Category Archives: Government

A Quick and Easy Debt and Deficit Primer

What is the federal deficit?

The federal deficit is the amount by which federal government spending exceeds revenues in a particular year. It is the additional amount that the government has to borrow each year.

How big is the federal deficit?

In fiscal year 2012 (which ended Sept. 30), the deficit was about $1.1 trillion.

What is the Public Debt?

The public debt is the total amount owed by the U.S. government. It is the net total of all deficits and surpluses the government has had since the country began, or the total amount that the government has borrowed.

How big is the Public Debt?

As of Jan. 3, 2013, the total public debt was just over $16.4 trillion.

What’s the difference between the Public Debt and the “Debt Held by the Public”?

Much of the public debt is held by the Federal Reserve and governmental bodies. Because this effectively is money that the government owes to itself, the amount of debt owed to others is much more important to look at. This is the “debt held by the public”.

How big is the Public Debt Held by the Public?

As of Jan. 3, 2013, the debt held by the public was about $11.6 trillion.

What’s the best way to measure the public debt?

The most useful way to measure the public debt is to look at the public debt held by the public as a percentage of Gross Domestic Product (GDP, or the total size of the economy). The debt held by the public is about 76% of GDP. The 2012 federal deficit was about 7.2% of GDP.

Who holds the public debt?

The largest chunk of debt is held by the Fed and governmental agencies. About a third is held by foreign governments and firms and investors in other countries. About 12% is held by U.S. mutual funds, private pension funds, and insurance companies. State and local governments hold about 3%.

What foreign countries hold the public debt?

The U.S. owes China about $1.1 trillion, about 21% of our total debt. We owe Japan another $1.1 trillion. Oil exporting countries (Saudi Arabia, Kuwait, Iraq, Venezuela, Indonesia, and others) hold about $260 billion. Brazil holds $250 billion. About $240 billion is held by “Caribbean Banking Center” countries (Bahamas, Bermuda, Cayman Islands, etc.).

When do we have to pay it all back?

True fact: The U.S. government never really has to pay back the public debt. As long as the debt doesn’t get “too big”, the government can keep borrowing to pay off older debt. However, the government does have to keep paying interest on all the money it owes.

How much interest are we paying?

We paid about $220 billion in interest in 2012. This was about 6% of total federal government spending.

How big is too big?

There’s no simple answer. The bigger the debt, the more interest we have to pay, the more likely it is that the government will have trouble borrowing more, and the more likely the debt will hurt the economy. Some research suggests that debt hurts growth when it gets over 90% of GDP, but opinions vary. However, if the public debt grows more slowly than the economy, the debt becomes smaller and smaller relative to GDP, and so becomes less and less important.

Are deficits bad for the country? What do economists say?

Economists differ on their views of deficits. Most economists agree that deficit spending (“fiscal stimulus”) during recessions is a good thing overall, for a number of good reasons. Few economists would argue that deficit spending during economic expansions is generally a good idea.

How much did the federal government spend in 2012? How much did it take in?

The federal government spent about $3.7 trillion in 2012, and revenues were about $2.6 trillion. Spending was about 25% of GDP, and revenues were about 17%.

Some Final Comments

Everything in economics is a trade-off. Deficit spending stimulates the economy in the short term, but has implications for the long term. When an economy has high unemployment, deficit spending can help to get people back to work, which eventually increases tax revenues. This can actually reduce future deficits. Thus, helping the economy in the short term can help in the long term as well, despite the long-term negatives of owing more money. But again, this is complicated stuff and opinions differ on the specifics.

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The “Fiscal Cliff” is Really a Slope

I wrote earlier about how the “Fiscal Cliff” is a bad name for it. It’s really a slope, albeit one with increasing steepness. Unless fear turns it into a chasm.

This is from the Associated Press:

“If New Year’s Day arrives without a deal, the nation shouldn’t plunge onto the shoals of recession immediately. There still might be time to engineer a soft landing.

So long as lawmakers and the president appear to be working toward agreement, the tax hikes and spending cuts could mostly be held at bay for a few weeks. Then they could be retroactively repealed once a deal was reached.

The big wild card is the stock market and the nation’s financial confidence: Would traders start to panic if Washington appeared unable to reach accord? Would worried consumers and businesses sharply reduce their spending? In what could be a preview, stock prices around the world dropped Friday after House Republican leaders’ plan for addressing the fiscal cliff collapsed.”

 

 

The Mis-Named Cliff

“Fiscal Cliff” is a bad name. It’s one of those terms that the media love, because it sounds dramatic and terrifying. People stay tuned when they hear terms like “Fiscal Cliff”.

That’s not to say that the Fiscal Cliff isn’t serious or important. It is. But it’s not a cliff.

A “cliff” is something sharp and jagged and high, something that, should one fall off it, one plummets hundreds of  feet to one’s inevitable death. (“Fiscal” just means having to do with finances. I’m okay with that part.)

When pundits and politicians speak of “going over the Fiscal Cliff”, they mean essentially passing the milestone of midnight on December 31, 2012, the implication being that as of 12:01 on January 1, 2013, the U.S. economy will immediately be in free fall, plunging precipitously toward our collective death.

The reality is less dramatic and less headline-grabbing. If Congress and the President fail to resolve the current political impasse, on January 1, 2013, there will be substantial spending cuts to many federal programs, and tax rates will increase significantly for most Americans.

How much of an immediate impact this would have depends mostly on how long it lasts, and on how consumers and firms react to it. If the impasse lasts just a day or three, or even a week, into 2013, the direct impact would be relatively small. Even a spending cut of 10 percent and a tax increase of 20 percent would only represent a small sliver of GDP, if it only lasted for one-fiftieth of the year.

What’s more substantial are the indirect, psychological effects, particularly from news anchors throwing around ominous-sound words like “cliff”. Firms already are balking at future investment spending, and consumers who are already edgy about their future prospects are going to be very leery about spending money over the holidays if the impasse remains unresolved. Uncertainty is rarely a good thing for an economy.

One thing we don’t need is fear-mongering and over-dramatization. The current political standoff about federal spending and taxation is many things, but a “cliff” is not one of them.

Let’s call it for what it is: A Fiscal Impasse. No one’s falling off of anything on January 1.

Fiscal Cliff Talks Underway; Both Sides Upbeat

Negotiations on the Fiscal Cliff have started, and both sides are sounding positive. According to the Washington Post:

The four Republican and Democratic leaders of the House and Senate were unanimous after the initial round of talks in saying they were confident that they and the White House could agree on measures to raise federal revenue and cut spending before a Jan. 1 deadline, when draconian provisions originally designed to force a compromise are scheduled to take effect.

The stock market was cheered by the positive tone of the news, with the S&P 500 index closing up by half a percentage point today, after having trended downward since the election on November 6.

Fiscal Cliffnotes: The Crisis in a Nutshell

With the election over, politicians in Washington are scrambling to avoid the “fiscal cliff”.

So what is this ominous-sounding escarpment?

Because the Republicans and Democrats were unable to agree on reducing the deficit, they passed the Budget Control Act in August 2011. This provided for automatic spending cuts if budget negotiations by a “super-committee”  failed. The negotiations did fail, so now Congress and the President have to find a new solution or else those increases and decreases will kick in beginning in January.

At the same time, “temporary” tax cuts passed by earlier Congresses are due to expire at the end of 2012 as well.

The fiscal cliff will effectively cut federal government spending by about $70 billion in 2013 and by $150 billion in 2014, increasing to nearly $500 billion in 2022. At the same time, taxes will increase by more than $300 billion in 2013 and by more than $380 in 2014, increasing to nearly $700 billion more in 2022. Together, these will decrease the deficit by more than $1 trillion in 2022.

So why is decreasing the deficit such a bad thing?

It’s not a matter of just decreasing the deficit. It’s how the fiscal cliff would do it: suddenly and indiscriminately.

According to the nonpartisan Congressional Budget Office, the fiscal cliff will drive the U.S. economy into another recession next year, and increase the unemployment rate from its current 7.9 percent to 9.1 percent by the end of 2013. Also, GDP will drop by 0.5 percent in 2013.

As Forbes points out,

The cuts hit all areas of the federal budget, including a $55 billion reduction to the Pentagon’s budget in 2013, a reduction of payments to physicians participating in Medicare, substantial cuts to FEMA and the Dept. of Education budget along with a host of serious reductions across the wide ranging operations of the federal government.

And let’s not even talk about the horror of those huge tax increases hitting in the midst of this fragile recovery.

Congress passed this plan never intending it to actually go into effect. It was supposed to be so horrible that both Democrats and Republicans would do anything in order to avoid it, forcing everyone to compromise. As of yet, that hasn’t worked, and time’s running out.

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The bets are that the fiscal cliff still will be avoided one way or another. The most likely outcome is a cop-out compromise that kicks the problem further down the road. Perhaps some spending cuts and a few revenue increases that make no one happy but attempt to show goodwill on each side’s part.

Both Democrats and Republicans are posturing heavily, putting on their game faces in hopes of cowing the other side into compromise. President Obama has announced that he won’t accept any agreement that doesn’t include tax increases on the wealthiest Americans. Meanwhile, as of late 2011, 238 of the 242 Republicans in the House of Representatives and 41 out of the 47 Republicans in the Senate had signed agreements to “oppose any and all efforts to increase the marginal income tax rate for individuals and business”.

Some see President Obama as having an upper hand, given his recent election victory and the pickup of 2 seats in the Senate. However, this is hardly a solid mandate by any historical standards. Yet Republicans have a lot to lose if defense and other funding is cut dramatically. It’s also been suggested that President Obama has little choice but to play hardball in negotiations, or else he’ll be paying for any signs of weakness through the next four years.

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A big part of the equation, as with all budget impasses, is which side would be able to paint the other as the real obstructionists. The bottom line is that no one really wants this impending fiscal cliff, and everyone has an incentive to want to avert it. But depending on the political and interpersonal dynamics, it’s still possible.

No one’s questioning the need to reduce the deficit eventually. No government can continue to borrow an increasing amount at an increasing rate indefinitely. The real issue is how best to do it. As with everything in economics, there are trade-offs, and people with different values have different view about which trade-offs are worth it.

At the end of the day, all we can do is hope that our politicians can rise above politics to find a solution – and contact them regularly to tell them we want them to do so.

The Myth of U.S. Defense Spending (Not) Debunked

I’d heard before that the U.S. not only is number one in the world in defense spending, but that is “spends more than the X next countries combined”, where X could be 5, 10, or even 15 or more.

And I’d always brushed off such claims. I figured they were just exaggerations by anti-American pinko-commie wimps. Distorted data warped to make a point. Misinformation.

Let me say from the start that I’m ex-Navy, and I like defense spending. A country’s first responsibility is to protect its people, and protecting American interests around the globe costs money. Countries that don’t have enough military presence are less likely to have things their own way on the global stage.

And I honestly believe that a lot of the stuff that the U.S. military does in other regions is good and even noble. I like being able to support pro-democracy movements in other countries, and being able to stop genocide. I take that “Never Again” talk about the Holocaust seriously.

So when a Facebook meme about the U.S. spending more than the next X countries came around the other day, I decided to check it out.

And I was surprised at what I found.

It’s true. The U.S. did indeed spend more on defense in 2011 than the next X countries combined, where X turns out to be 16.

The U.S. spent $690 billion dollars on defense (read “war and war-related stuff”) in 2011. Number two on the list was China with $129 billion in spending. Adding numbers 2 through 17 together gives a total of $684 billion in spending.

The U.S.’s defense spending as a percentage of GDP had been decreasing from 1986 through 1999. We called it the peace dividend. It was supposed to be the benefit we got from “winning the Cold War”, as we used to say. Spending decreased from 5.8 percent of GDP in 1986 to just 2.8 percent of GDP.

Understandably, September 11 changed things. Part of defending the “Homeland” required an increase in defense spending. It would be nice if defense didn’t have to go further than a country’s borders, but unfortunately it doesn’t work like that.

And so defense spending has been increasing since 1999 and is now up to 4.6 percent of GDP.

But the question today is, now that the U.S. has eliminated Osama bin Laden, now that the War in Iraq is over, now that the Taliban weakened, do we really need to be spending so much on defense?

Again, I like defense. I like being able to throw our weight around on the global stage. And I love me some Abrams tanks (let’s be honest – they really are cool). But do we really need quite so many of them? Do we really need to be outspending the next 16 countries combined?

I don’t want America to be weak, and I don’t want to make the world unsafe for Americans.

But maybe – just maybe – if we spent a little less on guns and bullets and tanks and missiles, maybe a few other countries wouldn’t feel obligated to spend quite so much. And maybe – just maybe – we’d have have much security without having to spend so much on it.

Not to mention having more money on hand to do good stuff for Americans right here at home.