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Archive for Thursday, July 28, 2011

Federal debt crisis: a Q & A

July 28, 2011

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Congress has until Tuesday to raise the federal borrowing limit or the government will run out of money and possibly default on its debt. House Republicans say they won’t raise the debt limit without equal spending cuts. President Barack Obama and Democrats have insisted that higher revenues must be included.

Wednesday’s developments: House Republicans appeared to be coalescing around a plan by House Speaker John Boehner to increase the U.S. borrowing limit and chop $1 trillion in federal spending. But the White House dismissed the proposal as did Senate Democrats and tea party activists. Still, there are hints a compromise might be near.

What’s next: The House plans a vote today on Boehner’s plan. Senate leaders are watching what happens to the House plan before moving ahead with their own.

Some background:

What is the debt ceiling?

It’s a legal limit on how much debt the government can accumulate. The government takes on debt two ways: It borrows money from investors by issuing Treasury bonds, and it borrows from itself, mostly from the Social Security trust fund, which comes from payroll taxes. Congress created the debt limit in 1917. It’s unique to the United States. Most countries let their debts rise automatically when government spending outpaces tax revenue. Congress has increased the debt limit 10 times since 2001.

Q: What is the federal deficit, and how does it differ from the debt?

A: The deficit is how much government spending exceeds tax revenue during a year. Last year, the deficit was $1.29 trillion. The debt is the sum of deficits past and present. Right now, the national debt totals $14.3 trillion — a ceiling set in 2010.

Q: Why is the prospect of not raising the debt ceiling so worrisome?

A: The government now borrows more than 40 cents of each dollar it spends. If the debt ceiling does not rise, the government would need to choose what to pay and what not, including benefits like Social Security, wages for the military or other bills. It also might delay interest payments on Treasury bonds. Any default could lead to financial panic weakening the country’s credit rating, the dollar and the already hobbled economy. Interest rates would likely rise, increasing the cost of borrowing for the government and ordinary Americans.

Q: Who holds the $14.3 trillion in outstanding U.S. debt?

A: The U.S. government owes itself $4.6 trillion, mostly borrowed from Social Security revenues. The remaining $9.7 trillion is owed to investors in Treasury securities — banks, pension funds, individual investors, state and local governments and foreign investors and governments. Nearly half of that — $4.5 trillion — is held by foreigners including China with $1.15 trillion and Japan with $907 billion.

Q: How did the debt grow from $5.8 trillion in 2001 to its current $14.3 trillion?

A: The biggest contributors to the nearly $9 trillion increase over a decade were:

• 2001 and 2003 tax cuts under President George W. Bush: $1.6 trillion.

• Additional interest costs: $1.4 trillion.

• Wars in Iraq and Afghanistan: $1.3 trillion.

• Economic stimulus package under Obama: $800 billion.

• 2010 tax cuts, a compromise by Obama and Republicans that extended jobless benefits and cut payroll taxes: $400 billion.

• 2003 creation of Medicare’s prescription drug benefit: $300 billion.

• 2008 financial industry bailout: $200 billion.

• Hundreds of billions less in revenue than expected since the Great Recession began in December 2007.

• Other spending increases in domestic, farm and defense programs, adding lesser amounts.

Comments

Carol Bowen 2 years, 8 months ago

On many JW blogs, I have stated that Social Security does not contribute to the deficit. I should condition that statement. The U.S. owes the Social Security trust funds a lot of money. So, why is anyone trying to trim Social Security? It has been functional for a long time, and with a few minor adjustments, will continue a lot longer.

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JohnBrown 2 years, 8 months ago

Isn't it wonderful how Republicans have all the economic answers? They just "know" what will...and what won't work in an economy.

But wait...wasn't it Republicans who destroyed Clinton's balanced budgets and surpluses, wasn't it Republicans who said "deficits don't matter"? Wasn't it Republicans who DOUBLED the national debt, not once, but TWICE? Reagan doubled the debt, and GW Bush doubled it again.

Wasn't it the Republicans who said lowering taxes for the rich would "create jobs"? But after 10 years of the Bush tax cuts, where are the jobs? Why haven't they 'happened'?

And wasn't it the Republicans who didn't see the economic disaster known as the Bush recession coming?

I guess that's what happens when you gave a faith-based economic policy devoid of facts.

Here's a fact: Roosevelt did deficit spending to get the US out of the Great Depression. We were recovering with that deficit spending, just a Germany and England were. Then, in 1936 the Republicans came to power and demanded a balanced budget, which we did. So, in 1937 a new recession WITHIN the depression occurred. The deficit spending in '39 and later finally got us out of the depression.

So nothing's new under the sun, including Republicans being totally wrong this time just like the last time.

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