U.S. Fiscal Policy, 2010:

1. U.S. Fiscal Policy, 2010: Borrow Now, Pay Later

2. In the beginning…. • Remember your macroeconomics….. • Taxes • Spending • Interest rates • Saving • Investment • Exchange rates • Debt

3. Fiscal Policy • Government taxation and spending and the impacts of those activities on the overall economy and society • Governments manipulate tax policy and overall levels of spending to influence: • Aggregate demand and overall economic activity; • How various resources are allocated • How income is distributed • This is under the control of the President and Congress

4. Monetary Policy • The Federal Reserve and US Treasury • Influence the supply and availability of money, and its cost—the interest rate

5. The context..before the crash • Finance capitalism • Globalization of production and consumption; the global supply chain • Nation state still preeminent but under pressure • Global bond market and competition for FDI (foreign direct investment) limits state capacity to tax and spend • Economic growth drives economic and social model…. • …and creates additional tax revenues for redistribution

6. More recently…. • Federal budget surplus—strong growth and huge capital gains receipts (from the stock market boom); plus Clinton’s increase in taxes in 1993—now gone • Bush and Obama tax cuts • Historically low interest rates • Large current account deficit, funded by foreigners • Very low household savings…up during recession • “Bubble” in housing, stocks • Invisible recovery…high unemployment will continue

7. What has this left us with….? A much higher national debt http://www.treasurydirect.gov/NP/BPDLogin?application=np. The US Treasury’s “Debt to the Penny” web page.

8. How did we get here?

10. Act I: The Bush II Administration’s “Tax Plan For A Stronger America” • Economic Growth and Tax Relief Reconciliation Act of 2001(EGTRRA), June 2001, the largest tax cut in two decades. The multiyear cut reduced taxes by$1.35 trillion by 2010. • EGTRRA then “sunsets”on December 31, 2010, restoring the law to its pre-2001 status. • Substantial cuts in marginal income tax rates • Gradual reduction of the estate tax • Increase in the child tax credit; reduction in the “marriage penalty”; these provisions will cost $660 billion • The largest share of the tax cut goes to families with incomes over $200,000; this group receives 46 percent of the total income and estate tax cut by 2010.

11. Bush Cuts, Round II • Job Creation and Worker Assistance Act (JCWAA) of 2002 • Jobs and Growth Tax Relief Reconciliation Act of 2003 • Accelerated decreases in marginal tax rates • Reduce taxes on capital gains

12. Bush’s Kindest Cuts I

13. Bush’s Kindest Cuts II

14. The Big Picture of the Economy. Source: BEI.

15. http://economix.blogs.nytimes.com/2009/10/20/federal-revenues-at-lowest-share-of-gdp-since-1950/. From CBO data.

17. In 2000

21. 2003 data on national and household saving and current account balances. Source: http://www.angrybearblog.com/2005/06/international-saving-comparisons.html

23. Summary of  Collections Before Refunds by Type of Return, FY 2008. Source: IRS.

26. The Effects • Best estimate: the Bush cuts added $2.4 trillion to national debt (just as Medicare and Soc. Security needs grow with retiring boomers) • No fix for AMT (Alternative Minimum Tax) • Long term rise in the debt/GDP ratio • Higher interest rates • Lower national savings, and lower investments • Impact on growth rates contested

31. 2009 Stimulus Bill Tax Cuts • Making Work Pay Credit:Estimated cost: $116 billion. • One-time payments to those who don't work Estimated cost: $14.2 billion. • Break for higher income families: AMT one year fix. Estimated cost: $70 billion. • Temporary deduction for car buyers:  Estimated cost:$1.7 billion. • Temporary credit for home buyers:  Estimated cost: $6.6 billion. • New temporary college credit: Estimated cost: $13.9 billion. • Temporary expansion of child tax credit: . Estimated cost: $14.8 billion. • Temporary increase in earned income tax credit:  Estimated cost: $4.6 billion.

32. But wait, there’s more…… • Health Care Bill taxes: • Medicare payroll tax applied to investment income beginning in 2013. • 3.8 percent tax on interest, dividends, capital gains and other investment income for individuals making more than $200,000 a year and couples making more than $250,000. • Increase in the Medicare payroll tax by 0.9 percentage point to 2.35 percent on wages above $200,000 for individuals and $250,000 for married couples filing jointly.

33. ear 2010 income brackets and tax rates Current US marginal tax rates

34. Bush tax cuts expire at end of 2010. • Obama and Democrats would like to extend the tax cuts on those making less than $250,000. • But the third-top tax rate must be restructured since it affects earner making above and below $250,000. This means Democrats must introduce legislation that somehow splits this bracket so tax cuts for the middle-class are extended without affecting those earning more than $250,000.

35. Can we sustain current patterns of taxation and spending????

36. Source: Brookings Tax Policy Center. http://www.taxpolicycenter.org/taxtopics/budget/longterm.cfm

38. http://www.clevelandfed.org/research/trends/2009/0609/01intmar.cfmhttp://www.clevelandfed.org/research/trends/2009/0609/01intmar.cfm

39. Debt!

40. Entitlements “crisis”? • It’s not great…a crisis? Depends on your perspective • Social security and other entitlements due to rise by about 1 percent of GDP. • Real problem: financing health care, particularly Medicare • CBO projects health care spending rising from 16 percent of gross domestic product to 37 percent by 2050. • This could drive out all other federal spending

41. Source: BEA. http://www.bea.gov/newsreleases/international/transactions/2010/pdf/trans409.pdf

42. The danger…… • Asian countries stop buying $, government bonds to prop up their currencies • Continuing current account deficit • Dollar’s prospects uncertain • No fix for AMT • Increased savings limits consumption, growth, tax revenues • Social Security in deficit this year; permanent deficit by 2014 • Medicare revenues about equal to spending; soon in the red • 2009 federal deficit about $1.4 trillion; $1 t deficits projected for the next several years

43. Obama’s argument… • We can’t afford NOT to “invest” in health care, education, and climate change • Income tax increase difficult to avoid • Created panel to rethink entitlement programs: • Social Security/Medicare/Medicaid and set glide path for taxes and federal spending

44. Hmmmm….Is there a “hedonic treadmill”? • “…. the relationship between happiness and income is complicated, and after a point, tenuous. It is true that poor nations become happier as they become middle-class nations. But once the basic necessities have been achieved, future income is lightly connected to well-being. Growing countries are slightly less happy than countries with slower growth rates, according to Carol Graham of the Brookings Institution and Eduardo Lora. The United States is much richer than it was 50 years ago, but this has produced no measurable increase in overall happiness. On the other hand, it has become a much more unequal country, but this inequality doesn’t seem to have reduced national happiness.” • Source: David Brooks, NYT http://www.nytimes.com/2010/03/30/opinion/30brooks.html?src=me&ref=homepage

45. Possible Scenarios to 2020 • Do Nothing. Medicare, Social Security payouts exceed revenues. High federal deficits. Other federal spending slashed. Risk of dollar drop, recession. • “Fixes.” Small changes to Social Security and Medicare. Deficits reduced somewhat. Scattered fee increases • Raise income taxes on middle class and top earners. • Grand compromise. Some tax increases, reform to Social Security and Medicaid, reducing benefits and costs. Likely tied to tax reform, possibly a national consumption tax. • Ryan’s Roadmap. Slash health, Medicare and Social Security benefits, add private accounts. Limit federal spending to 19% GDP. Add consumption taxes.

46. What Should We Do????

47. Sources • IRS tax info: http://www.irs.gov/taxstats/indtaxstats/article/0,,id=129270,00.html • OECD data: • http://www.oecd.org/document/3/0,3343,en_2649_34573_2483901_1_1_1_1,00.html • Stimulus Bill details: http://money.cnn.com/2009/02/13/news/economy/stimulus_individuals/index.htm?postversion=2009021811