The Fiscal Cliff for Dummies

by Jack Lee

We keep hearing about this so-called fiscal (financial) cliff, but few people seem to understand what it really means. So, here is the explanation, in brief, which is probably more honest and comprehensive than anything your $176,000 a year Congressperson has read.

Background: The first national debt ever was probably caused by a war. It is always expected that during a war a nation (any nation) must borrow what it needs to defend itself. Wars are historically very expensive, but despite the significant number of wars in our history, including two very expensive world wars, it’s taken slightly over 200 years for the National Debt to reach the trillion dollar mark (1977). Then it only took about another 10 years to reach $2 trillion dollars. 4 years later our debt was at 4 trillion dollars and in 05 our debt doubled again, to $8 trillion! Now, in 2012 the US debt is about to cross the infamous $16 trillion dollar mark and for the first time our nation’s debt will be equal to the sum of our gross national product…that’s why I called it infamous. We owe as much as we are worth and that is really dangerous when compared to our credit rating, our government bond value and ultimately the strength of our dollar. if you need graphs see reference (5) located at the bottom of page two.

Extrapolate this unabated credit card spending scenario out to the year 2050 and the US debt will equal about $90 trillion or an amount equal to sum total of all the wealth in world! But, don’t worry, our debt won’t get that high – we will implode long before that happens. Our best minds think we’ve got maybe another 10-15 years.

Let me pose this dire situation in another way, the U.S. government has borrowed, some might say stolen, $16.3 trillion and climbing, from future generations of Americans until we’re zeroed out our profit and loss statement.

This horrific debt currently increases by l over a hundred million dollars every single day day. During the Obama administration, the U.S. government has accumulated more new debt than it did from the time that George Washington became president to the time that Bill Clinton became president. (1)

The $15 plus trillion spending binge that we have been on for over the past 3 decades has given rise to a high standard of living, but. . . this was built on borrowed money!

We’ve created the illusion of prosperity without establishing the underpinnings for it to be sustainable. This prosperity is built like a house of cards. We can reasonably say this credit card generated prosperity and all the entitlements that come with it, one big fat lie – perpetrated upon the American people by their elected representatives in both parties!

Yes my friends, I have just said both party’s are too blame,. Sorry to burst your partisan bubble, but it’s 100% true and I’m not going to provide cover for either side. Both sides have had their own special time when they could have developed a realistic plan to achieve a balanced budget and they didn’t. Now we’re in serious trouble.

CONT-

Too many Republican’s wrongly assume Democrats are the tax spenders responsible while ignoring their own party’s culpability. It’s time for this bubble to burst. For example, George W. Bush increased government spending more than any of the six preceding presidents. One could argue this was due to 9/11 and two regional wars, but in blunt truth Bush’s social spending increased at the same time as the defense spending. Fact: Discretionary outlays increased by 48.6% in his last 4 years in office.

The Obama Plan: Obama’s budget is $3.7 trillion. This would cut funding for the Low Income Home Energy Assistance Program by 50%. It also calls for cutting $300M from community development block grants and limits expending the Pell grant program for low income college students. He also wants to put a freeze on annual domestic spending over the next 5 years. This would save a piddly $400 billion over the next 10 years.

Obama’s plan will cut or eliminating about 200 of the 2700 federal programs, many dedicated to social services and education. The $3.7 trillion dollar proposal would cut funding in half for the Low Income Home Energy Assistance Program, which subsidizes heating costs for low-income Americans. It also calls for cutting $300 million from community development block grants and limiting an expansion of the Pell grant program for low-income college students. In exchange for these meager cuts Obama wants to hike taxes on banks and oil companies, who will in turn pass thru these additional costs to the consumers. Obama also wants to end the tax breaks on the wealthiest Americans (2% upward adjustment) and this will return estate tax (2) to 2009 levels.

The Pentagon will receive $553 billion for regular spending — $12 billion less than what the military expected, but still three percent higher over fiscal year 2011. Another $118 billion is earmarked for war-time spending.

Left untouched are almost all of the 2700 plus subsidy programs that spread hundreds of billions of dollars annually to special interest groups such as state governments, businesses, nonprofit groups, and individuals. The number of subsidy programs has grown by 54 percent since 1990.

Barack Obama’s spending has increased the national debt by an average of more than $64,000 per taxpayer and he will soon become the first president to run deficits of more than a trillion dollars during each of his first four years in office.

The Republican Plan to counter the wasteful spending goes like this: They would allow tax hikes on the rich ($800 billion in new revenue) , if they could cut a piddly $2.2 trillion over the next decade. On top of that Republicans estimated they could save $300 billion by cutting discretionary spending, $600 billion in “health savings,” $200 billion in changes to the consumer price index and another $300 billion in mandatory spending. The president has flatly rejected this plan and wants to double the new tax revenue (code for taxing the rich). (3)

The CBO says, “Larger deficits caused by the budget would cause the government to issue more bonds, sucking up private capital to finance its debts and thereby reducing the funds businesses could use to expand and hire, the CBO said. An increased tax on capital gains included in the president’s plan would also tend to reduce private capital, it says.” (4)

If neither side can agree more austere cuts will be automatically initiated starting January 1st, 2013 courtesy of Bloomberg press:

“The Budget Control Act passed last August stipulates that failure of the super-committee and Congress to act on further deficit reduction will trigger across-the-board cuts of $1.2 trillion in both defense and non-defense programs, starting in 2013. Here is a general look at how those cuts may play out through 2021 — some savings would occur after 2021:

–The Congressional Budget Office says caps on new, Congress-approved spending on defense programs will be reduced from 10 percent in 2013 to 8.5 percent in 2021, with savings of $454 billion.

–Caps on Congress-approved spending on non-defense programs would be reduced from 7.8 percent in 2013 to 5.5 percent in 2021, with savings of $294 billion.
–Most Medicare spending would be reduced by 2 percent a year, with savings of $123 billion. Savings from other mandatory spending programs would produce another $47 billion.

–The CBO estimates that the savings would reduce interest payments on the national debt by $169 billion.

–In a further breakdown, the Center on Budget and Policy Priorities says that in 2013 the cuts to mandatory programs include about $10.8 billion in Medicare payments to providers and insurance plans and about $5.2 billion to other programs such as farm price supports.

–Mandatory programs that are exempt from sequestration, or cuts, include Social Security, Medicaid, food stamps, the CHIP children’s’ health program, child nutrition, Supplemental Security Income, the Earned Income Tax Credit, veterans’ benefits and federal retirement.

–Veterans’ medical care and Pell grants would also be exempt from cuts to Congress-approved, discretionary programs.

–The CBPP estimated that both defense and non-defense cuts would total $54.7 billion in 2013. It said that would represent a cut in 9 percent in defense programs, or 7 percent if the president elects not to exempt military personnel funding from the reductions.

–The Pentagon had been headed for a budget of some $700 billion in 2021. With cuts already enacted under the Budget Control Act and future across-the-board cuts, that would be reduced by more than $100 billion.”

1 – http://www.infowars.com/27-things-that-every-american-should-know-about-the-national-debt/

2 – http://en.wikipedia.org/wiki/Estate_tax_in_the_United_States

3 – http://www.whitehouse.gov/omb/budget

4 – http://thehill.com/blogs/on-the-money/budget/222767-cbo-sees-obama-budget-reducing-growth-in-long-term

5 – http://www.federalbudget.com/