Archive for April, 2011

Debt Ceiling

Monday, April 18th, 2011

With the recent budget compromise negotiated and passed last week, budget talks in Washington D.C. have already moved on to discuss the vote to raise the debt ceiling. Before diving into each side’s position, a few important facts need explaining in order to help navigate the political terrain.

First, one might wonder, “What is the debt ceiling? And, how does it affect me?” The debt ceiling is the limit on the amount of money that can be used by the government to finance its expenditures, kind of like a credit limit for a personal credit card. A big difference being, instead of the bank deciding the limit for you, you get to decide it for yourself and hope that the bank will go along with it. The “you” in this case is the government, and the “bank” is all the investors comprised of amongst others; foreign governments, investment firms, and, ironically, the American people themselves via the Federal Reserve.

The ways in which the debt ceiling can affect you are numerous, but three main ways stick out. One is by crowding out investment in other sectors. Government debt is considered very safe in the investment world and is a key part of any investment portfolio. But the amount of money out there to invest is finite. Since investors are attracted to government debt, less money is available to invest in other ventures, such as a business that needs money to expand so it can hire more. So, in that case, private businesses have less money to create jobs. And even though government jobs count as jobs too when one talks of labor statistics, it’s generally agreed that the government job market is more static and less dynamic in creating jobs than the private sector. So, more debt can equal a greater risk of slower business growth thus fewer new jobs created.

Another is the effect government debt has on interest rates. As government debt grows, investors are less confident in the government’s ability to repay that debt. To issue the new debt on the open market, the government is often forced to pay a higher interest rate. Those higher interest rates mean that the government is paying more to service the debt than it is on performing its other tasks. So, the government is forced to choose either to cut programs in order to keep the government running with the money it has; or, ask for more money at the higher interest rate in order to keep financing the government as is, thus perpetuating the debt cycle.

The third effect on you is monetary. Government debt is financed by the issuance of bonds (they call them T-bills). The government in this case is, in effect, creating more money, which means inflation. Inflation can have a negative effect on the value of the money in your bank accounts, investment portfolios, home values, interest rates on the debts you pay, and the like.

So, given all these effects on the average American, it’s easy to see why our representatives look at the raising of the debt ceiling as a difficult political issue. But a little history and some facts and figures are still needed to help us frame the issues that surround the debt ceiling.

First, some history… The argument on whether or not the federal government should go into debt has been a contentious one for some time. It even was an issue that involved our own founding fathers. Alexander Hamilton argued that government debt was necessary in order to stabilize the country’s currency and repay the debt incurred during the Revolutionary War. It would also allow our government to confront emergencies and build infrastructure. His opposition, led by Thomas Jefferson and James Madison, thought that the ability to issue debt would overtly strengthen the central government’s power over the states, by forcing the states that were not in debt to take on the debt that other states had left over after the Revolutionary War. They also viewed it as an unconstitutional breach of congressional power. Hamilton ultimately won that debate; already predetermined in some sense by the great amount of debt the Continental Congress had already accrued and it and the Confederacy’s failure in paying that debt back. (See U.S. News Staff. “Past & Present: Alexander Hamilton and the Start of the National Debt,” Internet Website: Posted: 18 September 2008. Accessed 11 April 2011)

The U.S. Constitution of 1789 gave specific powers to Congress to issue debt. Article 1, Section 7 states, “All bills for raising Revenue shall originate in the House of Representatives…” while Article 1, Section 8 states, “The Congress shall have Power…To borrow money on the credit of the United States.” The Constitution is important to the present argument because it has been frequently stated that the present Speaker of the House, John Boehner (R-OH), actually forced President Obama (Dem.) and Senate Majority Leader, Harry Reid (D-NV), to accept the Republicans position when discussing the recent 2011 Budget while it is actually the Constitution that gives the Republican-controlled house and thus the Republican Party a procedural advantage in discussing the budget–a factor which will also be in play in deciding the debt limit debate.

Anyways, the historical trend is that the country’s debt tends to rise in the case of national emergencies such as wars, inflation, or recession; and that the government in the form of taxes, duties, and fees; recovers the money to pay down the debt. The debt limit itself has been raised 72 times since its creation in 1917. So, to understand what the politicians’ problem is this time around, we need to consider the four overarching themes of the present debt ceiling debate.

First, there is the Second Liberty Bond Act of 1917. Basically, before the passage of this bill, Congress had to decide each time how it would borrow money. That means, taking today’s standard into account, each of the roughly 200 times a year that the U.S. Treasury Department issues bonds would have had to have been argued and discussed individually in separate acts of Congress before 1917. After 1917, Congress authorized the U.S. Treasury to issue the debt while giving them a total that is subject to a limit. In sum, this act established the “debt ceiling” concept that we’re arguing about today. But it has also had the practical effect of de-coupling the argument of whether or not to pay the bill from the argument of how the money should be spent. The debt ceiling was now vulnerable to being politicized as an issue in and of itself. (See Heakal, Reem. “What Fuels the National Debt,” Internet Website: Investopedia ULC, 2011. Accessed 11 April 2011)

Second, there is the government’s obligation to provide for the modern welfare state. The economist, John Maynard Keynes, believed that the way in which the government managed resources to fight a war could also be used to combat domestic social ills such as poverty, thus benefiting the greater whole of society. President Franklin Roosevelt (Dem.) began to implement government policies to increase the government’s role in providing social protections for the poor in response to the Great Depression of the 1930s. This policy was largely continued by successive presidents until the 1970s. And in that time, the government became responsible for aiding the welfare of the retired, the poor, and the disabled through Social Security; providing government health insurance for the poor and the disabled through Medicaid; and government health insurance for the elderly through Medicare. These programs collectively are often referred to interchangeably by government folk as the social safety net or entitlement programs. Their passages revolutionized the idea of what government should do on behalf of the people and also greatly contributed to the government’s financial burden. Look at it as the government having three new kids whom it loved dearly but who would also be permanently living at home. In addition to setting up a social safety net, our central government in Washington D.C. began regulating other economic sectors in earnest during this time according to Keynes’ central planning model.

Third, we have to consider the ideological counterweight to Keynes’ economic model which was presented by the economist, Friedrich von Hayek. Hayek believed that central government planning was a challenge to human liberty because it sought to benefit the common good through coercion. He believed that a competitive market system was better in achieving this end because it allowed for individuals to freely cooperate for their own economic benefit. While Hayek was not specifically opposed to a social safety net, he was opposed to the excessive intervention of government in the market through expansive regulation. As a response to the economic stagflation (read: no jobs plus inflation) of the 1970s, President Ronald Reagan incorporated Hayek’s model into his “Starve the Beast” model of governance. Reagan believed that the best way to limit the government from growing too large and burdensome was by cutting its revenue. Basically, by working with Congress to cut taxes, Congress would later be compelled to reduce the number of government-run programs, such as overwrought regulation, and also be compelled to prioritize between its essential and non-essential functions. This would in turn allow people to be freer to obtain wealth through private means. This model ultimately led to the privatization of government functions in order to save money and increase efficiency, a model which has persisted from the early 1980s to the present day.

Fourth, there is the politically difficult issue of when to raise taxes. President George H. W. Bush (Rep.) was famous in his 1988 presidential campaign for his quote, “Read my lips–No New Taxes!” But in response to the public debt incurred during the Persian Gulf War and the 1991 economic recession, Bush was compelled to go back on his promise and raise taxes. Bush’s change in position was seen as a major reason why he lost his 1992 presidential bid to Bill Clinton (Dem.). An important but infrequently mentioned precedent had been set making it extremely difficult for first-term presidents to raise taxes lest they threaten the chance of winning their re-election bids.

With a little bit of the history outlined, we can finally take a look at some of the facts surrounding the present debate and what the positions of both sides are as the debate moves ahead.

The current debt ceiling is $14.294 trillion. That is a little more than 97% of the total of everything we produce in the United States in one year; what’s called Gross Domestic Product (GDP). If you earn $30,000 a year, that would be like being $29,100 in debt. That may not seem like a lot for an individual, but it is a lot for a government. In terms of the percentage of debt to GDP, it places us at 12th in the world. While in considering the total amount of debt we’ve accrued, we are the world’s number one debtor– Hurray, for us! Government debt is more difficult to address than personal debt because of its shear size (trillions), the complicated way in which it is accrued and paid down, and the fact that government revenue doesn’t adhere to the same economic rules as personal income. Most economists agree that a sustainable level of government debt for the U.S. usually hovers around 60% of GDP.

In order to get themselves out of debt, there are three general methods governments have at their disposal. One is to raise revenue; that is, raise taxes, duties, fees, etc. Two, is to cut spending. Three, is to rollover the debt while the general economy grows. If the debt grows more slowly than the rate of economic growth, the percentage of debt to GDP is reduced. In order of preference, rolling over the debt and waiting is the one most often methods used by politicians because it’s the least controversial. Raising taxes and cutting spending are both very unpopular, and tend to be avoided.

The debt we have now isn’t the fault of any one person or party; it’s really an aggregate total of many years of deficits. Deficits are simply when in the course of one year, the government spends more than it receives in revenues. One could blame the Vietnam War as much as they could blame the Bush tax cuts or Obamacare. For example, the non-partisan Congressional Budget Office evenly divides the blame between Bush’s and Obama’s policies for the $2 trillion swing from the last time the government didn’t spend more than it received, which was in 2001, to the deficits we’re running today. Regardless of whose fault it is, what is true according to most non-partisan government sources is that our current debt and expenditure levels are unsustainable. As people born after World War II in the late-1940s and 1950s (typically called the Baby-boomers) begin to retire, the government will need to spend more money on Social Security and Medicare and less on some of its other important programs, like defense or food regulation. That’s because their retirement will greatly increase the number of people receiving Social Security and Medicare in proportion to the number of people in the work force that are paying into those programs. Medicare is especially worrisome because its rising costs are coupled with the projected rising costs in health care. Without new income (Yes, that means taxes), the government can’t slow the accrual of debt used to fund its current or future obligations. That is, our government can’t bring down the debt until it begins to make more money. It’s like continuing to borrow to pay for the groceries while your salary doesn’t rise. Without cutting government expenses, no amount of government income will be able to maintain even that reasonable 60% debt level that was mentioned earlier. Even if your salary goes up, that doesn’t mean you can spend more. You still have to watch what you’re spending in order to bring your debt down. Rolling over our debt is also hard to do since are debt ratio to GDP is already so high. Nobody knows what the top debt ceiling is; but as was stated before, the more we add to the percentage of what we borrow in relation to the total we produce, the greater adverse risks it may pose to our overall economy. Despite what you think of Obama’s spending programs, we are compelled to add his debt to the historically high levels of debt Bush had accrued during his tenure. I’m not bringing that up to be partisan. Actually Obama is falling in line with the same upward spending curve as Bush. It’s just to show that we are adding a great amount of debt onto what already was a greatly increased amount of debt.

This overview helps lead us from the political-economic background of the debt ceiling to the politics of the debt ceiling debate.

For now, there are three plans out there to help bring our national debt under control, the Report of the National Commission on Fiscal Responsibility and Reform co-chaired by former Republican Senator from Wyoming Alan Simpson and the former Chief of Staff of President Clinton Erskine Bowles (Simpson-Bowles Plan). There is A Roadmap for America’s Future a report by the U.S. House Budget Committee, chaired by Rep. Paul Ryan (R-WI). The Simpson-Bowles Plan was commissioned independently by President Obama and is now being translated into legislation by the Gang of Six, headed by Mark Warner (D-VA) and Saxby Chambliss (R-GA), who are joined by the Senate members that also served on the president’s commission, Tom Coburn (R-WY), Mike Crapo (R-ID), Kent Conrad (D-ND), and Dick Durbin (D-IL). Ryan’s Plan has already passed the House Budget Committee and the House. In February, President Obama presented The Federal Budget for the Fiscal Year 2012.

The Democrats generally view the debt ceiling debate as just that- a debt ceiling debate. This debate, as in the case of the recent budget debate, should be narrowly focused on the merits of raising the government’s debt ceiling to fund its current obligations. Strategically, this is away to deflect argument over the debt since the money has already been spent. And since the money has already been spent, what’s the use in arguing over it. It’s important to note here that the debt ceiling is raised to account for spending provisions that were already passed and does not allow for further spending in the future. Republicans believe that the debt ceiling debate should be tied into the broader overall debate on how to bring down the national debt. Therefore, the Republicans, who hold the legislative advantage in terms of government revenues by being the majority party in the House, have called on President Obama to present his own plan to combat the debt so that it can be debated along with the debt ceiling debate and the Republican-led Ryan Plan. The President’s budget for 2012 did not address possible spending cuts in Social Security, Medicare, and Medicaid and was thus viewed as incomplete and unacceptable to the Republicans. Remember that the budget that was just passed a couple of weeks ago was for last year, not this year. The Republicans are saying basically. Alright, we let you get by this time but we want assurances that you’re not going to spend like that again. Another important fact to note is that a budget year (a.k.a. fiscal year) doesn’t follow from January to December or even along the election cycles that come by every November. Instead a budget year starts in October and goes through 4, 3-month quarters until the end of September.

Strategically, Republicans are quick to not that the plan Obama has put forward  in his speech this week has called for a rise in taxes, they also know that that could be politically damaging for Obama heading into an election cycle ala George H.W. Bush. Obama promised during his 2008 campaign that he would not raise taxes on anyone making less than $250,000 a year. This week, Obama proposed tax increases on individuals making more than $250,000. Republicans generally view this as an attack on the wealthy that may stifle initiative and threaten the recovery. Also, there looms on the horizon after the 2012 presidential elections a need to broaden the tax increases to include the middle class. One can expect that Republicans will continue to throw this issue in Obama’s face during the upcoming election in order to back him up into a corner on whether or not he seeks to raise taxes. As long as the Republicans control the narrative of the debt debate, they get to control the narrative of the public’s perception of Obama.

That’s why making the national debt a priority is so popular with the Republicans and why it will most likely continue to dominate this year’s politics. In political theory, it is said that the masses are fickle. They have a short memory, are governed by their passions, and are vulnerable to undue influence by demagogues. Might sound elitist, but that’s the way it is taught. And if public opinion rules in a democracy where sovereignty is held by the people, then each side is fighting for control of the public narrative. And neither side is apt to give it up, like ball possession on the football field.

            In conclusion, there is much talk in politics of public opinion being like a pendulum which swings back and forth between the left of liberal democrats and the right of conservative republicans. The Republicans will most likely fight to see that many of the government reforms of the last 30 years are not undone by the overall need for reform during the economic recession. That is why Obama will continue to be referred to as a socialist, attempting a government takeover of our economy; so as to scare the people into opposing his reforms. Remember the summary of Hayek given earlier. The Democrats, instead, will continue to berate the excesses of wealthy corporations in order to legitimize their call for greater regulation of business excesses and the need for the government to take a strong role in the recovery, mainly through continued government spending. Obama’s early major spending initiatives were designed to combat the recession. And there is great resignation in his administration to make any move that could threaten the fragile recovery our country is undergoing. Raising taxes could reduce the money people have to spend on goods and services. And since consumer consumption is the primary engine of the U.S. economy, it could slow the nation’s recovery rate.

            As citizens we have to decide if the time to pull back on government spending is now or whether we should still wait. And if it is now, what will that pull back look like? Is it going to be a recovery where government participates by adequately regulating food, trade, and banking while making strategic investments in new technologies, schools and infrastructure as the Democrats are proposing? Or, is it a recovery that favors private business by reducing public expenditures and tax obligations, attracts businesses to open shop and hire again by reducing the costs and burdens of regulation and stimulating those companies which already occupy the largest portions of our economy and provide the most jobs? And what do we do with those children we love but won’t be able to afford in the future, Medicare and Social Security? The debt ceiling debate is really a small part of this greater overall discussion. It is not ‘Armageddon’ as Senator Kay Bailey Hutchison (R-TX) had said; but rather a window into how our government intends to bring our debt under control in the near- and long-term. And in the long run, that’s a good thing. The government has until the middle of May/ early-June to decide. Let us hope this discussion bears concrete steps toward addressing our debt.

For some non-partisan sources that help cut through the confusion, consult the Government Accounting Office, the Congressional Budget Office, and

Remember that in a democracy, it’s the responsibility of all citizens to regularly inform themselves!!!

Warning: When you start reading news and government articles on the debt and deficit, your head quickly starts to spin from all the facts and figures. The political rhetoric and the fishing of statistics by politicians and pundits to support their ideological biases make it even more difficult. Just remember that the overall plan is to reduce spending, raise revenues, and grow our economy.

Hello world!

Friday, April 8th, 2011

Welcome to Formazione per la Ricerca – Università di Pisa. Hello. My name is Carlo Garofalo. This is my first web log; so, I’ll make it short. I’m a doctoral candidate in Social and Political Sciences at the Universita’ di Pisa. My doctoral thesis generally covers the field of Church State relations. But, I intend to use this blog to cover current events and American politics more generally. I hope you enjoy my web postings!!!