Tag: money

The other day, I was reading an article on the agreement on the debt ceiling when something caught my eye:

 The new proposal to balance the budget in a decade would zero out the federal deficit almost twice as fast as previous Republican efforts.

“It’s time for us to get serious about how over the next 10 years we balance this budget and put America on a sustainable fiscal path,” the speaker said after the debt ceiling measure passed the House, 285 to 144.

Think about what that says. We had a balanced budget under Bill Clinton.That meant that we were not increasing the Federal debt. After 8 years of a Republican administration and 4 years of a Democratic administration (here’s another analysis), we are now at the point where it will take at least 10 years to bring the budget back into balance, let alone pay down the debt to a reasonable level.

How do the Republican’s propose to achieve their goal? Not through new taxes. Not through cuts to the Defense budget. According to the article, “their approach would require steep reductions in domestic programs — particularly education, infrastructure investment and the safety net for low- and moderate-income Americans.”

Now, I’m all for working our way back to a balanced budget, and to bring the debt down to a reasonable level (but not wiping it out–there are many reasons not to do that). But if we are going to do it — and if it is a National priority — it has to be shared sacrifice. It can’t just be in domestic programs. There needs to be significant increased income and significant cuts across the board. If there is going to be pain — and there will be — it must be shared.

If our leaders do not feel this is a program worthy of shared sacrifice… if our leaders feel do not feel this is important enough for everyone to give a little… then we may just as well live with the debt we have. After all, other countries are perfectly happy having us pay interest to them, reliably. They show no great desire to be paid back; they are not increasing the interest rates they charge us because they do not believe America will pay its bills. (As an aside, that was the problem with Spain and Greece: other countries believed there was a risk they wouldn’t get their interest payments, and thus kept raising the rates to account for that risk — this is something that hasn’t happened with US debt). I certainly feel that most people don’t understand the National debt, nor realize that households are different than nations, and there is no agreement on what is too much debt.

Personally, I do not believe our leaders feel the debt and deficit is a real issue that requires shared sacrifice and pain from everyone. They are willing to use it as a campaign issue to goad the other side, but want to protect their sacred assets while letting others pay. This is being done by both side. That’s not fair.

As I’m reading various news sites over lunch, I’m seeing article after article about the next fiscal problem — the debt ceiling. Every time this comes up I realize that many people don’t understand what the real issues are here. Here’s a little primer to help. Note that throughout this discussion I’m not going to talk about what the government spends money on; I’m just going to presume it is spending it on something. We can argue the what later. I’ll note that much of this was learned by listening to NPR’s excellent Planet Money podcast. I’ll link where I can.

The government spends money through the appropriation process. In this process, Congress dictates how much money each Federal agency can spend over the next fiscal year (October 1 to September 30). Once the appropriation bills are signed, the agencies can spend the money. They don’t have to wait for the income to be received from taxpayers.

The budget for any year may run a surplus or deficit. This reflects whether the anticipated income is sufficient to cover all the money appropriated. If the anticipated income is not sufficient, the budget is running a deficit and money must be borrowed to cover authorized expenditures. If there is a surplus, this means that there is extra money that can be used as Congress sees fit — extra appropriations, paying down the debt, etc.

The Federal debt is what the government owes to those who have lent it money. How does the government lend money? Via government bonds, which are one of the safest investments around. These are instruments such as savings bonds and T-bills. Do you have savings bonds? Then you own government debt. Do you have investments, such as 401(K)s or pensions? Do you have savings accounts? Those put their money in T-bills because they are safe. This is one reason you do not want the Federal debt to go to nothing. There would be no safe investment for you to put your money in. If the Federal debt went to zero, there would be no savings bonds or treasury notes — which would be disastrous for the economy.

There’s another reason you don’t want the Federal debt to go to zero. Credit-worthiness. Economic markets prefer if there is some manageable level of debt; you get better interest rates that way. So the goal in paying down the debt should be not to eliminate it, but to bring it to a manageable level. There has 0nly been one time in the country’s history when we haven’t had a debt — during Andrew Jackson’s presidency — and it was disastrous for the economy (see here and here on Planet Money).

So what is the debt ceiling? There’s a simple answer: Congress has authorized spending money, but it doesn’t always have that money to spend. This could be because tax receipts haven’t arrived yet, or more likely, Congress authorized spending money with a known deficit. In the early days of the US, the Treasury had to come to Congress for each loan individually, and that became a burden for Congress (which would debate the terms and conditions for each individual loan). At some point, Congress authorized the Treasury department to create the loans without coming to Congress… up to a certain amount about of national debt. Each time that amount had to be raised to borrow money that Congress previously authorized spending, the Treasury department came back and said “Mother May I” (see here and here on Planet Money). So right now, that’s what we’re fighting about: raising the borrowing limit to cover the money that Congress previously authorized.

So, when you hear some critter on TV talking about reducing the deficit, realize they aren’t talking about reducing the national debt. They are only talking about increasing the debt at a slower rate (see, you do use calculus in real life). To reduce the national debt, you need many consecutive years of a budget surplus, with that surplus being applied to the debt in a regular manner. We all know how reliable Congress is when presented with extra money. They’re just like you and me: we always pay our bills instead of buying the new and shiny. Right?

Now for the big question: Is the debt a problem? Not necessarily. Further, the debt problem won’t be solved overnight, and may require temporary spending to get the economy moving again… which generates more revenue that can pay down the debt without slowing the economy.

I hope this helped you to understand things.