HR Budget Committee: The Effects of a National Financial Crisis

Yesterday, I watched a live broadcast of the House of Representatives Budget Committee. The Budget Committee was questioning the Director of the Congressional Budget Office.

One of the issues discussed was the high corporate taxes in the United States. A reduction in corporate taxes along with lower health Insurance costs and health care costs would give our corporations and businesses a more competitive place in the world market. Another fringe benefit would be the return of some industries to the US. This must be complemented with the simultaneous government spending cuts and economic growth. Temporary tax cuts add uncertainty which in turn encourages corporations to move overseas where taxes are more stable. Congress would be taking a big step in the right direction if the current Federal tax system was overhauled.

People often don't realize how difficult the task of this Congress is. The recession placed a double whammy on government income. First, the only way to stimulate the economy is to invest in the US economy. The Republicans prefer to use tax cuts and spending cuts to stimulate the economy while the Democrats prefer a mixture of tax cuts and government programs.

However, the Republican spending cuts may stunt economic growth: Especially if these cuts affect government grants to states. Florida has received over six billion dollars in Federal grants. These funds have helped with regard to entitlement programs and unemployment. How? If the federal grants were cut, the six billion dollars would have to come from elsewhere. It would be very unwise to borrow it. Hence the money would be replaced with cuts in state programs, cuts in state contracts with private contractors, cuts in essential state services and possibly an increase in state taxes. This results in cuts in both public and private jobs which increases the level of national unemployment. It also increases the burden on the unemployment insurance budget thus increasing the national debt.

The Congressional Budget Committee also discussed the Health Reform Law with the CBO director. The CBO director studies found the current health reform law will save a quarter of a trillion dollars in the next decade. The Health Reform Law paid for itself via cutting government costs on Medicare (trimming benefits) and by new tax revenues. A repeal of the Health Reform Law would add 1.3 trillion dollars to the national debt.

Another issue is the Congress budget. That budget is a five year budget. However, the battle to resolve the national debt will last much longer than five years.

Of course, when considering our national debt, some people advocate adding a balanced budget amendment to the US Constitution. A balanced budget requires that the annual government spending match the annual government income. During a recession, this is particularly difficult. The economy is stimulated via a combination of tax cuts and spending increases. The total immediate increase in government spending includes both tax cuts and government spending because the effects of the tax cuts and government spending would not be realized immediately. So our new policy would be that the combination of tax cuts and government spending would have to equal government income. This is complicated be the fact that in order for the government to receive back the money, the nation must have a robust economy. A slow economic recovery will not suffice.

So who owns the Federal Debt? China? No. The Federal debt is owned by investors who purchased government bonds and Treasury notes. Fifty percent of the federal debt is owned by US citizens. The other 50% of the Federal debt is owned by people outside the US.

Another topic discussed was the Entitlement programs. Many people state that the Entitlement programs are not in trouble. These people are referring to the trust funds owned by the Entitlement programs. However, what is in the trust funds? Everyone knows that Congress has dipped it's hands into the Entitlement program trust funds. However Congress did not steal the funds. Congress borrowed the funds and left (in place of those borrowed funds) US Bonds and IOU notes. As the Entitlement Programs dip into their trust funds, they cash the US Bonds and IOU notes. The money paid for the bonds and IOU notes comes out of the annual federal budget, thus increasing the debt.

Here is another issue with the budget. It deals with the responsibilities of the individual HR committees. The Budget Committee tells the Finance Committee how much money to raise and how much money to spend. However, the Budget Committee does not tell the Finance Committee how to raise that money nor how to spend it. So the problem is establishing a financial policy that governs all HR committees.

How exactly would a financial crisis affect the US? A financial crisis occurs when investors no longer have confidence that the US will be able to pay up it's debt. The result may be that our credit rating drops from AAA to AA. The US government finances the debt via the sales of bonds and treasury notes. The US will then have to raise interest rates in order to sell bonds and treasury notes. The higher interest rates ripple through the economy. This problem is complicated by investors cashing in on their investments causing the US debt to rise. Interest rates on all sorts of loans and credit cards will rise making it harder of people and businesses to attain loans. This in turn may encourage companies to move overseas.