Republicans and their Fiscal Cliff Dilemma

By: Nicholas Roch 

It has been well documented that America is in fiscal trouble.  Lack of accountability in the government has set the American economy spiraling downward as we continue to increase federal deficits and accumulate additional national debt.  A federal deficit occurs when government expenditures are higher than the tax revenue raised by the government. The accumulations of all deficits ultimately become the national debt.  The current national debt is $16,292,873,505,285.88 (Debt Clock, 2012) and is growing by the second.  Each United States citizen’s share of that debt is $51,693.  Just to put it into perspective, according to the Social Security Administration the national average salary is $42,979.61 as of 2011.

                The question facing congress now is how to deal with the federal deficit.  Republicans and Democrats each have separate ideas on how to handle the debt crisis. Traditionally, Republicans believe in less government interference in the private sector and lower taxes. The current issue for Republicans is that President Obama does not want to extend the Bush tax cuts to families who make over $250,000 and individuals who make over $200,000, effectively returning the tax rate to the levels they were during the early 2000’s. The thought of tax increases has sent many in the Republican Party into frenzy. Grover Norquist, founder and president of Americans for Tax Reform, has been an outspoken critic of any sort of tax increases. He is so adamant about tax increases that he “suggests” that Republicans sign a pledge to not raise taxes upon entering Congress. If any members try to refute the pledge or publicly criticize it, he paints them as a RHINO, Republican in name only. In his latest outburst, Norquist has attacked respected veteran lawmakers such as Senator Chambliss of Georgia, Senator Lindsey Graham of South Carolina, and Representative Peter King of New York. He has gone so far as to say about Representative King “I hope his wife understands commitments last a little longer than two years or something” (Cohen, p.5). 

If Republicans want to prove that they care about the middle class, they cannot afford this kind of childish banter. In normal economic times increasing taxes on those who make over $250,000 would have an adverse effect on the economy and small businesses. A majority of small businesses in America file as sole proprietorship so their revenue is taxed on an individual basis. This in turn would be unacceptable. Unfortunately, these are not normal economic times.  Currently the US debt as a percentage of GDP is around eighty percent with no sign of dropping in the future. According to most estimates in the near future the GDP percentage will be one hundred percent and above, without a clear plan to cut spending in order to reduce the national debt.  It is time for both parties to return to a bill similar to that of the Simpson-Bowles Act in which Congress would cut $10 of government expenditures for every $1 dollar in tax revenue raised.  It would be worth considering temporarily delaying an economic recovery to ensure that we secured a firm financial foundation for the future. A recommended approach for economic recovery would be collaboration between Republicans and Democrats to focus on fiscal crisis at hand rather than polarizing on standard political party agendas. 

http://www.cnn.com/2012/11/26/politics/fiscal-cliff/index.html?hpt=po_c2

http://www.usdebtclock.org/

http://www.ssa.gov/oact/cola/AWI.html

Caitlyn Gaugler- "Sponging Boomers"

Prior to social reform brought on by Word War II changing the dynamics of domestics of the USA, the concept of battle of the sexes when it came to jobs was not unusual. Now, almost 50 years later, the US is pulled into a similar social struggle, but this time, it’s between the Baby Boomer generation and the generations which followed. So, what’s so troublesome about the generation of aging baby-boomers? Their retirement may bring economic growth to a screeching halt.

In the mid-1960s, the baby boomers became a generation so large that they accounted for 41% of the total population, thus forming an entity large enough to exert both political and economic gravity. In their beguiled lives, they have enjoyed low taxes, excellent education, and were able to easily top previous generations in income earned at an early age. All of these distinctions, however, came with a big bill for younger generations. With retirements off-setting the earlier labor-force surge, the ability to educate current generations has become increasingly difficult and less profitable. Paired with the continual battle in Congress, the boomer generation has expanded the deficits by voting on benefits with inadequate premiums.  To make things brief, the boomers are leaving behind a bill much larger than the amount they've ever paid in taxes.

There are several proposed options:
1. Faster growth
2. Austerity
3. Inflation

           Faster growth would offset the debt left by the boomers, but increase unemployment due to the already existing slow recovery of the economy. The labor force is slow to expand anyways.

Austerity is another option, but the consolidation would be immense. With existing fiscal imbalance, this would require up to 35% cuts in transfer payments and 35% rise in all taxes—something neither generations would like to see with an already shaky economy.

Inflation—as disdained as it is—could potentially reduce household debts faster, but it’s a hard plan to sell. With younger generations typically existing as debtors who would like to see interest rates fall on their debts while the boomers would prefer to see interest rates increase on their savings, there’s a conflict of interests. Inflation could act as a wealth redistributor yet pressure on the Fed for expansionary measures continues to benefit the boomers.

So, what are we to do? With the shift in voting demographics, the boomers will continue to have a strong-hold in Congress in which they have the ability to continue to vote for benefits for themselves, but the deficits which come from these benefits is strangling future economic growth. A tax hike to accommodate incurred debts could potentially cave an already creaky system, but a cut in transfer payments would decrease perks to the boomers. The most appealing of options is surprisingly inflation which would drive down interest rates on debts and potentially encourage private investing to pick-up once again. Regardless, the US is looking at a set-back in GDP which is undesirable from either side of the age spectrum. In my personal opinion, it’s time to stop appeasing a past generation who enjoyed many “free lunches.”

[Source]

Marceline Piek- The Fiscal Cliff; Getting down to brass tacks

As the author of the article mentions, Republicans and Democrats have to find common ground on cutting spending to reduce America’s long-term deficit and to avoid the “fiscal cliff”. As we discussed in class this “fiscal cliff” means an automatic increase in taxes and spending cuts at the year’s end. Republicans have done most of the spending cuts so far and want something in return. Therefore, the Republicans say they want to fix the real problem by which they mean ‘the big three’: Social Security, Medicare and Medicaid-pensions and health care for the elderly and poor. Cutting on these entitlements makes the government spend less and therefore reduces the deficit. The Republicans fear that Obama’s government will finance the increase of cost for his new health care plan by raising taxes so that the affluent, rich people are paying for the poor and elderly people. They call it Obama’s “Robin Hood”-approach, which means providing support to the poor by stealing from the rich. The Republicans think it is better for an economy to have the lowest affordable level of tax payment so that people have more money to spend to stimulate the economy. 

The ‘big three’ are very important to the Democrats because they are crucial to Obama’s health-care plan, i.e. the government is responsible for the sick, poor and elderly people. This makes it unlikely that Obama is going to cut on these three entitlements. However, Obama did acknowledge that spending has to shrink. Therefore, he came up with some deficit deals to cut on discretionary spending like education, transport and research in 2011. Besides, Obama proposed two substantial concessions last year: to raise the age at which Americans become eligible for Medicare from 65 to 67, and to index Social Security benefits to a less-generous version of the consumer price index. It is calculated that these cuts will result in a reduction of governments spending of 225 billion dollar over a period of 10 years. 

It is expected that lobby groups for the elderly and the unions will oppose these cuts. According to Peter Orszag, Mr Obama’s first budget director, this is short-sighted and he thinks it’s a good idea to let Obama deal with the entitlements. By all means, it is sure that the re-elected Obama will not tolerate big changes to his health-care plan. The only question is if it is manageable to do so and still reduce the long-term deficit. One solution may be to increase Medicare premiums and make Social Security less generous for affluent people, a proposal that Obama already introduced. However, the question is if both parties will agree on this. The Republicans will certainly demand a ceiling, in return for borrowing money by the government in order to reduce money inflation. 

  

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Steven Christopher - Unemployment Rate

Steven Christopher

11/26/12

Blog Post #1

http://www.cartoonstock.com/newscartoons/directory/u/unemployment.asp   

Cartoon 4 and 5

Throughout our countries history there have been 10 recessions since 1945, and we have managed to climb out of them successfully. The most recent began in December 2007 and ended in June 2009. Many economists state that the U.S. economy is doing well, but we have still yet seen our condition return to pre-recession values. One of most important topics when dealing with the current recession is the unemployment rate and job loss. Unemployment fell more rapidly during this recession than any prior. Millions of Americans have lost their jobs over the recession and it is recorded that it peaked to 10% of the United States in October of 2009. Today, as we discussed in class, the unemployment rate is currently 7.9%. This statistic demonstrates that the economy is improving, and that more jobs are being created for Americans. However, recently in class we brought up the topic that some people might be giving up after not being able to become employed after a certain period of time.

            When job losses skyrocketed in 2008, Congress passed emergency measured to supplement state-level unemployment insurance programs, which generally offer about 6 months of benefits. In class today, we learned that at their peak, the federally backed programs extended benefits to up to 99 weeks in some states. In Virginia the maximum duration of unemployment-insurance benefits is 40 weeks, as of November 2012. Although this plan seemed to help in the beginning, most states do not qualify anymore to the generous programs due to cut backs. In my opinion, these programs created instances where people were trying to find jobs, but eventually stopped momentarily because they were still receiving some benefits from the federal government. Could it be possible that these people that no longer look for work have skewed the unemployment rate, is it higher than predicted this past month? I believe that people say they might have stopped looking for jobs because they have become depressed, tired of looking for work, or fell into unemployment benefits and were temporarily not searching for jobs.

            There are three types of unemployment that we include when talking about the unemployment rate. Structural unemployment deals with the mismatching of skills, frictional deals with a mismatch between job seekers and employers, and cyclical deals with unemployment due to the business cycle. In the current recession, I believe that most of the unemployment is caused by frictional and cyclical unemployment.  People are going after the high paying competitive jobs that they are not matched for. Too many people want the high paying jobs and will not take middle class jobs. This generates unemployment because they turn down the opportunities they have for the chance that one day they could get a higher paying job. Cyclical unemployment is clearly the main reason for unemployment. As of now, 7.9% of Americans are unemployed because there are a limited number of jobs being created. The depletion of their jobs at the beginning of the recession made it very hard for these particular people to come back into the work force.

            From this cartoon we can see that people still believe we are in a recession, and will continue to be for a couple years. For the recession to truly end we need to see the unemployment rate drop significantly. People are still constantly searching for new opportunities and have driven some citizens to stop looking for jobs. I believe that we need to create an unemployment statistic that includes the amount of people that have stopped looking for jobs because of the business cycle and cyclical unemployment. To get an idea of the true unemployment rate, we must know how many people have given up hope when searching for a new job.

Craig Hash Fiscal Cliff

In an article I read on CNN.com. President Obama is on the move trying to get Republicans as well as Democrats to come together and compromise on a deal to avoid the fiscal cliff.  America is only five weeks away from going over the fiscal cliff, and as we have all learned we know what that means. Tax increases, as well as deep spending cuts are what we are all going to be getting for Christmas. Obama wants to increase the federal debt-ceiling, which could be needed as early at the beginning of 2013. Are we not already in enough debt? One of the proposed ideas to fix the fiscal cliff is that we raise the gas tax. By raising the gas tax, which was proposed in the Simpson-Bowles debt reduction plan in 2010 called for a 15 cent increase in the tax of gas that would cover the shortfall in our transportation budget. The gas tax itself is used for the funding of transportation, and the construction of roads Etc. needed to assist it. This is however just a short run assistance. Obama wants to increase the income tax rate for families that make over $250,000, and for individuals who make over $200,000. By doing this Obama swears that it would prevent a major tax hike for almost 98% of other Americans. Republicans on the other hand believe that if Obama increases the tax rate on any of the classes, then there will be a cut in job growth, especially in the area of small businesses, which let’s face it is what runs our country anymore. In the poll conducted after the release of this article, it showed that 45% of Americans would blame republicans if an agreement was not reached, and 34% would blame the president himself. With the end of the year quickly approaching however though, if republicans and democrats cannot come to some sort of an agreement then here is what will most certainly face Americans at the start of 2013. Unemployment will spike up to 9.1%, our economic growth will halt by 0.5%. the tax bill will rise by almost $4,000 dollars per household in 2013. So if you are in the middle class, which most of us are then you can expect to see about $2,000dollars more. However there is a chance that if we go over then Congress can still make a deal, seeing as how the tax hikes and cuts are spread out over a two year period. If we so go over Congress is going to have to work a lot faster than the rate at which they are going now.

http://www.cnn.com/2012/11/28/politics/fiscal-cliff/

Sophie de Mol van Otterloo - Free Exchange, The Argument In The Floor

The article “Free Exchange: The Argument In The Floor” is about the pros and cons of a minimum wage and about why we should keep it.
The first national minimum wage was established in 1894 in New Zealand, so it is a phenomenon that has been around for a while. The article says that a minimum wage will increase employment, and numerous studies support this statement. It makes sense. When there is an equilibrium-wage for a certain job, and the government lets the employers artificially pay more, they do not have the money to hire the number of people the equilibrium suggests. In class we talked about different kinds of unemployment and this measure will make more people structural unemployed, there aren’t as many jobs for low-skilled people as there originally were. Milton Friedman is mentioned in the article calling a minimum wage “a form of discrimination against low-skilled workers”.
But, since 1990, studies have seemed to turn around, they now show an increase in employment in places where there is a higher minimum wage rather than no effects or even a decrease. This is because a minimum wage makes sure that all people can afford their primary goods, like water and Band-Aids. These are goods for which spending doesn’t necessarily go up when income increases. So when more people work for the equilibrium wage, they don’t have the money to buy all these goods and sales go down. When less people work for the minimum wage and do have the money to buy these goods, sales go up. Companies now have more money to hire more minimum-wage people. And employment will go up.
In Britain, it was even the case that a minimum wage made income-inequality reduce. The article gives a variety of reasons, like firms cutting costs by squeezing wages elsewhere. This makes higher incomes go down and more people working for the minimum wage. They also mention improving the productivity of the lowest-wage workers, modestly raising prices or saving money from lower turnover. When using these tactics, companies do have the money to hire the amount of people the equilibrium suggests. Higher incomes will decrease or stay the same, while more less-skilled people are working for more money. That’ll level out the wages more.
After reading this article I was surprised that there are doubts about the minimum wage in America. Being from Holland, where the richest people have to give 70% of their income away in taxes and where social security is therefore a part of daily life, this was quite a shock. Pretty much everyone gets money from the government to support whatever they’re doing. A minimum wage is not something we question, it is inhumane when people are working full time to the best of their ability, and are not able to buy the things that they need. There are reasons why the minimum wage doesn’t have the success it has in America than it does in other countries. For example the infrequent and hefty changes in the wage, companies can’t prepare for that. There is no reason not to have a minimum wage, especially in hard times like these when we rely on the middle class to spend more, it is something that makes sense and is here to stay.

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Bernanke Challenges Lawmakers To Address Nation's Fiscal Problem

The International Business Times published an article on November 20th 2012 about how Ben Bernake, the Federal Reserve Chairman, really brought the fiscal cliff to the attention of federal lawmakers. Bernake spoke about this in his speech to the Economic Club of New York as he stated that "the ability of the Fed to offset headwinds is not infinite." This really made me think about how much power we have invested in the Fed's. The Federal Reserve has always been the most powerful form of banking and a great indicator of how the economy will be looking in the near future. However after reading this quote I quickly realized that despite the great power that the Federal Reserve has, it cannot keep this country running by its self. The fact that Bernake is asking for help really shows that the Federal Reserve really does need law makers help to start making head way on the fiscal problem that our country is currently facing. It is amazing to me how invincible the Federal Reserve seems to us as we discuss them in class. The class discussion and the packet we read about the Federal Reserve made me feel like they could fix any problem with the current fiscal situation. However after reading the quote by Bernake it made me realize that even the Federal Reserve needs help sometimes and that they cannot always fix everything immediately. This request for help from Bernake to the federal lawmaker’s shows how the Federal Reserve is not always invincible and that they do need help from time to time. In a quote from Bernake he states that the Federal Reserve has “spent a good deal of effort attempting to understand the reasons why the economic recovery has not been stronger." This comment by Bernake really seems like he is legitimately concerned about the fiscal cliff and that it is possible that the Federal Reserve cannot fix all of the problems that America is facing right now financially. However despite the fact that Bernake is requesting help from law makers, he said “preventing a sudden and severe contraction in fiscal policy early next year will support the transition of the economy back to full employment; a stronger economy will in turn reduce the deficit and contribute to achieving long-term fiscal sustainability.” This quote really seems as if the Federal Reserve has a plan that they will execute so at least they know what they need to do to keep our economy from falling even lower. This last quote really gives me hope that the Federal Reserve does have a plan, and we will be okay despite sitting on the edge of this fiscal cliff.

 

http://www.ibtimes.com/bernanke-challenges-lawmakers-address-nations-fiscal-problem-893204