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 FebruaryJanuaryMarchAprilMayJuneJulyAugustSeptemberOctober 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 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

FebruaryJanuaryMarchAprilMayJuneJulyAugustSeptemberOctober 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 18 th If a budget is not passed by April 15 th, 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!

Deficit = $1.225T Deficit = $236B Deficit = $135B Deficit = $167B Deficit = $139B US Government Deficits since 1980

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, US 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

US Government Deficits as a percentage of total income since 1900 We ran much larger deficits during WW11 (As a percentage of our economy)

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

Persistent, large deficits create a rapidly increasing total debt

We have run our total debt up to: $16,443,372,900, $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, $15,811,000,000,000.00

US Government Debt as a percentage of GDP Following WWII, we paid our debt down

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 Debt Current 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 Debt Current 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 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: $350B Medicare 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 14 th 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?