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Budget Wars! (Part 2)

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David Smailes

on 19 September 2018

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Transcript of Budget Wars! (Part 2)

Budget Wars!
David Stockman
Three elements to President Reagan's agenda:
economic stimulus through a tax cut
cutting spending
increased military spending
Arthur Laffer
A stronger economy would generate more economic growth, which would lead to more tax money coming into government to offset costs
This shift toward encouraging business growth was termed "supply-side" economics - it was based on a belief that the business community would gain faith in the future of the economy and continue to grow
Reagan campaigned that large savings could be had through the management of "waste, fraud and mismanagement," but Stockman made it clear cutting taxes and increasing military spending could result in large deficits without deep cuts in other spending
Stockman faced initial resistance from members of Reagan's cabinet, but more important from members of Congress, when it came to budget cuts
It was the administration's ability to persuade members of Congress, particularly wavering Democrats, that led to early victories on the first round of budget cutting
"None of us really understands what's going on with all these numbers.

You've got so many different budgets out and so many different baselines and such complexity now in the interactive parts of the budget between policy action and the economic environment and all the internal mysteries of the budget, and there are a lot of them.

People are getting from A to B and it's not clear how they are getting there."
Stockman's problem wasn't political victories - it was the response in the business community.

Looking more at the long-term, the business community saw deficits in the future.
* The "magic asterisk" becomes part of the planning - cuts that will occur in the future to help prevent future deficits
What Stockman knew was the hard choices were yet to be made to avert deficits: cut defense, Social Security, Medicare, and/or every social program (and even then the latter might not be enough).
All this leads Stockman to "leave the church" of supply-side theory - to move towards limiting the tax cuts to make up for lost revenue and reduce the deficit
Stockman saw victory in the final budget cutting/tax cuts, but it was a limited one, which he knew hadn't come close to achieving its goals - instead, greater deficits loomed
Fritz Hollings Phil Gramm Warren Rudman
Gramm-Rudman-Hollings (most often Gramm-Rudman) required a specific set of deficit reductions by law

If Congress failed to meet those targets, "sequestration" would kick in and across-the-board spending cuts would take place
The hope was that the threat itself would be enough to encourage deficit reduction - that no one would want to go through sequestration
By 1990 this was replaced by a "paygo" system - budget increases or tax cuts would only be allowed if one could show how they would be paid for.

It lasted until 2002 - throughout the Clinton years
Stockman found resistance from members who would find cuts falling on their districts and states
After the 1984 election, Congress
acts on deficit reduction
At first Gramm-Rudman seemed to work - President Reagan agreed to a series of tax increases to reduce the deficit and bring the budget closer to balance
The economy began to rally, and with economic growth came the confidence of the George H.W. Bush campaign that "staying the course" would mean continued growth and an even greater balance.
But Bush's promise was premised on the idea that the economy would continue to grow - it didn't.

The country faced an economic downturn which forced Bush to consider drastic ways to address the growing deficit
Gramm-Rudman left Bush with little choice but to agree to raise taxes in 1990,
Clinton came into office with the promise to promote job training, health care reform and balancing the budget

Like Reagan, he found the first two priorities in conflict with the third
"What are we,
Clinton addressed the deficit problem in a way he thought would gain bipartisan support: a package that cut spending and raised taxes in roughly equal amounts.

The package would cut the deficit by about $500 billion over five years

But instead of being bipartisan, the package was attacked by both parties:

Republicans objected to any tax increases
Democrats opposed the deep cuts Clinton was proposing

And both hated specific elements of the package (like the BTU tax)
Clinton managed to get the law passed, but only by one vote in the House and by VPOTUS Gore breaking a tie in the Senate
What was a slow climb out of the deficit was quickened by the Republicans winning control over the House in 1994 and the "Gingrich revolution"
We'll be discussing the politics of the 1995 shutdown later, but the thing to note now is that the turning point toward a budget surplus came as the result of that dispute
As "Ten Trillion and Counting" explained, the Bush years were characterized by increasingly deep deficits, driven largely by a tax cut, the nation's response to 9/11 and the expansion of Medicare.
The late Bush and early Obama administrations' deficit was largely driven by the government's effort to bail out investment banks that had failed, creating a cascading economic collapse that threatened an even deeper depression
But it was the economic crisis of 2008/09 that added to both the Bush and Obama deficits
The result was the passage of Recovery Act of February 2009, which pumped $787 billion into the economy through spending and tax breaks.

The Troubled Asset Relief Program (signed by President Bush in October 2008) devoted about $700 billion to stabilizing the banking/investment industry

And the Recovery Act (signed by President Obama in February 2009) pumped around another $800 billion into the economy through spending and tax breaks you saw described in "Ten Trillion and Counting."

Adding pressure to the Obama deficit was the decision to pursue health care reform - the cost of supporting the program ($630 billion over ten years) early on was large by any measure, but clearly a key toward changing the deficit future.
The concern over the national debt is one of fiscal stability - how long will other countries and private parties continue to fund the debt by buying Treasury securities and bonds?
Full transcript