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Debt Ceiling Debate Looms as Red Ink Piles Up

As the Congressional recess begins for lawmakers in Washington, D.C., a major fight looms shortly following their scheduled return. Prior to the start of the near month-long break, Congress failed to agree upon on the next step for the debt limit debate.

As time ticks away, the country inches closer to the late fall deadline set by the Treasury Department. That date is when the U.S. will hit its limit of $16.699 trillion dollars.

Although it’s likely that the debt ceiling will be raised, it’s unknown what, if any, cuts in spending will accompany the hike.

Currently, the debt stands at over $16.7 trillion. If you were to break that number down to show the amount each citizen of the U.S. owes, it would come out to around $53,000. If you just include taxpaying citizens, the share of debt increases to around $148,000 per taxpayer.

“Debt has to be repaid,” said William Shughart, a professor at the John Huntsman School of Business at Utah State University and senior fellow at the Independent Institute. “The only way to get out of it is either drastically reduce spending, or drastically increase taxes.”

With the Federal Reserve’s Quantitative Easing program still in effect, some believe inflation may be drawing near. Interest rates are being held at historically low rates by the Federal Reserve in hopes of spurring economic activity.

“Keeping interest rates low only postpones the problem,” said Shughart. “The day of reckoning could be worse than the Great Recession and the Great Depression.”

But the Federal Reserve’s actions may have other unintended consequences. “They are creating a large moral hazard problem,” said Jason Fichtner, a senior research fellow at the Mercatus Center. “They are making it easier to borrow and harder to pay off the debt.”

As of now, the Federal Reserve estimates that there is $1.2 trillion U.S. dollars in circulation. That means the country’s national debt is nearly 14 times larger than the amount of money currently in circulation.

With an economy growing between one and two percent, others fear it will take years before the debt situation becomes stable.

The U.S. Gross Domestic Product – the value of all goods and services produced within the country – stood at $15.6 trillion in 2012. “If every American worked for an entire year, and the government took all their earnings, it still wouldn’t be enough to pay off our debt,” said Fichtner.

Concerns are also growing over future unfunded liabilities. Estimates of unfunded liabilities – money that has been promised through entitlement programs such as Medicare, Social Security and other government programs – ranges from $60 trillion to well over $125 trillion.

A recent study by the University of California – San Diego shows the U.S. has over $70 trillion in off the books liabilities.

By taking the conservative estimate of $60 trillion, and using the 2012 GDP figures, it would take the U.S. just under four years to pay off those liabilities if the government took all the earnings of every citizen and business during that time.

Congress does have the ability to lower the amount of future liabilities through different means. Raising the retirement age and increasing payroll taxes for entitlement programs would lower long-term debt. However, experts like Shughart don’t foresee that as likely scenario. “I don’t see any political will in allowing major adjustments to take place.”

The U.S. has a long history of having some level of debt. However, only in the last 13 years has it exploded at record pace.

When George W. Bush took office in 2001, the debt stood at $5.73 trillion. In the eight years of his presidency, Bush added over $4.8 trillion to the deficit, leaving office with the country’s debt figure standing at $10.63 trillion.

Since the four and a half years President Obama has spent in office, the debt has risen by over $6 trillion, which leads back to today.

The Obama Administration has made their stance clear; they will not negotiate spending cuts as part of a potential debt ceiling deal. The president is looking to avoid another situation similar to the 2011 compromise that lead to sequestration.

For the first time in U.S. history, 2011 also saw the country’s credit rating downgraded due in large to the inability of lawmakers to agree upon long-term debt management.

Although the summer season is winding down, following the August recess, the nation’s capital will certainly be heating up as the showdown begins.

Categories: Budget and Finance, Must Read, News, Politics
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