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Thursday, October 11, 2012

Debt versus Deficit

This post is not meant to take sides, but to inform. There's plenty of blame to go around, of course. That blame includes you and me, when we expect government to do things that benefit us that it can't currently pay for, or when we wrongly evade paying taxes.

There are certainly complications, such as different ways of counting what is in the budget, and the following is simplified, but is as close to the facts as I can get.

A Deficit is created when more is spent, during a fiscal year, than comes in during that year. The US Government has often run a deficit. A deficit adds to the public debt. A deficit could also be a budget deficit, meaning that there is a plan to spend more money than projected income, during a future fiscal year.

The public debt is the total amount that we owe -- funds that that we have borrowed. The current debt is somewhere over 16 trillion dollars, according to this source, which claims to be produced by a conservative (whatever that means!). That figure "doesn’t include state and local debt, and it doesn’t include the so-called unfunded liabilities of entitlement programs like Social Security and Medicare."

So we owe, thus, at least $16,000,000,000,000, (sixteen trillion dollars) which is the sum of all the previous deficits, and the current one. The US Census Bureau says that there are about 314 million of us, which means that each of us has a share of the current debt of approximately $51,000. The US has had a federal debt, sometimes rather small, for most of our existence as a nation, except for around 1835.

Who do we owe this money to? If you listen to politicians, from both sides, you'd think we owed it all to the Chinese. Not so. According to this Wikipedia article on the United States public debt, we owe about 2.25 trillion to the Chinese and Japanese, combined. Of that, we owe a little more to the Chinese, but not much more than we owe Japanese entities. The majority of the debt is owed to people or institutions in the US. The total owed to foreign entities is about 5.3 trillion dollars.

Who spends the money? Congress must approve most expenditures. There are exceptions, but mostly, it's Congress. The Executive Branch, which the President is responsible for, then spends the money. A President is required to submit a budget to Congress, but Congress usually makes lots of changes. Presidents seldom get their own way in budgetary matters, at least not entirely. (Presidents can veto spending bills adopted by Congress.) Overspending, thus, must be agreed upon by Congress and the President.

How can we stop running deficits? We could cut spending, we could increase revenue, from taxes, fees, and other sources, or we could do both. Most experts seem to agree that we need to do both. Both Presidential candidates seem to agree. Governor Romney, for example, says that he wants to close some tax loopholes, which should increase revenue, and wants to eliminate funding for the Corporation for Public Broadcasting, and, presumably, for other things, which would cut spending.

It is difficult for Congress and the President to cut spending, for several reasons. Cutting spending usually hurts someone, and groups whose special interests are threatened complain, usually loudly, to Congress. There are things that most of us agree that we need, such as air traffic controllers, federal courts, and at least some military. These take money. It is difficult to raise taxes, because nobody wants to pay more.

Not only the President and Congress, but external forces also cut revenue. The current recession, which, we hope, we are coming out of, is an example. It caused large decreases in government income -- as people lost their jobs, and as businesses had less income, they paid less in taxes. External forces, such as the attacks of September 11, 2001, also may lead to unforeseen increased spending.

Occasionally, Congress and the President are able to agree on plans to produce a budget surplus. That is, there is a plan to spend less than will be taken in, during a fiscal year. Unfortunately, that doesn't happen very often. Under President Clinton, there was a surplus of about 250 billion dollars in Fiscal 2000. Budget surpluses could be applied to the federal debt, but they could also be used to cut taxes, or to justify spending that wasn't originally planned.

What is the fiscal cliff? The Congress, with one house currently controlled by Democrats, and one by Republicans, hasn't agreed on very much lately. But they did agree, in the recent past, to pass legislation that would cut federal spending, including for the military, seriously, and would also allow tax rates to go up significantly, unless some solution for the federal deficit was agreed upon by Congress in a future session. That latter agreement has not occurred. Unless Congress agrees on some such plan, or repeals the legislation requiring them to, there will be serious consequences, such as job loss, perhaps downgrading of the credit rating of the US, insufficient national defense. That event, which may happen within the next few months, is known as the fiscal cliff.

Some final notes. 1) Although both Mr. Romney and Mr. Obama have indicated that they want to do something about the deficit, either of them would have to work with Congress in order to do that.
2) Both candidates usually speak of their plans, but their plans are over a longer period than their Presidency. Mr. Obama has, at most, about 4 years left, and Mr. Romney, at most, about 8. Their plans are usually for 10 or more years.
3) In my opinion, neither candidate, and most of Congress, has really explained all this to the U.S. citizenry. It's too easy to just let things go along, as we get deeper and deeper into debt.
4) Presidents cannot veto particular items in a bill. Presidents of both parties have requested a line item veto, but the Supreme Court has said that that would be unconstitutional.* Congress may, for example, combine expenses for 10 different things, nine of which the President agrees with, but one which the President considers to be fiscally irresponsible, into a single bill. But the entire bill must be signed, or vetoed.
5) There are looming problems with the infrastructure of the US, which are going to require lots of money to fix. My own state of South Carolina, depending on who is assessing, has some of the worst roads in the country. Many sewer and water systems, bridges, school buildings, harbors, dams, etc., are in serious need of repair, and most or all of the funds will have to come from the federal government, or state or local governments, or a combination thereof.
6) A significant portion of the federal budget must be spent on interest on the debt that we owe, each year, until the debt is paid.
7) I haven't touched on the financial pressure brought on by an aging population, or the rising healthcare expenses.

Thanks for reading!

*I originally said that Congress had not authorized the line item veto, but that is incorrect. I have corrected this on the original publication date.

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On November 10, 2012, I'm linking to a previous post, "Taxes create jobs!" which discusses the relationship between jobs and taxes.

On November 12, 2012, I'm linking to a post by Ken Schenck, which argues that, although it is possible that government assistance to the poor may harm people, there is Biblical evidence that indicates that, at least some of the time, it's a good thing for governments to do.


Aaron Bishop said...

Another topic that you did not cover is the nature of our money and how its existence creates debt. The Federal Reserve is a privately owned bank that prints our currency. When the currency is released to the public it is done so with interest. This interest creates debt. Every dollar in circulation has debt owed on it, and that debt cannot be paid off because there is more debt than currency. It is mathematically impossible for the US to pay off it's debt. Also, the income tax goes solely to pay off the interest on the debt owed due to this setup. There is also the fact that the more money that is printed,the less value each dollar has. This is the reason for inflation. As more and more money enters circulation, less and less can be bought using that money. Quantitative Easing is simply the printing of more currency. We are currently in QE3 which is also being called QE Infinity since the Federal Reserve has set no end date for this round of printing. All this is going to do is dilute the monetary supply to the point where the money you have saved will soon become worth less by the percentage of currency added to the supply/total amount of currency in circulation. With no end in sight to the printing, there is no telling how bad the inflation over the next few years will get.

Martin LaBar said...

Thanks, Aaron. I'm not an expert on these matters, but I recognize that printing money, whoever does it, could be dangerous.

The Wikipedia, which is usually correct, indicates that the Federal Reserve is a mixture of both private and public entities:

It also says that the Treasury, not the Federal Reserve, is responsible for printing money:

The current interest on the federal debt is about $360 billion per year, according to this source:

Another source says that the income received by the Federal Government is about 2.2 Trillion dollars per year, and that about 42% of that comes from individual income taxes:

That means that the amount received from individual income taxes is significantly more than the interest on the debt.

For more about Quantitative Easing, which doesn't exactly seem to be printing money, see here:

Aaron Bishop said...

The articles from Wikipedia are how it is supposed to work, but not how it works in actuality. H. Edward Griffin explains how it was really setup in his book "The creature from Jekyll Island"

Murray N. Rothbard goes into the creation and destruction of money, currency, and wealth in his book "What has the government done to our money"

And if you want to go even deeper into what exactly constitutes money and wealth and how it is created there is always Frederic Bastiats "What is Money?"

There are many more on this topic, but for anyone interested this is a good start.

Aaron Bishop said...

Here is a quicker and simpler explanation of the Fed, and central banking in General.

Martin LaBar said...

I looked at some of the links you included in your comments. As I'm sure you know, Aaron, the view of the Federal Reserve indicated by the sites you recommended is at least somewhat controversial. Maybe a lot controversial.

That doesn't make that view wrong -- it may be right. But I'm not expert enough in this area to know who is right, nor am I inclined to study the ins and outs of government finance much. Thanks for the links you supplied, and anyone else who read this blog is welcome to examine them, too.