Saturday, January 29, 2011

Friday, January 28, 2011

China introduces first property tax for home buyers

China has introduced its first property tax for home buyers to try to curb record house prices and tame inflation. See full article.

Unlike other countries, specifically the U.S., China does not face growing deficit. It will be interesting to see whether services will increase with increased revenue or if China will save this new income. I believe the latter.

Thursday, January 27, 2011

President’s State of the Union and Budget Deficit Outlook

President’s State of the Union and Budget Deficit Outlook
The President’s State of the Union address took a conciliatory approach and provided an indication of his budget proposal. This included a freeze on government spending in certain areas for five years and other cuts. President Obama stated this would cut $400 billion from budget deficits over a decade.

As the chart below shows, as of September 2010, the U.S. deficit is nearly $14 trillion with the most of the loans (42.2%) being provided by U.S. individuals and institutions. Contrary to popular belief, China does not hold the majority of U.S. debt. Rather, China holds about 7.5% or over $1 trillion being the largest foreign holder of U.S. debt.

Social Security Trust Fund is the second largest holder of U.S. debt at 17.9% of total U.S. debt or $2.4 trillion, which means that the budget may actually be $16 trillion or $2.4 trillion higher.

President Obama also offered some potentially appealing proposals to his newly empowered Republican Congress — a corporate tax cut, reform of the tax code and an end to earmarks with a promise to veto all bills with earmarks. However, these reductions in revenues provide challenges to debt service as mandatory spending quickly approaches revenues. This leaves discretionary spending to be paid through increases in public debt or increased taxes, both of which are opposed by the newly elected Republican majority. Thus, the outlook looks bleak with cuts in spending expected. California has already imposed mandatory furloughs on all state workers to meet tough budget times, and it is uncertain what cuts are on and off the table for the federal government.

States and Bankruptcy article

Here is the link to the article in the NY Times that I mentioned in class about states being able to declare bankruptcy: A Path is Sought for States to Escape Their Debt Burdens


Cities in Debt Turn to States, Adding Strain

Cities in Debt Turn to States, Adding Strain (NYT, 10/04/2010)

This article was posted last semester, but it is still relevant to our discussion yesterday, on how cities manage debt during a fiscal crisis--or don't.

S & P Downgrades Japan as Debt Concerns Spread

New York Times, 01/28/2011: S & P Downgrades Japan as Debt Concerns Spread.

Promo for PAYGO

We had a great discussion last night about the federal budget, especially around the Washington Post chart that showed the 2010 federal budget income and expenditures. There was a general sense of astonishment when it was clear that the amount of revenue coming in was only enough to cover the mandatory spending portion of expenditures. “How did we get here?” one of my classmates asked.

On the Washington Post website I found an additional chart that shows a historical look at federal deficits. According to the text on the chart, 2010 marked the highest annual gap between spending and revenue since WWII (as a percentage of the overall economy). Notice the trend in the deficit from 1980–1992, during the era when conservative political rhetoric began promoting tax cuts as a better way of life. Tax cuts may make for good campaign fodder, but it’s clear by looking at the chart that if you don’t take in as much as you spend, you’re going to get into trouble.

The first "pay-as-you-go" rule was enacted in 1990 ( "The pay-as-you-go rule, also known as PAYGO, is designed to encourage Congress to offset the cost of any legislation that increases spending on entitlement programs or reduces revenues so it doesn't expand the deficit. Under PAYGO, Congress must pay for such legislation by reducing other entitlement spending or increasing other revenues" (

As you can see by the chart included in Professor Zhao's deck for week 2 (slide 18), this rule began to reduce the annual deficit beginning in 1993. From 1997-2001 we enjoyed annual budget surpluses. PAYGO was allowed to expire in 2002, and we've had a deficit each year since then. Although a new version of PAYGO was enacted in 2007, it doesn't have the same restrictions as the 1990 law. "PAYGO doesn't force lawmakers to make the tough decisions needed to reduce the deficit, but it restrains them from making deficits worse or undercutting deficit-reduction efforts they have already enacted" ( When added together, all the annual deficits make for a mountain of national debt. The so-called Great Recession and the cost of bailouts compound the problem.

I believe it is imperative for the federal government and the American people to come to terms with the fact that there is no free lunch. We need to pay today for the programs and services we need, value and use, and stop borrowing from future generations.

Wednesday, January 26, 2011

NPR Article on Social Security

After the discussion about social security, I saw this article and thought of the class:

CBO: Social Security Will Run Permanent Deficits (NPR, 01/26/2011)

Tuesday, January 25, 2011

Federal Budget: The Process and Its History

Article I, Section 9, Clause 7 of the Constitution of the United States sets out the budgeting authority of the federal government: “[n]o money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of Receipts and Expenditures of all public Money shall be published from time to time."


The current system for the crafting of the federal budget was created through the Budget and Accounting Act of 1921 (Pub.L. 67-13), which “require[s] the President to submit a single, consolidated budget proposal for congressional consideration each year[1],” in a process known as the Executive Budget. The act also created the Bureau of the Budget, now called the Office of Management and Budget (OMB). Statute requires the president, with the aid of the OMB, to submit a draft budget to Congress “[o]n or after the first Monday in January but not later than the first Monday in February of each year[2].”

The draft is submitted to the House Committee on the Budget and the Senate Budget Committee for their review and markup. This process, and the committees themselves, were created by the Congressional Budget and Impoundment Control Act of 1974 (Pub.L. 93-344), which sought “to reassert the congressional role in budgeting, to add some centralizing influence to the Federal budget process[3].”

The federal fiscal year runs from October 1 – September 30, but rarely is the budget finalized by the end of September. As a result, the Congress must pass a Continuing Resolution (CR) to continue to fund the government until a new budget is passed and signed. If a CR is not passed and no budget is agreed upon the government enters a general shutdown. The most recent example of a federal shutdown took place between November 14 – 19, 1995 and December 16, 1995 – January 6, 1996, when Speaker of the House Newt Gingrich and President Bill Clinton were unable to agree to proposed cuts to Medicaid, Medicare, education and the EITC.

Federal Deficit

Since 1930, there have been only twelve years in which the federal budget was not in deficit: 1947–49, 1951, 1956–57, 1960, 1969, 1998–2001[4]. With the exception of the World War II years (1942-46), the relative size of the deficit has ranged between 10.6 (2010 estimate) to .01 percent (1938) of GDP; during the same period, and with the same constraints, the relative average size of the deficit was 2.7 percent of GDP[5]. While 2010 does represent a non-WWII high, much of this can be attributed to the significant bailout and stimulus spending undertaken as a policy response to the financial crisis which began in earnest during the autumn of 2008 and continued economic ills negatively affecting income tax receipts.

Public Debt

A distinction must be made between the federal deficit, which represents the difference between government revenues and expenditures in a given year, and the public debt, which represents all government borrowing in aggregate. Since 1951, the relative size of the public debt has ranged from 23.9 (1974) to 66.9 (1951) percent of GDP; during the same time period the relative average size of the public debt was 39.5 percent of GDP[6]. The 2010 estimate from the OMB is a debt equal to 63.6 percent of GDP.

[1] Joint Committee on the Organization of Congress. “Organization of the Congress.” December, 1993.

[2] 31 U.S.C. 1105

[3] Joint Committee on the Organization of Congress. “Organization of the Congress.” December, 1993.

[4] Office of Management and Budget. “Historical Tables FY2011: Table 1.2” February 2010.

[5] Ibid.

[6] Office of Management and Budget. “Historical Tables FY2011: Table 7.1” February 2010.