2011 debt ceiling crisis

7/27/2019 2011 Debt Ceiling Crisis

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A look at the 2011 debt ceilingcrisisDavid J. Moore, Ph.D.

August 3, 2011


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Why a crisis?

On April 15, 2011 Congress passed a budget with $3.82trillion in spending and only $2.17 trillion in expectedrevenues (e.g., tax collections).

Yes, Congress authorized spending it could not afford!

If you pass a budget with a deficit you have to do somethingas 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 fiscalyears did not have a budget deficit.


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What happens if the debt ceiling is notraised?

This eliminates the option of borrowing money to pay alreadyapproved 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 Republicansrarely talk about whose taxes. Taxes on the fortunate few or taxeson the majority of Americans?

This leaves cutting spending and not paying people as the onlyoption.

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 toChina on the treasury securities it owns is preposterous.Renegotiate the debt!


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Balanced Budget Act of 2011

On August 2, 2011 the debt ceiling was raised subject to theBalance 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 billionand 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 likeMedicare, 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 intheir own pay "civil employee pay." Rather, they caneffectively cut non government employee pay (e.g., teacherpay by cutting education spending).


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My take on the Act

While I agree with cutting wasteful spending (e.g., Iraq,Libya, etc.), cutting Medicare and education harms lower andmiddle class Americans. Wealthy Americans can affordprivate insurance and private schools.

Lest we forget how that wealth was accumulated andpreserved: hard work (maybe), inheritance, theft, exploitationof lower and middle class, not paying taxes

The Act makes no changes to taxation. That means thewealthy continue to pay relatively lower taxes. Most

Americans don't own enough stock and bonds to benefitfrom the Bush tax cuts (example to follow). These tax cutshave been forced to remain by Republicans.


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My conclusion: Be aware of a wideningwealth gap

Before the Bush tax cuts: we had a framework for a middleclass. Taxes from the wealthy could fund the health and educationof 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 widenthe gap every year. You need your $73 to buy food.

2011 debt ceiling crisis

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