It's been almost nine months since we've heard any news about the looming National Debt Crisis and the Debt Ceiling. Around this time last year, news outlets were just beginning to report that the Federal Government's National Debt was approaching the Debt Ceiling. Today, the National Debt is at $16,400,000,000,000 ($16.4 trillion) while the US GDP is at $15.8 trillion. Essentially, America owes more then it trades/makes in a whole year.
Why this is a problem: The American government's debt has been increasing steadily for the past decade. Now, the government owes more money then it gets in a year (it owes more then its GDP). This is a problem because the American government now needs to borrow more money in order to pay off its existing debt. In addition, taxes are still relatively low, and government stimulus/spending is at a high in order to help the American economy grow. Because the government needs to pay off its substantial debt, the government reduces its spendings in different areas which would actually help the economy; the government might fire thousands of workers, or reduce unemployment benefits and infrastructure projects. The government will then proceed to increase taxes in order to increase revenue, which would cause an increase the interest rate. Adding on to those woes is the decrease in domestic investment; foreign investors will see that America owes more money then it currently trades in a year and realize that it might not be a very safe investment because in all actuality, it could default. Additionally, the American government will have to reduce the yield on its bonds because it can not afford to pay more in interest to its debt holders. As a result, foreign and American investors might look else where for a financial instrument that offers a higher rate of return. With less people buying bonds, the US Government needs to find another way to raise revenue in order to pay off its existing debt, which would likely come from a higher tax increase.
How this whole debt cycle works: The American government needs money in order to operate and keep America healthy. The American government needs money to invest in maintaining/creating infrastructure, in keeping the country and its interests safe (both abroad and domestically), and to pay the millions of workers it employs. The government gets a lot of the revenue it needs to pay off those costs through taxes, but sometimes taxes aren't enough, and the government needs to borrow. So, the government sells bonds and treasuries (US Bonds and US Treasuries) to investors. When investors buy the bonds, they are actually giving money to the US Government, and the US Government is promising to pay them an annual yield, and then the value of the bond once it expires (ex. two year bonds).
When President George Bush came into office, the American economy was still in a recession from the 2000 "Internet" stock market crash. In order to help the economy recover, Bush lowered the interest rates, so it became cheaper for people and corporations to borrow and spend money which would fuel the economy. But, the economy did not recover at a fast enough pace, so in 2003, Bush enacted a capital gains tax reduction. Bush lowered the tax on capital gains (returns on investments) from 39.6% (20% tax + dividends) to 15% to encourage people to invest their money in the stock market, because now the rate of return was a lot higher since investors did not have to lose as much of their profits to taxes. Companies would then use that money to expand their business by hiring new workers.
In addition, the Bush administration eliminated many taxes, including some on scholarships. The economy did recover with all of those tax breaks, but the national deficit continued to increase. The Iraqi war which Bush started began in the early 2000s, contributed hugely to the national deficit increase; some Economists estimate that the government spent more then $1 billion per day to keep the troops and their equipment in Iraq. Furthermore, the Bush administration created the Department of Homeland Security, increased the size of the military by hundreds of thousands of soldiers, and made DARPA to invest hundreds of millions of dollars in colleges/universities to research military technology advancements.
To sum it up, the American government under the Bush administration was spending hundreds of billions more per year then it was making, because of the lowered tax rates/eliminations, and the increase in the government's spending. The tax breaks were signed in to effect for the next 10 years, so for the next 10 years the American government continued to spend way more then it made. As a result, it had to borrow a lot more too. The recession in 2009 occurred because American consumers and businesses were borrowing way more then they had, just like the American government. As a result, the American government had to spend more through federal bank bailouts ("too-big-to-fail banks"), and Quantitive Easing programs. In addition, the government had to keep interest rates low so that businesses and consumers could afford to borrow more in order to spend more (help put money back in the economy). Bush was not the only one who contributed to the increase in national debt, under the Obama administration, federal government spending increased by nearly 50% for his MediCare, MedicAid, Social Security and unemployment benefit increases.
The end result is that the government is now in a cycle of borrowing more money to pay off the money it has already borrowed, while attempting to keep interest and tax rates low, and having the government not increase the amount it spends per year.
Fast forward to 2012. The Bush Tax Cuts were scheduled to expire on Jan 1st of 2013. If those tax cuts expired, Americans would go from paying 10 - 20% in taxes to 30+% in taxes, a huge increase. If American consumers and businesses had to lose that much more in taxes, they would not have as much money to spend, which means they might be thrifty with their money, and choose to save it instead of spending it. In 2012, the economy had not fully recovered from the 2009 depression, unemployment rate was still high, PMI/consumer spending was still low, and real estate prices were still low. If the tax break had gone into effect, almost everyone would stop spending their money, and choose to save it in the bank. If consumers stopped spending money, businesses would stop making money, and would need to cut down on expenses; first by not hiring new workers, then by firing existing workers. If existing workers are being fired, they need to rely on the government for Food Stamps/Unemployed Benefits, and they will not have any money to spend. Even though the higher tax rate would initially decrease the national debt, over time, it would actually increase the national debt. If consumers stop spending money, the government loses sales tax. If businesses make less revenue because consumers are spending money and not saving it, the government loses revenue taxes. When the businesses have to fire workers, the workers don't have to pay income taxes, and the government loses the income rate tax.
In October of 2012, there was actually a mini-crisis; the US Federal Government had a national debt of over $16 trillion, which Congress had made the debt ceiling. As a result, many government facilities closed down because the government literally did not have the money to pay the employees who ran the facilities. Congress was decently quick to increase the debt ceiling, and actually postpone the debt ceiling to October 1st of 2013.
But Congress, of course, was unable to come up with a solution for the sudden tax increase that would occur on Jan 1st, 2013 if they did not do anything. Because many media outlets began reporting the tax increase for December in September, and because the American people had little faith in Congress (CNN poll reports less then 20% of Americans felt satisfied with Congress), Americans saved more of their money then they normally would have. This caused a problem because the fall and Christmas season are the two times of year when people spend the most money. As a result, Black Friday was a disaster, and company profits/revenues barely made it to the black. On December 31st, 2012, at around 9PM, Congress came up with a solution to slightly increase taxes, and decide how much higher the taxes should be at a later date (pretty last minute, right?).
October 1st marks the beginning of a new fiscal year for the American government. A fiscal year where the budget has not yet been approved by Congress or the President, a fiscal year where the debt ceiling has not yet been determined. In a New York Times Opinion Editorial, Paul Krugman identifies the Republican party as the source of the problem. Krugman states that the Republican party is literally holding Americans hostage until Obama lowers the tax rate and dismantles the health reform that he has made the signature achievement of his Presidency. Congresses's Republican radicals are holding Americans hostage by refusing to sign the 2014 Fiscal Year Budget by September 31st, 2013 which is the latest it can be signed; the Fiscal Year budget goes into effect on October 1st, 2013. If the fiscal budget is not approved, the Federal government can not spend any money, which would ruin the American economy, and then the international economy.
Congress has approved a bill that funds the federal government $986 billion until December 15th, to avoid a total government shut down. Currently, Congress is still trying to reach a resolution on how much to cut spending in MediCare, MedicAid, and Social Security, while deciding whether to pass ObamaCare. It looks like the Republicans have succeeded in cutting off funding for ObamaCare by using some tricks in their parliamentary toolbox, which makes ObamaCare need 60+ Senate votes to pass, more then a simple majority, and the Republicans have control of the Senate.
ObamaCare/Obama Administration Policies: The Obama administration wants to make health care available to everyone at low cost. This is obviously going to be a very, very expensive plan, as providing health insurance for everyone (the poor, those with severe pre-existing conditions, etc) can become very expensive.
Previously, Americans had the option of buying healthcare from private insurance companies, or from the government. Having private insurance companies meant that there would be competition to decrease prices. On the other side, using Game Theory, insurance companies could match the prices with their competitors, or increase their prices, making it more expensive for consumers with pre-existing conditions to buy. In addition, private insurance was a lot more exclusive/picky in getting new clients, many people with severe preexisting conditions were not given insurance plans, or their plans were very expensive. Government provided insurance meant that it would be overall cheap and available to everyone (including those with pre-existing conditions). The only problem with government provided health insurance is that it requires the government to spend a lot more money, which means the government needs to increase taxes. Steven Cruz at Forbes Magazine points out that it is actually the healthy, middle age male and female who end up paying the most for insurance in order to subsidize the older, poorer Americans in bad health. Obama's policies tax pharmaceutical companies more, and force them to sell their drugs at a cheaper price; in someways, giving them a double whammy, they have to sell their product for less money, and pay more of their revenue in taxes.
Why this is a problem: The American government's debt has been increasing steadily for the past decade. Now, the government owes more money then it gets in a year (it owes more then its GDP). This is a problem because the American government now needs to borrow more money in order to pay off its existing debt. In addition, taxes are still relatively low, and government stimulus/spending is at a high in order to help the American economy grow. Because the government needs to pay off its substantial debt, the government reduces its spendings in different areas which would actually help the economy; the government might fire thousands of workers, or reduce unemployment benefits and infrastructure projects. The government will then proceed to increase taxes in order to increase revenue, which would cause an increase the interest rate. Adding on to those woes is the decrease in domestic investment; foreign investors will see that America owes more money then it currently trades in a year and realize that it might not be a very safe investment because in all actuality, it could default. Additionally, the American government will have to reduce the yield on its bonds because it can not afford to pay more in interest to its debt holders. As a result, foreign and American investors might look else where for a financial instrument that offers a higher rate of return. With less people buying bonds, the US Government needs to find another way to raise revenue in order to pay off its existing debt, which would likely come from a higher tax increase.
How this whole debt cycle works: The American government needs money in order to operate and keep America healthy. The American government needs money to invest in maintaining/creating infrastructure, in keeping the country and its interests safe (both abroad and domestically), and to pay the millions of workers it employs. The government gets a lot of the revenue it needs to pay off those costs through taxes, but sometimes taxes aren't enough, and the government needs to borrow. So, the government sells bonds and treasuries (US Bonds and US Treasuries) to investors. When investors buy the bonds, they are actually giving money to the US Government, and the US Government is promising to pay them an annual yield, and then the value of the bond once it expires (ex. two year bonds).
When President George Bush came into office, the American economy was still in a recession from the 2000 "Internet" stock market crash. In order to help the economy recover, Bush lowered the interest rates, so it became cheaper for people and corporations to borrow and spend money which would fuel the economy. But, the economy did not recover at a fast enough pace, so in 2003, Bush enacted a capital gains tax reduction. Bush lowered the tax on capital gains (returns on investments) from 39.6% (20% tax + dividends) to 15% to encourage people to invest their money in the stock market, because now the rate of return was a lot higher since investors did not have to lose as much of their profits to taxes. Companies would then use that money to expand their business by hiring new workers.
In addition, the Bush administration eliminated many taxes, including some on scholarships. The economy did recover with all of those tax breaks, but the national deficit continued to increase. The Iraqi war which Bush started began in the early 2000s, contributed hugely to the national deficit increase; some Economists estimate that the government spent more then $1 billion per day to keep the troops and their equipment in Iraq. Furthermore, the Bush administration created the Department of Homeland Security, increased the size of the military by hundreds of thousands of soldiers, and made DARPA to invest hundreds of millions of dollars in colleges/universities to research military technology advancements.
To sum it up, the American government under the Bush administration was spending hundreds of billions more per year then it was making, because of the lowered tax rates/eliminations, and the increase in the government's spending. The tax breaks were signed in to effect for the next 10 years, so for the next 10 years the American government continued to spend way more then it made. As a result, it had to borrow a lot more too. The recession in 2009 occurred because American consumers and businesses were borrowing way more then they had, just like the American government. As a result, the American government had to spend more through federal bank bailouts ("too-big-to-fail banks"), and Quantitive Easing programs. In addition, the government had to keep interest rates low so that businesses and consumers could afford to borrow more in order to spend more (help put money back in the economy). Bush was not the only one who contributed to the increase in national debt, under the Obama administration, federal government spending increased by nearly 50% for his MediCare, MedicAid, Social Security and unemployment benefit increases.
The end result is that the government is now in a cycle of borrowing more money to pay off the money it has already borrowed, while attempting to keep interest and tax rates low, and having the government not increase the amount it spends per year.
Fast forward to 2012. The Bush Tax Cuts were scheduled to expire on Jan 1st of 2013. If those tax cuts expired, Americans would go from paying 10 - 20% in taxes to 30+% in taxes, a huge increase. If American consumers and businesses had to lose that much more in taxes, they would not have as much money to spend, which means they might be thrifty with their money, and choose to save it instead of spending it. In 2012, the economy had not fully recovered from the 2009 depression, unemployment rate was still high, PMI/consumer spending was still low, and real estate prices were still low. If the tax break had gone into effect, almost everyone would stop spending their money, and choose to save it in the bank. If consumers stopped spending money, businesses would stop making money, and would need to cut down on expenses; first by not hiring new workers, then by firing existing workers. If existing workers are being fired, they need to rely on the government for Food Stamps/Unemployed Benefits, and they will not have any money to spend. Even though the higher tax rate would initially decrease the national debt, over time, it would actually increase the national debt. If consumers stop spending money, the government loses sales tax. If businesses make less revenue because consumers are spending money and not saving it, the government loses revenue taxes. When the businesses have to fire workers, the workers don't have to pay income taxes, and the government loses the income rate tax.
In October of 2012, there was actually a mini-crisis; the US Federal Government had a national debt of over $16 trillion, which Congress had made the debt ceiling. As a result, many government facilities closed down because the government literally did not have the money to pay the employees who ran the facilities. Congress was decently quick to increase the debt ceiling, and actually postpone the debt ceiling to October 1st of 2013.
But Congress, of course, was unable to come up with a solution for the sudden tax increase that would occur on Jan 1st, 2013 if they did not do anything. Because many media outlets began reporting the tax increase for December in September, and because the American people had little faith in Congress (CNN poll reports less then 20% of Americans felt satisfied with Congress), Americans saved more of their money then they normally would have. This caused a problem because the fall and Christmas season are the two times of year when people spend the most money. As a result, Black Friday was a disaster, and company profits/revenues barely made it to the black. On December 31st, 2012, at around 9PM, Congress came up with a solution to slightly increase taxes, and decide how much higher the taxes should be at a later date (pretty last minute, right?).
October 1st marks the beginning of a new fiscal year for the American government. A fiscal year where the budget has not yet been approved by Congress or the President, a fiscal year where the debt ceiling has not yet been determined. In a New York Times Opinion Editorial, Paul Krugman identifies the Republican party as the source of the problem. Krugman states that the Republican party is literally holding Americans hostage until Obama lowers the tax rate and dismantles the health reform that he has made the signature achievement of his Presidency. Congresses's Republican radicals are holding Americans hostage by refusing to sign the 2014 Fiscal Year Budget by September 31st, 2013 which is the latest it can be signed; the Fiscal Year budget goes into effect on October 1st, 2013. If the fiscal budget is not approved, the Federal government can not spend any money, which would ruin the American economy, and then the international economy.
Congress has approved a bill that funds the federal government $986 billion until December 15th, to avoid a total government shut down. Currently, Congress is still trying to reach a resolution on how much to cut spending in MediCare, MedicAid, and Social Security, while deciding whether to pass ObamaCare. It looks like the Republicans have succeeded in cutting off funding for ObamaCare by using some tricks in their parliamentary toolbox, which makes ObamaCare need 60+ Senate votes to pass, more then a simple majority, and the Republicans have control of the Senate.
ObamaCare/Obama Administration Policies: The Obama administration wants to make health care available to everyone at low cost. This is obviously going to be a very, very expensive plan, as providing health insurance for everyone (the poor, those with severe pre-existing conditions, etc) can become very expensive.
Previously, Americans had the option of buying healthcare from private insurance companies, or from the government. Having private insurance companies meant that there would be competition to decrease prices. On the other side, using Game Theory, insurance companies could match the prices with their competitors, or increase their prices, making it more expensive for consumers with pre-existing conditions to buy. In addition, private insurance was a lot more exclusive/picky in getting new clients, many people with severe preexisting conditions were not given insurance plans, or their plans were very expensive. Government provided insurance meant that it would be overall cheap and available to everyone (including those with pre-existing conditions). The only problem with government provided health insurance is that it requires the government to spend a lot more money, which means the government needs to increase taxes. Steven Cruz at Forbes Magazine points out that it is actually the healthy, middle age male and female who end up paying the most for insurance in order to subsidize the older, poorer Americans in bad health. Obama's policies tax pharmaceutical companies more, and force them to sell their drugs at a cheaper price; in someways, giving them a double whammy, they have to sell their product for less money, and pay more of their revenue in taxes.
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