PSC 101 Fiscal Policy

Summary

Fiscal policy in the United States revolves around the annual federal budget, which involves taxation and spending. The President proposes the budget, which Congress revises. Key revenue sources include taxes and tariffs, while critical spending areas cover defense, Social Security, and healthcare. The U.S. has faced a growing deficit, with the national debt reaching about $34 trillion. Ownership of this debt has shifted over the years, with foreign countries now holding less. Various financial instruments like treasury bills, notes, and bonds are used to manage debt obligations, with interest rates tied to market conditions. Increasing interest rates, driven by inflation, have impacted government spending, diverting funds from other essential programs.

Highlights

• The U.S. federal budget is a dynamic interplay between the President's proposals and Congress's priorities. 📑
• American government has not run a surplus since the late 1990s. 📉
• A significant drop in foreign-held U.S. debt has occurred over the last decade. 🌐
• Federal Reserve, banks, and intergovernmental holdings now constitute the major debt owners. 🏦
• U.S. treasury bills, notes, and bonds are key instruments for managing debt obligations. 💸

Key Takeaways

• Fiscal policy involves managing taxes and government spending. 💰
• The U.S. government operates on a fiscal year from October 1st to September 30th. 📅
• Budget surpluses and deficits shape the national debt narrative. 📈
• Public debt soared from $4 trillion in 1990 to $34 trillion by 2023. 😱
• A major shift in debt ownership shows declining foreign investment. 🌎

Overview

The federal budget is a crucial aspect of U.S. fiscal policy, with the President and Congress wrestling to balance their priorities. Each year is a tug of war, trying to allocate funds efficiently across numerous programs and agencies. While taxing and spending are fundamental pillars, the government's incapacity to pass the budget on time often leads to operational challenges. However, the larger picture reveals a long-standing struggle with deficits, contributing significantly to the mounting national debt.

The journey from a budget surplus in the late 1990s to a towering debt of $34 trillion illustrates a dramatic financial trajectory. Over the years, the nature of debt ownership has changed, with a noticeable decline in foreign stakeholders like China and Japan. This shift indicates a growing reliance on domestic institutions and requires strategic maneuvering to maintain balanced fiscal health. Whether for infrastructure, defense, or social programs, every spending category plays a pivotal role in driving the overall fiscal strategy.

Managing the debt involves adept utilization of financial instruments such as treasury bills, notes, and bonds. These tools help in stabilizing the fiscal environment amidst inflationary pressures that lead to fluctuating interest rates. Consequently, the cost of borrowing rises, impacting the availability of funds for beneficial programs such as education or research. Maintaining low yield rates and sustainable debt interest is fundamental to ensuring that future investments do not stall.

Chapters

• 00:00 - 00:30: Introduction to Fiscal Policy Fiscal policy refers to the government's approach to taxation and spending.
• 00:30 - 01:00: Budget Process and Fiscal Year The chapter discusses the budget process and fiscal year timing, noting that the fiscal year runs from October 1st to September 30th. It also highlights various budget components, including off-budget items such as Social Security trust funds and the Postal Service fund. It explores sources of federal revenue, primarily taxes, including income, payroll, and tariffs.
• 01:00 - 01:30: Surplus, Deficit, and National Debt This chapter discusses the concepts of surplus, deficit, and national debt within the context of the United States economy. A surplus occurs when the government's revenue exceeds its expenditures in a particular year. The last time the U.S. experienced a surplus was in the late 1990s. Conversely, a deficit happens when the government spends more than its revenue for the year.
• 01:30 - 03:00: Public Debt and Debt Ownership The United States government is currently deeply in debt, as indicated by the sum total of all annual surpluses and deficits since the beginning of the Republic. It is important to understand that 'debt' is a cumulative concept, while 'surplus' and 'deficit' refer to annual financial outcomes. The transcript highlights the notion of national debt as of its endpoint.
• 03:00 - 04:30: Government Spending in 2013 vs. 2023 The chapter examines the significant escalation in government spending and public debt over a decade, comparing figures from 2013 and 2023.
• 04:30 - 06:30: Government Securities: Bills, Notes, and Bonds In the chapter titled 'Government Securities: Bills, Notes, and Bonds,' the discussion revolves around the significant increase in U.S. government debt from 1990 to 2023. Over this period, the national debt surged by approximately $30 trillion, reaching nearly $34 trillion. This represents a considerable increase over 33 years. The chapter provides insights into the mechanisms of government securities and their role in managing the national budget and debt.
• 06:30 - 08:30: Interest Rates and Bond Yields In 1835, the United States was completely debt-free for the first and last time under President Andrew Jackson. The chapter delves into the changes in debt ownership over the past decade, with a focus on how significantly the ownership landscape has shifted.

PSC 101 Fiscal Policy Transcription

• 00:00 - 00:30 hi this is fiscal policy in the United States the basics fiscal policy is about taxing and spending every year Congress and President try to come up with a federal budget budget is law president proposes budget and Congress works on his proposal incorporating its own priorities and rejecting some of president's priorities sometimes the budget is not passed on time and the government operates based on continuing resolutions
• 00:30 - 01:00 that appropriate uh which appropriate money to various government programs and agencies the fiscal year begins in October 1st and ends September 30th some spending items are considered of budget for example Social Security trust funds and the Postal Service fund Surplus deficit and debt the federal government gets most of its revenues from taxes including income taxes payroll taxes and tariffs which is
• 01:00 - 01:30 taxes on Goods imported into the United States when the revenues the government takes in exceed the amount the government spends in a particular year the government is said to be running a surplus we haven't had a surplus in the United States since the late 1990s when the government spends more than it take than it takes in Revenue in a particular year the government government is said to be running a
• 01:30 - 02:00 deficit the sum total of all surpluses and deficits from the beginning of the Republic to the present shows the United States government is currently deeply in debt note that debt is the summative concept while Surplus and deficit are annual Concepts that is the sum of all annual surpluses and deficits thetion naal debt as of the end
• 02:00 - 02:30 of 2023 was approximately $34 trillion and that was approximately 125% of the country's GDP gross domestic product public debt of the United States from 1990 to 2022 has increased dramatically so in 1990 the debt was just about $4 trillion and by the end of
• 02:30 - 03:00 23 it went to almost $34 trillion so roughly $30 trillion were added to the budget from 1990 through 2023 so that's a that's a tremendous jump of 30 trillion in about 33 years the last time the United States was able to completely pay off of the
• 03:00 - 03:30 national death was 1835 so in 1835 the United States for the first and last time was Dead completely debt free this was under President Andrew Jackson so who owns the national debt I'm interested in showing you how debt ownership has changed so over the past decade the only significant change has been
• 03:30 - 04:00 a noticeable drop off in how much of the debt is held by foreign countries so in 2013 China held 8% of US national debt Japan 7% other foreign Nations 19% right so if you add Japan China and all other countries you get 34% so 34% %
• 04:00 - 04:30 was owned by foreign countries if you go to 2023 you will see that this percentage has declined right so now Japan 4.6% China 3.7% United Kingdom 2.2% all other countries 16.3% so there's a significant drop off in the percentage of
• 04:30 - 05:00 foreign ownership of the United States debt other major holders besides foreign countries the Federal Reserve System which uh owns almost 20% of the US debt US non-bank public sector which is 16.6% US commercial Banks 15.6% commercial banks are the banks that hold customer deposits like checking accounts savings accounts like
• 05:00 - 05:30 Wells Fargo Bank of America Chase and intergovernmental Holdings 21.7% so a huge chunk of debt is the debt that the United States government essentially owes to [Music] itself areas of spending if you look at spending including off budget spending on an annual basis they have increased sign significantly over the past decade
• 05:30 - 06:00 so in 2013 uh the total amount of money spent was 3.5 trillion on revenue of only 2.8 trillion so in that year the government ran a significant uh deficit of $642 billion the major categories of spending in that year were as follows defense and International assistance 19%
• 06:00 - 06:30 International Security assistance that is to say defense related assistance to foreign countries so our own defense and assistance for defense of other countries was 19% Social Security 24% Health spending on the large programs Medicare Medicaid and Chip 22% various safety net programs like food stamps Section 8 housing supplemental security income
• 06:30 - 07:00 12% and interest on the debt 6% other spending categories benefits for federal retirees and Veterans 8% Transportation infrastructure 3% education 1% science and medical research 2% non-security International this is just the eight that the United States gives away to foreign countries just 1% of the budget and everything
• 07:00 - 07:30 else 3% of the budget how did this change in 2023 we see that the major change really lies in this sheer amount of money spent it doesn't lie in the percentage of money spent on the categories on the various major categories there is some change in that regard but it's not uh it's not huge except maybe in case of Defense so total spending in fiscal year 2023
• 07:30 - 08:00 that's the year that ended uh in September of 2023 the total spent was $613 trillion that's for all items budget and off Budget on total revenue of 4.4 trillion this yielded the annual deficit of about 1.7 trillion major categories of spending defense 133% Social Security 20 21 health insurance which is Medicare
• 08:00 - 08:30 Medicaid and Chip 24% Economic Security Programs these are various assistance programs like uh Section 8 housing uh and uh food stamps that's 8% benefits for veterans and federal retirees 8 and interest on debt 10% so we see that uh there is a noticeable drop on uh defense spending and there is a noticeable increase on
• 08:30 - 09:00 the amount of money that goes to service the interest on the debt education has gone up from 1% to 4% transportation is at 2% and Science and medical research is 1% law enforcement 1% International Aid 1% everything else 4% so again the United States government is now spending a whole lot more money than it was spending only a decade ago
• 09:00 - 09:30 and deficits have become significantly larger so the deficit in 2023 fiscal year was over a trillion dollars larger than it was in 2013 truly a disturbing Trend what's the difference between bills notes and bonds so when the United States government borrows money it issues Securities so people and institutional investors buy these
• 09:30 - 10:00 Securities uh in exchange for interest rate and promise to repay so this is how the United States borrows money and there are three principal instruments bills notes and bonds treasury bills or t bills um they're like marketable Securities T bills are shortterm obligations issued with a term of um one year or less and because they're sold at a discount from
• 10:00 - 10:30 Face Value they do not pay interest before maturity the interest is the difference between the purchase price and the price paid either at maturity or the price of the bill uh if sold prior to maturity so the incentive or the financial interest of the purchaser of a t bill is to sell it later at a higher price but there's no interest rate that such an investor gets again because this
• 10:30 - 11:00 is a very shortterm uh security then we've got treasury notes and treasury bonds treasury notes and bonds are securities that have a stated interest rate that is paid semiannually until maturity what makes notes and bonds different are the terms of maturity notes are issued in 2 3 5 and 10 year terms Bonds on the other hand are very long-term Investments with
• 11:00 - 11:30 terms of more than 10 years so 20 years and 30 years would be called a bond rather than a note so you can buy uh these Securities T bills T notes and T bonds if you have a self-directed investment account or if uh you have a 401k uh plan where which you can direct to invest hold or partially in U United
• 11:30 - 12:00 States debt so when the debt instrument has matured the treasury can either pay cash old uh including interest or issue new Securities debt instruments issued by the US government are considered to be the safest investment in the world or at least they used to be until recently in fact the money the treasury uses to pay the interest is automatically made available by law so technically the US government is not supposed to default on
• 12:00 - 12:30 its obligations so this is why people continue to invest in uh US debt because they believe the system but the political system is stable and this stability will guarantee that the United States government will not default on its obligations so even though even though the interest rate or yield is low what you have for your investment is a place to park your money until such time where you can take it
• 12:30 - 13:00 out where you can sell the bonds and invest them in uh perhaps more risky but more lucrative prospects how have the yields or interest rates paid on ndes and bonds have changed well in recent years they have obviously increased because the US government is spending a lot more money there are inflationary pressures and these significant inflationary pressures forced the US government to increase uh
• 13:00 - 13:30 interest rates basically the bonds um which are traded as I said on the market on the marketplace uh naturally are forced into higher interest rates so if you take as an example in 2016 on a random date January 14th 5-year note was 1.5% 10e note 2.1% 30-year note
• 13:30 - 14:00 2.85% and these are of course traded in real time so you can actually go to many websites that show realtime uh bond yields and uh look what those bond yields are now of course on a daily basis you're not likely to see much variation right unless there is some really really serious economic news but you won't see too much of a variation and significant variation can only be seen over a long period of time
• 14:00 - 14:30 when it comes to us bonds because uh the economy and the political system are so stable bond yields are going to be relatively stable but if you uh go to the end of 20123 you will see that the bond yields are much higher 5-year note is now 4.55% 10 year 4.5% 30y year 4.66% so clearly the difference between
• 14:30 - 15:00 2016 and 2023 is high inflationary pressures have pushed the bond yields higher it's more expensive to borrow and if it's more expensive to borrow more money goes to pay for interest and if more money goes to pay for interest on the debt that money doesn't go somewhere else and if it doesn't go somewhere else we miss out we miss out on research on education and on another things that we could have had
• 15:00 - 15:30 but we don't have because the government instead has to pay more money in interest