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America’s Uncounted Debt

Already, America’s dept will reach $13 trillion this year. By 2020, this will increase to $22 trillion. If this figure isn’t disturbing enough, consider the hidden cost of debt. There are potential debt bombs that aren’t included within the budget analysis of the US economy.

When talking about US debt, it typically includes two figures including the debt held by the public and what the federal government owes to trust funds such as Social Security and Medicare. Revenues from those programs were used to cover other outlay. Debt to these establishments is approaching $5 billion.

These figures may be big but what’s even more worrying is the debts that are not included in the books. Among these are:

Fannie Mae & Freddie Mac Losses

As giant mortgage lenders, these companies have enjoyed implicit government backing for years. As a result, investors were falsely assured that if anything went wrong, Uncle Sam would step in. Something did go wrong, and it went wrong in a big way.

The Congressional Budget Office (CBO) did an account for both companies. Though the figure isn’t clear what the total impact of the companies will have on the congressional budget, Amherst Securities said that it can reach $448 billion – with some portions covered by outside parties. Total loss to the government may reach $370 billion in 2020.

Unfunded Promises

The accrued debt of the government to Social Security and Medicare won’t be easy to pay, especially given the increase in government spending and drop in revenue. Len Burman from the Syracuse University said that “Lawmakers need to acknowledge they have no way of funding them right now.”

But this future entitlement was not included in the current budget. Within the next decade for Medicare and by 2037 for Social Security, these organizations won’t be able to collect enough to cover the benefits promised. The government will need to make up for the difference by borrowing.

Cost of Tax Breaks

People love tax breaks. However, for the government, this means lower revenue. While no one wants to abolish tax breaks, the government budget should treat it as discretionary spending to reflect to true cost of tax breaks. Through this, lawmakers can look at figures and recognize the cost associated with their decision.

Funding Innovation Takes a Backseat Due to Budget Cuts

Everyone knows that in America, innovation drives growth. The United States is no longer a manufacturing hub, China has taken that title. The U.S. no longer relies on agriculture, mining, or outsourcing to sustain growth. However, this advantage may be fast becoming a non-driver of growth. With the recession, budgets have been cut and inventories are being protected.

For the first time in almost 13 years, innovation has slowed down. For 2009, the number of patent filing went down 2.3 percent from last year after years of growth, year on year. According to David Kappos of the Patent Office, “That’s unfortunate because patent filings are a reflection of innovation.” In turn, the development of new products and services provides a lot of opportunities in the country. It is recognized as a key to long-term success in today’s economy.

At the same time that number of patents filed by US companies fell, US patents that are issued to foreign businesses rose to 6.3 percent. For companies in Silicon Valley, this is a worrying sign. It has been a leader in the industry for decades but it might be in a vulnerable position because of the recession. Symantec, one of the most notable companies in tech security reported that their filings went down 25 percent as a direct result of a bigger macroeconomic issue.

Cost Cutting

Companies cited cost cutting as the main reason why they didn’t file for patents. Applying for US patent costs around $15,000 in processing and legal fees. This doesn’t include the costs companies have to bear in case they need to defend their patent. Generally, legal fees cost about $3 million to $6 million.

Henry Nothhaft from Tessera noted that “Once you have a patent, you have to go out and defend your own turf.” When companies don’t have the financial back-up to defend themselves with their finances, some would rather keep their invention hidden to prevent others from duplicating it.  Ultimately, it can spell trouble for US workers. The Obama administration cited innovation as the key to an economic recovery. It might not be the case if this competitive edge is eroded.

AIG Bailout: Did the Government Overpay?

It is possible that the government might have overpaid a number of banks during its initial rescue attempt of American International Group (AIG). The company was in such big trouble that the Federal Reserve Bank of New York – previously headed by Treasury Secretary Tim Geithner – that the US government had to wind down its relationships with business partners.

The Federal Reserve Bank had paid the full face value of securities so that these businesses would cancel the insurance handed out by AIG. This was an attempt to relax the AIG’s liquidity trouble. However, reports leaked that at least one company had offered to cancel the contract at less than its face value. According to Neil Barofsky, the Special Inspector General, what it means is that the government might have paid billions more than what was necessary to cancel debt insurance contracts.

Why Was AIG Bailed Out at Any Cost?

Despite these findings, some analyst cannot blame the actions of the Fed during the crisis. AIG is too interconnected with other financial and non-financial firms that its failure could push the global banking system over the edge. As it neared collapse, officials decided to step up and bailout the company with billions of dollars and government guarantee to prevent a deepening of the crisis.

Whether the bailout is good for the long-term future of AIG and the government remains to be seen. This is because after several bailout attempts, the company now holds up to $180 billion in government commitments. The Treasury Department owns about 80 percent of AIG.

The Government Still Getting Some Criticisms

Critics though aren’t content with the government’s actions. They note that AIG’s trading partners knew full well what risks they are taking when they got insurance for credit-default-swaps. These partners showed willingness to take risks based on these actions. They should have been forced to take than 100 percent value of their contracts.

Neil Barofsky said that taxpayers are unlikely to recover the money infused into AIG.

U.S. Unemployment – Stemming Job Losses without Second Stimulus

Faced with an increasing number of job cuts despite pumping trillions in the American economy, the Obama administration is considering a mixture of tax cuts and spending programs to stem job losses in the United States. It will entail an additional stimulus without carrying the stigma of a bailout.

Implementing these proposals is another matter because the White House needs to balance the concern about unemployment with the issue of the gaping budget deficit. It is estimated to be at $1.6 trillion for 2009 and $1.4 trillion in 2010. New programs are bound to be politically sensitive. In fact, Press Secretary Robert Gibbs clarified that there “were no plans” to pass a second stimulus similar to the $787 billion approved earlier this year.

Instead, the White House is merely looking into extending the programs that are already in place. He further added that the “economic team is certainly looking at and working on any way that we can create more jobs.” Among the measures discussed include boosting the transportation spending and extending the tax credit for first-time home buyers.

According to Chris Van Hollen “If there was to be another round of stimulus, additional infrastructure would be at the top of the list.” Investments in roads and bridges would be popular among Democrats. No matter what lawmakers and the White House decide to call these programs, financial experts think of it as economic stimulus. Dean Baker of the Center for Economic and Policy Research stated that these are stimulus spending and that “there’s no two ways about it.”

At this point, the Obama administration hasn’t made any final decisions yet. Jen Psaki, a spokesperson from the White House, said that they are still exploring the “best options”. Looking for the best solution is certainly a necessity in these troubled times especially with the health care bill being pushed in Congress.