Monday, August 1, 2011

Deal or No Deal

One way or another it looks like the debt ceiling/budget reduction drama is about to end. Like most large pieces of federal legislation, it will take a few days to sort out the details, and then analyze the impact. However, one thing remains true regardless of the fallout. This was a manufactured crisis to push an agenda, and it could not have come at a worse time for the country.

The debt ceiling of the US government has been raised hundreds of times by both parties. George Bush raised it 7 times and conservative icon Ronald Reagan raised it 18 times. Our debt sounds scary to Joe and Sally citizen when the talk of Trillions of dollars is in the air. However, a government budget does not function like a family budget. (Although even family budgets are scary when one considers long-term debt such as home and auto mortgages.)Governments are judged on their economic capacity and their ability to pay as they go. Our debt is approaching GDP (depending what calculation you want to use it ranges all the way from 59% of GDP to 96% of GDP), some reputable nations such as Japan have debt at twice that amount. No one doubts that the hard working and innovative Japanese are worth the investment and will continue to pay bonds. Can they say that about the US now thanks to this lunacy?

There is also a mythology about China buying the US debt and controlling us etc. While we should certainly be concerned about our trade deficit with China and the outsourcing of US jobs to China, the debt is of less concern. China owns about 7.5% of the debt. Japan is then next closest creditor nation holding 6.4% of US debt. United States individuals and institutions own 42.2% of the debt. It should also be noted that the US government owns some of their own debt: 17.9% Social Security Trust Fund and US Civil Service Retirement Fund 6% are examples of this.

As a nation we should control spending and eliminate a great deal of fraud from government contractors. We should realize that military adventurism is very expensive. We should realize that tax cuts to the wealthiest Americans do not "trickle down" and are extremely costly ($1 Trillion for the Bush tax cuts). Corporate welfare is costly. For example, why are oil companies receiving billions of dollars from taxpayers?

With all of the above acknowledged there was no crisis today that warranted the actions taken by Congress. The US economy is plugging along at a dismal pace (.4% first quarter and 1.3% second quarter). Unemployment is over 9%. Why is that relevant? Because slowing federal government spending is a sure way to cause more retraction and unemployment. The inexcusable thing is that economists know this, we have data on this, it's not just an ideological opinion.

If these cuts take effect in 2013, we will see another significant dip in the economy. Of particular concern is how much of this deal involves aid to states for such things as Medicaid and education? State budgets have not recovered from the original crash, and now they could take another hit. A part of our current slump comes from the fact that state and local governments shed another 250,000 jobs this year.

The recession is not due to government spending at either the federal or state level. The crash was caused by private sector greed and incompetence, compounded by historic levels of wealth disparity. The whole debt ceiling/budget reduction drama will not add a single job to the economy.

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