The Atlantic’s James Fallows says these two sentences should be part of all discussion of the debt ceiling
- Raising the debt ceiling does not authorize one single penny in additional public spending.
- For Congress to “decide whether” to raise the debt ceiling, for programs and tax rates it has already voted into law, makes exactly as much sense as it would for a family to “decide whether” to pay a credit-card bill for goods it has already bought.
I’m not a supporter of President Obama, but if I thought that balancing the federal budget was the overriding issue, I would vote for him. On fiscal matters, he is a better conservative than the present Republican Party leadership.
Remember that the fiscal year begins in October of the previous year. The 2009 fiscal year began Oct. 1, 2008, and so is the responsibility of the George W. Bush administration, except for the stimulus program enacted after Barack Obama took office.
The main causes of the federal budget deficit were the tax reductions proposed by President George W. Bush, the cost of invading Iraq and Afghanistan, and the Great Recession, which reduced tax revenues while automatically increasing spending for the social safety net. Recall that when President George W. Bush took office, he and Federal Reserve Chairman Alan Greenspan thought that federal budget surpluses were a problem, and Bush’s tax reduction program was intended to eliminate those surpluses.
I see little hope of balancing the federal budget until (1) the Clinton era tax rates are restored, (2) military spending is brought under control and (3) the Great Recession comes to an end. President Obama has proposed restoring Clinton era taxes on upper-bracket taxpayers, and he is reducing the size of the U.S. military (although not cutting back on its mission). Obama’s embrace of drone warfare is, I think, partly for budget reasons, like the Eisenhower-Dulles “massive retaliation” policy of the 1950s.
The most important step to bring the federal budget under control would be to bring the Great Recession to an end. Budget problems, like other problems, are relatively easy to solve under conditions of peace and prosperity. So long as unemployment is high and poverty is increasing, tax revenues will be low and spending on the social safety net should be relatively high.
Newt Gingrich called President Obama the “food stamp” President. The present food stamp program was created by bipartisan legislation in the 1970s co-sponsored by Senators Robert Dole and George McGovern. The reason spending on food stamps is high is because the Great Recession is pushing people into unemployment and poverty-wage jobs. We should not change the law and let children go hungry, but by work toward a high-wage, full employment economy in which hard-working people won’t need food stamps.
Click on Marketwatch: Obama spending binge never happened for background and the source of the first two charts.
Click on The Four Causes of the Huge Deficit for more background and the source of the next to last chart.
Click on Causes of the Trillion Dollar Deficits for more background and the source of the bottom chart.
Click on Greenspan Endorses a Cut in Tax Rate for an article from 2001 about how Federal Reserve Chair Alan Greenspan and President George W. Bush wanted to get rid of budget surpluses.
Click on ‘Reagan Proved Deficits Don’t Matter’ for comment on the Crooks and Liars web log on changing Republican attitudes toward the deficit.
On economic policy, American voters in November will be offered a choice between Mitt Romney, who is part of the problem, and Barack Obama, who is not part of the solution.
I’m not happy with President Obama, but Gov. Romney is no improvement. Neither Obama nor Romney have realistic plans for unemployment or mortgage foreclosures. Both regard the federal budget deficit as a higher priority problem. But Obama at least has a realistic budget plan, and his record on federal spending is much more conservative than most of his admirers or detractors admit. Romney proposes further tax cuts for upper-bracket taxpayers, which will make the problem worse.
Obama has not shown the least willingness to curb the irresponsible behavior of the financial elite which has brought on and prolonged the current economic recession. Romney is part of that financial elite.
Both Obama and Romney regard Social Security and Medicare as “entitlements” which need to be cut back. Obama repeatedly has offered up cuts in Social Security and Medicare as part of a grand bargain for balancing the budget. Romney is an admirer of Rep. Paul Ryan of Wisconsin whose ultimate goal is to privatize Social Security and Medicare.
Romney scapegoats poor people, while Obama doesn’t talk about them at all.
President Obama’s economic policies follow in the footsteps of President Eisenhower and the first President Bush. Governor Romney’s policies, based on his statements and his choice of advisers, would follow the second President Bush and the Tea Party movement.
If Obama and Romney were my only choices, and economic policy the only important issue, I would reluctantly vote for Obama. But since I live in a state where third party candidates are on the ballot, I will vote for Gary Johnson, the Libertarian candidate, or perhaps Jill Stein, the Green Party candidate.
Click on How Paul Ryan Captured the G.O.P. for a profile of Rep. Paul Ryan of Wisconsin, the architect of Republican economic policy, by Ryan Lizza in the New Yorker.
Click on Romney Tax Plan on Table, Debt Collapses Table for a report on a bipartisan analysis of Gov. Romney’s tax proposals. Romney has not given specifics for an excellent reason. It is mathematically impossible for him to deliver his proposed tax cuts for rich people and still balance the budget by closing loopholes.
Click on Obama spending binge never happened from MarketWatch and Who Is the Smallest Government Spender Since Eisenhower? Would You Believe It’s Barack Obama? from Forbes for President Obama’s record on government spending. If I were a conservative Republican who believed that cutting government spending was the overriding issue, I probably would vote to re-elect the President.
Click on Obama’s Second Term Agenda: Cutting Social Security, Medicare and/or Medicaid for analysis by Matt Stoller of the Roosevelt Institute, based on the President’s proposals and appointments during his first term.
Click on U.S. poverty heads for highest level in 50 years for a Chicago Tribune article on a subject neither candidate talks about. The nonsense about Barack Obama being the “food stamp” President reflects the fact that the deep economic recession has made huge numbers of people eligible for the program that was put in place in the 1970s.
Click on The Choices Still to Be Made in the New Debt Deal for the source and context of the chart.
Hat tip to zunguzungu.
Tom Ferguson, a professor of political science at the University of Massachusetts and a fellow of the Roosevelt Institute, has a lot of good sense and good insight about current issues.
Here he is in an interview in July about President Obama, the Congress and the debt ceiling. [Added 2/16/2019] Click on this link to view the video.
It is interesting how some people who disbelieve in the power of government to do anything about unemployment also believe there is such a thing as “war prosperity.” During my life I’ve heard many people say that it was World War Two, not the New Deal, that ended the Great Depression. To the extent that this is true, all it means is that the level of government spending in the 1930s was too modest.
Here’s a quote from Judson Phillips, a Tennessee lawyer who heads Tea Party Nation.
If we decided to build a couple of new carriers, thousands of workers would be hired for the shipyards. Thousands of employees would be hired for the steel mills that would provide the steel for the hull and various sub contractors would hire thousands. Do you know what that means?
It means they would receive paychecks and go out and spend that money. That would help a recovery. That is a shovel ready project!
Increasing spending for the military does a couple of things. It not only not only stimulates the economy, it protects our nation. That is a better investment than say spending money on teaching Chinese prostitutes how to drink responsibly.
via The Economist.
But there are those on the opposite side of the political fence who are just as inconsistent. Many advocates of economic stimulus programs believe it is possible to make deep reductions in the armed forces and military spending without any adverse effect on employment and the economy generally.
If Judson Phillips favors military spending as a job-creating measure, and opposes spending on infrastructure construction to create jobs, that is inconsistent. But many members of the Tea Party movement do in fact want to cut military as well as civilian spending.
The Obama administration is more in line with Judson Phillips than some of his fellow Tea Partiers are. Defense Secretary Leon Panetta has warned against any real cuts in military spending (he favors only a slowing in the rate of growth) and says cuts should be concentrated on discretionary non-military spending as well as Social Security, Medicare and other entitlements.
I do not think the declining U.S. economy can sustain military bases and military operations all over the world. I think the size and mission of the U.S. armed forces are excessive compared to what is needed for defense of the homeland. But if the armed forces and military spending were shrunk to what is necessary, and nothing is else changed, this is going to raise the unemployment rate. We need a change in priorities, not just cuts in spending.
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I asked a Canadian friend how it is that Canada has a much stronger social safety net than does the United States, yet has a smaller national government debt in relation to the size of the Canadian economy (gross domestic product).
Her short answer: “Canadians pay more in taxes, and we fight fewer wars.”
President Obama said the compromise budget deal with the Republican congressional leaders will bring non-defense discretionary spending to its lowest level since the Eisenhower administration. Andy Kroll, a writer for Mother Jones magazine, explained:
Andy Kroll
The Obama-GOP plan cuts $917 billion in government spending over the next decade. Nearly $570 billion of that would come from what’s called “non-defense discretionary spending.” That’s budget-speak for the pile of money the government invests in the nation’s safety and future—education and job training, air traffic control, health research, border security, physical infrastructure, environmental and consumer protection, child care, nutrition, law enforcement, and more.
The White House’s plan would slash this type of spending nearly in half, from about 3.3 percent of America’s GDP to as low as 1.7 percent, the lowest in nearly half a century, says Ethan Pollack, a senior policy analyst at the left-leaning Economic Policy Institute. Pollack’s calculations suggest the cuts in Obama’s plan are almost as deep as those in Rep. Paul Ryan’s slash-and-burn budget, which shrunk non-defense discretionary spending down to just 1.5 percent of GDP. The President has claimed that the debt deal will allow America to continue making “job-creating investments in things like education and research.” But on crucial public investment, Obama’s and Ryan’s plans are next-door neighbors. “There’s no way to square this plan with the president’s ‘Winning the Future’ agenda,” Pollack says. “That agenda ends.”
via Mother Jones.
Many countries have suffered financial crises. The United States is exceptional in creating a financial crisis where none existed before.
Click to view
The debt ceiling crisis would not have been a crisis unless political factions in Washington had not decided to create for their own purposes. It is an example of what Naomi Klein called The Shock Doctrine — how political and economic elites use crises to force changes on the public they would not have accepted otherwise.
The Associated Press reported that the bipartisan agreement signed by President Obama and House Speaker John Boehner provides for an immediate $900 billion in reductions in discretionary spending over the next 10 years, followed by an addition $1.5 trillion in spending reductions to be proposed by a bi-partisan committee of Congress by November and to be voted on by the end of the year. If that happens, the debt ceiling would go up by $1.5 trillion; if not, $1.2 trillion in spending cuts would take place automatically across the board. Social Security, Medicaid and food stamps would be exempt from the automatic cuts, but apparently not from the cuts proposed by the bipartisan committee.
Since the agreement does not specify exactly what will be cut, it is hard to argue against it based on specifics. But once the cuts are specified, it will be too late to do anything about them. The agreement pretty much commits the President and Congress to accept whatever is proposed.
President Obama said the agreement will leave the government with the lowest levels of spending, as a percentage of the overall economy, since the Eisenhower administration. I can’t imagine how that could be accomplished and still provide a social safety net, still provide aid to state governments necessary to maintain basic services, and still make the investments the President has said are necessary to the nation’s future, not to mention continue on-going wars and an ever-growing proliferation of intelligence and surveillance agencies. As Jonathan Cohn wrote in The New Republic:
That first round of cuts to discretionary spending might reduce some waste, but it would also undermine vital government services. At the same time, it would deplete the opportunities for easy spending reductions, making it more likely that second round of cuts had an equal, or harsher, impact. … There’s just no way to enact spending reductions of this magnitude without imposing a lot of pain.
And contrary to the common understanding in the Washington cocktail party circuit, “pain” does not simply mean offending certain political sensibilities. Pain means more people eating tainted food, more people breathing polluted air, more people pulling their kids out of college, and more people losing their homes — in other words, the hardships people suffer when government can’t do an adequate job of looking out for their interests.
More immediately, but equally troubling, this agreement would not address our most pressing economic problem: lack of jobs. On the contrary, by reducing deficits starting next year, this deal would do the very opposite of what virtually every mainstream economist now believes we should do: increase consumer demand by pumping more money into the economy.
At one point, the debt ceiling agreement included promises to extend unemployment insurance and renew a break on the payroll tax. Those two would have provided a modest but very real boost to the economy (not to mention financial relief to people who need it). This deal would do neither.
via The New Republic.
Most Americans are relieved that the government is not going to default on its bond payments or delay payments of government salaries or Social Security pensions. It makes President Obama’s proposals, which once would have been considered an extreme right-wing agenda, seem reasonable in comparison.
But the debt ceiling crisis is not over. It has merely been postponed until after the 2012 election. After that we can expect a continuing series of debt ceiling crises, as long as (1) the debt ceiling exists and (2) a 60-vote majority requirement in the Senate gives any 41 Senators a veto over government policy.
This chart, which first appeared in the Washington Post, is seriously flawed, but still informative. The flaws are:
Nevertheless, the chart is important because it shows that the size of the total government debt, not the size of the annual deficit, is what matters. The government’s annual deficit was slightly lower in 2010 than in 2009. How much that was due to President Obama and how much to the economy, I can’t say. Nevertheless, the total government debt went up, as under previous administrations.
There’s something else that’s even more important than the size of the government debt, and that is the size of the debt in relation to the size of the economy. The United States came out of World War Two with a huge debt that never was paid off, but it ceased to matter, because the economy grew so much in the next 30 years that the debt become less and less important.
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The debt to GDP ratio can be improved by reducing or eliminating the annual government budget deficit, and by growing the economy. Economic growth will help shrink the deficit. Shrinking the deficit may or may not help economic growth, depending on how it is done.
The federal government does not control the growth of the economy, but there are ways that it can help. It can rein in reckless speculation by investment banks, so that they return to investing in the real economy. And it can spend money on things that contribute to economic growth, such as education, scientific research, infrastructure and maintenance of basic services.
There is a fine line to walk. Spend money on useless things, and you worsen both the government’s financial position and the overall economy. Refuse to spend money on essential things, and you also stifle economic growth.
The federal debt ceiling has long been a political football. The political party in power favors increasing the debt ceiling, many members of the party out of power oppose increasing the debt ceiling, but, until now, the debt ceiling always has been raised.
Democrats are running the following broadcast by Ronald Reagan in 1987, appealing for an increase in the federal debt ceiling.
Republicans might well run a clip of Senator Barack Obama, opposing an increase in the debt ceiling under President George W. Bush.
Click on Then and Now: The changing rhetoric in the debt-limit debate for a review of changing positions on the debt ceiling by prominent political figures.
Click on The GOP turns its back on Reagan for a comment on the Republican stance on the debt ceiling. (Hat tip to Bill Elwell for the link.)
Click on Democrats invoke Reagan in support of debt-ceiling increase for a comment on the Democratic stance on the debt ceiling.
Truly, where you stand (in this case) depends on where you sit. The Republican congressional leaders some time back argued that the recovery has been retarded by business uncertainty about future government policy. If they really believed that, they would not be engaging in brinksmanship now.
But the inconsistencies of the two sides are not the main point. The main point is that the debt ceiling needs to be raised (or better still, abolished) before the crisis point is reached. Senator Obama was wrong. President Obama is right. The Tea Party is wrong. President Reagan was right.
The trouble with Keynesian economics is that it asks too much of human nature.
The late great British economist John Maynard Keynes said it was possible for governments to smooth out the business cycle of boom and bust by doing what Joseph and Pharaoh in the Bible did—to store up surpluses in the good years, and draw them down in the bad years.
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Human nature is just the opposite. Human nature is to spend money when you have it, and to cut back when you don’t have it. This is pretty much the history of U.S. government policy during the past 10 years. During a period of economic growth, the George W. Bush administration added to the government’s debt by cutting upper-bracket taxes, by starting two major wars and by adding a new mandate to Medicare. Barack Obama took office in the middle of a recession with a government already deeply in debt. Whatever you think of the President’s decisions and priorities (and I think they are mostly wrong), he is in a situation where he has few good options.
John Maynard Keynes was not an advocate of big spending or high taxes. He said that, in times of recession, the government should either increase spending or cut taxes—either one would do. President John F. Kennedy, for example, promoted a temporary business investment tax credit in order to counter a business downturn during his administration. But the best way to fight recession, according to Keynes, would be programs or tax cuts that helped low-income and middle-income families because those families would be most likely spend money and stimulate business activity.
But whether government increased spending or decreased taxes, the increase or decrease should be temporary, Keynes said. As economic activity picked up, spending and taxes should revert to normal. This is where his ideas are contrary to human nature. As soon as you start a new government program or lower taxes, you create a constituency to keep the program and the tax break through good times as bad.
Historically the Federal Reserve System, because it is somewhat (not completely) buffered from political influence, has been able to implement Keynesian economics better than the President and Congress have. The Fed has used its powers to influence interest rates to stimulate borrowing when times are bad, and to throttle down on credit when times are good. As a former chairman once said, the Fed’s job is to take away the punch bowl when the party starts getting good. Unfortunately, under the leadership of Alan Greenspan, the Fed’s policy was just the opposite. During the stock market and housing bubbles, the Fed spiked the punch bowl instead of taking it away.
Another way to protect Keynesian policy from human nature is to put policies in place that automatically respond to changes in the economy. One example is unemployment compensation. In good times, workers and employers normally pay more into the compensation fund than they take out; in bad times, the fund pays out more than it takes in. It would be possible to increase the effect by having payroll taxes automatically go up when a state’s unemployment rate goes down, or to increase the period of eligibility for unemployment when the unemployment rate goes up.
I think the ideas of Keynes were good as far as they went. I think the United States is in a situation in which a Keynesian stimulus is not enough. The U.S. government is already deeply in debt, and we Americans individually are deeply in debt. We need to rebuild our productive capacity, not just jump-start the economy, and this requires more than temporary measures. That in many ways is a more difficult challenge than faced President Franklin Roosevelt during the Great Depression.
Senate Minority Leader Mitch McConnell proposed giving President Obama the responsibility for addressing the federal budget deficit. If I were a conservative Republican banker, I would be very happy to entrust President Obama with that responsibility.
As Jonathan Zasloff, a contributor to the Reality-Based Community web log, commented:
Just a year before a general election, the country’s unemployment rate is over 9 percent and its effective unemployment rate might be twice that. Obama’s solution to the searing crisis of the middle class apparently is to raise the Medicare eligibility age from 65 to 67, in exchange for tax increases that will occur anyway. Oh yes, and $2 trillion of other unspecified cuts, which always figure to work beautifully during a recession. … What is there in any of this that a progressive could possibly object to?
President Obama has managed to make McConnell, House Speaker John Boehner and House Majority Leader Eric Cantor look like fools, by conceding the substance of what they demand. His characteristic political tactic—giving his opponents enough rope to hang themselves—has worked well for him once again. At the same time he has abandoned historic Democratic principles and constituencies. What price victory?
Zasloff sees two ways to interpret President Obama’s actions.
1. Obama is a Democrat, and he is a political moron.
2. Obama is a Republican, and he is a political genius.
Source: Office of Management and Budget. Click to view.
The majority of Democrats say that the federal budget deficit should be addressed by raising taxes and cutting spending. The majority of Republicans say that the federal budget deficit should be addressed by cutting spending and taxes under no circumstances should be raised. Based on the chart, I would say the Democrats have the better of this argument.
Notice that the only time in the past 30 years that revenues exceeded expenditures was during the Clinton administration. This is partly a technicality of accounting; the surplus in the Social Security Trust Fund was used to offset the general government’s deficit, even though Social Security is kept separate from the general budget. It also reflects the moderate tax increases enacted during President Clinton’s first year, and the work done by Vice President Al Gore to improve governmental efficiency and reduce civilian important. Even so, President Clinton did not project a budget surplus. What brought his administration into the black was the economic boom during his second term.
During the George W. Bush administration, spending increased, covering the cost of wars in Iraq and Afghanistan and a new Medicare drug benefit, and taxes were cut. The recession caused spending to increase and tax revenue to fall during the last Bush years, and the gap has grown even greater during the Obama administration.
The Republican leadership – Senate Minority Leader Mitch McConnell and House Speaker John Boehner – say that the deficit is the overriding problem, and non-military spending can in no way be increased. But when possible tax increases come up, they say that you shouldn’t raise taxes during a recession—in other words, that the recession, not the deficit, is the overriding problem.
My own view is that as a result of the deindustrialization and financialization of the U.S. economy over several decades, we have to think not just about the deficit and not just about restarting the economy, but about rebuilding the nation’s economic strength.
Chart shows monthly change in private-sector jobs under Bush (red) and Obama (blue). Chart by Steve Benen of Washington Monthly. Click to view.
The U.S. economy is showing some recovery, and reputable economists agree that the Obama stimulus program did some good, but the economic recovery is stalling, and we have a long way to go before we get back to the way things were before the recession.
It would be nice if President Obama, House Speaker John Boehner and other top leaders would show as much concern about the jobs deficit as they do about the federal government’s budget deficit. Even if you think the latter is the only thing that matters, a lot of the deficit is due to the fact that recession has sidelined millions of people willing and able to work and pay taxes.
The U.S. Department of Defense budget for Fiscal Year 2011 (which ends Sept. 30) was the highest, in inflation-adjusted terms, that it has been in any year since World War Two, according to the non-partisan Center of Strategic and Budgetary Assessments.
In inflation-adjusted dollars, the total national defense budget request for FY 2011 is at the highest level since World War II. Even if only the base defense budget is considered, the FY 2011 budget request exceeds the previous peak in defense spending in FY 1985 of $538 billion (in FY 2011 dollars). …
The president’s budget projects that the deficit will rise to a record level of $1.6 trillion in FY 2010. In an attempt to address the deficit, the FY 2011 budget request proposes a freeze in non-security discretionary spending, which excludes defense, homeland security, veterans, and other security-related programs. The proposed freeze applies to less than one sixth of the total federal budget and saves $15 billion, compared to a $45 billion increase in security-related spending.
Click on Analysis of the FY 2011 Defense Budget for the CSBA summary for FY 2011.
Click on Analysis of the FY 2011 Defense Budget PDF for CSBA details for FY 2011.
The base defense budget is projected to rise another 3.6 percent for Fiscal Year 2012, from $526 billion to $553 billion, the CSBA reporter. But that’s less than the $566 billion the Obama administration originally estimated it would need for 2012.
And spending for Overseas Contingency Operations, mainly the wars in Afghanistan and Iraq, are projected to decline from $159 billion to $118 billion, resulting in a decline of total spending.
However, all this was written by analyst Todd Harrison for the CSBA back in February, before President Obama decided to jump into war in Libya, so the current estimate may be different.
Click on FY 2012 Defense Budget Represents a Turning Point for the CSBA summary for FY 2012.
Click on FY 2012 Defense Budget Represents a Turning Point PDF for CSBA details for FY 2012.
The Republican Party is amazing. The Republicans, after winning a majority in the House of Representatives, have done more to change the direction of the country than the Democrats did in the two years that they controlled the Presidency and had majorities in both Houses of Congress.
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President Obama has agreed to shift from doing something about the present unemployment and foreclosure crises to addressing the future federal budget deficit. And he has further agreed that the federal budget will be balanced largely at the expense of the elderly, the sick and the unemployed rather than upper income taxpayers.
And even with this, it is still an open question as to whether the Republicans will accept Obama’s terms or force the federal government into defaulting on its debt anyway—resulting in loss of faith in U.S. financial solvency and higher interest rates for decades to come and maybe indefinitely.
Either President Obama is an exceptionally weak President, or his priorities are different from what his supporters assume they are. Just as only a supposedly conservative Republican could go to China, only a supposedly liberal Democrat can cut Social Security and means-test Medicare. If this is what the President had in mind to do anyway, his supposed dilemma is not a dilemma. He is like B’rer Rabbit being thrown into the briar patch.
Actor Craig T. Nelson, appearing on the Glenn Beck show a few months back, said he is going to stop paying taxes until the government stops bailing out failed corporations. “I’ve been on food stamps and welfare,” he said. “Did anybody help me out? No.”
I had to smile at Nelson’s idea of what government help is and isn’t. But when I viewed the whole segment and listened to his full comments, I found that I sort-of halfway agreed with him.
It doesn’t make sense to continue with bailouts, subsidies and special tax breaks for big corporations, and at the same time cut back on education, fire protection and other basic services, on taking care of our veterans and, yes, on food stamps and unemployment compensation for people temporarily down on their luck as Craig T. Nelson once was.
I don’t see eye to eye with Nelson in every respect. I think he probably gets too much of his information from Fox News. I think the Glenn Beck wing of the Republican Party is part of the problem rather than part of the answer.
But I think Nelson’s moral outrage at our current national priorities is thoroughly justified, and I even agree with Glenn Beck on recommending people read the Declaration of Independence and Tom Paine’s Common Sense.
Click on After Senate’s Medicare Vote, Ryan Remains Unbowed for a National Public Radio interview with Rep. Paul Ryan, the Republican chair of the House Budget Committee.
Click on Ryan Budget Would Increase Health Care Spending for Medicare Beneficiaries for analysis by Paul N. Van de Water of the Center on Budget and Policy Priorities.
Click on Sharing Costs is No Way to Fix Medicare for analysis by Peter Orzag for Bloomberg News.
The refusal by the Republican majority in Congress to raise the ceiling on federal debt means that, on the one hand, they think this issue is so important they are willing to put the functioning of the federal government at risk, but, on the other hand, they are unable to come up with a plan to actually bring the budget under control, and so leave it to President Obama to figure out.
A lot of people who discuss this issue assume that this would mean that the federal government would default on its existing debt. A default would be catastrophic. U.S. government bonds would no longer be considered an absolutely safe investment, which means the Treasury Department would have to pay more interest to attract lenders. This would not only mean the federal debt would compound at a faster rate. It would push up U.S. interest rates generally. It would be more expensive to take out a car loan, a home mortgage or a small business loan.
Fortunately there are other options.
The most likely option would be a partial shut-down of the federal government. I can’t guess what would be cut. Presumably the military and Homeland Security would be exempt. Would the national parks be closed? Would the Postal Service suspend or reduce mail deliveries? I don’t know. Would it be legal to reduce or suspend payments for Social Security, Medicare and other so-called entitlements programs mandated by law? I don’t know. Would federal employees have to take a pay cut or suspension of wages? Maybe.
Another possibility would be that the Federal Reserve system would simply create money to pay down the national debt. That, in fact, is the normal mechanism by which money is “printed.” It is what was done with “quantitative easing.” I can’t guess the long-term consequences of this would be, but it doesn’t seem like a good idea. But it is an option (if the Fed agrees – admittedly, a big “if”). Creating money by buying Federal bonds would provide a means to keep the federal debt within the legal limit while continuing the normal operations of the federal government.
The final possibility is that President Obama would simply refuse to comply with the debt ceiling on Constitutional grounds. But such a confrontation wouldn’t be his style, and the Constitutional argument seems weak to me. It rests on Section 4 of the 14th Amendment states that “the validity of the public debt of the United States, authorized by law … shall not be questioned.” But it is an option. He could make his Constitutional claim and see what the courts say.
If you are serious about reducing the U.S. government’s debt, you need to start with the figures shown in this chart.
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The largest factor in the debt is the Bush-era tax cuts. If you thought the most important thing is to reduce the government’s debt, you would restore tax levels to the level in the 1990s. This means middle-class taxes as well as taxes on the rich. I’m willing to do my share, if the millionaires and billionaires do theirs.
The next largest factor in the debt is the economic downturn. Government outlays for unemployment insurance and food stamps increase, while fewer people are earning wages and salaries to provide tax revenue. If you thought the most important thing is to reduce the debt, you would make a plan to put Americans back to work.
The third largest factor in the debt is the wars in Iraq and Afghanistan, now mutating into wars in Afghanistan, Pakistan, Libya and maybe Yemen. If you thought the most important thing is to reduce the debt, you would make a plan to wind those wars down.
Nine Things The Rich Don’t Want You to Know About Taxes by David Cay Johnson.
Top Ten Tax Charts by the Center on Budget and Policy Priorities
Five Ways GE Plays the Tax Game by Jeff Gerth of ProPublica and Allan Sloan of Fortune.
Taxes and Spending for Beginners by James Kwak
Want a Flat Tax? I Got a Flat Tax for You by “Asymptosis”
Click on the links to read them.
Phil Ebersole's Blog 