« | Home | »

U.S. National Debt and The Deficit

November 1, 2013

The United States national debt is at roughly $17.2 trillion dollars and growing every day.  A lot of us are asking how we got in this fiscal mess, and things are getting pretty heated.  I’ll try to shed a little light on a very complicated issue.

First, we can address the primary causes for why we’ve been running deficits, and hence, running up our national debt.  These are the main reasons given by a  2012 Congressional Budget Office report.

The Bush Tax Cuts (extended by Obama) (~2 trillion)

About 12 years ago, income taxes were cut across the board in pretty much every tax bracket by several percent.  Next, capital gains taxes were cut in half, going from 39% to 15%.  Capital gains refers to money made from having lots of money.  Interest earned from bank accounts, real estate, stocks, bonds, and that sort of thing.  This has led to a major loss in revenue, but spending was never cut to compensate.

Wars Overseas (~1.5 trillion)

It seems we’re always at war.  There’s a generation growing up today that’s never lived in a time when we weren’t at war.  Sad, but true.  It’s been a massive economic drain.  We’ve spent anywhere from 1.5 to 2 trillion dollars on our conquest of the Middle East, establishing bases all over the place, controlling sea lanes, oil, and other natural resources.  It’s expensive.

Increased Defense Spending And Homeland Security (1.5 trillion)

We’ve been spending a lot of money on defense and homeland security.  You know all those airport security scanners?  Those massive data centers spying on everyone across the globe?  How about those drones, stealth airplanes, and those massive aircraft carriers we’ve been building out of fancy composite materials?  A giant black hole.  We’re building a space shield of drones and missiles under the guise of fighting terrorism.  In reality, it’s world conquest and domination.

Interest Payments On Our Debt (1.5-2 trillion)

When you borrow money, you have to pay it back with interest.  We’ve borrowed our money from Japan, China, Russia, and other places.  We’re taxed and send them interest payments each month.  Good for them I guess.  Not so much for us.

Varied Economic Stimulus Attempts (1 trillion)

Roughly 1 trillion has went into different economic stimulus programs.  The government has tried to jump-start the economy by investing money in all sorts of things.

Subsidized Student Loans (700 billion)

There’s been $700 billion dollars given to students in federally subsidized loans.

Lost Revenues Due To The Economic Recession (4 trillion)

Because the economy hasn’t been great, revenues were down for a while but spending wasn’t decreased to compensate.  There’s an important economic relationship which you have to understand.  When the economy takes a downward swing, more and more people need assistance (unemployment benefits, etc), so safety net spending increases as revenues fall during a recession.

It’s quite clear that President Obama inherited an economic mess, as did President Bush.  There were major recessions during both of their first terms.  Less money was spent in stores, leading to less profits for businesses, more layoffs, and less federal revenues.  The chart below makes that quite clear.

But there is some good news.  Federal spending has leveled off while revenues continue to increase.  It’s a nice change of pace, though it’s not enough.  We need to increase taxes (get rid of the Bush tax cuts), cut defense spending, end the wars, and continue to reform healthcare and social security.  But we have an uphill battle ahead.

revenue vs expenditures

Entitlement spending is a huge problem.  Social Security, Medicare, and Medicaid spending is growing far faster than the economy.  The CBO is telling us that if these programs continue on their current course, their expenditures will eat up all tax revenues sometime between 2030 and 2040.  There won’t be any money for defense, education, the FDA, scientific research, or anything else.  It will all go to Medicare, Medicaid, and Social Security.

GAO_Slide

Look at that red bar in the entitlement spending chart.  That’s debt interest payments.  It balloons out of control, mainly because at that point we have to borrow money to even keep our government functioning.  The more money you borrow, the higher the interest rate to further borrow.  It’s a downward spiral.  That chart is depressing.  It’s obvious that our current course is unsustainable, and with an inept Congress stuck in ideological deadlock, do you think they’re going to be able to sort this out?

Our primary problem is the inflation in healthcare costs.  We have short-term unemployment problems, and that gives us short-term deficit problems, but our long-term problem is healthcare costs.  If we don’t fix that in the coming decades, we’re done.  They have to fix healthcare.  But, on the bright side, healthcare inflation is the lowest rate it’s been since the 1960s.  We’ll have to see how the Affordable Care Act plays out.

Entitlement spending could easily span an entire post, but I need to get going, so hopefully this was at least a little informative.

Topics: Economics, Politics | No Comments »

Leave A Reply