Chapter 17 Budget Deficits
I. Three Budget
II. Federal Tax Receipts are Complicated
III. Relative Size of Federal Debt
IV. Should the Federal Debt be Paid 4 Videos
V. Should America
Be Unhappy With Her Federal Debt?
VI. The Future of Social Security
VII. Latest Data
VIII. How Can the US Afford a $17 Trillion Debt?
3. Functional finance
a. A balanced budget is not important.
b. Deficits are expansionary and somewhat self-
c. Money can be printed and taxes increased.
d. The interest burden of the debt is falling.
Interest on the debt as a percent of GDP
was projected to be down to 2.5% in 1999
from 3.0% in 1992.
e. The Great Recession lowered tax collections
while federal spending increased taming the
recession and now increased economic activity
has brought spending back to normal. See
Financial Crisis Lessons ... It's extensive.
Editor's Note: I'm
sure one could find a
Much Recent Debt is
It Worked and U.S. Federal Government Spending Quickly Returned to Normal
Other Countries Were Not So Wise
|Government debt began the 20th century at less than 20 percent of GDP. It jerked above 45 percent as a result of World War I creating a New Normal. Debt went above 70 percent in the depths of the Great Depression then returned to normal.||Debt has breached 100 percent of GDP because of World War II and returned to normal. The Crash of 2008 caused a big spike but much debt was intergovernmental which has no interest expense.|
D. Experience of the 1990's
1. The deficit turned into a surplus in the early 1990's
a. Refinancing to short-term bonds lowered interest costs
b. A strong economy increase payroll taxes receipts
c. A 1993 Omnibus Budget Act increased revenue
d. By the year 2000, the Treasury was retiring debt which
3. In November of 2001, the Treasury decided to stop issuing 30-year bonds.
a. Long-term Treasury bonds carry a higher interest rate because inflation
risk increases with time.
b. Issuing shorter-term Treasury bonds should lower the interest paid on the
c. People who want 30-year bonds will now buy 10-year bonds pushing their
1. Since 10-year bond rates are used to set mortgage rates, the resulting
mortgage refinancing would provide consumers with the ability to increase
2. Low mortgage lowers the risk of recession.
a. The government spends less of its income on interest than most businesses
b. Democratic Capitalism vs. a Capitalistic Democracy explores running
government as business
E. Experience of the 2000's
1. Dot com bubble begins the decade.
2. 9/11 adds to insecurity
3. Fiscal Policy of tax cuts and reform plus cash payment
keeps growth high, deficit reasonable.
4. Financial Instability cause by 1980's finally leads to
Deep-Do-Do or D3 for mathematicians.
5. US Bailout Using Debt Works
6. Austerity Fails Europe
1. A Tale of Two Debts Japan vs. Greece is an interesting read for
understanding why some are not bothered by U.S. recent debt build-up.
2. CBO 2015-2025 Budget Projection Note: Ten-year budgets
projections are notoriously inaccurate
3. The Incredible Shrinking Budget Deficit
4. Seven new federal debt data series from FRED, data
service of the St. Louis Fed. 1/11/12
You can get in Excel with FRED pluginsat at
II. Federal Tax Receipts are Complicated
A. Tax expenditures the loss in tax revenue from items that
lower taxable income have a substantial affect what is paid by
1. Tax deductions and Tax Credits affect the bottom line the
same as traditional expenditures.
2. They are designed to benefit select groups with political clout
3. Politicians have made increased tax expenditures dramatically
since 1986 because they hide political maneuvering from all
4. Taxing the Rich
The U.S. Treasury building in 1804. This building was burned by the British on August 25, 1814.
Distribution Tax Expenditures CBO
Who is On Tax Expenditure Assistance
insurance taxes -SS + Medicare = deep doo-doo
Editors Note: Traditional
analysis does not include this
|III. Relative Size of Federal Debt|
Federal Debt as % of
Editors Note: Because federal assets are not accounted for there is no way to calculate federal worth.
Household Net Worth Hit 81 Trillion in 2013
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
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
6. How To Tell Debt Facts From Political Hype
B. Don't Pay It
1. The debt was caused by wars and recessions.
2. We are not going bankrupt, the debt is about 100 %
of one year's GDP.
a. First-time homeowners go a few 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 11/01
the impending recession and events of September 11
cast a shadow on this 10-year projection
4. What is the Federal Debt: a primer for politicians
5. The Big Lie
6. 2 concerns U. S governments debt
C. Balance the budget is a simulation that allows
participants to make changes and balance the budget.
Modern Money & Public Purpose 1 hour
1, The Historical Evolution of Money and Debt
2. Governments Are Not Households
3: The Eurozone
4: Real vs. Nominal Economy
Projection probably include an increase in current low rates.
Editors Note: Revolutionary War debt
had been piled up
by both state and federal governments. Secretary of the Treasury Alexander Hamilton orchestrated
the first federal tax on imports in 1789 to pay federal and state debt .
This debt was our
largest federal debt related to GDP until 1933 when the Great Depression crushed revenue collections
which caused deep- do-do (d-cubed).
Secretary of the Treasury Alexander Hamilton began the practice of increasing taxes to pay for war expenses. Printing money causing inflation usually helped.
This practice continued for over 150 years. Then both Hover and Roosevelt borrowed not for war but to help people survive the Great Depression. Then Bush II reversed over 200 years of logic as he cut taxes during good times so as not to pay for wars in Afghanistan and Iraq plus he created entitlement Medicare Part D.
Hamilton's paying state war debts began federal government practice. Today many states take the money and show their appreciation by telling the federal government to stay out of state and local business.
Individuals also follow the practice of
taking and saying stay out of my business.
Retires and poor people don't want the FEDS involved with their lives even though much of our debt is caused by the big four of Social Security, Medicaid, Medicare and Defense.
State and Local Governments can't print moneys so they can't have deficits. They use unfunded pension and health liabilities to cover future spending. Unfunded state and local employee and retiree benefits would head list of major contributors to state and local liabilities.
I don't like the term entitlement programs when they are financed by individuals paying into a fund. This is especially true since there is not a contract so what the government gives it can take away so the word entitlements is a sham.
Governments spend so much more than is taken in that balancing the budget is futile. Living at such a peaceful and prosperous time should allow cuts in the gravy train but Greed, Guns, God, and Government get in the way. Source
|V. Should America Be Unhappy With Her Federal Debt?|
Few Pay More Income Taxes
Inflation To Date
Revolutionary War veterans were paid in worthless currency which they sold at a large discount to wealth people who were then helped by Hamilton's decision to redeem at full value. This could happen again as debt is bought by the wealth on margin on borrowed money at low Federal Reserve sponsored interest rates.
Some states had paid their revolutionary war debt and were not helped by Hamilton's decision to assume all war debts.
Financial stress caused by financial excesses were substantial during the 19th century and early 20th century.
Inflation during the 1970's hurt fixed income often retired older residents and fixed asset people. SS was not indexed to inflation until early 1980's.
BUT, recent financial crisis's have been moderated by government
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 to increase his expected pension. This would be
difficult as Social Security was having financial problems soon to be solved by
a bipartisan commission chaired by a man named Greenspan. 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 friends normal retirement age increased from 65 to
sixty-six. What have these
changes accomplished over the past 25 years.
Outlook for Short-Term SS Trust Fund Adequacy?
2013 Trustees Report
short-range adequacy of OASI, DI, and HI
Trust Funds by
By this measure, the OASI Trust Fund is
financially adequate throughout the 2013-22 period, but the
DI Trust Fund fails the short- range test because its trust
fund ratio was 85 percent at the beginning of 2013, with
projected depletion of all reserves in 2016.
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 it is politically
easier although Republicans won't be happy. Then a bipartisan commission will be formed to increase rates,
subject to Social Security taxes, and the normal retirement age. A commission shares the political burden.
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 Research 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.
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%. Becoming Oldest-Old: Evidence from Historical US Data from MIT shows we are living longer. 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! Boston College has more on Social Security.
Historical Development of Social Security (In Adobe PDF format)
Not All Debt is Created Equal.
|VII. Latest Data|
|Last Chapter||Next Chapter|
|Chapter 15 Class Discussion Questions||Economics Interactive Course Notes|
|Chapter 15 Homework Questions||Economics Internet Library|
VI. Many industrial countries have debt.
|Country||2003 Central Government Debt
as a percent of GDP
All are higher in 2015.
|Japan||155% and stagnate
population makes problem
more difficult to solve.
tendency toward socialism
makes problem more difficult to solve.
|Canada||77% and tendency toward
socialism makes problem
more difficult to solve.
|Germany||64% and tendency toward
makes problem more difficult to solve though a major decrease in the social safety net should help
|Source: 2004 World Fact Book of CIA|
VIII. Foreign Holdings of U.S. debt as of Dec. 2004
Foreign Holdings of U.S. debt as of Dec. 2004
|United Kingdom||$163.7 billion|
|Caribbean Banking||$69.4 billion|
|Analysis: Most of this debt is held by foreign central banks that have a vested interest in the economic well being of the Unites States Economy.|
makes 2015 difficult is the large contingent liability
for SS, Medicare, and Federal Retirement. Unless US has
a real prosperous decade or two similar to after WW 2
she will have Inflation, a substantial change in benefits
unless Obama Care works! Net Debt looks a little better.