I. Introduction
    A. A budget deficit results when expenditures are greater than revenues for an accounting period.
    B. Debt is an accumulation of deficits.

II. Three budget philosophies
     A. Annually balanced budgets (classical economists)
         1. The problem with balancing budgets annually is it reinforces the business cycle. 
         2. Governments are forced to spend less during a recession as tax revenues decline. 
         3. Governments must increase spending during economic expansion as revenues increase.
         4. Many disagree with this philosophy as it is counter cyclical because the worst time to cut spending is during a recession.
    B. Cyclically balanced budgets (Keynesian)
        1. Balance over the business cycle with deficits during recessions and a surplus during expansions. 
        2. Problem is getting politicians not to spend revenue increases which occur during expansions. 
   C. Functional finance
       1. A balanced budget is not important.
       2. Deficits are expansionary and somewhat self-liquidation.
       3. Money can be printed and taxes increased.
       4. The interest burden of the debt is falling.
           a. Interest on the debt as a percent of GDP was projected to be down to 2.5% in 1999 from 3.0% in 1992.

           b. Much of this decrease was caused by refinancing old debt as it came due at lower rates.
           c. By the year 2000, the Treasury was retiring debt which, if continued, will lower the burden even more.
           d. In November of 2001, the Treasury decided to stop issuing 30-year bonds.
               1. Long-term Treasury bonds carry a higher interest rate because they have higher inflation risk.
               2. Issuing shorter-term Treasury bonds should lower the interest paid on the federal debt.
               3. People who want 30-year bonds will now buy 10-year bonds pushing their rate down. 
                   a) Since 10-year bond rates are used to set mortgage rates, the resulting mortgage refinancing
                       would provide consumers with the ability to increase consumption.
                   b) This could help the U.S. pull out of the impending recession.
              4. The government spends much less of its income on interest than most businesses and individuals

III. The federal debt (data rounded and in billions of dollars)

IV. Gross national saving rate (as a % of GNP)

Year	Gross National  Saving Rate =	Household Saving +	Business Saving +	Federal  Saving +	State and Local Saving
1952-71	15.9	4.8	11.7	-0.5	-.1
1972-81	16.9	5.4	12.4	-1.9	1.0
1982-89	13.4	3.3	12.9	-4.1	1.3
Analysis: Savings of governments are under stated because they do not include asset accumulation. Savings of individuals are understated because asset accumulation in homes and the stock market are not part of the calculation. Businesses are not in the business of saving. Our economy is very dependent on low interest rates and cheap oil. Any dramatic change in either will cause a sever recession, but to expect participants to hoard cash for such a situation is asking too much. General Motors has all kinds of cash but is using it quickly to downsize in hopes of staying in business.

U.S. Department of Commerce as published in Jan. 1992 issue 1, Vol. 27, p. 37 of Business Economics, 
"Low U.S. Savings: Increase It By Reducing the Federal Deficit" by Dennis K. Hoover.

V. Should the federal debt be paid
    A. Pay it
        1. The external debt (owned by foreigners) has gone up from 5% in 1960 to 13% in 1988, 22% in 1999 and 43% in 2005.
        2. The crowding-out effect slows growth as Federal dissaving causes high interest rates lowering private investment.
        3. Paying $230 billion in annual interest causes incentive problems as this money could be used to solve many problems.
        4. Recently foreigners have been willing to invest their export earnings in America helping to minimize the effect of the 
            high federal deficits on interest rates.
            a. If foreigners decided not to make these investments, interest rates would increase, slowing economic growth. 
            b. Interestingly one of the reasons the Federal Reserve was unable to lower long interest rates quickly during the
               1990-91 recession and its recovery  may have been the Japanese decision to dramatically curtail their U.S. investments. 
        5. Annual interest on the federal debt increased 50% (from 1.9% to 3.3%) during the 1980's. By 1999 it was down to 2.5%.
   B. Don't pay it 
       1. The debt was caused by wars and recessions.
       2. We are not going bankrupt, the debt is less than 59% of one year's GDP.
           a. First-time homeowners go a number of salary years into debt.
           b. Much of the annual deficit goes into capital expenditures and because the U.S. does not have a capital budget, these
               items are all expensed in the year of purchase. During periods of growth, the result is an over statement of the deficit.
      3. Paying it would overtax the average American.
      4. Most Americans would rather spend tax money to solve problems rather than lower the deficit.
          a. This attitude changed substantially in the early 1990's. 
          b. By the end of the 1990's, projection had the debt paid off in 10 years. By November of 2001, the impending recession
              and events of September 11 cast a shadow on this 10-year projection

VI. Many industrial countries have debt.  

VII. Social Security Recollections Lead To Follow The Cash

In 1980, my friend Mr. Average lamented his Social Security pension would be small. He wished the government would take more out of his pay and increase his expected pension. This would be difficult as Social Security was having  financial problems to be solved by a bipartisan commission. It recommended, Congress passed, and the President signed a social security tax increase, an increase in the wages subject to Social Security, and a delay in the normal retirement age. My normal retirement age increased from 65 to sixty-six. What have these changes accomplished over the past 25 years.

What to do! Options include increasing the wage base being taxed, the tax rate, and delaying the maximum benefit date. All were done in 1981. Ignoring the problem and borrowing the cash will be difficult as borrowing much more than we already have will push interest rates higher on Treasuries and lower the value of the dollar. So they will  increase from $90,000 base soon because because it is politically easier although Republicans won't be happy. Then a bipartisan commission will be formed to increase rates, wages subject to Social Security taxes, and the normal retirement age. A commission shares the political burden. 
All have been done before. What bothers me is a new option.

Indexing Social Security to wages has caused Social Security pensions to increase. Wages go up because of inflation and productivity. A plan indexing  pensions to inflation lowers pensions and a Presidential/Congressional cash crisis is avoided for a while. The Center for Retirement at Boston College analyzed this change. My friend Mr. Average just retired at 65 and receives $14,689. Had we indexed to inflation in 1951, the average Social Security pension would be lowered by $2,131 to $12,558.  To be candid, my friend Mr. Average needs this additional income. Let us move ahead to 2025. Under the current system, Mr. Average will receive $16,205 in 2005 dollars, a $1,516 increase.  If indexing to inflation passes Congress and is approved by the President, Mr. Average will receive only $14,689 in 2005 dollars. No real increase because he would not share in productivity increases. His pension would be larger in 2025 because it was but he could only buy the same amount of goods and services as in 2005.

My liberal side is bothered by the fact that this has even been proposed and the average pension  is so low.
My conservative side reminds me, "If we send it, they will spend it."
My cynical side realizes the excess is spent to buy votes from constituents.

The Real Story  

The Center for Retirement at Boston College also reports the entire mess can be solved by increasing the normal retirement age from 67 to 70 over a period of years for people under 45 or people under 55 could receive a benefit cut of 20%. They also report we are living longer in Becoming Oldest-Old: Evidence from Historical U.S. Data. Since Social Security was adopted in 1935, life expectancy for someone 65 has increase by almost 5 years to almost 17 years. Since these numbers are going up, my friend Mr. Average is making out very well. My normal retirement age is 66 years. Hopefully I will pay for one more year and collect for 4 more years. Not bad!

Read Historical Development of Social Security (In Adobe PDF format)
A section from SSA's publication, "Social Security Programs in the United States." (7 pages)

VIII. Foreign Holdings of U.S. debt as of Dec. 2004