The Fiscal Cliff is a Symptom of The Debt Cliff

A casual consumer of “news” might perceive the so-called fiscal cliff as nothing more than a debate about whether or not “millionaires and billionaires” (defined as annual income of $250,000 or more) will be “asked to pay a little more.”

The “news” rarely provides background to to answer the question, why are we on the cliff edge, facing increases in virtually every federal tax rate unless Congress and the President can agree on legislation that would prevent it. The answer is in this chart.  [continued below chart]Since 2009, under President Obama’s leadership, government spending and debt have expanded dramatically. Polls show huge majorities see the debt as a crisis, and exploding debt was a major reason for the emergence of Tea Party activism and the historic election sweep of 2010 that shifted control of the House of Representatives from Democrat to Republican.

Today’s so-called fiscal cliff is the result of inconclusive “show-downs” between Obama and House Republicans  over spending and the looming debt cliff.  Failing to resolve their differences they enacted short term measures that “kicked the can down the road,” until January 1, 2013.  Can kicking has been forcefully criticized by all sides and we don’t feel the need to add our 2 cents worth now, except to point out that putting a stop to soaring debt is the action that can kicking postponed, and thus the real reason America faces the fiscal cliff.

Since the beginning of 2011 the Republican led House of Representatives has passed several bills that would have enacted at least token spending reductions.  But the Democrat controlled Senate has refused to bring them to the floor for a vote. 

The next chart shows the same debt as a percentage of GDP. [continued below the chart]Government debt can be made less threatening by a growing economy as measured by GDP.  But recent GDP growth has been slower than in any post-recession period since the government began reporting quarterly GDP data in 1946.  It would take a substantially greater growth rate for many years plus a freeze on new borrowing for the current level of debt to be sustainable over the long run.

While President Obama talks on TV of a “balanced approach”  his “compromise offers” to House Republicans were “deals” that would increase spending.  He has changed his tax increase “offer” several times since fiscal cliff negotiations began right after the election.  But in every case the only taxpayers to take a hit would be higher income individuals, two thirds of whom are business owners.  He has not proposed any increase in the corporate income tax on big business.

As scary as they look the charts above actually understate the debt crisis.  For the sake of clarity, they show only one of the two categories of federal debt, that which is owed to “the pubic.” The Pubic is defined as foreign and American individuals, foreign and domestic financial institutions, foreign governments and the Federal Reserve.  The other category is debt that is owed to “government accounts.”

The largest government accounts are the deceptively named Social Security and Medicare “Trust Funds.”  For decades government has logged Social Security and Medicare Payroll tax revenue that was diverted to other programs as a “debt” owed to the Trust Funds.  These fictitious debts the government supposedly owes to itself now total about $4.8 Trillion.  The headline debt number usually reported by the media includes both the debt government owes to the public and to itself. 

For at least the next 30 years Social Security and Medicare benefits will exceed payroll tax revenue so the government will have to “pay back” debt owed to its own trust funds by borrowing even more from the public.

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