July 28 2011

The Debt Thing

Congress continues to run in circles and all of the serious people are busy wringing their hands about debt and the deficit. The immediate problem is that the debt ceiling has not been raised. The debt ceiling is the total aggregate amount that Congress has authorized the US Federal government to borrow. The power to borrow money is granted to Congress in Article 1, Section 8 of the constitution. So, if the debt limit is not raised, then the Federal Government runs out of money to pay all of its bills on approximately August 2, 20111. The exact effects of this are unknown but almost certainly bad. And here, bad means things like possibly plunging the whole world back into a recession. Not raising the debt ceiling is entirely a political problem. There are 0 structural reasons not to do so at this time. So, this part of the problem is wholly manufactured and can be resolved by a simple vote–if Congress just gets its act together.
Then, there is the problem of the actual federal debt and deficit. The deficit is the difference between Federal receipts and Federal expenditures for a given fiscal period.
Here is a graph of Federal expenditures versus receipts2:

Federal Expenditures vs. Receipts

The red line is receipts and the blue line is expenditures. As you can see, receipts are currently less than expenditures.
The debt (in this case) is the total amount of debt owed by the Federal government. As of June 29, 2011, the Total Public Debt Outstanding of the United States of America was $14.46 trillion. The trillion unit is a source of panic among many as people aren’t typically used to dealing with numbers in that range. For another number in that range, the total US gross domestic product (GDP) is about $14.94 trillion.
Here is a graph of Federal debt vs. total US GDP:

Total debt vs GDP

This means that the Federal government currently owes about 96.8% of the total value of the US GDP for one year. Now, how to interpret this data? Listening to sources from the Right would lead one to believe that the problem of the debt and deficit are immediate and about to result in the heat death of the universe in serious consequences. As near as I can tell, no actual data supports this. While it might be nice to have zero debt the total size of the debt should be viewed as a long time problem (think in terms of your mortgage–it is often greater than your yearly income, but is a long term (15 or 30 year) payback.)
Given the current state of the economy, it should be expected that Federal expenditures will be higher than Federal income. The economy is just barely starting to recover, unemployment is still high, and the rate of taxation is low compared to other developed nations. Here’s a graph:

As you can see, the US tax revenue as a percent of GDP is the bottommost number. A search of Google for “us federal tax rate” will give you a plethora of data and a vast number of ways to slice it that all show that US tax rates are low.
So, tax rates are low and the total taxable base is lower than it “should” be due to the effects of recession.
On the income side of things, then, there are two levers. As GDP increases, total revenue will gradually increase. The current rate (2011) of GDP increase is 1.9%, so that is a fairly slow increase in revenue over time. Increasing tax rates is a much quicker way of increasing the revenue side of the deficit picture. As the above chart showed US relative taxable income is low, so this lever is quite available–even now in a weak economy.
The other lever that is available is decreasing expenditures. As the economy is in a weakened state, an immediate decrease in expenditures would seem to be unwise. As a long term measure, expense control should certainly be part of any deficit reduction plan. In fact, the Health Care reform act is exactly an example of a measure that is expected to reduce the long term deficit. Reducing total unemployment would both raise revenue and reduce expenditure (through lower unemployment support) and so is an example of a measure that wins on both sides of the equation. Exactly how to reduce unemployment is, of course, a complex problem.
So, to summarize: The deficit can be addressed through a combination of income increases from structural and tax changes and from long term expenditure planning. Now, if Congress could just realize that.
1The August 2, 2011 date, is the date that from the Treasury Department, when the U.S. government would run out of cash to pay all its bills. There may be somewhat more money available from July receipts than was estimated and the exact date of payments may extend the actual default out to around August 15.
2Source, St. Louis Fed economic data

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Posted July 28, 2011 by user in category "Uncategorized

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