As a nation and as individuals, Americans are carrying massive and increasing debt. While there are innumerable aspects to a topic such as this one, the pages in the links below cover some basics regarding government deficits and debt. In the coming weeks look for additional information on personal debt.
"At its most simple, a budget represents a government's or individual's determination regarding how to allot and distribute resources. In the context of the federal government, the budget is our main tool for allocating resources and setting national priorities and values. When we can't do everything, making the budget is how we decide what to do first. If the budget making process is taken seriously, it will make a lot of people unhappy the last thing a politician wants to do." (1).
In considering the allocation of resources by the federal government, consider the following information from the 2005 Budget (all amounts in millions of dollars):
- Total Budget: $2,472,205
- Social Security: $523,305 21% of total budget
- Defense: $495,335 20%
- Treasury Debt Interest (gross): $352,345 14%
- Medicare:$298,638 12.1%
- Medicaid grants:$181,720 7.3%
- Veterans' benefits:$70,151 2.8%
- Elementary/Secondary/Voc. Educ: $38,271 1.5%
- Higher Education: $31,442 1.3%
- NASA, space flight: $14,778 0.6%
- Energy Conservation:$883 0.03%
www.whitehouse.gov/omb/budget/fy2007/fct.html
Background
Difference Between Debt and Deficit
The Budget Deficit is the amount in a single calendar year that the government spends more than what it collects in revenue. For example, on an individual level, if you earned $30,000 in 2005 but spent $31,000, you would have a budget deficit of $1,000. The National Debt represents the sum of all prior deficits, including unpaid interest accumulated on the borrowed money. Returning to the individual example, if from 1995-2005 you had budget deficits of $1,000 a year, your debt would be $10,000 plus unpaid interest on the borrowed money.
How Government Borrows Money
The federal government borrows money, in part by lending money from one government entity to another, and in part through selling Treasury bonds. Money lent from one government entity to another is called an intragovernmental holding. "[I]t's a liability that represents future government payments to itself." (5) The Social Security Trust Fund is the largest example of this. Payroll taxes dedicated to Social Security are larger than the benefits presently being paid out. Thus, there is a surplus in the SS trust fund. That money is not set aside in a bank (or lock box) but is loaned to other parts of the government to fund other programs.
Public Debt, on the other hand, is "all Federal debt held by individuals, corporations, state or local governments, foreign governments, and other entities outside of the United States Government less Federal Financing Bank securities. Types of securities held by the public include, but are not limited to, Treasury Bills, Notes, Bonds, TIPS, United States Savings Bonds, and State and Local Government Series."(6)
Interest rates have been steadily rising over the last few years. When Treasury bonds, issued at lower rates than exist today, come due, the government will have to sell new bonds at the now higher interest rates just to maintain the same amount of debt. Simply stated, the amount of the budget dedicated to paying interest on the national debt will get larger. "Soaring interest rates will cause the federal deficit to jump, as Treasury bond buyers demand much higher returns." (7) As of September 11, 2006 the publicly held debt was $4,913,395,514,125.35 and the intragovernmental debt was $3,617,769,914,579.04. The daily debt amounts are recorded daily on the U.S. Treasury website.
Increasingly, the publicly held U.S. debt is being held by foreign countries. "The average Chinese earns around $1,500 per year but has personal savings of 23 percent of his income and is lending a large chunk of these savings, via the People's Bank of China, to the average American." (8) "At the end of 2004, foreigners (central banks, especially) held 44% of publicly held Treasury debt, up from only 19 percent ten years ago." (9) "To say that it doesn't matter if Americans own their own economy is like saying that there is no difference between being a landlord and being a sharecropper." (10) "As 2005 draws to a close, foreigners hold about $3 trillion (yes, that's trillion) in US dollars, Treasury bonds, and other government securities such as Fannie Mae mortgages. Two thirds of this is held by four Asian countries Japan, China, Taiwan and Korea." (11)
U.S. Debt Historically
As far back as 1791, the U.S. has carried a debt. The lowest it has ever been was 1835 when the entire national debt was $33,733.05. (2) From 1950 to 2000, the debt increased over 5 trillion dollars. (3)
1950 - $0,257,357,352,351.04
1960 - $0,290,216,815,241.68
1970 - $0,389,158,403,690.26
1980 - $0,930,210,000,000.00
1990 - $3,233,313,451,777.25
2000 - $5,674,178,209,886.86
And in the last 6 years, "[F]ederal spending has increased by 33 percent since 2001, from $1,863 billion to $2,472 billion." (4)
The Debt Today
In just the first half of 2008 the budget deficit is $311 billion. The budget deficit for 2005 was $318 billion. (12). As of March of 2006, the National Debt was $8.3 trillion. (13) By April 29, 2008 the debt was $9.33 trillion. That is an additional $180 billion in five months. You can access the present amount of the national debt on a daily basis at http://www.publicdebt.treas.gov/cgi-bin/cgiwrap/~www/opdpnhis.cgi. By law there is a limit to the amount of debt the federal government can incur. This is commonly referred to as the "Debt Ceiling." As recently as March of 2006 the debt ceiling was increased to $8.96 trillion. That was the fourth increase in the last five years. (14)
"[T]he U.S. economy is mind-bogglingly enormous two and a half times as big as the next largest economy in the world and almost as large as that of the six other members of the Group of Seven combined. The catch is that it has to consume almost incessantly to sustain its great heft." (8). "Expert analysts at The Concord Coalition, the Committee for Economic Development, and Goldman Sachs project that on our current path budget deficits will total roughly $5 trillion over the next ten years." (15).
On what exactly are we spending all this money?
Spending Programs
Medicare and Social Security
Social Security and Medicare are two of the largest government programs and they are expected to have ballooning costs in the years ahead, as healthcare costs continue to rise, and Baby Boomers reach retirement age. "Indeed, if one looks at Social Security and Medicare together, including both Medicare's hospital and physician programs, they go from a modest combined cash-flow deficit of about $25 billion in 2003 to an unthinkable annual cash-flow deficit of $783 billion in 2020." (16).
While the present deficits in the hundred of billions of dollars, and debt around 9 trillion dollars, are certainly not small, the truly enormous numbers come in looking at the federal government's future commitments (e.g.:entitlement programs like Social Security) in comparison to expected tax revenues into the future. "[The International Monetary Fund points] to a huge and growing imbalance between what the federal government has promised to pay in future benefits and what it can reasonably expect to collect in future taxes. Its long term structural deficit now exceeds 500 percent of gross domestic product. Closing that gap, the IMF calculated, 'would require an immediate and permanent 60 percent hike in federal income tax, or a 50 percent cut in Social Security and Medicare benefits.'" (17)
In fact, even the President's 2006 Budget overview recognized and acknowledged that in its present for Social Security "has made promises to young workers that it cannot keep." Federal law requires private corporations to calculate future liabilities such that the costs are spread over the preceding years. This is called amortizing. The general idea is to prevent private companies from misrepresenting their financial condition by pushing expenses into future years. The federal government, however, does not require itself to comply with the same standards. Total unfunded liabilities, including future Medicare and Social Security benefits, amounted to $21 trillion in 2004. "Thus, if Congress had to abide by its own rules, it would have to throw itself in jail for fraudulent accounting." (18).
A substantial portion of the expected increase in deficits for Medicare and Social Security stem from the 'aging' of the population. " Our nation is about to undergo an unprecedented demographic transformation - with no idea of how to pay for it. The coming age wave is not a temporary challenge that will recede once the baby boom generation passes away. The boomers' retirement is ushering in a permanent transformation to an older population--and a permanent rise in the cost of programs such as Social Security, Medicare and Medicaid, which already comprise 42 percent of federal government spending. (19)
Earmarks or "Pork"
While entitlement programs like Medicare and Social Security are perhaps the biggest causes of rising deficits and debt, there are additional contributing factors, including what is often described as wasteful spending. "Excluding homeland security, domestic discretionary outlays have soared 7 percent annually over [President Bush's] first three years, in part due to pork-laden appropriations. [...] By all accounts, there is vastly more earmarking today perhaps five or ten times as much than there was a decade ago." (20).
In 2006, President Bush signed into law a $286 billion highway bill, which included, "cash to bankroll some 6,000 per projects for lawmakers in their home districts." (21). "But Senator John McCain, R-Ariz, one of four senators who opposed the bill, said the estimated $24 billion lawmakers directed to special projects was 'egregious.' He has cited dozens of what he calls 'interesting' projects. His favorite: $2.3 million for landscaping along the Ronald Reagan Freeway in California. 'I wonder what Ronald Reagan would say?' McCain asked about the fiscally conservative president." (21).
In December of 2005 the Senate passed what George Will described as "an entitlement to digital television" costing $3 billion dollars. By 2009 all broadcast television will be converted from analog to digital. "[T]o help all Americans acquire converter boxes to put on top of old analog sets, making the sets able to receive digital programming" the measure would provide a voucher to covert the cost of the converter box. (22) This bill was passed by the Congress and signed into law by the President in February 2006. http://www.thomas.gov/cgi-bin/bdquery/z?d109:SN01932:@@@R.
Despite many critics, there are those who cite the importance of earmarks. "[N]ot all pork is equal and not all earmarks are bad, say analysts close to the process." (23). Earmarks can support small local projects which bring jobs and resources to areas that would otherwise go without, proponents argue.
Defense / Homeland Security
Importantly, Defense and Homeland Security spending has been rising in the wake of the attacks on September 11th. "Throughout the postwar era, the federal budget has been able to accommodate steady growth in benefit spending in part by cutting back on all other domestic spending including investment [...] but most of all by cutting back on defense. From 1960 to 2000, federal benefits grew from 4.7 to 10.8 percent of GDP. Meanwhile, defense outlays fell from 9.3 to 3.0 percent of GDP [...]." (24). Since 2001 however, Defense spending has increased, and is expected to continue to do so.
Good and Bad of Debt
Good:
There is a saying, You need to spend money to make money. "[S]hort term deficits [can] give a kick start to a stalled economy." (25). Indeed, President Bush often cites tax cuts as providing needed stimulus to the economy.
Bad:
Increasing debt requires a large amount of resources be devoted to interest payments on that debt. "[B]ig public debts devour revenue that could be spent on other programs. They may crowd out investment by pushing up long-term interest rates. They may also have a regressive distributional impact, transferring economic resources from taxpayers to bondholders or from future generations to the present generation. What does a budget deficit mean? Not economic collapse or calamity. Rather, incremental but inexorable diminution of future wealth. [...] By sucking up scarce capital and spending it on current consumption, government burns up the money available for productive investment and so destroys wealth in the future. It is robbing the unborn. (26).
As noted above in the Background section, interest on the debt amounts to 14% of the federal budget.
Impact on Young Adults
Debt, simply, is money spent today that will have to be repaid at a later time. "The temptation to buy votes from boomers and seniors by piling massive unfunded liabilities on future generations ($74 trillion at last count) seems hard to resist. According to humorist Dave Barry, "it's like going to a fancy restaurant and ordering everything on the menu, secure in the knowledge that when the bill comes, you'll be dead.'" (27).
"[B]oth political parties have formed an unholy alliance an undeclared war on the future. An undeclared war, that is, on our children. From neither party do we hear anything about sacrificing today for a better tomorrow." (28). In a very real way then, decisions today to spend more money than is brought in are expenses which young Americans and future generations will be left to figure out how to pay off.
Policy Solutions
Do Nothing
If no change is made in the federal government's present course of spending, the national debt will continue to grow. At some point there will be no solution but "painful benefit cuts and steep tax increases [...]. Doing nothing to avoid such a gut-wrenching outcome, knowing full well that it could occur, would be an act of fiscal and generational irresponsibility." http://www.concordcoalition.org/events/fiscal-wake-up/fiscal-wake-up-call.htm.
The Concord Coalition has further noted:
Beyond fiscal imbalance, the policies embedded in today's budget threaten to place ever-tighter constraints on the ability of future citizens and policy makers to determine their own fiscal priorities. The share of federal resources pledged to aging baby boomers and the generations immediately preceding them is growing, leaving shrinking amounts for all other purposes.
Pay As You Go
In 1990, President George H.W. Bush broke his famous "Read my lips, no new taxes" pledge and it was one factor in costing him a second term two years later. The less well know fact about that decision was that it made way for a "pay as you go" rule in federal spend
