Making Sense of the Failing Economy and the Debt Deal/Downgrade

Making Sense of the Failing Economy

Susan Brannon
9 August 2011

First, I want to make it clear that I am not an economist, however, I do understand the basics in balancing a budget, the consequences for borrowing money, spending more than I make, credit card fees and interest on borrowed money and how it seems that I can never get that student loan paid off and…of course, paying taxes.

The mainstream news is finally printing articles about things that most of us already knew.  We knew that the economy was bad, that there are no “real” jobs to be found and our neighbors or ourselves lost all that we had saved up for that day when we were supposed to be able to travel the world and start on our passions during retirement.  Nothing was getting better, it seemed to only be getting worse.  Yet, once the American credit rating was downgraded, the mainstream media could not ignore the fact any longer and they had to start telling the world about the American woes.

In reality, I was shocked that the American people did not demonstrate like in the Arab Spring and join the revolution.  Stories of government corruption has been hitting the front pages for a few years now, corporate, bank and wall street corruption had created this mess.  It took thirty years on average for the Arab nations to wake up and fight and I surly hope that it does not take the Americans that long.  However, I feel that in reference to the economy, it is a bit too late.

We can give thanks to the efforts of Eric Cantor and Michele Bachmann (who is now running for President in 2012)  for the future of America.  The republicans in their ignorance and propaganda blame Obama and Timothy Geithner.  Yet this economical collapse has been a long time coming and in reality was caused by the republicans themselves.  Yes, I am disappointed in Obama, he did not stand tall as he showed during the election, he seems to have bowed down to the republican  scheme of keeping the rich rich and dissimulating the middle class making the hard working American poor.  Obama did not take up the fight as the Americans wanted, he did not flex his muscles for the people of the country.  In the end, this is what will lead to his non re-election in the upcoming presidential campaign.

I must admit, the downgrading by Standard and Poor (S&P) was a deserved one.  They did so because of the immaturity of the Republican tea-party and lack of willingness to really create a plan that would get America out of the debt mess.

The Republicans and Democrats spend all their time pointing fingers at each other, and are not looking at the real picture.  First, who is S&P and what gave the rating agencies so much power?  What gives them the right to play political games with countries economy?  They are privately owned and have a massive list of “conflicts of interest” in this game of economics and policymaking.

First, these rating agencies are usually paid to rate companies and their products by the very same companies.  Wait a minute! Did I just write that?  Yes, Those who need to be rated pay the rating agencies.   Second, during the savings and loan debacle in the 1980’s, to the Asian financial crisis of the 90’s to Enron and the sub-prime bubble the three big rating agencies (S&P, Moody’s & Fitch) they were in the wrong by assuring creditors that the risks of a bank, a company or minimal.  While the Lehman Brothers were on the brink of bankruptcy, S&P gave them an A rating.  Ummm…interesting.  All three rating agencies failed to see the credit crisis coming and for years they provided a AAA rating on bundles of mortgage bonds, even when the securities were questionable.  Many investors purchased the securities based on the AAA ratings and when the mortgages went sour, investors lost billions of dollars that kicked off the financial crisis.  (NYT)

Third, they do not deserve the power that they have in running policymaking and the global economy.  The rating agencies have a huge impact on the media and political debate.

In the end, it is America’s fault to allow them to dominate the economic discussion.  S&P did not make their downgrade because of America’s position but because “the effectiveness, stability, and predictability of American policymaking and political institutions that have weakened at a time of ongoing fiscal and economic challenges”  This was the tea-parties downgrade.

What is the economic reality? 
The U.S. national debt is rising fast;
•    First, the major tax cuts on the corporations and the rich in the 1970’s and more in 2000 has reduced the revenues;
•    Second, the cost of wars has increased government spending;
•    Third, the bailouts of dysfunctional banks, insurance companies and large corporations since 2007 increased the government spending. 
All the above with less revenue coming from the corporations and rich, more spending on wars and bailouts, the government had to borrow the difference.

Unfortunately, the debt deal did not cover any of these items listed above.  The two parties pretend concern about the debt with only how to cut government spending on the people and instead focus on the 2012 election.

The result?
Here are some numbers:
13.9 million unemployed  known unemployed (12%  Center on Budget and Policy)
6.8 million fewer jobs since the start of the recession
40% and more looking for work for more than 6 months
29.1 million underemployed; those who work in the labor force for low wages
22% unemployed and underemployed
3.5 million homeless (an estimate, it is hard to know this number because of movements)
1.5 million homeless children
45.6 million receiving food stamps
60,000 new fired government workers
14 million in January not to receive unemployment checks
2,000.000.000 homes repossessed
1 in 7 homes now in foreclosure
50 million on Medicare
57 million without insurance

What does the debt plan do?

The reality is that nothing has been done yet…there is no concrete plan. The government started a Joint Select Committee.  They must measure “deficit savings against an “existing-law baseline,” under which letting President Bush’s tax cuts for upper-income households expire wouldn’t count as reducing deficits because they (along with the rest of the Bush tax cuts) are scheduled to expire at the end of 2012 under current law.” (Center on Budget and Policy Priorities)

Here are some key points:

•    $1.1 trillion (or $840 billion, depending on the budget baseline used) in discretionary (i.e., non-entitlement) spending cuts over ten years, enforced by binding annual caps through 2021
•    Joint Select Committee to reduce the deficit by at least another $1.5 trillion over ten years, and for the House and Senate to consider the proposal under fast-track procedures that guarantee an up-or-down vote in both bodies, with a simple majority needed for passage.
•    Multi-year discretionary caps – However, establishing multi-year discretionary caps without an agreement on increased revenues makes it even harder to secure revenue increases for deficit reduction in the future. “because the only way to secure a bipartisan agreement that includes increased revenues is to provide anti-tax policymakers with significant spending cuts in return, likely including substantial savings from imposing discretionary caps. With 10-year discretionary caps already in place (and with the potential for across-the-board cuts that would further cut discretionary programs), there will be little prospect to exchange substantial discretionary cuts in return for revenue increases” (CBPP)
•    The joint committee will have the legal authority to produce a balanced package that includes revenue increases as well as program cuts. But House Speaker John Boehner, in an effort to secure votes for the deal, is undermining the joint committee before it's even established. Boehner has circulated documents to his caucus claiming the agreement requires the use of a "current-law revenue baseline," thus "making it impossible for Joint Committee to increase taxes."  The problem is that Speaker Boehner pledged not to raise the taxes, it gives the committee two places to go;
o    Cuts in entitlement programs (Medicare, Medicaid, Social Security)
o    Cuts in discretionary programs (Highways, Agriculture, Energy, Interior, Education, Housing)

The Problem:

Currently the democrats will not agree on entitlement cuts or a mixture of entitlement and deeper discretionary cuts.  Speaker Boehner honors his pledge to keep revenue increases off of the table, so what do we get?  We get a stalemate.  Unless, Boehner will budge and they can meet their goals of a savings close to 1.2 trillion, triggering staggering cuts that will remain in place for nine years.  If it becomes “lame-duck”  then the crisis will loom and there will have to be:
•    cuts across the board  in 2013 after the election.
•    The scheduled expiration of President Bush’s tax cuts at the end of 2012
•    Renewed default if the policymakers do not raise the debt ceiling once again.

If the game of hostage taking continues and proves functional for those who play the games are also playing with the very lives of the American people that will all drown in the turmoil.
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Debt Plan Fact Sheet August 2011

Debt Plan Fact Sheet

From:  White House 

Fact Sheet: Bipartisan Debt Deal: A Win for the Economy and Budget Discipline
Bipartisan Debt Deal: A Win for the Economy and Budget Discipline

    * Removes the cloud of uncertainty over our economy at this critical time, by ensuring that no one will be able to use the threat of the nation’s first default now, or in only a few months, for political gain;
    * Locks in a down payment on significant deficit reduction, with savings from both domestic and Pentagon spending, and is designed to protect crucial investments like aid for college students;
    * Establishes a bipartisan process to seek a balanced approach to larger deficit reduction through entitlement and tax reform;
    * Deploys an enforcement mechanism that gives all sides an incentive to reach bipartisan compromise on historic deficit reduction, while protecting Social Security, Medicare beneficiaries and low-income programs;
    * Stays true to the President’s commitment to shared sacrifice by preventing the middle class, seniors and those who are most vulnerable from shouldering the burden of deficit reduction. The President did not agree to any entitlement reforms outside of the context of a bipartisan committee process where tax reform will be on the table and the President will insist on shared sacrifice from the most well-off and those with the most indefensible tax breaks.

Mechanics of the Debt Deal

    * Immediately enacted 10-year discretionary spending caps generating nearly $1 trillion in deficit reduction; balanced between defense and non-defense spending.
    * President authorized to increase the debt limit by at least $2.1 trillion, eliminating the need for further increases until 2013.  
    * Bipartisan committee process tasked with identifying an additional $1.5 trillion in deficit reduction, including from entitlement and tax reform. Committee is required to report legislation by November 23, 2011, which receives fast-track protections. Congress is required to vote on Committee recommendations by December 23, 2011.
    * Enforcement mechanism established to force all parties – Republican and Democrat – to agree to balanced deficit reduction. If Committee fails, enforcement mechanism will trigger spending reductions beginning in 2013 – split 50/50 between domestic and defense spending. Enforcement protects Social Security, Medicare beneficiaries, and low-income programs from any cuts.    

1. REMOVING UNCERTAINTY TO SUPPORT THE AMERICAN ECONOMY

    * Deal Removes Cloud of Uncertainty Until 2013, Eliminating Key Headwind on the Economy: Independent analysts, economists, and ratings agencies have all made clear that a short-term debt limit increase would create unacceptable economic uncertainty by risking default again within only a matter of months and as S&P stated, increase the chance of a downgrade. By ensuring a debt limit increase of at least $2.1 trillion, this deal removes the specter of default, providing important certainty to our economy at a fragile moment.
    * Mechanism to Ensure Further Deficit Reduction is Designed to Phase-In Beginning in 2013 to Avoid Harming the Recovery: The deal includes a mechanism to ensure additional deficit reduction, consistent with the economic recovery. The enforcement mechanism would not be made effective until 2013, avoiding any immediate contraction that could harm the recovery. And savings from the down payment will be enacted over 10 years, consistent with supporting the economic recovery.

2. A DOWNPAYMENT ON DEFICIT REDUCTION BY LOCKING IN HISTORIC SPENDING DISCIPLINE – BALANCED BETWEEN DOMESTIC AND PENTAGON SPENDING

    * More than $900 Billion in Savings over 10 Years By Capping Discretionary Spending: The deal includes caps on discretionary spending that will produce more than $900 billion in savings over the next 10 years compared to the CBO March baseline, even as it protects core investments from deep and economically damaging cuts.
    * Includes Savings of $350 Billion from the Base Defense Budget – the First Defense Cut Since the 1990s: The deal puts us on track to cut $350 billion from the defense budget over 10 years. These reductions will be implemented based on the outcome of a review of our missions, roles, and capabilities that will reflect the President’s commitment to protecting our national security.
    * Reduces Domestic Discretionary Spending to the Lowest Level Since Eisenhower: These discretionary caps will put us on track to reduce non-defense discretionary spending to its lowest level since Dwight Eisenhower was President.
    * Includes Funding to Protect the President’s Historic Investment in Pell Grants: Since taking office, the President has increased the maximum Pell award by $819 to a maximum award $5,550, helping over 9 million students pay for college tuition bills. The deal provides specific protection in the discretionary budget to ensure that the there will be sufficient funding for the President’s historic investment in Pell Grants without undermining other critical investments.

3. ESTABLISHING A BIPARTISAN PROCESS TO ACHIEVE $1.5 TRILLION IN ADDITIONAL BALANCED DEFICIT REDUCTION BY THE END OF 2011

    * The Deal Locks in a Process to Enact $1.5 Trillion in Additional Deficit Reduction Through a Bipartisan, Bicameral Congressional Committee: The deal creates a bipartisan, bicameral Congressional Committee that is charged with enacting $1.5 trillion in additional deficit reduction by the end of the year. This Committee will work without the looming specter of default, ensuring time to carefully consider essential reforms without the disruption and brinksmanship of the past few months.
    * This Committee is Empowered Beyond Previous Bipartisan Attempts at Deficit Reduction: Any recommendation of the Committee would be given fast-track privilege in the House and Senate, assuring it of an up or down vote and preventing some from using procedural gimmicks to block action.
    * To Meet This Target, the Committee Will Consider Responsible Entitlement and Tax Reform. This means putting all the priorities of both parties on the table – including both entitlement reform and revenue-raising tax reform.

4. A STRONG ENFORCEMENT MECHANISM TO MAKE ALL SIDES COME TOGETHER

    * The Deal Includes An Automatic Sequester to Ensure That At Least $1.2 Trillion in Deficit Reduction Is Achieved By 2013 Beyond the Discretionary Caps: The deal includes an automatic sequester on certain spending programs to ensure that—between the Committee and the trigger—we at least put in place an additional $1.2 trillion in deficit reduction by 2013.
    * Consistent With Past Practice, Sequester Would Be Divided Equally Between Defense and Non-Defense Programs and Exempt Social Security, Medicaid, and Low-Income Programs: Consistent with the bipartisan precedents established in the 1980s and 1990s, the sequester would be divided equally between defense and non-defense program, and it would exempt Social Security, Medicaid, unemployment insurance, programs for low-income families, and civilian and military retirement. Likewise, any cuts to Medicare would be capped and limited to the provider side.
    * Sequester Would Provide a Strong Incentive for Both Sides to Come to the Table:  If the fiscal committee took no action, the deal would automatically add nearly $500 billion in defense cuts on top of cuts already made, and, at the same time, it would cut critical programs like infrastructure or education.  That outcome would be unacceptable to many Republicans and Democrats alike – creating pressure for a bipartisan agreement without requiring the threat of a default with unthinkable consequences for our economy.

5. A BALANCED DEAL CONSISTENT WITH THE PRESIDENT’S COMMITMENT TO SHARED SACRIFICE

    * The Deal Sets the Stage for Balanced Deficit Reduction, Consistent with the President’s Values: The deal is designed to achieve balanced deficit reduction, consistent with the values the President articulated in his April Fiscal Framework. The discretionary savings are spread between both domestic and defense spending. And the President will demand that the Committee pursue a balanced deficit reduction package, where any entitlement reforms are coupled with revenue-raising tax reform that asks for the most fortunate Americans to sacrifice. 
    * The Enforcement Mechanism Complements the Forcing Event Already In Law – the Expiration of the Bush Tax Cuts – To Create Pressure for a Balanced Deal: The Bush tax cuts expire as of 1/1/2013, the same date that the spending sequester would go into effect. These two events together will force balanced deficit reduction. Absent a balanced deal, it would enable the President to use his veto pen to ensure nearly $1 trillion in additional deficit reduction by not extending the high-income tax cuts.
    * In Securing this Bipartisan Deal, the President Rejected Proposals that Would Have Placed the Sole Burden of Deficit Reduction on Low-Income or Middle-Class Families: The President stood firmly against proposals that would have placed the sole burden of deficit reduction on lower-income and middle-class families. This includes not only proposals in the House Republican Budget that would have undermined the core commitments of Medicare to our seniors and forced tens of millions of low-income Americans to go without health insurance, but also enforcement mechanisms that would have forced automatic cuts to low-income programs. The enforcement mechanism in the deal exempts Social Security, Medicaid, Medicare benefits, unemployment insurance, programs for low-income families, and civilian and military retirement.
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