Debt ? Deficit

A lot of people ask a question like this:

Great video, However, in the video you include Jimmy Carter as reducing the deficit.  As much as I like Jimmy Carter, his administration started out with a deficit left over from Ford of $ 77 billion and ended up with a deficit of $ 85 billion.  If I’m wrong let me know.

The Answer:

Off the top of my head, I think you are, as you say, talking about the deficit. The video is about the debt, and more specifically about the debt as a % of GDP. So I think you are probably right about the deficit. That's how much the debt increases from one year to the next (and there are various definitions of debt--I use the one the Republicans use and put on the national debt sign in NY -- the big one).

OK, so your deficit numbers tell us hat the debt was going up every year -- what gives? Well that's right, but the countries income was going up every year. Under Carter is was going up really fast because of inflation > 10% and normally the economy grew (in a real sense -- inflation is fake growth) by 3%. So over 4 years the economy got much bigger.

So even though the debt was getting bigger,  we were getting bigger much faster. When you are 10 years old, a $1000 debt is a big deal. When you're 30, you many have a $100,000 mortgage and that may be not a problem at all. You are far bigger economically when you are 30, so a much bigger debt is, in effect much smaller.  Watch the first part of video again. It explains a little more.

Also the $85 billion was probably worth a lot less than the $77 billion due to inflation.


President Bush claims that "we have now achieved our goal of cutting the budget deficit in half."  [#Source] Is this true?

First, be careful, the deficit is annual additions to national debt. So all he's saying is that the national debt is not going up as fast as it had been. It's certainly not going down (as it did in between 1995 and 2001 — see graph). So in terms of the accumulated national debt, we haven't cut anything except its rate of increase (that's better, but the debt is still headed the wrong way).

Second, he's not talking about the annual gross (total) budget deficit, but only a part of it. As this chart shows, the total deficit has hardly decreased at all.  [#note]




Bush's deficit, call it deficit 'lite', counts borrowing from the 'public' (financial markets) but does not count borrowing from Social Security--which is huge. This ignores the fact that like public debt, Social Security contributions are actually an obligation that must be repaid. Most importantly, those funds should be helping to increase savings and investment in order to provide for the coming retirement of the large "baby-boom" generation. They should not be used for current government expenses (see below).

Did Bush's "pro-growth" policies cut the deficit lite in half? No. The deficit always goes up in a recession (2001--2003) and down when the economy recovers (last two years). To check on his policies, look at what actually happened compared with what he predicted his policies would do.  ( Graph )

If one counts Social Security contributions as offsetting the deficit, then the deficit lite has gone down by almost half, from $413B to $248B. But that's just a normal result of increased Social Security contributions, which, as pointed out above, are themselves an obligation that must be repaid.  The real total deficit, the gross national deficit, is still near a record high. That's not normal.


Bush almost cut "deficit lite" in half, but the real total deficit is still taking billions from Social Security. more

Deficit "lite" vs. the gross deficit
The gross deficit is the real "total deficit." Unfortunately, politicians talk about a smaller partial deficit, but call it the "total deficit," so you won't ask about the the real one. I'll call it "deficit lite" and I'll call the real one the "gross deficit." 

The gross (total) deficit is bigger because it takes into account that when the fed's general fund (mostly military spending) borrows money from the Social Security Trust Fund, it will have to pay it back. Borrowing from Social Security is still borrowing. Deficit lite, which Bush is talking about, assumes there is no such obligation — that Social Security will not have to be paid back. So the more they borrow from Social Security the smaller is deficit lite.

Because of this, when more of us have jobs and pay more Social Security, deficit lite goes down because the general fund borrows more from Social Security — which they don't admit they have to pay back — and less from the public (and foreigners) — which is the only part they admit they must pay back.



How can they call "deficit lite" the "total deficit"?
As you might expect, it's a bit confusing. The "deficit lite" is basically the gross (total) deficit (military spending, etc.) plus all the extra money that comes in from Social Security. Since the Social Security surplus is added, they call this sum the "TotalDeficit." 

This is what's happening. The gross deficit is about $550B and when you subtract$300B coming in from Social Security you get the $250B deficit lite. Tastes better.

But subtracting does not sound like you're getting a total. So they turn it all upside down. They say the gross deficit is minus $550 and then they add the $300B from social security, and get minus $250. Since, with signs reversed, they are "adding" they call their answer of -$250B the "total" deficit even though its much much smaller than the gross deficit, which is the real total deficit.

You can check out this charade in the Economic Report of the President, Table B-78. (Economists put up with this because (1) they're paid to, (2) they have a legitimate use for the deficit lite number, and (3) their political bosses love it.)


The annual deficit vs the national debt
The annual deficit is this year's spending minus this year's income. If we spend $900B with income of $600B in one year, the annual deficit is $300B. That makes the national debt go up by $300B.

The annual deficit is how much the debt increases each year. On any day we can ask how much the annual deficit was over the preceeding year and find it by subtracting the national debt a year ago from what it is now.

That's how the graphs above were made. You can find the national debt to the penny herexlnk.gif for almost every day back through 1993.


[=Source] Bush's press conference, October 11, 2006

"Before I take your questions, I'd like to discuss a couple subjects.
First, I want to briefly mention that today we've released the actual budget numbers for the fiscal year that ended on September the 30th. These numbers show that we have now achieved our goal of cutting the federal budget deficit in half, and we've done it three years ahead of schedule.
The budget numbers are proof that pro-growth economic policies work. By restraining spending in Washington and allowing Americans to keep more of what they earn, economy's creating jobs and reducing the deficit and making our nation a more prosperous nation for all our citizens." (NYTs)
[=note] This chart shows the total deficit in dollars, although it would be more correct to show the deficit as a fraction of total economic activity (for example, Gross Domestic Product -- new chart coming!).  Since total economic activity has only changed by a few percent per year recently, the overall picture will be quite similar to what this chart shows.


Why It Matters

Currently, contributions to Social Security are greater than payouts because members of the large baby-boom generation are currently in their prime earning years. But the baby-boomers are about to start retiring. In fact, an increase in the Social Security tax was passed just to help fund their retirement.

This money should be saved/invested in order to make it easier for the younger generation to support the baby-boomers after they retire. How could this happen? If the rest of the government budget was in balance then the current excess of Social Security contributions over payouts would result in more investment.

Here's how a surplus produces investment: an excess of Social Security contributions over payouts (assuming the rest of the government budget in balance) would be used to reduce outstanding debt. That means buying back bonds. That means more money in the hands of former bond-holders, who clearly were interested in saving the money, not spending it. To save that money they'd buy corporate bonds or stock, or put in the bank, etc., all of which would encourage more investment in real, productive assets. Investment now means increases in productivity in the future. A more productive younger generation would have an easier time supporting the soon-to-be-large number of retirees.

That's why it's important to look at the real deficit that does not include Social Security contributions in excess of payouts. The current deficits indicate that the government is spending far in excess of revenues, thereby more than offsetting intended Social Security saving.  And, as the annual total deficit graph shows, the situation is not improving, even after a recession.

The reasons for the annual total deficit continuing at near-record levels — even after a recession — are not hard to find: (1) huge tax cuts; (2) Iraq war expenditures.