Embed Size (px)
Citation preview
What’s So Super About the Supercommittee
Farm Policy Study Group
December 13, 2011
Jerry LynchProfessor of Economics
Krannert School of ManagementPurdue University
Supercommittee Failure
“Despite our inability to bridge the committee’s significant differences, we end the process united in our belief that the nation’s fiscal crisis must be addressed and thatwe cannot leave it for the next generation to solve.” Rep. Jeb Hensarling (R-Tex)
“We remain hopeful that Congress can build on this committee’s work and find a way to tackle this issue in a way that works for the American people and our economy.”Sen. Patty Murray (D-Wash).
“Unfortunately for your political careers, there was nothing “super” about that feckless collection of politicians.”Joe Scarborough
“You may just be the only 12 people that are hopeful about congress – especially thepart about congress working for the American people.”Anonymous blogger
What Brought on the Supercommittee
This summer the United States bumped against its Debt CeilingFirst established in 1917 at $11.5 BillionDebt Ceiling has been raised 74 times since March 1962Was at $14.294 Trillion when raised last summerOnly the US and Denmark have a Debt CeilingThere is no Deficit Ceiling
The Government DebtDowngrade
On August 5, 2011 S&P downgraded US Debt from its list of risk free borrowers.
Does this mean if you own a US government bond theymay not pay you back?Or, will the real value of future payment fall
“The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenge,”
How Did We Get Here
If Government spending is greater than tax revenue then there is a deficit
Either – Increase Tax Revenue orDecrease Government Spending
Why the rise in government spending?Why the decrease in tax revenue?
Where Will We Borrow It
-
Fed Deficit for 2011 will be over 10%Domestically
Depends on People Increasing Saving Abroad
Foreigners have to be willing to hold dollar denominated assets
Print More Money Fed buys T-bills and Bonds
Old Wine in a New Bottle
-- When the Fed Buys US GovernmentDebt they Increase the Rate of Growth of the Money Supply-- We Expect That to Push Interest RatesLower – focusing on Long Term--This is what as known as Quantitative Easing – second phase so QE2
Interest/Tax Revenue
Year
Interest/Tax Revenue
What Does the Future Hold?-If interest rates return to historical levelsand the DEBT/GDP ratio keeps growing-Prospect for Tax Increases-Impact on Growth (Reinhart & Rogoff)-Fed has reduced it’s projected growthfor GDP 2012
January 2011 – 3.5%-4.2%April 2011 -- 3.1%-3.3%
June 2011 -- 2.7%-2.9%
-Be more concerned about the Long Run
