U. S. National Debt and Deficit

 

This is a preliminary abstract from the study as of November 2016. It will be updated as the study progresses and the full study will be published on-line when it is complete. Comments are solicited.

1       OBJECTIVE

The objective of this study is to better understand the process of US debt accumulation over the past several decades and determine what if anything needs to be done about it.

2      SCOPE

The scope of this study is restricted to the US debt. It is concerned primarily with the debt of the U.S. Federal Government but it also includes some discussion of total U. S. debt which includes federal, state and local government debt and the debt of corporations and private citizens. It includes estimates of future US federal debt based upon currently committed liabilities (such as Social Security) for projected population levels and age groups.

3      BACKGROUND

During the 2012 election year there was a good deal of political froth concerning the US public debt and deficits. This was generated by an unusual increase in U.S. National Debt over the preceding decade and critical sovereign debt issues in several European countries.

US debt had been rising rapidly over the preceding decade. It was mostly due to a reduction in tax revenue resulting from “Bush Tax Cuts” and the subsequent squandering of both financial and military resources on the wars in Afghanistan and Iraq. In addition, the economic collapse in 2007 required huge amounts of deficit spending to avoid complete economic disaster. So there was cause for concern. The question was/is what to do about it and how urgent is the “Fix”.

In 2012, congress enacted a cut in expenditure referred to as “Sequestration”. This curtailed government activity on some items that needed continued support, but it DID reduce the deficit somewhat. It would have been more helpful if Congress had been more selective in their cuts.

As of January 2016, the deficit has been reduced by 75% but the debt continues to climb although not as steeply. Debt currently sits at $17 Trillion which is a bit more than our annual GDP.

During the 2016 election cycle there has been little discussion of the debt or any other policy matters. It has been all about personalities and generalities like “Making America Great Again”.

4      Measures of Financial Strength

In personal affairs we are all familiar with measures like credit scores, and debt/income ratios and have a general idea of why they are important and how they can affect our personal lives. In national or international affairs there are some accepted measures such as the debt as a percent of GDP but very few people are sure of what they actually measure or what might happen if the seemingly arbitrary limits associated with these measures are exceeded.

The full study gets into this area of measures and their validity but it quickly becomes a semantic morass. Very briefly, I accept US Federal Government Debt as a percent of GDP as a legitimate measure because that is what the rest of the world uses to determine the risk associated with U.S. Treasuries.

I feel that this Debt vs. GDP relationship is adequately described by the charts at :

http://www.usgovernmentspending.com/us_national_debt_chart.html

Information from several other sources confirms the general shape of the curves and timing of the significant changes.

As mentioned previously I feel that the measure of Federal Debt/GDP is important in our financial interplay with the rest of the world but I do not see a strong correlation between these figures and economic success or failure. We will not disintegrate as a nation if our debt exceeds 100% of GDP but we are skating on thinner ice and our world image will suffer. Under this measure and current circumstances, a default on US debt obligations would be disastrous.

The on-going growth of our debt is worrisome but the question is “How much debt can our nation handle safely?” Much of the debate centers on the measure of Federal Debt as a percent of GDP. Although that is not an adequate measure, it is the most popular and we are currently running a little over 100% of GDP.

I feel that the Liabilities vs. Assets relationship is a better measure of overall financial condition. This relationship is well described at https://en.wikipedia.org/wiki/Financial_position_of_the_United_States  It states; “The financial position of the United States includes assets of at least $269.6 trillion (1576% of GDP) and debts of $145.8 trillion (852% of GDP) to produce a net worth of at least $123.8 trillion (723% of GDP)[a] as of Q1 2014.”

As far as I can determine, this measure is not used on an international basis because many other nations simply do not have the necessary data available. It indicates that although we have a lot of debt, we aren’t near bankrupt.

My preliminary conclusions (below) are based primarily on these two measures.

5      CONCLUSION (Preliminary)

Since 2000, the national debt has increased to an uncomfortable level. It is not an economic crisis. However, it is precarious. As a nation, we need to get a tighter control on debt. We MUST at least reduce the rate of increase. If possible we should eliminate the increase (annual deficit) completely. At that point we would be operating on a balanced budget.

To achieve a balanced budget, we need to reduce expenditures AND increase income or revenue.

On the expenditure side, current economic conditions, require stimulation so we must proceed slowly and carefully with the reduction of federal expenditures, perhaps by shifting some foreign expenditures to domestic programs.

On the income side, although conservatives claim that increasing taxes on the wealthy will slow the economy, that’s hogwash and we do need to return at least to the rates that existed during the latter half of the 1990s. They produced balanced budgets then, they can do it again.

Specific social programs that need attention include the Medicare/Medicaid programs and the Social Security programs. Both are covered as separate issues within this blog.

The administration claims that the Affordable Care Act will go a long way toward containing medical expenses over all including the federal government’s portion. However, that remains to be seen. There doesn’t seem to be any way to predetermine the effect. Since it is in the process of implementation, our best alternative is to complete the experiment, make whatever adjustments or changes are necessary and continue to work toward an effective/efficient system. IMHO the eventual solution will be a single payer system such as  “Medicare for every one” with a significant Medicaid supplement. Whether Medicaid can vary by state or must become a Federal function is debatable.

AARP used to include a simulation model of the Social Security Retirement Fund on their website. It offered about a half dozen aspects of the program that could be adjusted to varying degrees to bring the program into fiscal balance for the foreseeable future. I played with the various combinations and concluded that relatively small adjustments to all of them would probably be the best solution. However, it is interesting to note that simply removing the cap on earnings to be taxed for SS (currently set at ~ $110,000) by itself will keep the fund solvent until 2080. Over my life time I’ve seen that cap rise from ~$5,000 to the current $110,000. From a taxpayer’s standpoint, that rise has been irritating but not painful.

 

6      SUMMARY (Preliminary)

The National (Federal) Debt is relatively high (about 101% of GDP) and is almost equal to National Government Assets. This is not a comfortable position in view of our unfunded future liabilities. We must reduce the size of existing unfunded future liabilities by judicious reduction of benefits AND increase in contributions.

We must avoid any future wars, or if they are necessary they should be financed by concurrent federal revenue increases, not debt increases.

We must insure that any new social programs are also funded by concurrent increases in federal revenue.

Existing social programs should be reviewed on a nationally accepted cost/benefit basis. If the ratio is satisfactory, and can be improved by further expenditures, increase the federal revenue to adequately fund those programs. If the ratio is not satisfactory cut back costs until it is, even to the point of elimination.  Any net cost increase across programs might be funded to a limited extent by growth in the GDP but that is not a highly probable scenario. Some if not all will have to come as increased tax rates and the closing of existing loopholes. Close the

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