A look at the 2011 debt ceiling crisis

David J. Moore, Ph.D.

August 3, 2011

Why a crisis?
On April 15, 2011 Congress passed a budget with $3.82 trillion in spending and only $2.17 trillion in expected revenues (e.g., tax collections). Yes, Congress authorized spending it could not afford! If you pass a budget with a deficit you have to do something as bills come due: 1. Borrow money (issue debt). 2. Dip into savings - part of the "extraordinary accounting methods" used in the past. Maybe sell some gold bricks. 3. Cut spending and decide who does not get paid. 4. Raise more revenues, i.e., increase taxes. Budget deficits are common: Only one of the last 30 fiscal years did not have a budget deficit.

What happens if the debt ceiling is not raised?

This eliminates the option of borrowing money to pay already approved obligations. If there are no savings left that leaves just two options cutting spending and decide who does not get paid, or increase taxes Republicans do not want to raise taxes. However Republicans rarely talk about whose taxes. Taxes on the fortunate few or taxes on the majority of Americans? This leaves cutting spending and not paying people as the only option. The problem is, who does not get paid? Social security, Medicare, military salaries, civil employee pay, education, interest on debt, etc. My opinion: talk of cutting military salaries so we can pay interest to China on the treasury securities it owns is preposterous. Renegotiate the debt!

Balanced Budget Act of 2011

On August 2, 2011 the debt ceiling was raised subject to the Balance Budget Act of 2011. What is in that Act? Cuts spending more than debt limit is increased. For example, the debt limit is immediately increased $900 billion and spending is to be cut $917 billion over 10 years. There are no additional revenues, i.e., no tax increases. The penalty for failure to produce a deficit reduction bill: automatic across the board cuts that apply to things like Medicare, education, and defense but not Social Security, Medicaid, civil and military employee pay, or veterans. Notice how the politicians did not vote to approve cuts in their own pay "civil employee pay." Rather, they can effectively cut non government employee pay (e.g., teacher pay by cutting education spending).

My take on the Act

While I agree with cutting wasteful spending (e.g., Iraq, Libya, etc.), cutting Medicare and education harms lower and middle class Americans. Wealthy Americans can afford private insurance and private schools. Lest we forget how that wealth was accumulated and preserved: hard work (maybe), inheritance, theft, exploitation of lower and middle class, not paying taxes The Act makes no changes to taxation. That means the wealthy continue to pay relatively lower taxes. Most Americans don't own enough stock and bonds to benefit from the Bush tax cuts (example to follow). These tax cuts have been forced to remain by Republicans.

My conclusion: Be aware of a widening wealth gap

Before the Bush tax cuts: we had a framework for a middle class. Taxes from the wealthy could fund the health and education of the majority from whom that wealth is generated in the first place. After the Bush tax cuts: Money spent educating and healing the majority of America is now sent back to the fortunate few. Simple example I own 10,000,000 shares of Walmart and you own 1,000. We both have access to the same returns from Walmart stock. We both benefit from the Bush tax cuts (15% on dividends as opposed to 20%). The 5% tax cut saves me $730,000/year but only $73/year for you. Clearly the gap will widen between us over time. In fact, I can take my $730,000, buy more shares, and exponentially widen the gap every year. You need your $73 to buy food.