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Congress must agree on a solution to financial crisis before America collapses
Like many college students, Congress has the habit of procrastinating whenever it has something difficult to do. However, just like college students, procrastinated work does not turn out nearly as well as it could have.
The recent fiscal cliff crisis is a perfect example of this.
Congress knew for months that it had a problem on its hands. The fiscal cliff, the expiration of President Bush’s tax cuts as well as the enacting of some automatic spending cuts, was set to occur at the end of 2012.
Yet, despite ample time to reach some sort of compromise on this issue, Congress did not pass a bill to resolve these issues until after the Dec. 31st deadline had passed.
The resulting bill was H.R. 8, entitled The Job Protection and Recession Prevention Act of 2012.
Despite its grandiose name, this bill was a feeble attempt to solve the problem and really ended up just pushing it to a later date.
According to ABC News, the results of this bill included a 4.6 percent increase in taxes on individuals earning more than $400,000 and on couples earning more than $450,000, a permanent extension for President Bush’s tax cuts for those earning less than $400,000 and a two-month delay for the scheduled spending cuts.
George Young of Liberty University’s School of Business gave this example to show how small the tax increase on the wealthy was.
“Sixty billion, they spent that in an afternoon with Hurricane Sandy. Everybody’s taxes that they talk about for 5,000 years, the rich people, raises $60 billion a year, and they spent that in an afternoon,” Young said.
What the bill did not do was extend the payroll tax cut, which, according to the Huffington Post, will result in a two percent tax increase for 77 percent of Americans.
“In 2012, that 2-percentage-point cut in the payroll tax was worth about $1,000 to a worker making $50,000 a year,” Stephen Ohlemacher from the Huffington Post said.
Andrew Light, an economics professor at Liberty, explained that the tax increases on the middle class will be harmful because they will directly decrease disposable income, which results in fewer consumption of goods and a weakening of the economy.
Congress’ solution to the fiscal cliff does not solve much, but the U.S. government faces an even bigger problem not too far in the future — the national debt ceiling.
The debt ceiling, as explained by Alan Blinder of the Wall Street Journal, is simply the amount of money the U.S. government is allowed to borrow. Currently, it is at $16.4 trillion. Sometime around March, the U.S. will not be able to pay its bills because it will be out of money and unable to borrow more unless the debt ceiling is raised by Congress.
As explained by the U.S. Department of the Treasury, failing to increase the debt limit could have devastating consequences if the U.S. is no longer able to pay its bills.
“The ensuing financial crisis from a default would have catastrophic economic consequences, potentially including the loss of millions of American jobs,” the Department of the Treasury wrote in a fact sheet entitled “Debt Limit: Myth v. Fact.”
Even if the budget was trimmed and taxes were increased, it is still likely that the debt ceiling would need to be raised. However, there are limits to how much the nation can borrow.
“This process of the national debt increasing eventually will push the interest rate higher, and that is not good for the economy,” Light said.
The more the U.S. borrows and the deeper in debt it is, Light explained, the harder it will be to pay off this debt, so any loans that the U.S. gets will have higher interest rates in order to account for the risk of the loan.
The question then is, what can be done to reign in the deficit?
“Taxes, to get us out of this hole, are going to have to increase … there is no doubt about that. But our (spending) costs will have to decrease,” Scott Hicks, Dean of Liberty University School of Business, said. “We are going to have short-term pain. It is going to have a negative effect on the economy, but (the) deficit is having a negative effect on the economy.”
However, this process will have to be done carefully.
“There is no way you can cut spending so much to bring down the deficit to $200-300 billion,” Light said. “That’s maybe too (many) cuts, but you just have to show the will to cut the spending, and you do it gradually because the problem is our economy is too weak. … The economy cannot sustain a strong spending cut.”
It is easy to try to pin the blame for this on either the Democrats or the Republicans, but the fact is that the blame for this budget deficit should be on every member of Congress for their collective and frustrating inability to compromise.
If the deficit is to be resolved, Democrats must agree to serious spending cuts and Republicans must raise taxes. This is not the ideal scenario, but there is no likely alternative.
While the situation is certainly complex, the deficit has grown to be a problem too big to ignore. Congress must act to reduce the deficit before it becomes too late to fix.