be able to pay for the retirement of those baby boomers, that offset some of the deficits in the general operating budget. In the next slides are the receipts, outlays, and deficit data for 2012 and a time series graph of the deficits. 2012 Federal Budget (Billion $s) Total On-budget Surplus or deficit (-) Receipts Outlays 2,450 3,537 -1,087 Receipts Outlays 1,881 3,030 Off-budget (SS) Surplus or deficit (-) -1,149 Receipts Outlays 570 How much does the government have to borrow in the capital markets in 2012? 508 Surplus or deficit (-) 62 2012 Federal Finances Receipts $570 B $1,880 B Off Budget -$1,148 Off Budget +$62 Outlays $3,030 B = -$1,087 need to finance this deficit $508B On- and Off-Budget Surplus or Deficit/GDP 5.0% 0.0% 1900 -5.0% Off 1920 1940 1960 1980 On -10.0% -15.0% -20.0% -25.0% -30.0% -35.0% 2000 The surpluses while those boomers are working 2010 General government financial balances / GDP (%) 0.0 -5.0 -10.0 -15.0 -20.0 -25.0 -30.0 -35.0 How the US compared to the other OECD countries in 2010 as the financial crisis eased in the US and deepened in Europe What about that debt? Some important differences between our debt and that of the government The three most important differences between your finances and the finances of the federal government are: 1.The government has no life expectancy: A government has no life expectancy and thus may never need to settle its debts. 2.The government can print money: To pay its debts a country government can print money to pay its bills - at least as long as people accept the money. 3.The government owes much of the debt to itself: Some of you probably own US savings bonds, which means you own a small piece of the government's debt. Because of this the debt is decomposed into that owned domestic investors and that owned by foreigners. US Debt: Total and Public (Billion $s) 18,000 16,000 14,000 12,000 The difference is Big, so why is the distinction so important and which number is the most relevant number when we are interested in the “burden of the debt”? Total 10,000 8,000 6,000 4,000 Held by Public 2,000 - 1940 1950 1960 1970 1980 1990 2000 2010 Total and Public Held US Debt/GDP 140.0 What is the “story” about debt in the US since WW II? What do you think is behind the long decline after 1945, the rise beginning in 1980, the decline in the 1990s, and then the rise again? 120.0 100.0 80.0 Total 60.0 40.0 Public 20.0 0.0 1940 1950 1960 1970 1980 1990 2000 2010 US Debt Held by Public (not by Federal Reserve)/GDP 120.0 This is even closer to the debt held by the public. 100.0 80.0 60.0 40.0 20.0 0.0 1940 1950 1960 1970 1980 1990 2000 2010 Share of Public Debt not held by Federal Reserve 100% 95% What was the Treasury Accord of 1951 and how do you see it here? 90% 85% 80% 75% 70% What do you see here? 65% 60% 1940 1950 1960 1970 1980 1990 2000 2010 A longer view on the debt Who owns US debt? Who owns this share? Who owns US debt? 2010 General government gross financial liabilities/GDP (%) 200 198.4 180 Here are some numbers to give the US some perspective. 160 140 120 100 80 60 40 20 0 129.2 131.3 124.9 104.9 102.5 92.8 92.9 92.4 91.6 81.3 89.0 General government financial balances / GDP 4.0 2.0 0.0 1990 -2.0 1995 2000 2005 2010 -4.0 -6.0 -8.0 -10.0 -12.0 -14.0 -16.0 Here you can see the impact of the Great recession on the deficits of two countries. Why did Greece turn around so quickly? Greece US Clinton and the deficits History of deficit reduction efforts • • • • • • • • 1982 Tax Equity and Fiscal Responsibility Act 1983 The Social Security Amendments 1984 Deficit Reduction Act 1985 Balanced Budget and Emergency Deficit Control Act (G-R-H) 1986 Tax Reform Act (real estate) 1987 Balanced Budget and Emergency Deficit Control Reaffirmation Act 1990 The Omnibus Budget Reconciliation Act (Bush) 1993 Omnibus Budget Reconciliation Act (Clinton) Candidate Clinton’s proposal to deal with recession Problem: economic stagnation AS-AD Solution: traditional demand stimulus (tax & spending) Price Level Result: increase in AD increases GDP that will lower unemployment AS AD 0.0 0 National Output A problem with Clinton plan? "There was no magic to coordinating the economic efforts of a president and Congress with the Federal Reserve. But there was a crucial new reality. The short-term rates the Fed controlled were at about the right level. The critical interest rates were the long-term rates, the rates that mattered to businesses with large debts and to people paying mortgages. Lower long-term rates would leave businesses and people with more money to spend, causing the economy to grow. Perhaps no single overall event than a drop in longterm rates would do more to help the economy, businesses, and society as a whole. The long-term rates were also the most sensitive to the federal budget deficit. Credible evidence that the federal deficit was going to be controlled could cause long-term interest rates to drop." Greenspan’s View of the “Problem:” 3-Mo. Treasuries 10 Yr. Treasuries Gap (% Points) 1979-82 8.63 11.1 2.47 1973-75 4.99 7.61 2.62 1969-70 4.35 6.16 1.81 1959-60 2.38 3.88 1.5 Average post Recession 5.09 7.19 2.1 Greenspan saw this big gap as a sign of investor concern over US debt. Either US would not pay back or it would print money and raise inflation End of 1992 3.29 6.79 3.5 Another view of the Greenspan effect – a steeper yield curve How did the BIG US deficit show up in the interest rate equation according to Greenspan? In higher default or inflation risks rLT = rr + rd + ri Greenspan’s view of the “Problem:” Pt. 2 Need to lower interest rates to stimulate economy – BUT how low could they go Greenspan’s view of Candidate Clinton’s proposal Problem: economic stagnation AS-AD Solution: traditional demand stimulus (tax & spending) Raises interest rates and crowds out I (AD now) & (AS later because of less new capital (I)) Price Level Problem AS AD 0.0 0 National Output Result Greenspan’s alternative proposal (Clinton’s Plan) Problem: economic stagnation Process lowers interest rates and stock prices crowds in I & C AD now) & ( AS later because of more new capital (I)) Result AS Price Level Solution: non traditional demand stimulus ( tax & spending) AD AS-AD c AD 0.0 0 National Output