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A two Party Debt
Posted at: Apr/14/2011 : Posted by: mel
Related Category: Economics,
Numbers have always intrigued me; they represent a specific understanding or measurement of something as opposed to a subjective definition. The current US national debt is hovering around $14 trillion dollars. For most people, despite being a number, $14 trillion is so large it is difficult to grasp and becomes subjective anyway. A little bit of simple division may help bring this big number back to some tangible. $14 trillion is the same as roughly $47,000 for everyone in the United States. When I said everyone, I meant every man, woman and child. I don’t know about you, but I can’t afford to write a check for $47,000. I know my children have a lot less in their piggy banks!
Of course, pointing the finger of blame is an engrained part of politics and right now there is a lot of blame rhetoric. In truth, both political parties have contributed to the current debt. Democrats argue that Republican President George W. Bush with his wars in Iraq & Afghanistan, underfunded prescription drug plan and tax cuts that favored the wealthy created the current debt. On the other hand, Republicans like to blame President Obama and his one time Democratic majority for their heavy spending that was intended to spur the economy, but failed to do anything except raise the debt.
The reality is that much like personal debt, both Presidents Bush and Obama have presided over budgets whose spending far outweighed revenues. There is no doubt in my mind that wars and pricy safety net social programs are a factor, but a significant culprit has to be the devastating recession of 2007-2010. The recession prompted the spending of hundreds of billions of dollars to stymie or at least slow down the economic down turn. All this spending to rescue the economy occurred while personal income and corporate income were sharply down reducing potential tax revenue. This is kind of a catch-22; when you need the money the most, it is least available to spend.
Much like personnel indebtedness, the “National Debt” is what the United States owes to other countries or debt holders.
The national debt is not something new, it began with President George Washington and his Congress which agreed to take on debts incurred by the individual states as a result of fighting the Revolutionary War. The United States has maintained a debt for most of its history. The debt broke through the $1 trillion mark (that’s 12 zeroes after the one) in 1981which was the first year of the Reagan presidency. Despite his campaign promises to balance the budget, the realities of dynamic circumstance can be overwhelming. With a recession, the savings and loan bailout, increased cold war defense spending and a large tax cuts the debt was at a little over $3 trillion when Reagan left office.
During the George H. Bush administration the debt grew an additional $1 trillion to approximately $4 trillion. Despite have a couple years of budget surpluses, when President Clinton left office the debt had grown to $6 trillion. When George W. Bush finished is two terms the debt had surpassed the $10 trillion mark. In President Obama’s first two years in office the debt has climbed beyond the $14 trillion mark with no clear end in sight.
Whether it is wars, bank bailouts, recessions, entitlement program or something else from a long list of something else’s, it would appear that no administration, Republican or Democrat, conservative or liberal can overcome the challenges of dealing with the events of their day without running up the debt. It should also be noted that the much noted national debt “clock” that is near Times Square in New York City had to be rebuilt in 2008 to allow for the extra digit.
The financial watchdogs break the current debt down in the following way. Approximately $4.6 trillion is money the government borrowed from itself, this is mostly revenue collected for Social Security, but used for other obligations. An additional $3 trillion is associated with the wars in Iraq and Afghanistan along with the lost tax revenues of “Bush-era” tax cuts. Stimulus spending obligations account for an additional $600 billion. The rest of the debt predates the last 10 years and is harder to directly attribute to any one program or event. We attribute all this to presidents because it is easier to associate events with a single individual. In truth, while a president attempts to set and push an agenda, the budget and all supplemental spending bills come from Congress and are voted on by members from both political parties so there is plenty of blame to go around.
The U.S. is considered to have good credit as we have never defaulted on a financial obligation. America’s bonds are considered among the safest investment in the world. In addition to American citizens, many foreign governments and investors have large holdings in U.S. treasury securities. As is well noted, China is currently the foreign government holding the most amount of U.S. treasury paper. Not meeting our obligations in not really an option. Like many countries who have defaulted on their debts, the consequences are lack of confidence and higher borrowing costs going forward.
The Republican Party, as a result of the 2010 mid-term elections is now the majority in the House of Representatives, but this does not mean that they will be able to easily push and budget agenda whether good or bad. In the U.S., while we support more than two political parties, it is virtually impossible to get elected as a third party. About every thirty years there is a political upheaval for some kind of change that appears to be the foundations of a new political party. These “reformers” ultimately join the ranks in mass of one of the two leading parties forcing an agenda shift. The current wave of reformers call themselves “Tea Party activists” and campaigned on an agenda of smaller government and fiscal responsibility. Historically, any reform movement has seldom followed strictly the leadership of the party that they join; House Speaker John Boehner has definitely found this to be true. Never the less, finding deep spending cuts and at the same time not bring the national economy to a halt will be a difficult balance.
President Obama suggested recently that the bulging debt is because during the Bush years “we lost our way.” While that sounds nice when talking to children, the challenges now and into the future are much more complicated and in many cases date back 30-60 years. The looming obligations for Social Security, Medicare, Medicaid and other entitlement programs are just starting to blossom as millions of baby boomers reach retirement age. As our debt holders ask for the interest on their investments and our seniors ask for the promises to be met, we are going to start running out of money. Obviously, this is no longer a problem that can merely be kicked down the road.
Much like individual finances, borrowing is a good way to accomplish big items like buying a car, financing a home, or sending a child to college. Left unchecked, debt can become the single biggest obligation in the stack of bills on the kitchen table. The end result for you or your neighbor could be spending more than half your income just making credit card interest payments without ever reducing the principal debt obligation.
Currently our federal government is looked to for managing safety net programs, ensuring food and drug safety, building and maintaining infrastructure, providing a national defense, and a host of other duties. If no changes are made in our government policies it is estimated that our debt could reach $20 trillion by 2020. If we do not relatively soon figure out how to manage our national budget and meet the obligations of our debt we could end out with a government that is reduced to only being an insurance broker with a small military.
There is plenty of blame for how we got here. In truth, much of it falls on our zeal to leave no one behind, but this may be a policy we can no longer afford. There are no easy answers anymore, but the mess only gets worse if we don’t deal with it soon.