Tuesday, June 24, 2014

The Federal Debt is Hiding in the Corner

The big exam is coming up. You have plenty of time to study and get ready for it. But stuff keeps happening. Your neighbor asks you to mow her yard. Your best friend turns 21 and you have to celebrate with him. It is a beautiful night and life is too short to not appreciate it. The test day arrives and you never got around to studying. Ugh.

It is easy to get diverted from disagreeable tasks. Today it is especially easy for our government to forget about some basic issues. The list of diversions right now is very long. No one can argue that each and every one of these issues is important in its own right – Fed monetary policy, Iraq, Russia, Iran, Libya, IRS, North Korea, Bergdahl, Minimum Wage, and so on.

But when is the last time you heard anyone talk about the national debt? I guess we must have solved that problem. Or maybe it wasn’t a problem at all? Maybe the debt should be collecting dust in the back of a closet somewhere?

I don’t think so. Current data and projections show we have made zero progress with the US national debt and it remains a ticking time bomb. And the worst thing about the debt is that it is self- exploding. It is like potato chips. You have one and then you have to have another. And before you know it you look like a before photo of Jared.

·        When the national debt gets bigger – that means the country pays more interest to bondholders.
·        Interest expense is part of government spending, so that means government expenditures rise and create a bigger deficit.
·        The bigger deficit means the government sells more bonds and increases its debt...

That sounds pretty dire but it just gets worse. The explosion gets bigger whenever interest rates rise. The Fed is projecting higher rates next year and beyond. By all accounts these projections underestimate what will happen. Ask anyone who defaulted on their home recently – debt is no laughing matter.

But isn’t the economy improving? Won’t these improvements bring in more tax revenues and reduce spending on social programs. Didn’t Congress make some compromises lately? Won’t all that help? Yes, all that is true. All those things will help to improve future government deficits and debt. But unfortunately other things are happening that continue to make matters worse. This is all laid out by the Congressional Budget Office in a coloring book. Well not exactly.

There is something on the CBO web page called “April 2014 Baseline from Update Budget Projections: 2014 to 2024”  http://www.cbo.gov/publication/45069  Click that link and you get a lovely XLS spreadsheet. The CBO puts a bunch of government projections of budgeting data together in 5 tables. We are currently in the government’s 2014 fiscal year – they project through 2024. These projections rely on the most current federal laws that guide future government spending and revenues – and use economic projections about GDP, prices, interest rates, and so on.

Below are some of the key projections…

·        After being $680 billion in 2014, the government deficit will improve for two years (2015, 2016) and then get increasingly larger in every year thereafter reaching $1 trillion by 2023.
·        Despite the 2015 and 2016 small improvements, all years from 2014 to 2024 will have government budget deficits and they will generally increase over time.
·        After many years of making a positive contribution to the budget, the so-called off-budget part (mostly from the Social Security Programs) will go negative in 2018. That means all those Boomers will be taking out more than the kiddies are putting in.
·        But it would be wrong to conclude that Social Security is the main issue behind larger deficits. Between 2015 and 2024 the off-budget deficit will increase by a total of $650 billion. The rest of the budget will worsen by approximately $7 trillion. The Social Security deficits are, therefore, less than one-tenth of the problem.
·        Since all the future annual deficits will be negative and growing, this means the national debt will grow each year – and will grow faster than GDP. Really!
·        The government debt held by the public in 2007 was $5 trillion or 35% of GDP. In 2014 it will be $12.7 trillion. It will rise in every year and reach nearly $21 trillion in 2024. It will have risen from 35% of GDP in 2007 to 78.1% in 2024. 

Clearly the debt took a huge jump during the financial crisis and we apparently have no plan to remediate that jump. I guess all is fine. There is no urgency perhaps not even a recognition that a more-than doubling of the nation’s debt burden is a problem or even a serious risk factor.

It isn’t like we are having major tax cuts that have reduced future government revenues. Total government revenues in 2013 were about $2.8 trillion. They will rise by $1 trillion in the next five years – that’s an increase of about 36% by 2018. Between 2018 and 2013 they are expected to rise by another $1.1 trillion. Tax revenues will be just a little under $5 trillion in 2024. So the explosion in deficits and debt has not come because we have restricted the government’s income. Hey mom – will you increase my allowance by 36%?

If taxes are not the culprit, how about spending? Total Federal government outlays in 2013 were close to $3.5 trillion. If you believe what you hear about government austerity then you might expect slowly growing government spending. But spending rises to $4.4 trillion in 2018 and to $5.9 trillion by 2024. Between 2013 and 2024 government spending will increase by about 69%. That is probably at least twice the rate of inflation over than same time period. It would be hard to call that austerity.

The upshot is that despite fairy tales that say the opposite our Federal government is doing nothing to reverse our exploding national debt. Taxes are rising at a generous pace. Spending is growing more than revenues so deficits and debt are increasing absolutely and as a share of the size of the economy. As for the spending, below you see where the spending increases are coming from in the next five years. The largest contributors to the increase in dollar terms is the mandatory spending category Social Security. In terms of fastest growing are Health Subsidies under Obamacare and Medicaid. In case you are wondering, present plans call for defense spending to be $623 billion in 2018, about $3 billion less than the $626 billion of 2013.  Spending on various social programs (found in the discretionary spending part of the budget) like unemployment insurance and food stamps, will fall by $18 billion between 2013 and 2018.

This is not rocket science. Tax rates will have gone from 16.7% of GDP in 2013 to 18.3% in 2024. Spending will increase too from 20.8% to 22.1%. More typical would be revenues at about 17% and spending at 19% of GDP. Clearly our buddies in Washington are planning tax rates and spending rates that are in excess of what has been normal for this country. In case you hadn't noticed, 2024 is almost 15 years since the recession ended. The debt ballooned in the recession and will get even bigger in the next decade. Who is minding the store? 

         2013    2018  $CHG  %CHG
Total                    $3.455     4.391   .936   27%
Mandatory             2.032     2.692   .660   32%
Social Sec.              .808     1.048   .240   30%
Medicare                 .580      .706    .121   21%
Medicaid                 .265      .418    .153   58%
Health Subsidy        .001      .103    .102   Huge

Income Security      .340      .322   -.018  -5.3%


  1. I heard O'Reilly cite the "$17.0 trillion national debt" when talking about the influx of "kids" over the southern border. Both Kristen Power...not surprised...and Brit Hume...very surprised...poo poo his concern about the debt. "We have to spend money(that we don't have)to save them(so they can vote Dem)." I think people are so overwhelmed by economic stupidity, they just don't care.

    1. Thanks Fuzz, seems to me that very few of Fox's stars know very much about macro. Even their business show hosts who know a lot about business and finance do not seem well versed in macro. The usual allures of government spending are apparently difficult for either party to resist. By the way -- the $17 trillion is the gross debt. I like to use the debt held by the public because it nets out a lot of transfers among government units. That's what we really owe.

  2. Dear LSD. The debt problem has gotten lost in the latest whack-a-mole scandals and crises landing on Obummer’s doorstep—unknowingly to him, of course—while he golfs and fund-raises. It’s not his fault . . . and it’s not Congress’ fault as both party’s fingerprints are all over the debt ceiling extensions, entitlement enactments, etc. . . . . unless you want to lay blame at Harry’s feet for holding up dozens of the House’s bills that might contain short-term remedies. Nope, it’s the fault of those who advocate for bigger govomit, dependency on govomit, more spending and higher taxes, etc.—that’s their game plan and essential philosophy. While both parties are culpable, only one matches the aforementioned description. But it’s not their fault—they didn’t lie—they do exactly as they say will. If nobody or less than a majority did not vote them into office we’d have a govomit that at least advocates for smaller of itself, self-reliance, less spending and lower taxes, etc.

    Who be at fault? To git the answer, voters need to look into the mirror that doesn’t lie.

    1. Thanks Charles. The sad thing about high debt is that it seems okay until a crisis arrives. Then everyone agrees that there is no solution and we have to endure terrible hardships. Look at what Greece has been going through. All that could have been avoided by keeping debt modest. Why are so many voters comfortable supporting such risky behavior? Are they really so ignorant?

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