Budget and Economy

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    • 00:00

      [MUSIC PLAYING]

    • 00:10

      DON KETTL: Hi, I'm Don Kettl.I'm Professor of Public Policy at the University of Maryland.And we want to talk today about the relationshipbetween budgeting and the economy,and to understand how they interrelate,and understand why it is that they matterso much in our daily lives.Underlying all this are a couple big problemsas we start to look at this.And on the one hand, this representssome of the nastiest kinds of politics that we see anywhere.

    • 00:32

      DON KETTL [continued]: On the other hand, so often they couldseem like absolutely mind numbingdetails that make it hard to grasp it in any kind of way.So what I want to try to do is explore those connectionsand to try to understand why it is that they matter not onlyin terms of the theory of public policyand the operations of public administration,but why it matters for all of us as citizens on top of that,too.

    • 00:53

      DON KETTL [continued]: And to do that I want to really get at some basic questions.Because budgeting, more than anything else,gets to the question of first, what should government do?Secondly, who should decide these questions?Third, how should we decide because wehave an ongoing debate between making these decisionsmatters of politics and power, but on the other hand,

    • 01:14

      DON KETTL [continued]: look at issues of rationality and analysis.And then finally, look at questions about whyit is that these things matter.To put this in context I want to go back to 1940 wherea political scientist name V. O. Key asked to what he said,was the big question about budgeting.And his big question was, on what basisshall it be decided to allocate X dollars to activity A instead

    • 01:38

      DON KETTL [continued]: of Activity B. And everything about budgetingreally hinges on that question.How should we take the amount of money that we have availableand decide whether we want to spend it on A versus B.Should we do it on the basis of politics or the basisof analysis?And what kind of difference does that make?And that's the issue that we want to look at.Looking at the relationship between budget

    • 01:58

      DON KETTL [continued]: and the economy is the first point.Secondly, the politics a budgetary decisions.Third, how all this is affected by the riseof uncontrollable spending in the budgetand particular of entitlements.And then fourth, to ask a kind of blunt question,are we all doomed because it seems so hard, especiallyat the federal level, to be able to make a budget

    • 02:18

      DON KETTL [continued]: and execute it?So we want look at those four questionsfirst, with a question of budget and the economy.Now at the federal level, in particular, wetend to use the budget not only to make basic policy decisions,but also to steer the economy.

    • 02:38

      DON KETTL [continued]: We have the budget, which has an impact on the economy,but at the same time, we also have the economy's effecton the budget.Because in good times, when the economy's growing,revenues go up and expenditures sometimesgo down because there are fewer people in needon which the government needs to spend its money.And so, we have times that makes the budget situation happier

    • 02:59

      DON KETTL [continued]: when, in fact, the economy's better.But when the economy dips, this happened for exampleback in 2008 and 2009, the budget problems can get worse.There's less money to spend.But the demands, on the other hand, grow.And so we end up with fundamental questions about howto try to balance those things.Now look first, at the question of the budget's impact

    • 03:20

      DON KETTL [continued]: on the economy.Since the 1930s there's been a real focus on the ideathat the use of government spendingcan and therefore should be used to pump upthe economy in times of need.During the 1930s the Roosevelt administration, for example,decided that with the economy in a bad shape and so many peopleunemployed, with unemployment on the verge of almost a third

    • 03:43

      DON KETTL [continued]: of all American workers, that the federal government couldspend money to try to pump up the economy,put people back to work.And so that the budget could be usedas an instrument of economic policy.Same thing happen after 2009 when President Obamacame in and decided he wanted to use the stimulusprogram of nearly a trillion dollars

    • 04:04

      DON KETTL [continued]: to try to pump up the economy there,an effort to try to put people back to work.Now the underlying strategy here of the relationshipbetween government and the economy is fairly simple.In theory, at least.The idea is to run a deficit whenthe economy is in trouble to try to stimulate the economyand to grow it.And when the economy is growing, to run a surplus

    • 04:24

      DON KETTL [continued]: to try to soak extra money out of the economy to prevent itfrom becoming overheated.Now the problem, if we think about this for a second,is that there is a fundamental mismatch.It's a whole lot easier to make the case for,let's spend more money, than to try to take money out.And so there's a political mismatchthat makes it hard to try to followthese strategies in practice.Especially because as we can see here on the slide,

    • 04:47

      DON KETTL [continued]: we have problems that have tended overtimeto create federal deficits that are badand make it hard for us ever to escape.Since 1965 we've been in deficit almost constantly.We've had times when we've spent more money than we've taken in,with the exception of the late 1990s.During one happy time when, believe it or not,

    • 05:10

      DON KETTL [continued]: the Republicans in the Congress and the Democrats,as well as President Clinton, decidedthat they could reach policies that, in fact, raisedthe amount of revenues, cut the amount of spending,and put the economy into balance.The problem is that it didn't last very long.And in the 1990s, late, the consensus begin to dissolve,

    • 05:33

      DON KETTL [continued]: gridlock began to grow.We had major problems in the late 2000swith the economic collapse that led to a huge increasein the federal deficit.And that has led to problems that we'vestruggle to escape from sense.Now before going further, just a quick point of definition.We talk about the Deficit all the time.And what the Deficit is, simply is the differencebetween the amount of money that we

    • 05:53

      DON KETTL [continued]: take in on revenues and the amount of moneythat we spend on expenditures.And whenever it is that we spend more money than we take in,that's a deficit.And what's happened is that we've consistentlybeen spending more money than we receiveand that, over time, has led to the Deficit.A quick other definitional point, the National Debt.And the National Debt is simply the accumulation

    • 06:13

      DON KETTL [continued]: of all these deficits over time.The easiest way to pay off the National Debtis simply to run surpluses.And over time that would happen if we could run surpluses,which we don't.Because we'd love to run deficits because welove to spend money.So that gets to the first questionabout the relationship between the deficit, and the economy,

    • 06:34

      DON KETTL [continued]: and the budget.That gets down to the second questionabout who decides how these decisions get made.And like all important pieces of politics, and policy,and lawmaking that has to do with a balancebetween the executive and the legislature.

    • 06:56

      DON KETTL [continued]: Before 1920 the budget was largelythe accumulation of individual decisionsthat were made without real focus on what the whole thingought to add up to.But in the 1920s there was a major reformthrough the Budget and Accounting Act of 1921 thatwas part of the rise of executive power,the rise of the modern presidency,in which the president for the first time

    • 07:17

      DON KETTL [continued]: submitted an annual budget to try to add togetherall the requests of the agencies weremaking so that the budget the president proposedwas a product of some careful central thinking.Then it goes to Congress.And Congress has found itself nowin the business of trying to decide individually, and oftenin a very fragmented fashion, howthat money ought to be spent.

    • 07:38

      DON KETTL [continued]: That, especially in recent years,has not been a pretty case at all.And we've seen ongoing debates about whether or notCongress ought to shut down the governmentby refusing to fund the activitiesthat the government does.No appropriations, no money.No money, nonessential activitiesin federal government have to shut down.Nonessential activities are shut down,nobody gets to go to the national parks.

    • 07:59

      DON KETTL [continued]: Nobody could apply for a passport.And the problems tend to accumulate on top of that.The problem is that Congress over timehas not been able to get its work done on time.The budget resolution that Congress is required to passhas been passed just once from 2009 to 2015,and the overall appropriations bills

    • 08:20

      DON KETTL [continued]: that are responsible for funding agency activitieshave not been passed on time since 1996.Congress just has not been good about meeting the deadlinesthat are required by law.Well, one question is, does this really matter?And the answer in some ways is, well, yes.In part because it makes it very hard for agencies

    • 08:42

      DON KETTL [continued]: to figure out how much money they have available to spend.If they don't know what Congress is going to doand when Congress is going to do that,it makes it very hard for the people whomanage government agencies to know how much money isgoing to be available.It makes it hard for them to engagein planning beyond the current yearto determine how to allocate resources.It makes it really hard for both the President and the Congress

    • 09:05

      DON KETTL [continued]: to build trust with citizens because there'sa constant sense of a gang that can't shoot straight.If they can't get the budget done on time,how could they possibly get anything else done?And that's undermined citizen trust in governmentalong the way, as well.But on top of that, it provides an upper handto somebody who operates inside the processand knows how to work the individual details to beable to make that work.

    • 09:26

      DON KETTL [continued]: It's important, even when we debatethe shutdown of government and whyCongress can't get its act down on time, to understandthat it is fundamentally a question of the balanceof powers between the President and the ExecutiveBranch on the one side, and the Legislaturein the Congress on the other.About over priorities, and politics,and who gets to call the shots.

    • 09:47

      DON KETTL [continued]: And especially when the presidencyis in the hands of one party and the Congressin the hands of the other, it's irresistible to makethese procedures the core of the basic political battlesthat they're fighting over.So let me go onto the third pointnow, the rise of uncontrollables.

    • 10:09

      DON KETTL [continued]: We talk about the budget as if these annual budget decisions,in fact, were the key decisions thatshaped the way in which all of the thingsthat the federal government does actually works,but it turns out that's not true.Because we're having more and more fighting and allthe battles over political grid lockover less and less of the budget,and that's because more and more of the budget

    • 10:31

      DON KETTL [continued]: is on automatic pilot.What are called Entitlement Programs.That is about some money that arespent based on provisions that are placed in law wherethe money flows automatically to recipients, like the SocialSecurity Program based on formulasand the amount of years of people workedand the salaries that they earned.As well as interest on the debt, whichwe have to pay to make good on the money that we borrowed.

    • 10:55

      DON KETTL [continued]: The entitlements include programslike Social Security, Medicare, whichis the program that pays for medical services for peoplewho he is a 65.Medicaid, which provides medical services and long termcare for people who are poor.The earned income tax credit, whichprovides tax rebates for people at the lower end of the tax

    • 11:16

      DON KETTL [continued]: spectrum.Food stamps, as well as retirement programsfor people who work for the federal governmentand who are members of the military.And all those programs, in fact, constitute entitlementsthat the federal government is required to spendand which don't require annual action by Congressor the President because the spending continuesautomatically.And if we look at this slide in particular,

    • 11:37

      DON KETTL [continued]: we can see what impact it's had on the wayin which the federal government spends its money.What's happened from 1965 to 2015, over that period,is that the balance between discretionary spendingand the mandatory entitlement spending has flipped itself.Discretionary spending accounted for about 2/3

    • 11:57

      DON KETTL [continued]: of all spending back in the mid 1960s and mandatory spendingwas about one third.Now it's the reverse.Mandatory spending accounts for 2/3of all federal spending and discretionary spendingis just a third.And of that discretionary spending a lot of itreally isn't all that discretionarybecause a lot of it has to do with payingthe salaries of people who work for the military

    • 12:19

      DON KETTL [continued]: to keep our troops in the field.It has to do with paying the salaries of peoplewho run Department of Veterans Affairs hospitals, thatpay to provide the care for our veterans and other programsthat are very, very hard to cut back.So it turns out that less, and less, and less of the budgetis subject to real decisions that anybody could really make.

    • 12:39

      DON KETTL [continued]: And remember the other point that I mentionedwas interest on the debt, and during the 1980sthrough about 2000 interest on the debt explodedas a share of the economy.And it's been brought back under control now to a level morelike what it was in the 1960s, but the problemis that the interest on the debt continuesto be a huge part of what we spend,

    • 13:01

      DON KETTL [continued]: and that we have to pay for because if we don't Thenno one is going to lend us money any longer.So the combination of these two items amountto something in the order of 70% of all federal spending, whichmeans that, plus the fact that the rest of itdoesn't have very much maneuvering roomat all, that the battles over less and less of the money

    • 13:23

      DON KETTL [continued]: that Congress actually can really control.Where does the federal budget go?Let's look at on the slide some of the details.And pension programs account for about a quarter.Health care a little bit more than a quarter.Defense spending is about 17%.Interest on the debt is about 11%.And put all this together, it turns out

    • 13:44

      DON KETTL [continued]: that there is very, very, very little leftthat's not accounted for by these big chunks.One more way of making the same basic point, wheremore and more the political fight is focus on lessand less about the budget.And that also means that in this basic decisionabout how much of the budget should wespend to try to stimulate the economy, with so much

    • 14:05

      DON KETTL [continued]: of the budget on automatic pilot,it means that our decisions about beingable to use the budget to steer the economyare getting harder and harder to try to deal with.This gets us to our last question.Does this mean that we're all doomed?We've heard stories about we're not

    • 14:25

      DON KETTL [continued]: going to be able to make payments for social security,the program's going to go bankrupt,that the national dept's going to crowd everything else out.Is this an apocalyptic vision for America's future?And what I want to suggest is that the situation in many waysis serious, but certainly not fatal.On this slide you can see what's happened to the national debtas a percentage of the total amount of the economy,

    • 14:47

      DON KETTL [continued]: and hear the story is one of increasing problems, whereback in 1970 the national debt accounted for about a quarterof the entire amount of the economic activityin the country and now it's almost 3/4.And so it's increased dramaticallyas a share of the economy.

    • 15:07

      DON KETTL [continued]: And what we also see from this chartis it doesn't show any signs of coming down.The national debt is a large and growing pieceof what it is that we generate in the economy,and therefore something we need to pay careful attention to.The problems are solvable.We could grow the economy more.That's going to be hard, though, to be able to manage if we wantto try to grow our way out.

    • 15:28

      DON KETTL [continued]: We clearly have to find ways of beingcareful about the money we spend,but it's hard to cut back on that spendingsince so much of it's on automatic pilot.Or we may need to have a frank conversation with ourselvesabout how much we tax ourselves and howwe try to make sure that we raise the money that'sgoing to be required to be able to pay the cost of the programsthat we, in fact, have come to get used to.

    • 15:56

      DON KETTL [continued]: So what kind of conclusions do we have from all this?A couple of things in particular.One is that if the budget process lookslike it's full of conflict, it's not surprising.Because the questions are central to the roleof government in society and the stakesare so high for everybody because what government doesand what it spends affects everybody.

    • 16:16

      DON KETTL [continued]: The stakes are even higher in many waysbecause more and more of the budget is on automatic pilotand so there's less and less of a budgetover which these decisions can have any real influence.We're looking at rising costs for entitlement programsin particular, which at the federal levelare a larger and larger part of whatit is that in fact, the federal government is spending moneyon.We have this specter of the rising national debt, which

    • 16:38

      DON KETTL [continued]: we will surely have to address.And the understanding ultimately about how all this affectsour economy, our budget, the way we govern ourselves,the way we think about ourselves,and the way in which the budgetary and economicand budget and economic process overall really affectsthe country as a whole.That is why it is that while it seemslike an ugly, nasty, dirty process, it is so important.

    • 17:01

      DON KETTL [continued]: And while it may seem mind numbing,it is something we need to pay careful attentionto because it's hard to imagine anythingmore important than that.[MUSIC PLAYING]

Budget and Economy

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Abstract

Professor Don Kettl explains the relationship between the national budget and the economy. Budgets are decisions about how to spend money, but national spending is mostly automatic pilot spending, which leaves little room to make adjustments. Kettl discusses the issues the U.S. faces and possible solutions to the national debt.

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Budget and Economy

Professor Don Kettl explains the relationship between the national budget and the economy. Budgets are decisions about how to spend money, but national spending is mostly automatic pilot spending, which leaves little room to make adjustments. Kettl discusses the issues the U.S. faces and possible solutions to the national debt.

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