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Should the U.S. Government Balance Its Budget? - YouTube
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- You may have heard a politician say,
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"If the average American household
can balance their budget,
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then the federal government should too."
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- It seems like common
sense, but it's at the heart
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of one of the longest and
most contentious debates
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in economic policy.
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And with a new administration
coming into Washington
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in the middle of a
pandemic and a recession
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you're probably gonna
hear a lot more about it.
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- So, let's take a look at why America
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can't seem to balance its budget
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and why some people think we
shouldn't even bother trying.
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(soft music)
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- In the simplest of terms
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the government's budget
is like a household
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in that there is income on one side
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and expenses on the other.
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The government generates revenue
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through taxes and spends
that money on everything
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from the military to entitlement programs
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to science research.
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How a government taxes and
spends is known as fiscal policy.
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And it starts with the executive branch.
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The president works with
the treasury secretary
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and the office of management
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and budget to draft a budget request.
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The budget request is sent
to the house and the Senate
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who each draft their
own version of a budget.
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If they can hammer out a compromise
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the final budget is set
back to the White House
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for the president's signature.
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- When the government spends
more money than it takes in,
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we call that gap a deficit
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and it is unfortunately very common.
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In fact, it only about a
handful of the last 50 years
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has there been more revenue
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than expenses known as a surplus.
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Just as a household
might use a credit card
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to make ends meet, the
government fills that gap
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by borrowing the money, which
adds to the national debt.
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So, to reiterate the deficit
is the yearly budget shortfall.
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The debt is the total
that the government owes.
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- You might think the
government shouldn't be allowed
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to spend more money than it makes
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but that's easier said than done.
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For one thing, most of the budget
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isn't even up for debate.
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By law the government must honor
its entitlement obligations
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like social security and veterans benefits
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and pay off interest on its debt,
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which leaves less than half of the budget
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for discretionary spending.
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Raising taxes and
cutting existing programs
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are both fairly unpopular.
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And since the White House and Congress
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all have to face the wrath of the voters
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suddenly borrowing the money
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doesn't seem like such a bad idea.
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- But that still leaves the question,
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who are we borrowing all this money from?
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- While it's true that foreign investors
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own some U.S debt, much more of it
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is held by the American people
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in the form of treasury securities.
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Heck, we've got some ourselves
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in exchange for lending the government,
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some dough we're guaranteed
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to make some interest down the road.
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- And even though America's debt
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has been growing steadily for decades,
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confidence in these bonds, hasn't budged.
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They're still considered
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one of the safest
investments money can buy.
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- Sometimes however,
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the government needs to
borrow a lot of money fast.
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And that's where the fed comes in.
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- If the White House and Congress
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are in charge of fiscal policy
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the federal reserve is in
charge of monetary policy
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which essentially means
controlling the supply of currency.
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It does this by printing new money,
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taking money out of circulation
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and adjusting the interest rate.
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The government often borrows money
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from the fed through the central bank
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and if things are really dire
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the fed will make new money available
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by creating it essentially from thin air.
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- This is basically what
happened in March of 2020
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in response to the coronavirus pandemic.
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The fed printed a bunch of new money
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and loaned it to the government
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who then distributed it
to the American people
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through the Cares act in
the form of tax rebates,
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unemployment benefits, loan
forgiveness and other spending.
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- The Cares act is an example of stimulus.
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When the government combats a recession
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by injecting a lot of
money into the economy.
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The idea was first proposed
by the famous economist,
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John Maynard Keynes in the 1930s
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as a response to the great depression.
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He argued that government spending
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could kickstart an economy back to life,
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thanks to something called
the multiplier effect.
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If the government sends
you a check for $1,200
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which you use to say, fix your car
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and the mechanic uses
that to pay his staff
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who then use it to pay their rent,
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that $1,200 has already created $3,600
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of economic activity in theory.
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- Keynes ideas became widely
accepted across the globe
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for much of the 20th century,
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but then, in the seventies and eighties,
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a series of debt and inflation crises
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helped propel a new thinking
to the forefront, austerity.
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- Simply put austerity is a
focus on balancing the budget.
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Proponents of austerity argue that nations
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with a lot of debt can
scare away investors
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and lenders leading to
a decrease in production
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and increases in interest rates.
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They encourage governments
to minimize their deficits
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by raising taxes,
cutting spending or both.
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- The International Monetary Fund
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which offers emergency loans to countries
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and economic crises embraced
austerity, wholeheartedly
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struggling governments
that wanted their help
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had to agree to a package of measures
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that focused on generating tax revenue
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and slashing social spending.
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The results weren't so good.
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- That's because national
budgets don't work
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like household budgets.
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URI could close a gap
by raising our income
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or lowering our expenses
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but a government makes
its income from taxes
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which are directly proportional
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to the amount of economic activity.
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The more money people are making
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and the more they're spending,
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the more tax revenue
the government takes in.
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Tax hikes and spending
cuts tend to decrease
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overall economic activity
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which decreases the government's income.
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- This is more or less what happened
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to a lot of countries
that embraced austerity.
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The measures that were supposed
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to make them more solvent instead,
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further stifled economic activity,
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which increased unemployment
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and decreased much needed tax revenue
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not to mention made a lot of citizens
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Very, very unhappy.
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- Stimulus on the other hand
has seen quite a resurgence
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in the last couple of decades.
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The recovery act of
2008 is widely credited
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with helping reverse the great recession
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and the Cares act with preventing America
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from sliding into another depression.
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In fact, most criticism of these actions
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is that they may not have gone far enough.
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- And a lot of the austerity
proponents worst predictions
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simply haven't come true.
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Despite the fed creating
trillions of new dollars
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we haven't seen a meaningful
increase in inflation.
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Investors haven't lost confidence
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in treasury bonds or the American dollar
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and when economists recently predicted
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that U.S debt would surpass
GDP for the first time,
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nothing happened.
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Seems like investors and
lenders Care a lot more
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about the health of the economy
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than they do about how
much the government owes.
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- To be clear,
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no one is saying debt is a good thing
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as anyone who's ever had a mortgage
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or a student loan can tell you
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owning a lot of money is
downright nerve wracking.
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It would be lovely to run at
surpluses most of the time.
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And finally see that national debt lines
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start to go down for once.
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The question is not whether we should try
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to pay off our debts, but when?
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- As individuals,
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we instinctively tighten our purse strings
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when times are tough
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and let the wind flow
freely when times are good.
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But most economists think
at the national level,
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it should be just the opposite.
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We should use good times
to shore up our finances
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so we have extra fuel to feed the economy
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when it slows down.
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Unfortunately, our instincts
often get the better of us.
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In 2017,
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when the economy was
already going gangbusters
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we passed a massive tax
cut that added $2 trillion
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to the national debt.
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Now, in the middle of a
pandemic and a recession,
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Congress is fretting
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about the cost of
another stimulus package.
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- Money is the lifeblood of the economy
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and if it slows down or stops moving,
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the consequences can be disastrous.
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Businesses and families get damaged
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in ways that aren't easily undone.
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- Keynes famously said, "In
the long run, we're all dead."
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I think he was criticizing the idea
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that we should use warnings
about distant dangers
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as an excuse not to help
people who are suffering today.
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- Almost a 100 years later,
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the current Chair of the federal reserve
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Jerome Powell echoed his thinking.
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The risk of overdoing it
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is less than the risk of underdoing it.
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[Both] And that's our Two Cents.
[547]
- Hey guys, it's us again, Julia.
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Phillip, happy to be with you again
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addressing a few comments
from our last video,
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but, before we do that, celebration time.
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- What happened?
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- We hit 500,000 subscribers
since our last video was up
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so, that's just crazy.
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So thank you.
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- Thanks guys.
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- That's huge.
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All right, let's start with our first one.
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Ryan Martin says, "One question
I've always had with this
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is how does buying shares
in an ethical company
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actually support that company?
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The stock market is a secondhand market,
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so it's not like buying stocks
in an oil company is directly
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funding their operations, right?"
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That's a great question.
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- You really understand the basics of it
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that's right that when you buy or sell
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a share of a company stock,
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that's not more money they
have to use right then,
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but, a company with a
healthy stock share price
[609]
or share price that's going up,
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means a lot of good
opportunities in the future.
[614]
If they offer more shares down the road,
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have another public round of offerings,
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all kinds of kinds of good
things can happen down the road,
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if their share price is high,
[625]
they get more money from
future funding rounds
[628]
and if they offer some
sort of incentive plan
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to their employees to buy company stock
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or earn company stock as
part of their payment,
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they can attract really
great level talent too
[638]
if they've got really attractive stock
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versus not so attractive.
[642]
- Second comment from
the North Remembers says,
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"To be honest you look
like Ryan Gosling, really?"
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Thank you, I get that a lot.
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- That's was true.
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- And finally, from Colby Saporito,
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"Are their ESG target retirement funds."
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- So the shorter answer is
no, not that we're aware of.
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If you do some online searching
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you might find some target
date retirement funds
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that talk about ESG or mentioned
that there's an ESG aspect
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but they're not specifically
trying to improve ESG scores.
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They're just sort of using it
as a bit of a marketing ploy
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but the reality is they're just mentioning
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it has a ESG score.
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Right now 401ks are kind of the only place
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that there's not really any
options for real ESG funds
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and that's partly because
of kind of lobbying
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and laws around this, but that's changing
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and I don't think that's
gonna be true in 10 years.
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I think we'll see a lot more
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of these options in retirement accounts.
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- Hope so.
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- All right, thanks for joining us guys
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again if you have questions or comments
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on this week's episode,
let us know down below
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and we might answer
your question next time.
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- That's right bye.
[714]
- See you.
[715]
- Do you love to dance, us too.
[718]
But do you ever wonder
[719]
about the people behind the dance moves?
[721]
- We think you'll love
if cities could dance
[725]
a show about dance
communities across the U.S
[728]
now on VOICES PBSs new
hub for documentaries.
[732]
- Check it out and let them
know that Two Cents sent you.
[735]
Thanks to our patrons
[736]
for keeping Two Cents financially healthy.
[739]
Click the link in the description
[740]
to become a Two Cents patron.
[743]
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