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Former Senator Pushed for Balancing the Budget Essay

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Updated: Jan 29th, 2021

Introduction

The fiscal cliff entails combined tax increases and large spending cuts which are expected to automatically take place in 2013. This is after the set temporary income tax cuts come to an end. Although both Democrats and Republicans want to avert the fiscal cliff because of the expected consequences, an agreement is yet to be achieved. The unemployment rate is expected to increase to 9.1% by 2013 and the economic growth would be 1.7%. Unemployment and emergency benefits enjoyed would come to an end. Federal Reserve Chairman Ben Bernanke has warned that the Federal Reserve may not be in a position to avert the effects.

Discussion

The article by Stephen Miller revolves around the Gramm-Rudman-Hollings budget Act which was pushed by Warren Rudman in an effort to balance the Federal budget. Mr. Rudman’s idea was that the federal budget could be balanced by cutting down the spending. The idea was to have a balanced budget at the end of each fiscal year. After passing the law, Congress later embarked on the process of addressing

The recommended cuts and budget caps. The solution reached was to apply cutoffs and targets. According to Mr. Rudman, the fiscal problems faced could not be solved given the financial crisis faced by the country. In his opinion, if the problem went unchecked, it could result in either skyrocketing interest rates or hyperinflation.

Philip Izzo’s article explores the “fiscal cliff” debate. The lack of an agreement by Congress on a “fiscal cliff” has hindered economic growth, and hence the slow rate of economic growth. The economic growth rate lacks the capacity to reduce the rate of unemployment. Given that the set tax cut reductions are soon expiring and automatic spending cuts are expected to begin in January, lack of an agreement would slow the economic growth. Economists warn that the economy would go over the fiscal cliff thus reducing the 2013 economic growth by an estimated 2.2%. This would be detrimental to the economy given that under normal conditions, the economy is expected to grow just 2.4% supposing an agreement is reached. An official from J. P Morgan Chase warns that a recession could be realized if the situation is not dealt with. Although members of Congress have remained indecisive, economists hope that action will be taken by the Federal Reserve.

Based on Jon Hilsenrath’s article, the chairman of the Federal Reserve has warned that automatic spending cuts and tax increases which are part of the “fiscal cliff” are a threat to the country’s economic recovery. To avoid the restrain on economic growth, Ben Bernanke has stated that the monetary policy stated earlier will continue to be applied. The policy advocates for the purchase of additional assets and mortgage-backed securities to ensure that the labor market is improved. The Feds have continued with the purchase of bonds so as to reduce long term interest rates and increase the rate of investment, spending, and borrowing. However, the job market has not improved and the unemployment rate has remained high and can be reduced once full recovery is realized. Given that the $500 billion of fiscal cliff tax increases and spending cuts are enacted, the economy could be toppled back into a major recession. Mr. Bernanke has advised the lawmakers to endorse a long-run deficit-reduction plan which will support the economy and lessen business uncertainty.

Authors John D. Mckinnon, Kristina Peterson, and Josh Mitchell explore the effects most low-income households would face if the budget dilemma (fiscal cliff) is not resolved. According to the Tax Policy Center, an estimate of 90% of the American households would be part of the high tax burden come 2013. After the expiry of the tax and cut measures, taxes will increase if the lawmakers fail to reach an agreement and prevent the fiscal cliff. If aversion is not taken, the marginal rates would increase and households would be expected to pay more payroll taxes of 6.2% compared to 4.2%. In most households, the fall over the cliff would result in loss of jobs, child credit, earned income credit, and marriage-penalty relief depending on several demographic factors. Among high taxpayers, higher tax rates would affect dividend rates and capital gains. Federal departments such as Defense Department would experience a 10 percent budget cut which would be carried for the next 10 years.

Conclusion

In their article, Jon Hilsenrath and Kristina Peterson explore the different challenges and options that the Feds have in enhancing economic recovery. Federal Reserve Chairman Ben Bernanke has observed that although the U.S economy has shown signs of economic recovery, economic activities have been decelerated. This is because investment has continued to decline as the unemployment rate continues to soar. Tight credit mechanisms, impaired creditworthiness, and tight lending standards have impeded economic growth because homebuyers are in no capacity to obtain mortgages. The expiry of the fiscal cliff coupled with the eurozone debt crisis poses major threats to economic recovery. The suggested solutions by Mr. Bernanke include the additional purchase of Treasury securities or mortgage-backed securities and avoid an increase in interest-rate in the short-term. Other options available include using the Fed loan facility to credit banks and cut the 0.25% rate paid to banks. Nonetheless, the Feds Chairman has maintained that a range of policies and possible tools would be considered.

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IvyPanda. (2021, January 29). Former Senator Pushed for Balancing the Budget. Retrieved from https://ivypanda.com/essays/former-senator-pushed-for-balancing-the-budget/

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"Former Senator Pushed for Balancing the Budget." IvyPanda, 29 Jan. 2021, ivypanda.com/essays/former-senator-pushed-for-balancing-the-budget/.

1. IvyPanda. "Former Senator Pushed for Balancing the Budget." January 29, 2021. https://ivypanda.com/essays/former-senator-pushed-for-balancing-the-budget/.


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IvyPanda. "Former Senator Pushed for Balancing the Budget." January 29, 2021. https://ivypanda.com/essays/former-senator-pushed-for-balancing-the-budget/.

References

IvyPanda. 2021. "Former Senator Pushed for Balancing the Budget." January 29, 2021. https://ivypanda.com/essays/former-senator-pushed-for-balancing-the-budget/.

References

IvyPanda. (2021) 'Former Senator Pushed for Balancing the Budget'. 29 January.

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