Wednesday, July 27, 2011

America’s Debt Crisis

Economist: America's Debt: Shame on Them
GuardianMedia:U.S. Budget Ceiling Standoff
WSJ:Obama Backs New Senate Debt Plan ; Gridlock for Debt Talks

Earlier this month, United States President Barack Obama announced his support for a $3.7 trillion deficit-reduction plan revealed by a group of six Republic and Democratic Senators. The proposal comes as the latest effort on the part of the President to shrink the deficit and strike a deal on the government’s debt ceiling of $14.29 trillion by August 2. Raising the debt ceiling is an urgent matter, as treasury officials have warned that the government will not be able to pay all of its bills by August 2 without an increase in the debt limit by then.

Among the government’s financial obligations that will be affected are Social Security benefits, military pensions, contractor payments and interest on its debt. Similarly, the United States faces a possible down grading of its triple-A rating by all three major credit rating firms if the President and Congress do not reach an agreement to increase the debt ceiling. This possible rating downgrade is especially troublesome as a lower rating could increase borrowing costs for the government, households and businesses.

Under the United States separation of powers system, Congress is in charge of the spending power and as such it is the branch of government that must authorize any extension of the debt ceiling. Currently, there are a variety of different plans that Congress is considering. The front runner among these plans is the so-called “Gang of Six” Plan, named after the six Republican and Democratic senators who proposed it. Under this plan, the country’s deficit would be cut by $3.7 trillion over 10 years. The deficit reduction would come from spending cuts (74%) and new taxes (26%). It would impose spending cuts and caps in the cost-of-living increases for Social Security and other programs. Also, the plan would make big changes to the tax code by lowering personal and corporate tax rates, eliminating the Alternative Minimum Tax, and reducing many deductions and tax breaks.

Other proposed plans include the McConnell/Reid “Plan B” which would allow the president to raise the debt ceiling by $2.5 trillion in three steps through 2012 and the House GOP’s “Cut, Cap, Balance” plan under which spending would be cut by $2.4 trillion over ten years and a statutory spending cap with a constitutional amendment for the president to submit a balanced budget each year would be required.

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