Content Tagged: balanced

Fears of Social Security and Medicare’s Demise

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April 24, 2012

The annual report on Social Security, published Monday, stated that the retirement program “is on track to go bankrupt three years earlier than expected if reforms are not made,” reports Rachel Younglai and Glenn Somerville for Reuters.  The funding for Medicare similarly appears to be depleting quickly.  Social Security, the report projected, would begin to run out of money for retirees’ pension checks in 2033, while Medicare would run out of funding entirely by 2024.

These projections relate closely to the fact that baby boomers, 78 million Americans born between 1946 and 1964, began retiring last year.  As they continue to do so, the strain on both Social Security and Medicare will increase.

Younglai and Somerville quote two trustees of Social Security as warning lawmakers that they must act quickly in order to prevent the demise of the program.  Because a large portion of the funding for Social Security comes from payroll taxes, a current suggestion for how to keep the program afloat is to raise payroll taxes.  Right now, the payroll tax on employers and employees is 12.4 percent.  The recommendation is to raise the percentage collected to 16.7.  This 4.3 percent increase is estimated to cover the growing costs of Social Security so that the benefits will continue to be paid in full.

Congressmen also have considered raising the retirement age or cutting certain benefits to the wealthiest citizens.  Because of the impending elections, however, it is unlikely that any decisions will be made regarding these issues, Younglai and Somerville report.  The most urgent issue, trustees of the Social Security fund reported, was the disability insurance program, whose funding likely will be depleted by 2016.

In terms of Medicare, Republicans are pushing to overhaul the entire program, while Obama and the Democratic party claim that his new health care plan has added eight more years of life to its funding.  Because both political parties strongly disagree on a solution, Younglai and Somerville explain again that it is unlikely for any changes to be made before the next election.

Bringing the Article into the Classroom

Teachers may begin by asking the students how the article relates the current U.S. economy to funding both Social Security and Medicare.  Why does the state of this country’s economy influence the funding of these two federal programs?  What other issues does the article point out as influencing the potential demise of Social Security and Medicare?  The teacher may also ask students to come up with alternative federal budgets, tax plans, or even Medicare and Social Security distribution plans that take into account the depleting funds.  Finally, the teacher may ask students how the issues raised about Medicare and Social Security relate to the federal budget and federal deficit.

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Though the Supercommittee Isn’t Back, Its Negotiations May Be

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February 28, 2012

The supercommittee may be gone, but it certainly has not been forgotten.  House Minority Whip Steny Hoyer of Maryland made that point clear in his address on Capital Hill on Tuesday, reports John R. Parkinson and Carson McKinlay for ABC News.  Hoyer stated that Congress should replace the automatic spending cuts set for the end of the year with a plan similar to the one proposed by President Obama and House Speaker John Boehner last summer (which failed in negotiations).

Hoyer explained that he believed the deficit posed a tremendous danger for this country, but that the current plan did not adequately address the country’s economic needs.  Referring to the automatic cuts, he explained:

Simply walking away from sequestration would be waving the white flag in the face of [the Congressional Budget Office’s] projection of a dismal fiscal future.  However, sequestration remains an irrational response.  It was the blunt instrument established to force both sides to the table to keep them there… It [the automatic spending cuts] should be replaced, but replaced only by the kind of big, balanced solution the Joint Select Committee [A.K.A. the supercommittee] was supposed to have produced.

In his speech, Hoyer went on to assert that the automatic cuts were never meant to happen.  The plan simply existed in order to force both sides to begin negotiations.  The additional fact that the cuts are not scheduled to begin until the end of the year also indicated that there still is time to agree on a new deal.  He explained that there must be a compromise between an increase in the amount of money the government collects (through taxes) and cuts in spending.

In Your Classroom

This article gives one Congressman’s opinion for what should happen next in the plans to cut the deficit.  Hoyer, as a Democrat, represents the party line, which is explored further in this article.  You may want to use the information provided in this article to create a graphic organizer with your students that examines the different stances Republicans and Democrats take on the appropriate action for Congress to cut the deficit.

Alternatively, you may use this article as a jumping-off point for a web-quest which would explore what Republican Congressmen are saying about the deficit reduction plan.  You may ask your students to see if there are: direct responses to Hoyer, similar statements made by Republican Congressmen unrelated to Hoyer’s response, and other Democratic statements.

In a discussion on this article, you may want to ask the following questions:  Why has Hoyer chosen this point in time to make an address about the deficit?  Why might he think that asking Congress to pass a plan that failed in negotiations over the summer would be reconsidered (and passed) now?

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Campaigning and Cutting the Deficit

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February 23, 2012

In less than one year, this country will vote to elect a new President.  As the Republican candidates spar in frequent debates, campaign advertisements, and other modes of publicity (as well as through the formal primary elections), Obama’s campaign team also has entered the public eye.  Rather than differentiating Obama from the Republican candidates through his stance on social issues, the Obama campaign has decided to look at which candidate would cut the deficit the most, reported Devin Dwyer for ABC News.

The Obama campaign recently released a memo that analyzed the budget proposals of Mitt Romney and Rick Santorum, the two frontrunners in the Republican primaries.  Dwyer reports:

Obama aides, citing studies from the Tax Policy Center and Center on Budget and Policy Priorities, conclude Romney’s public budget proposals would add $175 billion a year to the deficit.  They claim his proposed tax cuts and increased defense spending would not be adequately offset by as yet unspecified spending cutes the size of which are deemed ‘simply not plausible.’  The memo also claims Santorum’s plan would add $990 billion to the deficit in 2015.

In contrast to this memo’s conclusions, both Romney and Santorum have stated that they planned to cut government spending as President.  In an email to ABC News, Dwyer reports, Romney campaign spokeswoman Andrea Saul “did not directly refute” this memo’s analysis.  Rather, she highlighted the fact that, during the Obama presidency, the deficit has grown by over $5 trillion.

Bringing This Article into the Classroom

Dwyer’s article points to the fact that Obama’s campaign has decided to attack both Romney and Santorum for their proposed budgets and their effect on the federal deficit.  In a class discussion, you may ask your students why they think the Obama campaign is choosing to focus on the federal deficit as a campaign strategy rather than simply focusing on social issues?

This article also lends itself to a discussion on the different approaches Republicans and Democrats take to taxing and spending.  By examining the general philosophical differences of small vs. big governments, students will have a greater appreciation for why the Obama campaign sees their memo as an effective attack on the Romney and Santorum campaigns.

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Is Government Debt Analogous to a Family Mortgage?

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February 1, 2012

Paul Krugman, a 2008 Nobel Prize winner in Economics, wants you to stop comparing the federal debt to the debt of an individual.  In a recent New York Times op-ed piece, Krugman reframes this issue to explain why he believes that the federal debt is not the most urgent issue this government faces.

Krugman begins by pointing out that, despite the fact that the unemployment rate has been “disastrously high” the past two years, Congress has focused its energy on reducing the budget deficit.  Krugman lambasts both Congress and the economists with whom Congress has been consulting:

When people in D.C. talk about deficits and debt, by and large they have no idea what they’re talking about – and the people who talk the most understand the least.  Perhaps most obviously, the economic ‘experts’ on whom much of Congress relies have been repeatedly, utterly wrong about the short-run effects of budget deficits.

Krugman goes on to point out what specifically these economists have gotten wrong: in the short term, they claimed that the budget deficit would lead to increasing interest rates, though interest rates actually have dropped over the course of Obama’s presidency.

In the long term, Krugman claims, governments do not have to pay back their debt in the way individuals must pay back personal debts.  He explains: “An over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.” As discussed in earlier posts, the federal government borrows money by issuing bonds.  Though foreigners own many of these bonds, for each dollar of American debt claimed by foreigners, Americans have 89 cents worth of claims on foreigners.  In addition, American investments in foreign assets are more risky than foreign investments in the U.S. – which means that Americans earn more from their assets than foreigners do.

Krugman eventually does concede that debt is a problem without modest increases in taxes – and that raising taxes does have a cost.  He concludes by saying that the government may only continue to maintain a high debt if it also raises taxes.  Since this government is so anti-tax, however, it is unlikely that taxes will be rising anytime soon.

In order to introduce this article into the classroom, you may first want to introduce Krugman with a brief biography to contextualize his claims.  You may then ask the following discussion questions: What economic principles does Krugman introduce in this article (for example, do collecting taxes lead to more or less productivity)?  What are alternative opinions to what Krugman claims? Because Krugman makes many bold statements in his article, what alternative opinions have been discussed in this class in the past? What opinion/idea about the value of having a budget deficit makes more sense to you?


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A More Transparent National Debt

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January 17, 2012

When you take out a mortgage on your home or a student loan to pay for college, you generally are required to pay back that loan with interest through monthly installments spread over a specified number of years. As an individual, you may choose to create a monthly budget for yourself that indicates all of your ongoing and long-term expenses.

When the federal government needs to pay for a war or its employees or Medicare, it issue bonds (which essentially is borrowing money as a loan) to pay for those expenses.  Furthermore, when the federal government creates a budget for itself, it does not include the cost of borrowing or ongoing expenses beyond that fiscal year.  Bruce Bartlett, writing for the New York Times Economix blog, reports on the much larger deficit this country faces beyond what the single year tally indicates.

In this article, Bartlett first provides the history for the way in which the government reports its current and long-term debts.  He explains that the federal government did not publish a “consolidated financial statement” until 1977, despite the fact that the Hoover Commission had recommended that the government provide such a report as early as 1949.

The consolidated financial statement was succeeded by what is currently titled: The Financial Report of the United States Government. The Treasury’s Financial Management Service published this year’s report on December 23, 2011.  Bartlett surmises that this day was picked strategically, because most reporters would be preparing for the holiday rather than reading this 254-page document.

Bartlett summarized the report as follows:

According to the report, the federal debt – simply the cumulative value of all past budget deficits less surpluses – was $10.2 trillion on Sept. 30.  But the government also owed $5.8 trillion to federal employees and veterans.  Social Security’s unfunded liability – promised benefits over expected Social Security revenues – was $9.2 trillion over the next 75 years, or about 1 percent of the gross domestic product.  Medicare’s unfunded liability was $24.6 trillion, or 3 percent of G.D.P.  Altogether, the Treasury recons the government’s total indebtedness at $51.3 trillion – 5 times the size of the national debt.

Bartlett goes on to say that the report demonstrates that the largest growth in future federal spending will be in the interest owed on the debt, rather than in government programs as is commonly assumed.

Teachers may use this article to discuss the ways in which the federal government creates and considers its yearly budget.  If the students were in charge of redesigning the way in which the government reported its budget, how might they include the long-term projections of the deficit as well as the short-term ones (if they chose to include both)? Why might it be important to consider the long-term costs of borrowing money?

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Expiring Tax Cuts

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November 29, 2011

Now that the supercommittee has failed, automatic spending cuts, distributed across many government programs, will begin on January 1, 2013. These spending cuts have been framed as a win for the Republicans, since they are not accompanied by any tax increases, what Democrats wanted.

Ezra Klein, writing for the Washington Post blog, “Wonkbook,” identifies one neglected but crucial point in this matter: the expiring Bush tax cuts. January 1, 2013, does not just mark the beginning of the automatic spending cuts.  It also marks the end of the massive Bush tax cuts enacted 12 years ago.  For every dollar that the automatic cuts eliminate from government spending, there will be three dollars of tax increases.

Klein examines the implications of these two things happening simultaneously, and how it compares to the proposals of the supercommittee:

“If you count reduced interest payments, the two policies alone would reduce future deficits by about $6 trillion.  That’s far more than anything the supercommittee came close to discussing. It’s distributed far more progressively than anything the Democrats have even considered proposing.  And all that needs to happen for it to pass is, well, nothing.”

Klein goes on to explain to that, while there are ways the government to create an alternative to the simple expiration of Bush’s tax cuts, the road to this alternative is far from straight.  Republicans, he notes, will not be able to stop the expiration without Senate Democrats and President Obama’s support to pass an alternative.

It seems simple that the Democrats simply should refuse to work with the Republicans and allow for this massive tax increase, but Klein suggests otherwise.  He believes that there are two reasons why Republicans still have some bargaining power.  The first is that the $3.8 trillion collected in taxes will come primarily from the middle-class, and Democrats already have expressed a preference to make the Bush tax cuts for income under $250,000 permanent.  Politically, the Democratic party may fear a loss of support from the middle class, a huge part of its voter base, if those taxes increased. Without those tax cut, however, only 20 percent of the potential gain is left.  The second is that the simultaneous cuts in spending and massive increases in taxes would be too stressful for the U.S. economy. A slow phase-in of such increases may have worked, Klein claims, but these cuts expire all at once.

In the classroom, this article lends itself to a number of different group or class-wide discussions.  Some questions to consider: should the Democrats oppose any attempt to extend again (or make permanent) the Bush tax cuts? Why might Democrats feel compelled to oppose any Republican proposal (against what Klein claims)?  What are the economic implications of massive tax increases paired with lower federal spending?  If teachers have been discussing basic economic theory, they may ask their students to draw graphs of what government spending and taxing will look like over the next ten years, along with the size of the national debt each year based on the difference of the spending and taxing taken from the current size of the debt.

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Ideological Differences: Will the Deficit Panel Ever Agree?

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November 10, 2011

A recent article by Bobby Caina Calvan in the Boston Globe reports that the bi-partisan, deficit-reduction panel has temporary stopped meetings.  With only two more weeks until the panel’s November 23rd deadline, it is unclear if the panel will be able to agree on a plan before automatic cuts are instated.

Republican aides claimed that the Democrats had walked out of the meetings, while Democratic aides stated that both sides were still in conversation.  Regardless of which version of the story is correct, the most important issue is the ideological differences between Republicans and Democrats over how to reduce the deficit.

Over what do they disagree?

Calvan reports that the largest issue dividing Democrats and Republicans is whether or not this deal should include revenue increases – meaning, should the government try to collect more money as it cuts spending?  And even if both sides come to an agreement that new revenues should be included, both sides also need to agree on from whom the money should be collected.

Patrick Toomey, a Republican senator from Pennsylvania on the panel, suggested that the government could raise revenue by $300 billion by overhauling the tax code to reduce or eliminate many popular individual deductions while lowering tax rates, Calvan explains.

Democrats, however, rejected the plan.  They claimed that it simply was a tax cut for the rich.  The ongoing disagreement on this issue led to the supposed “timeout.”

Turning Your Classroom into the Deficit Panel

Depending on allotted class time for discussing the deficit, this article may be used as an introduction a class debate/reenactment of the Deficit-Reduction Panel.  Assign half the students to be Democrats and half the students to be Republicans.  Have them research the federal budget to find out the general breakdown of spending – what percentage of the budget goes to defense, education, etc., as well as the actual dollar amount for each of those parts.  It may also be helpful to give students some information about the amount of revenue the government collects each year and where it comes from.

After, have the students conduct research on the general position of their particular party on issues relating to the budget.  Then, ask each group of students to create their own deficit reduction plan with which they believe their political party would agree.  Make sure each group writes out a paragraph for each cut they make or type of taxes they plan to raise.

Finally, have the groups present their plans to each other.  Once each side has presented its plan, give students the opportunity to discuss and debate the merits of each side as if each student was a senator from that political party.  At the end, compare the students’ results to the panel’s actions.  How was the students’ debate similar to or different from that of the panel?  Were the students more accommodating to diverse opinions than the panel members seem to be to each other?

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Growing Concerns about the Debt Ceiling

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May 24, 2011

In a recent article in the Christian Science Monitor, Gail Russell Chaddock writes about the growing conflict between tea party politicians and the business lobby.  The US Treasury has reached the national debt ceiling of $14.294 trillion, and estimates that funds will run out by August 2 if the limit is not increased.  The possibility of default, according to Chaddock, “is sharpening lines of demarcation between Washington’s business establishment, which wants Congress to simply raise the debt limit, and many tea party-backed lawmakers, who don’t.”

This is uncharted territory for both sides, as US Chamber of Commerce and big business interests usually align with those of the GOP.  From the article:

After all, the two are usually allies on legislative matters. The tea party movement calls for lower taxes and less regulation – interests shared by corporate America…

But a rift over the debt ceiling sets up a deeper clash between these two primarily Republican camps. The tea party is all about chopping the size and scope of government, something that doesn’t sit all that well with businesses that depend on government spending and contracts – especially if it means taking the country to the brink of a default over the national debt.

Chaddock writes that President Obama and Treasury Secretary Geithner are calling on business leasers to push for a congressional vote to increase the debt ceiling “before international creditors get anxious.”  Yet, grass-roots tea party advocates seek “to hold conservative lawmakers to their pledges to vote against raising the ceiling – or to do so only if Congress enacts new spending limits.”

A growing number of senators support a balanced budget amendment.  One of whom, Sen. Mike Lee (R) of Utah, believes the amendment would be “the most important vote they take in this Congress.”  From the article:

“The Chamber of Commerce has a legitimate point of view…. But we should not be so eager to jump on the bandwagon that bad things will happen if we don’t raise the debt limit without asking what bad things will happen if we do raise it,” says Senator Lee. “If we raise the debt ceiling, we have to ask what we are doing to make sure we do not face this problem again.”

Previous Understanding Fiscal Responsibility blogs have discussed Republican and Democratic views about increasing the debt limit, public opinion about the debt ceiling, and the debate in Washington about a balanced budget amendment.  As the nation has already reached the debt ceiling and is rapidly approaching the estimated date that government funds will run out, teachers could once again raise these issues in class discussion.

Teachers should encourage students to discuss the quote that Chaddock uses to conclude the article.  What problems could the nation face if the government does not increase the debt limit?  What problems could the nation face if the government does raise the limit?  What steps could the government take to ensure we do not face this problem again in the future?   Students should watch the debates unfold and observe how compromises are reached (or are not reached) as the nation nears the date at which federal funds will run out.

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Colin Powell on Cuts to the Federal Budget

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January 25, 2011

In a recent interview on CNN’s “State of the Union”, Candy Crowley asked former secretary of state, retired General Colin Powell about his thoughts on the federal budget.  Crowley noted that Powell had “criticized Republicans for sometimes saying… let’s just freeze spending where we are and then we can save money without addressing the revenue side.”  Powell responded that everything must be on the table, including both domestic and international accounts, and he specifically mentioned that he saw “no reason why the military shouldn’t be looked at.”  Powell continued:

When the Cold War ended 20 years ago, when I was chairman and Mr. Cheney was secretary of Defense, we cut the defense budget by 25 percent. And we reduced the force by 500,000 active duty soldiers, so it can be done. Now, how fast you can do it and what you have to cut out remains to be seen, but I don’t think the defense budget can be made, you know, sacrosanct and it can’t be touched.

Powell noted, however, that the “real money” was in entitlement spending and that we cannot balance the budget without addressing Social Security, Medicare, and Medicaid. Powell disagreed with recent GOP plans to reduce government spending to 2006 levels (as discussed in last week’s Understanding Fiscal Responsibility blog), arguing that “you can’t fix the deficit or the national debt by killing NPR or National Endowment for the Humanities or the Arts.”  Powell concluded his thoughts about the national debt as follows:

I’m very put off when people just say let’s go back and freeze to the level two years ago.  Don’t tell me you’re going to freeze to a level. That usually is a very inefficient way of doing it. Tell me what you’re going to cut, and nobody up there yet is being very, very candid about what they are going to cut to fix this problem.

Teachers could use this interview to help students understand the difficult task of balancing the federal budget.  Students should consider Powell’s unique role as a respected advisor to both Republicans and Democrats, and consider how that influences both the substance and tone of his comments.  In the interview with Candy Crowley, Powell said he did not want a position in the Obama administration and preferred being “someone the president calls on from time to time for personal advice without me expecting anything in return.”  How does Powell’s role influence the advice he is willing and able to offer?  Does Powell’s position make his advice more or less valuable?  Why?  Why is Powell willing to consider cuts to the military, when most politicians are reluctant to discuss that issue?  How does his position as a retired General affect his credibility in those discussions?   Do you agree or disagree with Powell’s ideas about the federal budget?  What led you to those opinions?

Discussing these questions with classmates will help students form their own opinions about the best approach to balancing the budget.  These discussions will also help students understand the complex political process of determining where cuts can and/or should be made in an effort to balance the budget.

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Debating a Federal Balanced Budget Amendment

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October 22, 2010

Troy Senik, former White House speech writer for George W. Bush and Senior Fellow at the Center for Individual Freedom, recently published an article on FoxNews.com arguing in favor of a constitutional amendment requiring a balanced budget.  Senik believes that the passage of a balanced budget could be America’s last chance “to keep the U.S. economy on a path that could support consistent growth and prosperity.”  From the article:

What’s needed is a Constitutional Amendment requiring 60 percent of the Senate and House of Representatives to vote in the affirmative for any piece of legislation that increases the debt ceiling, raises current taxes or imposes new taxes. The Constitutional Amendment should also require Congress to pass a balanced federal budget annually.

Senik believes “any serious approach to our economic travails” must address three areas: 1) the need for a balanced budget, 2) avoiding tax increases during recession, and 3) not accumulating additional debt.  Arguing that “every federal expenditure… is extracted from the productive private economy,” Senik believes that “the fundamental problem is the size of government.”

Many economists, including Nobel Prize winner Paul Krugman, believe the demand for fiscal austerity is misguided.  In a September 2009, blog for the New York Times, Krugman wrote:

Under the kind of conditions we’re now facing, the main determinant of business investment is the state of the economy, as evidenced by the plunge in investment… This, in turn, means that anything that improves the state of the economy, including fiscal stimulus, leads to more investment, and hence raises the economy’s future potential.

That is, under current conditions deficit spending doesn’t lead to crowding out — it leads to crowding in. In fact, you could argue that the worst thing we can do for future generations is NOT to run sufficiently large deficits right now.

While Krugman believes that “things won’t always work this way” and that “eventually we’ll emerge from the liquidity trap”, for now he argues that deficit spending will help the economy.  Senik’s plan, from Krugman’s perspective, would only serve to exacerbate the United States’ economic problems.

Teachers could use these conflicting points of view to frame a classroom debate about the passage of a constitutional amendment to balance the federal budget.  Students could examine the pros and cons of this issue, discuss the positive and negative results of balanced budget amendments in state constitutions, and predict the consequences of a federal amendment.  Students could also research candidates running in the 2010 Congressional elections to find out who, if anyone, supports a balanced budget amendment as part of their platform.

While legislating a balanced budget seems like a simple solution to deficit spending, there are many consequences (both good and bad) to such a decision.  This activity will help students explore these issues and reach their own conclusions about whether or not to support a federal balanced budget amendment.

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