Shootout at the DC corral

What do we need in place for our government to function?

1) Every government program has to be authorized

2) Every government program has to be funded

3) Every dollar spent needs to paid for (by either taxes collected or borrowing)

1) Every government program has to be authorized

2) Every government program has to be funded

3) Every dollar spent needs to paid for (by either taxes collected or borrowing)

Mandatory Spending programs do not require annual appropriations…they are automatically funded (e.g. Social Security/Medicare)

Discretionary spending does require an annual appropriation of funding (e.g. Defense)

Timeline for the budget/appropriations process

FebruaryJanuary March April May June July August September October

Fiscal Year Begins

With the help of the office of management and budget (OMB), the president creates a budget proposal – sent to congress the first week of February

With the help of the congressional budget office (CBO), the house and senate budget committees write their own budget proposals

Differences between House/Senate proposals are worked out in conference committees – joint resolution presented and voted on

Appropriations bills presented and voted on

Vote takes place for final budget resolution

We also have a borrowing constraint –the debt ceiling

• Prior to 1917, the US congress approved every new debt issue• Beginning with the second liberty bond act in 1917, congress began to allow the

Treasury the discretion as to term, interest rate, etc., but put caps on total borrowing.

Article 1, Section 8 of the Constitution

“Congress shall have the power ….to borrow money on the credit of the United States”

Raising the debt ceiling requires a vote on both the house and senate…historically, this has been a formality.

However, recently, the debt ceiling has become a hot political issue…

Budget Control Act of 2011• Debt Ceiling raised by $400B (to $14,694B)• President can request an additional $500B subject to congressional

approval (motion to block failed 45-52 in senate) – ceiling raised to $15,194

• President could request an addition $1.2T to $1.5T (the house passed a disapproval, but the senate failed to pass one). Ceiling raised to $16,394B

• Establish the Joint Select committee on Deficit Reduction to produce legislation to cut the deficit by $1.5T over the next 10 year. (The committee failed to come up with anything)

• If congress failed to come up with a deficit reduction plan, automatic, across the board cuts are triggered equal to the amount of the debt ceiling increase over the next 10 years ($1.2T) – this is the sequestration. (Exceptions are Social Security, Medicare, Medicaid, civil and military employee pay)

The last “shootout” resulted in a compromise….debt limit increase for spending cuts

Sequestration cuts

FebruaryJanuary March April May June July August September October

Debt ceiling limit of $16,394 established by BCA 2111 hit on Dec. 31.

American Taxpayer relief act passed to avoid “Fiscal Cliff”• Bush Tax cuts extended (except for

top bracket)• Sequestration delayed for two

months)

February 4, 2013 Obama signs the No budget, no Pay act

• Suspends the debt ceiling until May 18th

• If a budget is not passed by April 15th, congressional pay is suspended until they pass a budget.

New Debt ceiling of $16,699B imposed

Treasury undertakes “extraordinary measures” to avoid debt ceiling

Deadline for Action• Government funding runs out with

expiration of continuing resolution• Treasury exhausts “extraordinary

measures”

2013

• Government funding runs out with expiration of continuing resolution• Treasury exhausts “extraordinary measures”

Senator Ted Cruz (R) is pushing too defund Obamacare in the next appropriations bill – without an appropriations bill, the government shuts down

President Obama is refusing to negotiate over the debt ceiling – without an increase in the debt ceiling, the government shuts down

Why has this become such a big deal? Let’s take a quick look at the Spending/Revenues for 2012:

Taxes collected: $2.627TFederal Spending: $3.729T

The difference between spending and tax revenues is the deficit – that’s what we need to borrow to finance the government

Federal Deficit: $1.102T• $3B per day!• $125M per hour!• $2M per minute!• $33,000 per second!

1980

-01-

01

1984

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01

1988

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01

1992

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01

1996

-01-

01

2000

-01-

01

2004

-01-

01

2008

-01-

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2012

-01-

01

-2000.0

-1000.0

0.0

1000.0

2000.0

3000.0

4000.0

5000.0

DeficitExpendituresReciepts

$1.102T

Deficit = $1.225TDeficit = $236BDeficit = $135BDeficit = $167BDeficit = $139B

US Government Deficits since 1980

1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011

-1,600,000

-1,400,000

-1,200,000

-1,000,000

-800,000

-600,000

-400,000

-200,000

0

200,000

400,000

US Government Deficits since 1900

Yikes!

Now, let’s step back for a second…the US is a big country. We collectively earn a lot of income, so we should be able to borrow a lot of money…

$1,102,000,000,000.00US Government Deficit (2012)

Total US Income (2012)

Therefore, if we knock off 9 zeroes off of each, we have:

Income: $15,811/yr.Borrowing: $1,102/yr.

Or, we could say we are borrowing equivalently to around 7% of our annual income…sounds better, right?

$15,811,000,000,000.00

1899 1909 1919 1929 1939 1949 1959 1969 1979 1989 1999 2009

-30

-25

-20

-15

-10

-5

0

5

10

US Government Deficits as a percentage of total income since 1900

We ran much larger deficits during WW11 (As a percentage of our economy)

-20

-10

0

10

20

30

40

50

Our deficit to income ratio puts us in with the PIGS!

1939 1949 1959 1969 1979 1989 1999 20090

2000

4000

6000

8000

10000

12000

14000

16000

18000

Total Held By Public

Persistent, large deficits create a rapidly increasing total debt

We have run our total debt up to:

$16,443,372,900,000.00

$52,000 per citizen$145,000 per taxpayer

Let’s do the same trick with the total US debt outstanding.

US Government Debt (2012)

Total US Income (2012)

Therefore, if we knock off 9 zeroes off of each, we have:

Income: $15,811/yr.Total Debt: $16,443/yr.

Or, we could say we have debt outstanding equal to around 100% of our income…sounds better, right?

$16,443,372,900,000.00$15,811,000,000,000.00

1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 20090%

20%

40%

60%

80%

100%

120%

140%

US Government Debt as a percentage of GDP

Following WWII, we paid our debt down

0

20

40

60

80

100

120

140

160

180

Note: #1 is Japan at 214%!

Our deficit to income ratio puts us in with the PIGS! Why is it so bad to be a PIG?

Greece

Portugal

Spain

Italy

• GDP: $281B• GDP per capita: $24,900• GDP Growth: -6.4%• Unemployment Rate: 24.3%• Population below poverty line: 20%• Household income by percentage

• Top 10%: 26% of total• Bottom 10%: 2.5% of total

• Budget Deficit: -10% of GDP• Total Debt: 156% of GDP

• GDP: $15.94T• GDP per capita: $48,000• GDP Growth: 2.2%• Unemployment Rate: 7.6%• Population below poverty line: 15%• Household income by percentage

• Top 10%: 30% of total• Bottom 10%: 2% of total

• Budget Deficit: -8.7% of GDP• Total Debt: 100% of GDP

*2011 estimate- Source: CIA world fact book

We’re one recession away from Greece!

2007• GDP Growth: 3%• Unemployment

Rate: 7.7%

Let’s break down the budget …

• Individual Income Tax: $1,141B• Corporate Taxes: $329B• Social Security: $659B• Medicare/Medicaid: $247B• Excise Tax: $103B• Estate Tax: $14B• Other: $116B

$2.627T

• Defense $884B• Non-Defense Discretionary: $456B• Social Security: $761B• Medicare/Medicaid: $754B• Other Mandatory: $613B• Interest of Debt

$240B• TARP $19B

$3.729T

Deficit = $1.102T

Now, let’s regroup…

Federal Government Proper• Total Revenues: $1.703T

• Income Taxes: $1.141T• Corporate Taxes: $329B• Other Taxes: $233B

• Total Spending:$2.210• Defense: $884B• Non-Defense Discretionary: $456B• Other Mandatory: $613B• Interest: $240B• TARP: $19B

Deficit: $507B (3% of GDP)

Social Security Administration• Total Revenues: $659B• Total Spending:$761B

Deficit: $102B (1% of GDP)

Medicare/Medicaid• Total Revenues: $247B• Total Spending:$754B

Deficit: $507B (3% of GDP)

Total DebtCurrent Deficit

+ Current Interest Rate Current GPD Growth

2.5%/yr.1.5%/yr.Deficit

$16,400B *100 = X

Federal Government• Total Revenues: $1.703T

• Income Taxes: $1.141T• Corporate Taxes: $329B• Other Taxes: $233B

• Total Spending:$2.210• Defense: $884B• Non-Defense Discretionary: $456B• Other Mandatory: $613B• Interest: $240B• TARP: $19B

Deficit: $507B

Under current circumstances, We need to get the deficit down to around $150B difficult, but possible

A manageable debt grows at a slower pace than the economy

Total DebtCurrent Deficit

+ Current Interest Rate Current GPD Growth

7%/yr.5%/yr.Deficit

$16,400B *100 = X

Federal Government• Total Revenues: $1.703T

• Income Taxes: $1.141T• Corporate Taxes: $329B• Other Taxes: $233B

• Total Spending:$2.210• Defense: $884B• Non-Defense Discretionary: $456B• Other Mandatory: $613B• Interest: $240B• TARP: $19B

Deficit: $507B

Under normal circumstances, we would require a reduction in the deficit to around $350B…again, manageable.

Long term averageLong term average

The problems of the Social Security Administration only get worse in the coming years!

Social Security Administration• Total Revenues: $659B• Total Spending:$761B

Deficit: $102B (1% of GDP)

Doesn’t look good!

Now, add the Medicare deficits…

Social Security Deficit: $350BMedicare Deficit: $3T

Social Security Administration• Total Revenues: $659B• Total Spending:$761B

Deficit: $102B (1% of GDP)

Medicare/Medicaid• Total Revenues: $247B• Total Spending:$754B

Deficit: $507B (3% of GDP)

Yikes!

What happens if the debt ceiling isn’t raised? The government is no longer allowed to borrow!

• Defense $884B• Non-Defense Discretionary: $456B• Social Security: $761B• Medicare/Medicaid: $754B• Other Mandatory: $613B• Interest of Debt

$240B• TARP $19B

$3.729T

Tax collections = $2.627T

We need to cut $1T in spending!!!

Can Obama ignore the debt ceiling? Maybe!

Argument #1: The debt ceiling creates conflicting laws.

• Every dollar the government spends is authorized by law. Therefore, if borrowing by the president is against the law, which law does he follow.

• Further, if the president needs to decide which programs to fund and which to cut, it puts the executive branch in charge of a legislative decision

US Constitution Article 1, section 1“All legislative powers herein shall be vested in a congress of the United States”

Or do we? Can Obama ignore the debt ceiling? Maybe!

Argument #2: The debt ceiling is unconstitutional

14th Amendment to the Constitution, Section 4

“The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. “

Or do we? Can Obama ignore the debt ceiling? Maybe!

Argument #3: The President could issue scrip

Scrip is a term used for any substitute to legal tender.

• The scrip would not violate the debt ceiling because it is not new borrowing backed by the credit of the US government…merely the formal acknowledgement of existing debt

• It is also not legal tender, so it does not violate congress’ right to “coin money”

Military personnel abroad have been paid in scrip

Or do we? Can Obama ignore the debt ceiling? Maybe!

Argument #4: The Trillion Dollar Coin

The president could authorize the Treasury to mint a $1T platinum coin and then sell it to the Fed which would credit the account of the Treasury for $1T

US Code: Title 31, Section 5112, subsection K

“The secretary may mint and issue platinum bullion coins…with such specifications, …denominations, …in the secretary’s discretion”

Is the $1T coin constitutional?

US Constitution, Article 1, Section 1

“All legislative powers herein shall be vested in a Congress of the United States”

US Constitution, Article 1, Section 8

“Congress shall have the power to coin money and regulate its value”

How does this get resolved?