With the recent near-default of the American government, we are forced to take a closer look at the dark rabbit hole that has become the federal budget. A short plunge into history will surface in a debate of the politics of the current financial crisis: Over the past century, the world has changed dramatically, contributing to and resulting from globalization.

Like the domino effect, once science reached a certain point of innovation, the world population exploded, creating a systematic and uncontrollable increase in both processes over the following years. The U.S. government reflects a clear example of this incredulous expansion. The 20^th century saw America transform from an infant nation into the leading nation of efficiency, compassion, and modernity.

At the helm of the 1900’s, the U.S. government consumed merely 6.9 percent of Gross Domestic Product (GDP, a minority of which was due to federal spending. However, World War I brought a kick to spending, and culminating at about 12 percent of GDP in the 1920s.

President Roosevelt and the New Deal brought spending up to 20 percent during the Great Depression, but it was during World War II that government spending peaked to 53 percent of GDP in 1945. In terms of government spending, the post -World War II era marked itself as the Golden Age, despite President Clinton’s 1995 declaration that big government spending has finally come to an end.

Immediately after WWII, spending dropped to 21 percent, but by the recession of 1980-82, hit a peak of 36 percent. Government spending averaged 32 percent of GDP until the disastrous recession of 2008, in which spending surged to wartime-like spending, 45 percent, thanks to bank and automotive industry bailouts.

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The federal budget for the 2011 fiscal year outlines exactly what the enormous percentage of the GDP amounts to. As seen in the pie chart below, courtesy of usgovernmentspending.com, the $3.8 trillion in expenditures is divided into 5 categories, in descending order of dollars spent: defense, healthcare, pensions, “other”, and welfare.

Defense, 25 percent of the budget, plunders a whopping one trillion dollars. Health follows at a close second with $0.9 trillion, or 23 percent. Pensions, at 21 percent, translate to $0.8 trillion. Welfare constitutes 13 percent of the budget with $0.5 trillion, with the remaining 18 percent pulling $0.6 trillion – including, but not limited to, education.

According to USA Today, the national debt has mounted to such a number that, to repay it entirely, each American household would have to fork over a whopping $668,621. In other words, with absolutely 0% interest, the most manageable payment plan would involve a $13,364 annual payment for the next 50 years per household, or approximately the annual tuition rate for a state-subsidized public American university.

To clarify, this number is only the amount of debt as it stands today, not the additional debt of next year, the year after, etc.

The level of debt has become so outrageous that, last month, the United States government was forced to raise its debt ceiling or face default. The latter decision would have crippled the government, rendering it incapable of basic function and placing the civil population into very real danger.

Welfare and public education would eventually become inaccessible, and troops abroad would be marooned without funding. Additionally, a debt default would have led to an enormous depreciation of the dollar and possible another global recession, due to a reduction in worth of all dollar-back assets worldwide.

Luckily, the Senate cobbled together a last minute compromise that left much to be desired. This heartbreaking piece of work was the result of months of partisan bickering and head-butting. As a result, the DJIA drop 1500 points in little over a week, and the S&P graciously downgraded U.S. debt for the first time in history.

How this will affect the American economy remains to be seen, but the future surely is not bright. Think the government can tighten their belts and spend within their limits? If it means we all must draw back a little bit, then here’s a rally towards a healthy economy in the unfortunately far off future.
Stephen C. / Shutterstock.com

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The debt ceiling was raised in the last possible moment in a deal that has no one really satisfied. The debt ceiling was raised along with a creation of a “secret super committee” that will dramatically slash spending.

Democrats in the Senate supported the bill despite the huge spending cuts. Forty-five voted “yes” on the bill and six voted “no.” Meanwhile 28 Republicans voted in favor of the bill and 19 opposed it. Sen. Joe Lieberman (I-Conn.) and Bernie Sanders (I-Vt.) voted “yes” and “no,” respectively.

The compromise allows Obama to increase the borrowing limit by $400 billion immediately but also mandates $917 billion in cuts over the next decade. The bill also sets up a committee of 12 lawmakers that will find another $1.5 trillion cuts over the next decade.  The bill “puts in place a powerful committee that will ensure further much-needed reform,” said Senate Minority Leader Mitch McConnell (R-Ky.)

“There must be a sharing of sacrifice,” Majority Leader Harry Reid (D-NV) said. “It’s very unfair for millionaires and billionaires not to be contributing.”

Very few lawmakers had positive reactions to the deal.

“This compromise that we reached is not perfect,” said Reid. “We settled for less than we wanted, but so did my friend [McConnell].”

He also complained that the country was forced to such an impasse because of the “very, very disconcerting” impact of the Tea Party.

McConnell was more satisfied with the outcome. “It was a debate that Washington very much needed to have,” he said. “The American people agree with us on the nature of the problem … if you’re spending yourself into oblivion, the solution isn’t to spend more, it’s to spend less.”

“The bill doesn’t solve the problem, but it forces us to admit we have one,” McConnell added.

Other tea-party backed Republicans were less optimistic over the outcome. “To me it comes close to violating our oath of office,” said Sen. Jon Kyl (R-Ariz.) about the potential cuts to military spending.

Economists also have mixed reactions about the deal. Raising the debt ceiling provides some stability in an already fragile economy however the huge spending cuts will continue to slow the economy.

“The federal government spends huge amounts of money, and to the extent, in the short-term, that it’s not spending that amount of money, there will be an impact to the economy,” said Ernie Patrikis, a banking partner at White & Case and former vice president of the New York Federal Reserve. He said that while he thought the stability would encourage more investment, “the impact on unemployment is not terribly helpful.”

“It’s definitely a drag — the only question is how much,” said Dean Baker, co-director of the Center for Economic and Policy Research. “We’re going backward when we desperately need to go forward.”

According to the Huffington Post, the Democrats began the debate stating that the hike in the debt ceiling be “clean” and not tied to spending cuts. They gave ground continually for months, and McConnell happily pointed out that the White House once labeled any linkage to future spending “insane.”

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As the United States is hurling closer to the point of no return on the debt ceiling, President Obama addressed the nation on Monday evening calling the partisan politics a “dangerous game.” Obama criticized the temporary Republicans plan and urged Congress to raise the debt ceiling before the quickly-approaching August 2^nd deadline.

“The American people may have voted for divided government, but they didn’t vote for a dysfunctional government,” the president said in a hastily arranged prime-time speech. He appealed to the public to contact lawmakers and demand “a balanced approach” to reducing federal deficits. “It is a dangerous game we’ve never played before,” Obama said, “and we can’t afford to play it now.”

Obama discussed the importance of raising the debt ceiling and the consequences if the ceiling is not raised in time. “Republican House members have essentially said that the only way they’ll vote to prevent America’s first-ever default is if the rest of us agree to their deep, spending cuts-only approach,” Obama said. “If that happens, and we default, we would not have enough money to pay all of our bills – bills that include monthly Social Security checks, veterans’ benefits, and the government contracts we’ve signed with thousands of businesses.”

The president suggested that Republicans consider raising taxes on the wealthiest Americans. He pointed out that it is not fair to ask for average American families to deal with deep spending cuts while the wealthiest Americans get off scot-free. “Most Americans, regardless of political party, don’t understand how we can ask a senior citizen to pay more for her Medicare before we ask corporate jet owners and oil companies to give up tax breaks that other companies don’t get,” the President stated.

“How can we ask a student to pay more for college before we ask hedge fund managers to stop paying taxes at a lower rate than their secretaries? How can we slash funding for education and clean energy before we ask people like me to give up tax breaks we don’t need and didn’t ask for?”

Arguing that Republican leaders were acting outside of the interests of their constituents, President Obama called on voters to “make your voice heard.”

Speaker of the House John Boehner (R-OH) unveiled a plan earlier on Monday that would raise the debt ceiling temporarily for six months. Obama addressed the plan stating, “In other words, it doesn’t solve the problem,” he said. Speaker Boehner issued his own rebuttal speech immediately following Obama’s address.

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Republican and Democratic lawmakers have been engaged in intensive negotiations for weeks to figure out how to lift the $14.3 trillion debt limit but a devastating default looms as the two parties have yet to reach agreement. President Barack Obama addressed the nation with his frustration over the deadlock: “Once again, the economy will be held captive unless they [Republican lawmakers] get their way. This is no way to run the greatest country on earth.”

“Every day that goes by without a deal will see investors become a bit more defensive,” said Omer Esiner, chief market analyst at Commenwealth Foreign Exchange in Washington to Reuters. The stalemate has shook the American position in global markets and experts say that failure to reduce the government deficit by $4 trillion over the next 10 years will downgrade the United States.

President Obama said in a televised address on Monday “I have told leaders of both parties that they must come up with a fair compromise in the next few days that can pass both houses of Congress – a compromise I can sign. And I am confident we can reach this compromise.” Leaders of both parties have insisted that they will not allow the United States to default but so far, demands from both sides have been irreconcilable.

Republican lawmakers say the lift of the debt ceiling must be accompanied by even larger reduction in spending, reflecting the Tea Party line to shrink government. Meanwhile, the Democrats want to shield Medicare and Medicaid to secure old and poor Americans — they want any cuts in the healthcare system to be balanced by changes in the U.S. tax code, something that Republicans in the House of Representatives have staunchly refused.

Because of the division between Republican control in the House and Democratic sway over the Senate, it seems unlikely that their competing plans will win bipartisan support by August 2, when the US ‘runs out of cash to pay its bills’.

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