Transcript Slide 1

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