Post Image
Nest-Worthy News
Getting your kids to understand and appreciate financial headlines and economic events can be a struggle for even the most financially-astute adults.

Together, we'll help you jump-start the conversations, breaking down the news into kid-friendly bites.
What is Health Care Reform
Who Are the 47 Percent?
More Feature Stories


What’s a Fiscal Cliff?
Posted on March 7, 2013 by Elizabeth Carey

With debt-crisis headlines everywhere, children have questions about how much trouble the country is in. Here’s a primer on what’s really going on and how you can make sense of these complex fiscal issues for kids.

 

First, all the hullabaloo was about the “fiscal cliff,” starting with the fight to raise the debt ceiling in 2011.  Then came the next fiscal cliff, just in time to ring in 2013.  The hardest decisions were kicked down the road for two more months, and now we’re in the midst of the dreaded so-called “sequester.”

 

Since the financial crisis started in the United States almost five years ago, the country has come crashing into the intersection of excessive government debt, a deep recession, high unemployment, and painfully slow economic recovery.

 

After months of political posturing, debates and rants on cable news, it’s all come down to a sequestration—or deep cost cutting—that took place on March 1st because Congress and the White House couldn’t cut a deal.

 

Plenty of people are worried. What will happen if after-school programs and vaccines for children are cut way back? What will happen to all the jobs if infrastructure projects like roads and defense are slashed to the bone? What about programs that Grandma and Grandpa count on?

 

Your first instinct might be to shield kids from these complicated issues and angst. After all, how do you dissect something as complicated as economic theory? Is this even a crisis? Some would say all of this economic drama is the result of politicians who are trying to scare the public for their own political gain.

 

Still, not using this time to sit down with children to explain what everyone is so concerned about would be a missed opportunity, say experts. It’s critical for parents and kids to discuss topics like how much debt is OK; what debt is useful and what is not. “It’s important that kids understand all of this because, for one, it’s a part of their government. It will directly impact all of their lives,” says Mike Vogel, a social studies teacher at Cleveland High School in Portland, Oregon.   Discussing the political economy with kids makes for more informed citizens—and hopefully, more fiscally responsible young people.

 

To get started, here’s a bit of background on how we got to this point and kid-friendly explanations on need-to-know terms.

 

What you need to know about the recent government budget problems


Today’s debate, at its heart, is over how much the government should be involved in the economy.  And it centers around the age-old question of how much debt is too much.

 

When President Bill Clinton left office in 2001, the U.S. had a surplus, or extra “cash,” left over after expenses were paid. During President George W. Bush’s administration, the cost of wars in Iraq and Afghanistan coupled with sizable middle- and upper-class tax breaks increased government expenses and reduced revenue over the next five years.  Enter the “Great Recession” of 2007 and a colossal $787 billion economic stimulus package in 2009. The result was a massive and growing federal debt.

 

Following  the 2010 election, Republicans became the majority in the House of Representatives riding on the promise that they would reduce “entitlements,” public programs such as Medicare, and other spending on public projects, while opposing tax increases for wealthier Americans.  At the same time, many Democrats were pushing to increase spending for government programs and “shovel ready” projects to help stimulate the economy, along with select budget cuts.

 

While Congress and the White House averted the last “fiscal cliff” by agreeing to raise income taxes on the wealthy, the two sides never resolved the spending side of the equation.

 

Fast forward to today . . . President Obama and Congress are deadlocked over what to do about all that government debt – an astounding $16 trillion. (That’s enough money to buy an iPad for every one of our planet’s 2.2 billion children.)

 

All this talk about the “fiscal cliff” started during these debates in 2011. Since closing down the federal government would be an unpalatable political option, Congress and the White house came up with a last minute compromise: the “sequestration.” This option contained so many painful cuts to both Democratic- and Republican-favored programs that neither side thought they’d ever take place.

 

What’s federal debt and the deficit?

 

Definition: Federal debt the amount of money our government owes our creditors (e.g., individuals, other governments, businesses).  It’s the cumulative effect of federal government shortfalls, or budget deficits (when annual expenses exceed revenues).

 

Think of it as your kids’ savings accounts, but with a line of credit.  If your child has a $500 balance, and each year withdraws $200 more than he puts in, in the third year he’ll be dipping into his line of credit.  In government parlance, he’d be running a “budget deficit” each year. And in year three, he’d create the equivalent of $100 in “federal debt.”

 

So what is the debt ceiling?

 

Definition: A legal limit on how much debt the government can have. This limit includes the money the government owes investors for bonds (certificates issued by the government that promises to repay borrowed money at a fixed rate of interest at a specified time), other negotiable loans, and the money the government owes itself, which includes programs such as Social Security and Medicare.

 

Background: When Americans pay taxes to the federal government, the government can decide to save the money (put it in a “piggy bank”) or spend it on bills, with an I.O.U. that must be paid back by a certain time.

 

To pay for services that people expect from the government—such as new roads, a strong military defense, helping kids got to college, making sure low-income families have food—the government sells bonds to investors around the world. Historically, the U.S. has spent more money than it receives in taxes. Congress says what the budget should be and how much the country should spend, but the U.S. Treasury oversees the actual “pocketbook” and takes care of financial transactions.

 

Until 1917, Congress had to vote to allow the U.S. Treasury to borrow more money. To give the Treasury more flexibility, Congress set the debt ceiling. But each time the government hit the ceiling, Congress always voted to raise the limit—especially as tax revenues were lowered and spending increased.

 

So what’s the problem: On December 31, 2012, the government hit its $16.4 trillion ceiling. Congress voted to suspend the debt ceiling until May 19th, 2013 and President Obama signed the plan into law. Without “suspending” the debt ceiling, the government probably wouldn’t be able to borrow money to pay off its debt, or afford its day-to-day expenses like utility bills. Some political economic experts say, because the government’s wallet is different than a person’s wallet, the effects of hitting the ceiling might not be as dire as it seems.

 

Authorizing an increase in the debt ceiling basically means the government is authorizing to pay (in this case borrow) money to pay for things Congress has already voted for or purchased.

 

It’s similar to a scenario in which your parents purchased a slew of Christmas gifts for their grandkids, and exceeded their credit line on the credit card.  When the credit card company tells your parents they must increase their credit line or risk default, your parents refuse to budge.  The rest of us, of course, don’t have this kind of leverage to negotiate like our federal government.

 

But in both cases, if we don’t pay our bills, our credit rating tanks.  And our future borrowing costs soar.

 

What’s a fiscal cliff?

 

Definition: Not an actual cliff, the term “fiscal cliff” describes the first debt ceiling crisis from 2011 and later the $500 billion of worth of tax increases and budget cuts that would’ve fallen into place on January 1, 2013, if President Obama and Congress hadn’t agreed to an alternative plan in the “nick of time.”

 

Background: This phrase was popularized in 2012 by the Chairman of the Federal Reserve, Ben Bernanke, who wanted to describe potential pitfalls of U.S. fiscal policies.  But the term began gaining currency in the media in 2011 around discussions of deficit reduction. Increasingly, the media throws around the term for any major budget-related “climax” or deadline.

 

So what?  Many have argued that going over the “fiscal cliff” would slow the economy’s recovery. The Congressional Budget Office, a nonpartisan organization that researches budget and economic issues for Congress so representatives have impartial information, reported that the fiscal cliff would’ve pushed the country into a recession. The “cliff” included expiration of tax cuts for some Americans, tax increases for most, and budget cuts for federal programs.

 

What’s sequestration?

 

Definition:  It’s a series of automatic, across-the-board cuts to government agencies, totaling $1.2 trillion over 10 years, starting with approximately $85 billion in budget cuts on March 1. The cuts will be split 50-50 between defense and domestic spending.

 

The sequester could affect many different programs, including air traffic control operations at airports, the military, pre-school Head Start, classroom sizes, nutrition and housing assistance for low income Americans, food inspections, and national parks. It could cut an estimated 700,000 jobs from the economy.

 

Background: Although this word first meant that a court took valuable things into its control for safekeeping, this so-called sequester was triggered last year by an agreement in a Congressional committee. The members of the committee couldn’t agree on a way to reduce the deficit.

 

Now what?

 

Even though the sequestration is now a reality, Congress and President Obama continue to debate the federal budget. While Republicans continue to push for spending cuts on many domestic programs, Democrats favor both revenue increases and budget cuts to sustain economic growth. The economy is slowly improving and some believe that if public spending is cut too much, unemployment will increase. The threat of recession is more damaging, they think, than the debt. They believe that during a time of recession, the government should spend more money to increase demand and put more money into the economy.

 

Others say that the debt should be taken care of now. They believe that if the government has too much debt, businesses won’t have a stable environment in which to invest, or hire more people.

 

Which side do you think is right?

 

Many conservatives say that government should handle its finances like a family. Others argue that the government is different than a family. “Economics is not an exact science,” writes David Balaam, professor of international political economy, University of Washington and University of Puget Sound. “The economy is constantly changing—just like the relationship of family members to one another.”  The problem is knowing when the amount of debt scares investors. Credit, he points out, is not inherently bad because it helps the economy grow. For example, many families borrow money to pay for a house, car or education.

 

But Bill Fay at Debt.org’s says the country’s fiscal challenges can be boiled down to politicians not wanting to solve a budgeting problem. “It’s the irresponsible behavior of elected officials in pursuit of being reelected,” he says. “It’s a responsibility issue from my standpoint.” A father of three teenage sons, Fay emphasizes responsibility when talking to his children about finances. He says when giving out their allowances he explains, “Here’s how much you have and when you’re out, you’re out. Don’t ask me for more.”

 

What surprising questions have your kids asked about what’s going on with the fiscal cliff? What do you kids think about all these high-powered adults not being able to compromise?   Join the discussion on Ballooning Nest Eggs Facebook page.