“The deficit is the annual amount the federal government borrows. It’s not the debt. That’s the total amount that’s been borrowed. The deficit is the annual amount. And the federal government has been borrowing over a trillion dollars a year to meet its spending. That is to say that they’ve had to borrow over a trillion dollars a year because revenues were falling short by that amount to meet what the federal government wants to spend.

Now with the improving economy, what we are seeing is that tax revenues have taken a big jump. Federal spending certainly is still going up and going up at a much slower pace. And so the expectation is that we’re now seeing those deficit projections cut from about a trillion dollars a year to about a little more than half of that, about $600 billion a year.

Now it still means the federal government is borrowing, but as a percent of the economy, they’re borrowing much less. At the peak of the recession, the federal government borrowed the equivalent of eight percent of gross domestic product, eight percent of all income generated in the economy. And now it’s going to be down to about four percent. So, it’s been cut in half.

And interestingly, some economists — and it depends on your perspective — some economists are worried about this. They’re saying, ‘hey the federal government is actually pulling back too fast.  We need this sort of deficit spending to stimulate things.’

I would think they’re in a minority, but there is still that viewpoint. So we are in a better situation regarding the deficit. We’re certainly not in a situation where the federal government is not borrowing. Many think that this may be the precursor maybe to a budget deal, which would solidify in some sense the improvements that we’ve seen in the deficit.”

“Well, the pivot would be to move from their policies that are focused on stimulating the economy to policies that would be more concerned with keeping inflation low. And right now, and really for the last five years, the Federal Reserve has been very, very aggressive at trying to stimulate the economy.  They’ve done that two ways.

They’ve kept interest rates very low. Short rates are close to zero percent. And they, quite frankly, have been creating a lot of money, increasing the credit supply, trying to get more credit into the economy.

Now everyone knows — every economist knows, and I think an average person if they thought about it would know — that this can’t go on forever. For one reason, there is a concern that inflation would eventually kick up either in terms of the prices for things that you and I buy or in terms of asset values.

So at some point, the Fed is going to have to turn away, with the economic recovery now into its fourth year — with many economists thinking that we’re at least growing and there’s no sign, imminent signs, of a new recession. And in fact, some economists think that growth may accelerate. There is an expectation that at some point, we will see this change in the Fed. That’s why every time Chairman Bernanke makes a presentation before Congress or the public all of his words are parsed to see if there are some indications, some inkling, that the Fed is getting ready to change policy. If they do — if and when they do — that will affect everyone. People will see it in interest rates. People will see it in terms of the availability of credit.”

“Of course, what people worry about is the housing boom that we had from 1997 to 2006, which made a lot of money for a lot of homeowners. But on the other hand, they lost a lot of it when we had the housing crash.

So people are worried about the boom turning into a bust. But I don’t think we’re in that territory right now. Now, we are seeing housing prices go up fairly significantly – seven, maybe in some markets, 10 or more percent on an annualized basis.

But you have to remember this is from a very low base. The average house lost a third of its value from 2006 to 2011. But also we’re not seeing big gains in supply right now. Obviously during the housing bust, we didn’t have a lot of building going on, and we lost a lot of builders. We lost a lot of construction workers, and we’ve not gotten those folks back. So right now, we’re sort of in the sweet spot, if you will, for prices.

We have people getting back in the market to buy, and we don’t have a lot of additional supply. Now, that supply will come back. We will start to see more building. We will start to see more houses on the market for sale. And I think eventually what we’re going to end up with is housing prices going up at the traditional three to four percent a year.”

“It’s GDP, gross domestic product. We’ve talked about this many times on our program. This is the broadest measure of the economy. Think of it as aggregate output in the economy.

And of course what comprises the economy changes over time. We have new products, new technologies, new ways of people earning money. So, what was measured as GDP even 10 years ago is not up to date today.

And so periodically the government and their statisticians and economists have to go through and revise GDP, revise the category, revise what they’re measuring. And that’s really what they’re up to. And they will do that, and they will go back and revise previous numbers.

And so we’re going to get perhaps a whole new look at the economy. Now, I should point out that some people are suspicious of this. Some people when they hear that the government’s going to revise the economic numbers think that it’s done for perhaps non-economic reasons to make the economy look better.

I can assure that is not the case. These revisions are all done by professional economists and statisticians, and people like me rely on these numbers to really know what’s going on in the economy.  So this is really a good thing.”

“Well, there’s a new book that’s been written by a Nobel Prize winning economist, Ronald Coats, who actually documents this. China basically did three things. And this all happened in the late 1970s, 1980s, and ‘90s.

First of all, they created incentives for workers and entrepreneurs. They essentially said, ‘Hey, if you’re a business and you find a market and you can sell things and make a profit, you get to keep those profits.’

And obviously that motivated a lot of people to really start businesses and expand. Secondly, China moved away from the state controlling prices to letting the marketplace — letting supply and demand — set prices. And what this did, many economists would argue, was that it encouraged innovation. It also encouraged frugality, and it made sure that inputs were used in a most efficient way.

And then lastly China moved away from state run monopolies. Really, prior to these changes, the state set up companies, and the companies are the ones that made things and sold things. They moved away from that model to a model like we have, where, really, businesses run by small firms, medium size firms, they’re out there competing. They’re out there looking for customers. Now politically of course China is not in a competitive situation, but economically China really now is a capitalist country.”

“Well, this is a plan. People should not say that this is going to happen, because we don’t know. It’s going to have to go through the legislative process, but if it did go through as presented, it would be a big change in how the state collects taxes.

Mainly the shift would be from taxing and collecting revenues on people and businesses’ income to taxing and collecting revenues on what people and businesses spend. In fact, the percent of state revenues derived from the sales tax would go from 25 percent to over 40 percent. And this would primarily be done by expanding the sales tax to include spending on many services.

The individual income tax rates would drop, and many other deductions would also go away. So, there are two big questions here.

One, what would this do to economic growth in the state? Supporters say it would increase it. Others say maybe not so much. The studies are actually all over the board on this. And then the second big issue is what we call equity. What would this do to taxes paid particularly by households of different income levels?

Some preliminary focus suggests that people at the lower income level would perhaps pay more. Those at the upper end of the income level would pay less. So, we’re going to hear this plan debated a lot over the coming weeks. People should pay attention.”

“This is the debate about the reduction in the so-called labor force participation rate. It is an issue.

Number one, you can clearly see it in the data, and it is a big source in the debate among economists. Some people say that, ‘Hey, the unemployment rate would be a lot higher if we were counting these folks who aren’t in the labor market as part of the unemployed.’ So, one appropriate question is, Why, why has the labor force participation rate gone down?

There are several factors here. One clearly is that people are staying in school longer. For example, it used to be if a large number of kids who came out of high school, they’d immediately go into the work force. Now, most of them are going on to college. So, that’s a factor.

Another big factor is the growth of retirees; the percentage of people over age 65 is growing. Many of those are now retiring. So, that’s bringing down the labor force participation rate. We’ve also had an increase in people who are officially categorized as disabled, receiving disability payments from social security.

So those three factors do account for a lot of this reduction in labor force participation, but there are folks out there who in the new economy simply don’t have the right skills to match up with jobs. Those, I think, are the folks that we really need to worry about. Those are the folks I think that policy needs to focus on.”

“Well, this is a very interesting story. There were a couple of very prominent professors — one at Harvard, one at the University of Maryland — who published some research a couple of years ago specifically looking at how debt — debt taken out by governments — affects economic growth.

And what they found was that the more debt that a government has, the slower economic growth. And specifically, they said that there’s a threshold level where debt is above 90 percent of the economy where the economic growth rate really, really slows down and approaches zero. And obviously this has gotten a lot of play, a lot of attention.

It’s been the basis of some big policy debates. Well, about six months ago some graduate students at a university here in the U.S. were assigned a topic of replicating this research. So, they went out and they got the data and they ran the analysis. They found their results weren’t matching up to what these prominent economists found.

And what they found was there had been some coding errors, there’d been some countries left out.  And this has really caused some embarrassment for those two prominent economists. Now what difference does it make in the policy recommendations? Well, these students still found that very high debt levels — i.e., above 90 percent of the economy –were associated with slower economic growth, but the growth rate slowed to two percent rather than 1.5 percent.”

“They are, and that’s the main message I give to various groups that I speak to about the economy.  When you compare the current economic recovery to the average of recoveries for the last 30 years, it does appear to be somewhat lackluster.

For example, if you look at growth and gross domestic product — the broadest measure of our economy — you look at growth in employment, consumer spending; all have been improving but improving at a much slower rate than our previous recoveries. Even government spending — now this may surprise a lot of people — even government spending has been rising much slower than government spending has been rising in previous recoveries. Now, specifically for government spending — we’re talking about spending on buying goods and services like building roads, military hardware, education, etcetera.

There is one area where the rebound in the economy has been better than in recent recoveries, and that’s been for corporate profits. Corporate profits are way up on a percentage base. Now, part of the reason is they went way down during the recession, but I think that is obviously tied into the stock market boom. But I think the best news — the best news for most people — is that there is, indeed, an economic recovery.”

“They’re going to find a better job market than the last couple of years. And it’s, of course, really tied to the economy. The economy has been improving, but it’s certainly not a perfect market.

Now, I will say that for a person who has a college degree, they probably have the best job prospects of any group in terms of educational level. For example, since 2008, when the recession started, jobs for college graduates have actually gone up by 9 percent, whereas jobs for high school graduates have gone down by 9 percent.

So, I think there is a difference there in terms of getting more education making yourself more marketable. Now, in terms of college grads and their degrees, experts say that the best prospects for jobs will be in the sciences, technology and for business. But what college students increasingly are becoming aware of and those of us who work with them are increasingly become aware of is that the economy is changing so rapidly. A

And the nature of jobs is changing so rapidly. Surveys show that many employers say that what is more important to them are what’s called the soft skills, the personal characteristics. Does the individual indicate they’re going to show up on time and do the work, and their cognitive skills, their reasoning skills. That may be more important than the particular kind of major.”