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