So I've been taking Economics 101 online from the local community college, and I have to say, I've been learning a ton. Everyone in the country should be required to take Economics. And unfortunately, there should be the most basic Economics 101 course that covers the fundamentals of macroeconomics, the Great Depression, and the current Great Recession in order to scare people into being conscious of how the world gets so effed up. And then, there should be a basic finance class that teaches people the fundamentals of earning, saving, how much things really cost, and basic equations to give people ways to think about money. I just read about compounding interest - the equation is simple, but, not being a math genius, I wouldn't have figured it out on my own. Now that I've studied it, I get it. Especially as I consider my 401k statement. Is there a negative compounding effect??
Anyway, for the class, we are asked to write short reports on topics or news articles. This particular topic, the Super-Committee, was something I knew pretty much nothing about. A quick scan through the internet pulled up a number of good sources, but I found that to get a really good rundown of the basics of the committee, the Canadian article was by far the best and least inflammatory. By inflammatory, I mean, the authors of the other articles obscure facts such as the Super-committee can decide on a proposal, but that proposal has a good chance of never becoming law, and furthermore, whatever law Congress grinds out of the proceedings could get twisted, whittled down, and essentially castrated before the laws go into effect. Kind of like the current Healthcare Law.
In my report, the applications portion at the end just refers to concepts we've covered in our weekly readings that apply to the article or topic. Enjoy!
1. Sources
NYTimes, pg. A22, October 19, 2011. "Deficit Panel May Need Push, Lawmakers Say" By Robert Pear
Reuters, October 21, 2011. "US Deficit Reduction Talks" by Richard Cowan http://www.reuters.com/article/2011/10/21/us-usa-debt-supercommittee-idUSTRE79K6C220111021
LA Times, October 19, 2011. "'Super committee' on deficit reduction is getting an earful." By Lisa Mascaro. http://articles.latimes.com/2011/oct/19/nation/la-na-super-committee-20111020
Financial Post (Canada)- Reuters. October 21, 2011. "What happens if US 'super committee' fails?" by Donna Smith http://business.financialpost.com/2011/10/21/what-happens-if-u-s-super-committee-fails/
wikipedia.org - Joint Select Committee on Deficit Reduction.
National Commission of Fiscal Responsibility and Reform report. http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf
2. Summary
The "Super-Committee" (formally known as the Joint Select Committee on Deficit Reduction) was legislated into being by the Budget Control Act, passed in August 2011. The committee's objective is to propose a plan to reduce deficits by at least $1.2 trillion over 10 years (greater if possible), and their report is due in one month, on November 23. Their recommendations will face a vote in Congress on December 23. If the committee cannot agree on how to reduce the deficit, or if their proposals are not made into law (either rejected by Congress or vetoed by the President), then the President is authorized to impose across-the-board cuts of $1.2 trillion in most military and civilian programs in January 2013.
However, cuts made either by legislation adopting the super-committee's recommendations or made by the President could be voted up or down by subsequent sessions of Congress before 2013, as Donna Smith points out in her Financial Post-Reuters article.
The problem the committee is trying to solve is a difficult one politically, and they reportedly spent most of September in a standoff. The main ideas to reduce the deficit include increasing taxes, which the Republicans are loathe to consider, and cutting spending on programs, like Medicare, which the Democrats won't do unless Republicans accept tax increases.
At least one Republican on the committee, Senator Rob Portman of Ohio, is pushing for tax law reform. He defends his position by saying that economists generally agree that "fundamental corporate tax reform is going to produce more economic growth and therefore, as a consequence, more revenues."
Both parties want to simplify corporate taxation, reduce rates, eliminate loopholes. But the problem there is that the profits of a large number of businesses "are not subject to corporate income tax, but distribute profits to the owners, who report the income on their individual tax returns."
According to a Reuters report, financial markets are looking for a deficit reduction greater than 1.2 trillion. Credit rating agencies are a part of the financial markets, and they would look for a greater deficit reduction in order to maintain confidence that US debt is not a high risk investment.
3. Application
Government budgets deficits and surpluses: Government deficits lead to reduced national saving, and reduced national saving means less investment, less investment leads to a reduced rate of long-run economic growth for the country. Clearly, the deficit has to be taken care of or the future of the country will be very dark. The debt to GDP ratio in 2010 was 62% (National Commission of Fiscal Responsibility and Reform report).
"Crowding out" - Deficits also mean that the government is borrowing more which eventually equals increased interest rates and less money for private firms to borrow for investments. Another reason the interest rates might rise is because of a downgrade by the rating agencies on US debt. Interestingly, according to the Financial Post-Reuters report, interest rates fell after S&P downgraded the US debt (bonds) earlier this year.
Bonds and Financial Markets: The US government borrows money to pay for its spending through issuing bonds. Financial markets in general are looking for a greater deficit reduction than $1.2 trillion in order to keep interest rates on those bonds low, but more importantly they rely on a stable and growing economy in order to function and function well.
Macroeconomics: Senator Rob Portman of Ohio is relying on macroeconomists' analysis of tax reform that says less taxes on corporations would produce more economic growth, more revenues in the end. This is directly related the idea that investment now grows the economy in the long run.
