Secretary of the Treasury Geithner just sent Senate Majority Leader Harry Reid a letter.
Noting that in 5 days the US will again have hit the debt ceiling, Secretary Geithner explains that actually, we might have an extra 2 months. In an appendix to his letter, he outlines 4 types of “extraordinary measures” that will let us avoid a debt default for awhile. He adds though, that he is not sure how long he can stretch it because of the uncertainty created by the current negotiations over tax increases and spending cuts. (Ironically, no Congressional tax and spending deal means more time to get a new ceiling.)
Where is the debt ceiling? $16.394 trillion.
Where were we on December 26th? $16.027 trillion.
In 1917, Congress decided it could not keep track of every U.S. loan. So, to maintain some control over national finance, they said, “We will decide the maximum amount the U.S. can borrow.” And, from that day onward, whenever necessary, they voted to increase how much the U.S. could borrow. Since 1962, the U.S. Congress has raised its debt ceiling 76 times.
Sources and Resources: Here is Secretary Geithner’s letter and the Treasury Department daily update of US debt totals. For some debt history, John Steele Gordon’s Hamilton’s Blessing The Extraordinary Life and Times of the National Debt is wonderful. Also, this CNNarticle and these these econlife posts, Debt Ceiling 101 and Looking at the Debt Ceiling, provide some background and some of the above history.
There might be 2 ways to look at the fiscal cliff.
Specifically, we can focus on tax increases and spending cuts:
Bush era tax cuts: expire
2010-2011 2% payroll tax cut: expire
Affordable Care Act taxes: kick in
Emergency unemployment benefits: expire
Budget sequester (cuts) from Super Committee failure: kick in
Previously legislated budget cuts: kick in
Defense cuts from Iran/Afghanistan reductions: kick in
Medicare payment rates for physicians: reduced
More broadly, we can take a step backward and look at the bigger problems that really have to be solved:
63% of the 2011 federal budget was on “autopilot.” Debating cuts, the Congress only looked at 37% of spending.
1 of 4 budget dollars is spent on healthcare. Looking back 50 years ago, less than 10% of all spending was healthcare, and looking forward, we are heading toward 33%.
Slicing federal employees and agencies would save money but not nearly enough. Even if we fired the entire federal payroll, the deficit would dip by less than one third.
Defense spending is massive. We spent 1 out of every 5 dollars on defense in 2011.
We now borrow close to 36 cents for every dollar we spend. And yet still, the more affluent are paying a larger proportion in taxes and the middle of the middle class (as expressed in the video) is paying a lower proportion.
Where does this leave us? Defined as taxing, spending and borrowing, US fiscal policy is the real fiscal cliff.
Sources and Resources: The specifics of the fiscal cliff are from a past econlife post while the summary of the big issues is from the David Wessel/WSJ video that follows. For even more detail, this Tax Foundation description of the fiscal cliff is good.
The research of several economists indicates that policy uncertainty foreshadows and might even cause slower economic activity. To prove their hypothesis, they created an Index of Economic Policy Uncertainty with 3 data components: 1) The frequency that uncertainty and economic appears in news articles. 2) The number of expiring tax provisions. 3) The volume of economic forecasting disagreement. Very simply, they think that when employers are unsure of future regulation, taxes and interest rates, they postpone hiring and investment decisions rather than risk having to reverse them in the future.
This takes us to election results. Will the political gridlock that creates economic uncertainty continue?
Sources and Resources: The economists, Scott R. Baker (Stanford), Nicholas Bloom (Stanford), and Steven Davis (U. of Chicago) have a website that presents their indices and links to their research (the source of the graph that follows) and further discussion of their ideas. For a briefer summary, I suggest this Vox article and a Stanford summary of their work. Do take a look. It certainly relates to election results.