Wednesday, November 21, 2012

Recommended for your Classroom Discussion of the Fiscal Cliff: Lee Arnold’s New Video on the Debt and Deficit

This new video from Lee Arnold is a great tool to spark a classroom discussion on the budget negotiations underway as the United States approaches the “fiscal cliff.” It uses great animated graphics and a polished voice-over to lay out the way that the CBO baseline revenue projections would interact with scheduled changes in spending to determine the future course of the debt and deficit.

Many students will be surprised to find that the CBO baseline projections produce future budget surpluses that would bring the debt down to nothing over time. Economists familiar with the CBO methodology will understand how this happens. The projections are based on the assumptions that all laws on the book as of late 2012 will come into force without further changes.

Of course, the whole debate over the fiscal cliff centers on what changes are likely to be made or not to be made—will scheduled across-the-board defense and nondefense spending cuts be allowed to happen? Will all of the Bush tax cuts, along with more recent temporary payroll tax cuts, expire on schedule? Will Congress again enact legislation limiting the impact of the alternative minimum tax? Will scheduled cuts in Medicare reimbursements come into force, or will Congress again pass “doc fix” legislation postponing them? You will have to watch your favorite news site for daily updates on the outcome of negotiations to learn the answers to these questions. Although the video can’t give the answers, it does provide the framework you need to see the impacts of these and other possible changes to current legislation.

Another strong point of the video is the way it brings out the importance of Medicare spending for the future budget. Arnold shows that without fundamental changes to the health care system, Medicare will account for a greater and greater share of the federal spending over time. By comparison, the social security system is much more under control.

There are a few things I would spin differently or emphasize differently than Arnold does. For one thing, I would explain a little more carefully just what items are included in and excluded from the CBO baseline projection, and compare it with alternative fiscal scenarios that produce more pessimistic fiscal projections. Tax reform is another topic that I would have liked to see discussed in more detail. The emphasis in this video is on projections of total revenue, not on changes that could, or should be made to broaden the tax base and modify marginal tax rates to make the system more efficient. Maybe that will be the topic of another video. There are 50 videos in all on Arnold'’s site, both micro and macro, and he seems to be adding new ones all the time.

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