A Little Perspective From Thom R. Church and Erin I. Rothback

America’s greatest domestic issue is undoubtedly the matter of its economic functioning. Those who watch the news can undoubtedly call to mind such hot-button phrases as “budget battle” and “fiscal cliff”. I’m writing today to give an objective background, explanation, and set of reasonable predictions concerning our country’s current crisis. If I fail in any way, you have my permission to criticize me openly on the internet.

There will be four parts to this post, modeled off of today’s Global Diplomacy lesson. My true motive for writing this is to clarify for myself the matter of today’s pressing budget issue, because tomorrow we have an essay to write describing… well, describing these four things:

1) All of the time up until the Budget Control Act (BCA) was passed

2) BCA to Jan. 1, 2013

3) Jan. 1

4) Issues, conceivable consequences, etc.

If this helps anyone study for tomorrow besides myself, I will be thrilled. Please know that I like you guys.

UP TO BCA

In 2008 there was a huge financial crisis in the US that ultimately forced us into recession. Decisions were made delicately because of the huge housing collapse, which was due to unqualified loans and improper banking decisions. Mortgages were subsequently withheld and foreclosures were abundant because the people weren’t paying off their loans (imagine that, many of them had poor credit ratings and deserved nothing of the sort). I learned recently of a loan called the “NINJA” which stands for “No Income, No Job, no Assets” and, of course, in hindsight, some think this loan was a bit ridiculous. But it was largely the fault of loans like these that caused the financial meltdown. In 2008 there was a budget deficit of $1.75 trillion, an immensely large sum, due to Bush’s TARP program and Obama’s stimulus package. These were huge budget burdens and were paid for with borrowed money.

The debt ceiling was seeming ever closer, and so in November 2010, during the elections, a new group of Tea Party politicians were elected to Congress and Boehner became the Republican Speaker of the House. The reason that elections proved so conservative was that the recession had come to be blamed on the Democrats, who in 2008 had governed both the Executive and Legislative branches of government. They had House majority and so their decisions were seen as the direct cause for the economic upset.

In May of 2011, the debt ceiling was officially hit. $14.3 trillion dollars had been accumulated in total debt and Congress fought over solutions for the entire summer. On August 2nd, which was the last possible day that anything could be done without a US default and a government shutdown, Congress passed the Budget Control Act, which raised the debt ceiling up to $16.39 trillion and also created a Supercommittee charged with formulating a balanced, bipartisan budget.

BCA to Jan. 1st

The Supercommittee certainly churned out ideas, and the most-cited example would have to be the Simpson-Bowles plan, which died in committee and never officially reached the House to be debated upon. The Supercommittee failed in November 2011, its deadline.

The failure arose from a microcosmic battle of ideologies. The reason that a budget had not been made in any of the previous years since 2008 was because there was fighting and polarization in Congress; it was the same in the Supercommittee. There was a complete failure to compromise over relatively small cuts and rate raises amounting to mere scores of billions of dollars. This battle is commonly known as “rates v. revenue” because it is entirely about taxes and spending. Democrats typically want to see tax increases to make up for excess spending; Republicans want to see spending cuts to make up for painfully low tax rates (by comparison, and especially in our current situation, can they be considered low).

The Supercommittee’s failure brought America to an ultimatum. The Budget Control Act mandated that if they failed to come to an agreement, there would be a massively effective and also harsh imposing of “sequestration” measures, which would yield $1.2 trillion over 10 years ($120 billion a year). These cuts and rate increases were designed to be harsh as an incentive for the Supercommittee to agree on a budget that would be less drastic.

JAN. 1st: Effects

In the middle of the night on Dec. 31st, the Senate voted 89-8 that the sequestration measures would be “staved off” for another two months. They prolonged their decisions on many matters, including many rate increases and spending cuts included in the sequestration measures. Sequestration will not officially take effect for another two months.

Of the things that the legislation accomplished, perhaps the most apparent one would be the tax increase on the ‘wealthy’ people, specifically those who make $400,000 or more a year. Individuals who make $400k or more, as well as couples who make $450k or more, now have their tax rates increased from 35% to 39.6%. This adds $60 billion to US Government revenue.

Another effect of the recent legislation increases dividend/capital gains taxes (taxes that are taken from stock and investment gains) from 15% to 20%. This also applies only to those above the 400k/450k individual/couple threshold.

Payroll taxes have increased from 4.2% to 6.2%. This is a result of the expiration of a specific portion of the Bush Tax cuts; the original tax rate is 6.2%, but the tax cuts have kept the payroll tax at a 4.2% level for some time. The Bush Tax cuts have not altogether expired and there is no reason to suspect that they will be allowed to expire. Obama and Congressmen have agreed to preserve most of the tax cuts in the most recent legislation.

To finalize this section, I can only say that Americans now face three fiscal cliffs: a continuing resolution has given Congress another two months to make decisions and cooperate. At the end of these two months, if no specific budget is agreed upon, the first of the cliffs will be a government shutdown, similar to the situation that was faced on August 2nd, 2011. The second cliff involves sequestration, because at the end of these two months this is what will be enacted if no decision is reached. The last is the debt ceiling hit, which may cause a second downgrade of America’s credit rating leading to interest rate spikes and other economic crises.

 Predictions

This part’s really up to you guys. Make of this what you will. What are the major issues, who will be affected? What kinds of things are we seeing delayed and are there any patterns in governmental business that you expect to see again?

I hope this helped you guys, I really do; writing it all down like this helped me a lot.

-Thom
aestheism, not atheism.

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