Fiscal Cliff (part 1) The Backstory

Today I’d just like to talk about the fiscal cliff and how it started and since I want to talk about that I’d like to give a little history about how America got into its latest debt situation since the fiscal cliff is a result of how the government is dealing with the national debt.

 

As it has been mentioned often, in 2000 when President Clinton left office, the country had a surplus. That meant that the government was actually taking in more money than it was spending (ahh the good ol’ days.) When President George W. Bush took office, he was confronted by the tragedy of 9/11. This necessitated that the country respond militarily. These military responses took place in the form of wars in both Afghanistan and Iraq. It should come as no surprise that wars cost money. After all, money must be paid for ramped up production of the weapons to fight wars, the movement of troops must be paid for, and all manner of expenditures must be taken into consideration, from the care of troops disabled in the war to the research and development of weapons unique to the environment where fighting is going on.

 

These costs were not figured into the budget, because although the budget is a “forward looking” document no one could have predicted 9/11 or the scope of the response that would be necessary following it. As a result, the wars became an unexpected emergency cost. When families are confronted with emergency costs, there are several ways that it can be dealt with. The family could cut the amount of money it spends on other things, working members of the family could take on more jobs or take more hours at their jobs to make more money, or they could charge the costs of the emergency to their credit cards in hopes that once the emergency is over they will be able to pay the debt off.

 

As the caretaker of the nation, President Bush had similar options. To deal with the costs of the war he could have made cut the amount of money the government spent on other things (cut spending on government programs), made more money (raised taxes), or put the cost on a credit card (borrowed the money from other countries or economic organizations through the sales of US Bonds).

 

In what I consider a purely political decision, President Bush decided the best way to deal with the emergency was not cutting government spending or raising taxes, but to simply borrow the money from other countries. In fact using the somewhat true rationale that after attacks on the World Trade Center the American economy was in a fragile state, he authorized the government to provide people with tax refunds and reduced taxes at a time when government was spending more money in order to fight wars. These measures combined to turn a surplus in government spending into a debt that the nation was carrying.

 

In addition to that the President continued the deregulation of America’s financial institutions, which lead to the loosening of financial regulations and caused the Great Recession. Deregulation has long been a hallmark of the Republican Party under the rationale that excessive regulations constrain the ability of businesses to make money and are another sign of government being too big and spending money unnecessarily.

 

The Great Recession resulted in President Bush deciding to give money to failing banks and businesses in order to keep the country and the world from sliding into a Depression. Since the government was already operating at a deficit due to the debts from the unpaid wars. The government had to borrow even more money in order to give it to the banks and businesses. This added even more money to the deficit.

 

So that’s the backstory of how America got into the current deficit.

 

(to be continued…tomorrow I’ll post fiscal cliff part 2 giving a short history of the past 4 years and what the fiscal cliff might mean to you.)

 

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