10 things you should know about the debt deal
All the ramifications of the compromise, signed into law hours before a potential default, won't be known for years. Here's what to look for now, and what to keep in mind later.
By Knight A. Kiplinger, Kiplinger's Personal Finance magazine
Now that President Barack Obama and Congress have defused the debt limit time bomb, it’s tempting to forget the enormity of the federal government’s fiscal problems. But although these challenges are addressed in the deal, they are far from solved.
At best, only half of the needed deficit-cutting will take place, and there is good reason to doubt that later this year, as planned, Congress will carry through with even that much. It’s half a deal, too, in ignoring tax revenues.
As the plan plays out, here are 10 key judgments to keep in mind:
Debt remains a threat. The deal pays lip service to the goal of lowering annual deficits to 3% of gross domestic product from the current level of 10%, which would indeed stabilize the federal debt. But the 11th-hour agreement calling for $2.4 trillion in deficit reduction falls far short of the mark. Roughly $4 trillion in cuts over 10 years is needed to get debt under control. Federal debt was 40% of GDP in 2008 and 69% this year. With no changes in policy, it would probably reach 80% in 2014. Under the deal, it will hit that mark in 2015 or 2016. So the agreement struck postpones, but does not diminish the chances of, a debt-induced financial crisis. Article continues after video.
One way or another, taxes are going up. It’s true that taxes were left out of this deal, but the pressure for higher revenues is irresistible. Since the agreement did not adequately deal with the deficit and debt problem, Congress will have to return to it within a few years and consider ways to increase tax revenues along with additional spending cuts. We see no way Washington can get out of the debt mess without higher revenues. More funds will pour into the coffers when the economy picks up, as individuals and businesses earn more and pay more to Uncle Sam. But that won’t be enough by a long shot. Washington will have to coax out more revenues, either by narrowing or eliminating some tax breaks or by raising some rates. Getting there won’t be easy and isn’t likely before next year’s elections. Moreover, as long as Republicans control at least one chamber of Congress, they will insist that any tax changes include lower rates.
Nothing in Washington is permanent. Almost every action designed to play out over 10 years doesn’t pan out, and odds are strong that this measure will meet a similar fate. The simple fact is that future Congresses aren’t bound by this legislation, and who knows where the political power will reside in the coming years. Between now and 2021, voters will have their say in five congressional elections and three presidential races -- opportunities for revisiting and tinkering.
The U.S. Treasury may still lose its AAA credit rating. The rating agencies say the deal falls short of what’s needed, and their credibility is on the line. Standard & Poor’s, Moody’s and Fitch will likely wait to see whether the special committee charged with crafting the second tranche of spending cuts meets its Thanksgiving deadline. If it fails and Congress ducks the automatic cuts then required, get ready for higher interest rates. After a downgrade, interest costs would rise by perhaps $250 a year or more on a $100,000 mortgage or business loan.
The deal could hurt the economy. As written, most spending cuts are back-end loaded, becoming much more severe in future years, when the economy will presumably be stronger. But tea party forces and other lawmakers intent on showing they are serious could insist on shifting that emphasis in the next tranche of cuts, front-loading them, with the unintended result of turning a weak recovery into a recession.
An eventual financial crisis is now probably more likely than it was a few weeks ago. The size of this deal was never as important as demonstrating that political leaders could make tough decisions. They didn’t, and the special committee isn't likely to either. That will undermine the confidence of investors who, perhaps naively, assumed that the leaders would make painful compromises, as European leaders did recently to stabilize Greece. There is no specific amount of indebtedness -- no bright line -- that would trigger a dollar crash and interest rate spike. But ensuring that investors believe the U.S. government can contain such a crisis certainly makes it easier to avoid ending up on the wrong side.
Sequesters and triggers don’t work. Historically, they have a lousy record. Under the 1985 Gramm-Rudman-Hollings law, for example, many programs -- defense, Social Security, Medicare, Medicaid and a few others -- were originally exempted, and Congress eventually found ways around the rules to avoid across-the-board spending cuts. In this deal, across-the-board cuts would take effect if the bipartisan, bicameral commission deadlocked or if Congress failed to act. But, as in the past, some programs, such as veterans’ benefits and food stamps, are exempt. Medicare is not exempt, but any cuts in benefits or increases in costs won’t apply to seniors already in the program.
Congress flinched on entitlement reform. If the ticking bomb of potential default didn’t provide enough cover for lawmakers to take on Social Security, Medicare and Medicaid, then the prospects for such political valor in peacetime are not good. Still, the programs are slowly going broke, and Washington can’t duck the problem forever.
Obama has some serious fence-mending to do with liberal Democrats, especially in the House. In the short term -- the time frame that matters in the House because every member who wants to return must face the voters next year -- Democrats came away with nothing to crow about to their constituents, except to say that they acted for the good of the country. But while the liberal wing of the party stews, Obama comes out of the negotiations looking more moderate, boosting his effort to reach independents in his reelection run.
The Tea Party will be more emboldened by its success in the debt debate. But its staying power will be tested -- severely -- in next year’s House elections and again when increased tax revenues become part of the picture. The agreement will also bring renewed calls for shrinking the size of government. The Education and Commerce departments are favorite targets of conservatives, but these efforts will come up short, as they have in the past. One reason: Eliminating a department doesn’t mean doing away with all federal spending on schools and other programs, so such moves wouldn’t save enough money to justify the amount of political capital needed to succeed.
More on Kiplinger and MSN Money:
- Debt deal may hit Medicare
- Investor's guide to the debt ceiling crisis
- How does the debt deal affect you?
- Quiz: How well do you know the federal deficit?
- Calculator: Do you have too much debt?
- How Uncle Sam spends your taxes
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Eliminating a department doesn’t mean doing away with all federal spending on schools and other programs, so such moves wouldn’t save enough money to justify the amount of political capital needed to succeed.
However, having a flat tax and Federal Sales Tax would eliminate a Department. One called the IRS that is too big and too self indulgent. Another could be the BATFE. We don't need our tax dollars to support such monstrosities and political wings of the Federal Gov't.
Eliminating the Welfare system to other countries' Dictators can be another way to reduce our tax burden. We give money to people so they can buy weapons to kill our own soldiers and their own people.. If this is just a form of Population Control we could do a better job, much more quickly by just nuking them out of existence.
Every dollar given to someone through our Gov't should have a 100% return in value. Our own Welfare program and Unemployment benefits should have people cleaning up the streets, painting or renovating buildings in our towns and cities. One appreciates what they get more if they work for it.
Hey, snowxdragon, I was complaining when Bush was in, too. Anyone who has chosen the left or chosen the right and points their finger at the other side to blame is a pawn and is right where our government wants you to be. And that is blaming the other side. Few are willing to admit or see that the 'left and right' have compromised this country down the drain! If anybody out there is not outraged at our government, go to unelected.org and read about the recent audit of our Federal Reserve. The link is on the right side of the page under The Failing Economy. The audit showed that our Federal Reserve didn't just hand out QE1 and QE2, they handed out 16 TRILLION to banks and corporations in the US and around the world. This is the news you will not here on CNN, FOX, MSNBC, etc. I don't care what side the people think they are on, if this audit doesn't outrage you, you're an idiot!
There are a couple of things that the U.S. Government can do to help this economy, increase employment and revenue.
Eliminate the surplus of labor, NO legal or illegal immigration and secure the borders.
Regulate the oil and gas industry, increase drilling in the U.S. and build the proposed oil pipeline from Canada.
Globalization is NOT working for us and we need to look at rebuilding our own country.
Maybe if our leaders paid more attention to the people that live here, work here and pay their salaries, we could turn this thing around
The author of this article couldn't find water if he were standing in a swiming pool. You know NOTHING of money or debt or how it started, let alone how to fix it.
For one thing the debt has NOTHING to do with GDP, trade deficit or import/export imballance. The debt is from the Federal Reserve (a private bank, not part of the United States Government) buying paper money from the US Treasury for the cost of the paper and printing costs, then distributes the paper money printed by the US Mint at face value to banks and lending institutions. They charge us the US tax payer interest on the difference between the cost of the printed money and the face value of the money. We, the US citizens are charged interest on our money to distribute our money by a private bank. For every dollar printed we are charged 2% to the private Federal Reserve bank. When the Federal Reserve loans our money to other countries we still pay 2% for every dollar that they distribute even though that money never touched US soil, yet we are charged the interest not the other country.
President George Washington said in 1786, "If you let the paper money banks distribute their filthy paper money in this country, it will be to ruin of this fledgling nation". The man that started the Federal Reserve Bank , Baron Von Rothchild said "I don't care who you elect or who sits at the head of the table in government, let me control the money and I will control the government"
Hey, me123876876, I was under the impression that the top 5% of the earners in this country pay 50% of all federal taxes, the top 10 or 15% pay about 75% of all fed taxes, and at least 45% of the bottom earners pay no fed taxes whatsoever after they get their tax returns at the end of the year. I think the rich pay enough. I have a right to say this because I'm poor! Our government is too inefficient, ineffective and corrupt to just start giving them more, no matter who you want to take it from. It's so easy for you "tax the rich" people to ask them to hand over more. The simple fact of the matter is you can't tax them enough more to do any good. Now, if your talking about rich politicians and bankers, I would agree with you. Tax them at 99%. They are the ones that have caused all the problems. By the way, the people building those jets and yachts are built by people like me. Ask the person building these jets and yachts if he wants the people buying the jets and yachts spending more of their money on jets and yachts or taxes.
stop the wars, bring the troops home,= save money. really simple! even a politician should be able to see that. but then the special interest groups(military corperations)would not be making massive profits so it will never happen! we are screwed !
The one thing I do know about this debt deal is it is another blank check and the real problem is again pushed off for another Congress to NOT deal with...at least until we crash and burn like Greece.
The writer is correct that Congress will figure out how to weasel its way out of the all but meaningless cuts written into this deal. History tells the story.
What blows my mind is with all the facts out there for nearly anyone to get and at the speed that information moves these days that you are still finding people saying "it's the Democrats' fault" or "its the Republicans fault!" If one bothers to actually find some facts rather than being content to be sold another barrel of snake oil they will see clearly at that not one of them can call themselves blameless..and many others are literally rolling in it!
A deal has been struck but Rome is still burning and they're all still fiddling! I can't believe so many people have been sold this bill of goods!
No one hates Obama, just his policies. But until we get away from labeling everyone a racist for not agreeing with him, it is all lost. What he is trying to do is right out of the socialist handbook to completely bankrupt the nation and start over. Those are socialist/Communist views not Republican idea's. Bush did spend way too much money and the Prescription Drug Program was a huge mistake and I read where the Dem's did not support it because it was not paid for. Now really lets get real the ones that did not support would have damned well voted for it if they did not have enough Republicans vote it in. There is no way a Democrat would ever vote against a Government handout and we all know that is a fact. The last year Bush was in Office he had a 400 billion dollar deficit plus a 700 Billion Dollar Tarp package in which he saved 350 billion for Obama to use. Now go figure this out All the Tarp funds was paid back so bush had a total of 400 billion deficit not 1.1 trillion they yell about. Obama used the tarp money he got back and another 700 billion stimulus that was wasted and he still continues to spend like a drunken Soldier or Sailor. But you libs yell and scream we are racists for pointing it out. Well allot of you people got to understand that is what drives the Tea Party people. We are Tax payers and Although there are upwards of 40 or more percent of you that pay no tax we still outnumber you all and will prove it at the polls. It is not a crime for us to keep the money we earned you pay your fair share for awhile.
I agree with kc590. but it is up to us to start using this technology we have to educate people like us who already know that our government is the most corrupt group in the world. we need to get the word out and get rid of all of them come election time. I have always been a republican supporter and now I feel weather it be donkeys or elephants they are both just feeding themselves. we need to get real americans back in office to straighten out this country. We need Moral people back in office and to restructure this country back to what is was founded on and that is christian values. Yes I said it. and I am no means considered a bible thumper. but our constitution was written on these values written in scripture to prevent what is going on right now.
We need down home honest people.
Not Millionaires. They are only looking out for themselves. While the rest of us slave away to keep them in the lifestyle they have become use to.
So how many liberals that didn't agree with the Bush Tax Cuts actually write out a check for 6,8,10,15,20% of thier gross income to support thier big government. I would bet zero%.
Did you see the interview with Matt Damon? He said he would pay another 6% in federal taxes. What is stopping him from putting his money where his mouth is? Oh, it's the liberal wack-o way of thinking.
Burns my butt that the wife and I pay 25-28% in federal taxes and almost 50% of Americans pay ZERO, NOTTA, NOTHING, ZILCH. That's worse than a dead beat dad in my book!!!!!
Support your local tea party, they have the dims and reps on the run!!
Banks, wall street and big corporations just got another free pass. This is the group that benefits from outsourcing for slave labor. They have been helped by special treaties, tax breaks and in every way possible by their government. Some members of both parties even tried to sell the idea that outsourcing was a good thing. Of course it was for them and their owners.
Our corporations are making record profits and actually paying record low taxes. If we forced our public owned corporations to pay our minimum wages wherever they go that would bring back jobs and show a little regard for workers.
When the CEO of Disney Made 600 million in salary and God knows what in bonuses he had children working in Haiti for 12 cents and hour. "Sick" is too good a word for such people and their supporters. Our corrupt corporate and financial system is a disgrace to America and the human race.
The capital gains tax where most giant money is made will remain at 15% and our 4 biggest banks with 8 trillion in assets will continue getting billions in 0% or 1/4% loans to play the market.
If all government Guaranteed loans were made directly for a low interest, notes for home buyers and students would be cut by half or more and trillions would be left in the hands of our people instead of thieving banks. Why should anyone pay a bank 600k for a 200k house when the tax payers back the loan? How long will we act like pawns and peasants to be ruled by usurious banking and their government?
I would like to say thank you too Bernie Sanders and those few who continue to work for the people. How disgusting that their own president deserts them. Any politician that says; "Sorry folks, I am not happy with this bill that puts all the burden of deficit reduction on the hurting people; But. we had no options." Those prostitute politicians have deserted America and they are helping their pig owners to destroy our country. Also, they are shameless liars: They had plenty of of options. They chose big money over the people and our country. One more time!
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