Tuesday, July 31, 2018

Forgotten Debt

The magician employs sleight of hand by having you fixate on something highly observable while he or she completes the trick with the other less visible hand. The audience oohs and aahs as they are sucked into thinking that something impossible has happened.

Today our government intrigues us with spies and improbable alliances with nasty dictators while they destroy our nation with behind-the-scenes budgetary policies that likely will bleed us ounce by ounce. The sleight of hand lets them spend more and more as they pretend to give us tax breaks and other goodies. Few speak out because frankly, the topic of budgets pretty much puts most of us to sleep or has us heading to the closest bottle of JD.

The data reveal a clear path to ruin but alas there are few in the press or anywhere who want to press the case. It seems to be a lot more fun to watch our key federal institutions lob daily bombs at each other. In fairness, there is a group that seems dedicated to warning about the national debt called the Committee for a Responsible Budget. You can find them on Google easily. Today, I share some data I found at cbo.gov – the Congressional Budget Office. I look at historical budget data and then their 10-year budget projections. It’s not a pretty picture but you would never know it if you read the daily Bloomington Herald Times or watch Fox Business News (or anything else).

Federal government spending came in at $3.98 trillion in fiscal year 2017. That amount was more than twice the number recorded for spending in 2001 ($1.86 trillion). While spending always rises during a recession (2008-9), the 2017 number is about a half trillion dollars higher than it was after the recession in 2010 ($3.46 trillion). Now for the future: the CBO projects that without any major changes in spending legislation, federal government spending will rise to $6.62 trillion in 2027. That’s an increase of about $2.6 trillion in 10 years.

Luckily, we got tax cuts so all is fine. Ha ha. Federal tax revenues rose from $2.16 trillion in 2010 to $3.32 trillion in 2017. CBO predicts revenues will rise to $5.30 trillion in 2027. Tax cut? I don’t think so. In the next 10 years, our taxes will increase by about $2 trillion.

You're on a budget, right? The budget is motivated by the difference between your spending and income. If you are like the federal government and you spend more than you earn, then you use the plastic. In government, the annual plastic usage is called the deficit. The total amount you owe is called your debt – the total amount the government owes is called the national debt. 

The government deficit in the year right before the recession was $248 billion. In 2017 it was $665 billion. The CBO says it will increase through 2027 when it will hit $1.3 trillion. Yup, in that one year the difference between government spending and revenue will be more than $1 trillion. Yup, in that one year we will spend $1.3 trillion more than we collect in tax revenues. Meanwhile, the national debt will rise from $9 trillion in 2010 to $14.7 trillion in 2017 and to $27.1 trillion in 2027. Can you imagine getting a statement form Visa saying you now owe $27.1 trillion dollars?

Another way to present this data is to compare these figures to GDP. That approach removes the impacts of inflation and shows the relative importance of these numbers to the size of the economy. The below table shows:

  • Tax revenues as a share of the economy declined right after the recession but will climb as a percent of the economy through 2027
  • Government spending increased during the recession and went back to something more normal, but recent legislation has spending rising as a share of the economy through 2027.
  • The deficit ballooned in the recession but was already falling by 2017. It will rise again through 2027.
  • The national debt increased in the recession and thereafter doubled as a share of the economy to 76.5% in 2017. Good times usually imply smaller deficits and lower debt. But in the case of the USA today, we see the national debt rising to almost 100% of the economy in 2027 – almost three times what it averaged right before the recession.

Is this a crisis? Not yet. But with our current tendencies in government today and the almost total lack of interest in approaching a 100% debt to GDP ratio, it is likely that these numbers will worsen.

Combining the government’s debt with student debt, credit card debt, auto debt, and a few others – the US could easily see itself in a debt crisis. The economy is strong today and that helps. But we have not seen a recession in a long time. When it comes the world’s investors may wonder if America is really a good place to stash their money.

We might want to think about ways to reduce that debt before the fit hits the Shan.

Government Budget Figures as a Percent of GDP (in percent)
                          2007    2010    2017   2027*
Tax Revenue      17.9     14.6     17.3    18.5
Spending            19.1     23.4     20.8    23.1
Deficit                 -1.1     -8.7      -3.5     -4.6
Debt**               35.2     60.9     76.5     94.5

* This is a projection assuming there are no changes made to the laws on government spending and taxing. Of course any new laws that change spending or reduce taxes would alter budgets in 2027.
**The debt quoted here is what’s called debt held by the public. This is what the government has borrowed and owes to private investors (domestic and foreign) and the Federal Reserve.


  1. Dear LSD. I don’t see how the 4.1.% GDP and the projected 4+% by Kudlow, Mulvaney et al will generate enough moolah to make a dent in the debt. Given the amount of budget required by transfer payments, Medicare/Medicaid, and Social Security, etc. that Congress doesn’t have guts to reduce—even just a reduction in the rate of spending—5% GDP growth won’t move the deficit danger flag from red to green—particularly as long as the R Senate majority remains slim. Sanguine Kudlow/Mulvaney have acknowledged the possibility of rising interest rates due to robust growth but that it won’t be problematic—that’s one aspect of DJT’s econ team I question.

    • Interest spending will more than triple between 2017 and 2028 and could approach $1 trillion in just a decade. That would be a new record, as a share of GDP.

    • Interest is the fastest growing part of the federal budget. Interest spending will exceed Medicaid costs by 2020, defense by 2023, and all non-defense discretionary spending by 2025.

    • If interest rates rise 1 point higher than projected, it will cost an extra $1.9 trillion over ten years.

    I think interest will be like pac-man chewing our butts off . . . including Kudlow’s and Mulvaney’s. Not in crisis yet but apparently unavoidable.

    1. Thanks Tuna, The CBO projections try to model most of that stuff you mention and yet the deficit and debt just get bigger. It goes without saying that in the next few years between Trump and Congress, they will pass legislation that adds even more. Trump's economists depend on future results that are more hope than reality. Anything is possible but what they are hoping for is not highly probable. A gusher of tax revenue could come in and save the day because of growth. But garsh. It probably won't. And then we will get caught holding the bag.

  2. But the CBO does not "dynamically" score the budget, the forecasts you report are only for current law and current revenue collections. There is at least the logical possibility that the tax-cuts will reduce the deficit by more than the tax cut itself. I doubt it too but it is possible.

    1. It is possible for me to bench press 300 pounds but highly improbable.

  3. I'll use the "fit hits the shan" in class at my risk but it could also be that the deficit is just too lucking farge to be cut. Now what is the risk, inflation? Flat growth? Too much power to buyers of treasuries? How do we know when the shan is fit?

    1. Your students will probably complain you used a shan instead of a shana.

      At risk? All that you mention -- you do remember learning about crowding out, right?

      But worse is lessons from Venezuela and Greece. Things look ducky for foreign investors right now but wait until you combine large debt with a weakening US economy. Ugly.