Arm yourself with the power that knowledge gives

Posted: October 18, 2012 in Elections, Mitt Romney, Pres. Barack Obama, The Economy
Tags: , , ,

Okay, Econ 101 lesson of the day.  What is the difference between the terms “debt” and “deficit”?  And no these answers won’t fit on a bumper sticker or into a Presidential debate, which is precisely why Romney and Company can lie to you about it and get away with it.

Deficit = The difference between cash inflows (and assets) and cash outflows.

For example, in 2009 the U.S. paid out more than it took in equaling $1.4 trillion (it was projected to be $1.2 trillion two weeks before Pres. Obama took office in January 2009 due to Bush’s two wars, Medicare Part D–the donut hole, and tax cuts–less coming in and more going out).

2012 is projected to have a deficit of $1.089 trillion

Okay if that isn’t clear enough for you, let me make it even simpler.

$1.4 trillion
–        $1.089 trillion
 $311 billion REDUCTION, this is a 22.2% reduction in three years

Romney said, “The president said he’d cut the deficit in half….…Unfortunately, he doubled it“. — Four Flaming Elongated Pinocchio Noses!!!!

This reduction came in the midst of the worst economic downturn since the Great Depression while engaging in two very costly, nation-building wars.  Only two other Presidents saw decreases in the deficit near this scale–Clinton and Truman 1 (both Dems…Things that make you go, hmmmmmm)

The first two full fiscal years of the Obama presidency saw unprecedented decreases in deficits: more in two years, after adjusting for inflation, than in Truman’s eight years, and twice as much as in Clinton’s eight years.

In other words President Obama faced on Day One of his term the second worst economic downturn in U.S. history and the highest deficit in U.S. history and he still managed to reduce a greater portion of the deficit in one term than any other president in U.S. history.  The projected deficit for 2013 is $900 billion and if this holds true, then the President will have reduced the deficit by $489 billion total over a 5 year period.

Note, this will be important later, the budget Deficit calculation each year does not include what is owed to the Social Security fund (see how Debt and Deficit affect one another near bottom).

Debt = a financial obligation owed by one party (debtor) to another (creditor).

Here’s the short answer:   We have NEVER been free of Debt EVEN when we had a Deficit surplus under Clinton.  Never, ever, ever debt free.  George Washington sent John Adams to get a loan from the French as early 1778 before we were even a country for crissake! Now the very long answer.

According to the debt calculators online it appears that the debt as of today, 10/17/2012 at about 1 pm AZ time, is $16.02 trillion (increasing daily because of interest rates, of course, all debt has interest rates and that get’s added on to the principal loan amount).  Debt is not necessarily a bad thing.  Let me explain.  If you lived your whole life just paying cash for things and never owned a credit card or debt of any kind, then you would have no credit history, i.e., creditors wouldn’t have any idea of how reliable you are and how likely you would be to pay back the loan.  As a result, you would have a very rough time getting a loan to buy a home or a car.  So having some debt, paying it off, accruing more debt, paying that off, etc is what establishes good credit history.

What bother’s most people about the debt (and the deficit) is that the numbers are so huge–I mean, c’mon, a trillion dollars is a lot of damn money if you don’t consider the context.  But the context is very important (I will get to this in a minute).  Also, for in individual to carry a big debt for a long period of time without paying it off is considered a bad thing.  And the longer the debt goes unpaid, the worse it is for the individual because the time one carries a debt plays a role in one credit history too.  However, the context matters here too.  Plus there’s an apples to oranges fallacy being perpetrated by the Romney campaign.   That is the mistaken belief that one can compare an individual’s or family’s debt to the debt of the largest economy  the world has ever known.

Okay, here’s some context and the apples/oranges fallacy that most conservatives (ahem, Vulture/Granny Starver 2 )  ignore.  First of all, there aren’t any countries in the world that don’t have a debt.  So having debt over a long time is pretty standard procedure for countries on our Planet.  Second, a country as a whole is going to experience more unpredictable crises than a typical family would.  Those crises sometimes require that we have “cash” on hand in order to respond to some crises.  Take Hurricane Katrina for instance.  The President and Congress had designated a particular amount for FEMA’s 3 budget in 2005.  Then Katrina made landfall and the Federal Government ended up actually spending 11 times the amount of the original budget.   To cover that cost the President or Congress can’t just run to Fort Knox, pick up a heap of gold, give it to FEMA and then have them distribute it to the various service providers and local and state agencies who helped Katrina victims.  Nor can the government raid other agencies’ budgets.  They couldn’t take Veteran’s Affairs because we had two wars going on and it was legally promised to this other agency who has their own constituents who need that money as a matter of life and death.  Families CAN go to their bank accounts (presuming they have any money in them) and pay service providers directly, and if they don’t have enough money, they can borrow more and then directly pay their expenses.  If they have money budgeted for food, they can use that too because there’s no legal obligation that says they can’t.   Are you starting to see why an family budget isn’t like a government’s budget?

Okay more context--a family’s “debt burden” is a ratio of the amount of debt to current and projected in the near future income.  For the Federal Government, the “debt burden/level” is a ratio of the Debt to the GDPGross Domestic Product, which is the market value of all the goods and services that we produce collectively as a nation.  Note, it has nothing to do with national income or personal per capita income.  When a family member loses a job, the loss is easy to calculate (simple subtraction), and it’s effect on credit and debt usually pretty immediate (unless they have tons of money saved up, which most families do not).  However, for the Federal Government GDP is a very amorphous thing.  Our economy is huge and complicated.   Sectors could be doing great while others are doing horrible, yet overall it could be high and even growing, and vice versa.  It’s not as easy to predict what happens when GDP changes and it’s not as easy to know how the loss of production will affect credit and/or debt.  Which brings us to the next context and difference.

A family’s debt could be dependent on two types of interest rates:  the fixed and the variable.  These rates are, for the most part determined by domestic economic activity (although this is changing as the economy becomes more globalized).  The Government, however, depends on rates more internationally based, so if there is an economic crisis in Europe or Asia that affects the variable rates much more for them.  And again, the larger the economy (in this case domestic for a family v globally for a country) the greater potential for crises.

Another point, only 2/3 of the debt amount is actually public debt–meaning that it is owed to anyone (foreign or domestic) who bought Treasury bills, notes and bonds (basically promissory notes the Government must pay back at some point in the future).  These note/bills/bonds are sold at auctions, usually in quantity and they are STILL considered one of the safest ways to invest money in the world.  I.E, the rest of the world knows we’re good for it.  They trust us.  The other 1/3 of the debt is what is owed to various trust funds.  Those trust funds include things like Social Security, which also gets paid out at a later date when seniors retire.   Now this third of the debt does to a certain extent get covered by ongoing payments in of current generations.  For example, I am now paying into Social Security and when the baby boomers retire soon the money I have put in will go to their Social Security retirement.  The people who are 10 to 15 years younger than me are paying for my Social Security retirement in about 25 years from now.  Now this may sound untenable but it has worked just fine since WWII with only minor periodic adjustments.  Furthermore, when times are good more money is earned and put into the trust funds and it is possible to have a surplus in those funds 4 .   In fact, the current surplus (if current poor economic trends continue) will run out in 2036.  This means that we will have to put out more in Social Security than is getting paid in.  That’s a big IF.  If the economy starts to recover and more payroll taxes are going into the fund, then that “run out” year will get pushed back.  So when someone tells you that Social Security is broken and needs to be fixed they are LYING.  What needs to be fixed is the economy in general.

Now some history and numbers.  In 2001, the U.S. had a surplus.  Coming off the Clinton years the country was in pretty good shape.  Then G.W. Bush was elected and taxes were slashed to their lowest level in 50 years and spending exploded (again two wars, Medicare Part D, etc).  Add to that slower than expected economic growth (i.e., GDP wasn’t as good as they projected it to be) and the result was that between 2001 and 2011 the debt increased $11.7 trillion.  Okay, so what part did President Obama play in this increase?  He corrected some overlooked (purposely unaccounted for expenses that good old GWB left off the books).  Those accounting changes by President Obama to more accurately report the total spending by the federal government included:

      1. accounting for the wars in Iraq and Afghanistan (“overseas military contingencies”) in the budget rather than through the use of supplemental appropriations 5 ;
      2. assuming the Alternative Minimum Tax will be indexed for inflation;
      3. accounting for the full costs of Medicare reimbursements; and
      4. anticipating the inevitable expenditures for natural disaster relief.

So, wars previously unaccounted for, he did the responsible thing, he put them on the books.  He also added the cost of Medicare D (donut hole) to the books because that was left out too.  He more realistically planned for increased disaster spending 6  Did it increase the debt?  Yes but it was unavoidable.  No matter who was elected in 2008, they would have had to deal with these things.  And no you couldn’t just defund the military or welfare or any other programs to pay for it.  If we did that people would have died, literally.  Blaming President Obama personally for being responsible and for accounting for those things is so stupid it beggars belief.  Would Congress have excoriated McCain for increasing the debt?  No, because they are the same folks who caused this “now you see it,now you don’t” accounting under Bush and hardly anyone said a damn thing in protest.  It takes balls the size of Canada to do what President Obama did.  He could have tried to push it off on the next guy/gal (like Bush did), but for four years?  No, he did the grown up thing–the thing that they should have done back in 2006-2007 and now the Republicans want to tell him he did the wrong thing.  This isn’t a whine and blame Bush thing.  This is REALITY.  Facts have a liberal bias, paricularly in this case.

How are the Debt and Deficit related?

Deficit affects the Debt:  Each year the Government sells notes/bills/bonds to cover the deficit (what it overspent) and then that amount is what gets added to the Debt.   If we have a surplus that can go to pay down the debt or it can be misspent (again see GWB). So if we overspend, the debt will increase. How can President Obama be responsible for falling GDP when the Recession was in full swing the day he walked into office?  How?  How can he be expected to clean up such a mess in only four years?  No other President (or any leader of any other country on the planet) has been asked to perform such a feat, but we ask it of him.  This is insanity.  It’s like being mad at an ant because he can lift a rubber tree plant but not a full grown oak tree.

Debt affects the Deficit:  

1)  The debt is a better gauge of the actual annual deficit because the debt does take into account what is owed to the Social Security Trust fund and the Deficit does not.

2)  Interest on the debt is added to the deficit annually.  So as the debt grows so does the deficit.

3)  The debt can decrease tax revenue which adds to the deficit.  IF creditors get worried about our debt, they can increase interest rates and that serves only to dampen the economy.  That’s why creditor confidence in the U.S. is so important.  That’s why in mid 2011, when Congress decided to use the debt ceiling as a political tool against President Obama, it caused creditors around the world to worry 7 and doubt the U.S. would be able to pay out on bonds, notes and bills.  So who was responsible for the debt increase over that debacle?  Republicans in Congress or the President?  Congress, no question.  Using the debt as a political weapon has never, ever before been used as such in the history of our country.  That is one of the reasons that international creditors trust us–they believe we are stable and mature.  That we not a bunch of asshats dicking around with vital economic systems for the sake of political optics and strategy.  Except, that year, Republicans in Congress did  the unthinkable and it hurt  us debt wise and now they want to blame President Obama for it.  Don’t you buy it.

Notes:

1. Truman reduced his overall deficit by about 83.5% BUT he did it in 8 years and he had the benefit of winding down WWII and with huge increases in revenue from all those returning home soldiers who were able to get jobs and pay taxes.  Clinton reduced the overall deficit by about 18.6%, again in two terms.  Calculated by me from data at http://home.adelphi.edu/sbloch/deficits.html

2. for the uninitiated that is Romney/Ryan

3. Federal Emergency Management Assistance, agency responsible for responding to natural disaster to aid victims

4. Last time we had a surplus the Republicans were chomping at the bit to get at that extra money to spend on other things like the deficit instead of reinvesting it for the eventual retirees.  And that’s exactly what they did.

5. Yes, Virginia, Congress appropriated billions of dollars for the wars without really saying where the money would actually come from and without putting it on the books, literally.

6. Because Hurricane Katrina should have taught us something AND climate change predictions (regardless of what you think might be causing it, it is demonstrably happening) are projecting an increase and the number and ferocity of storms, flooding, etc.  Planning for this is just smart and long term thinking is exactly what we need.  If we don’t use the money, then great.  If we do, then he did the right thing by budgeting for it.

7. The federal government can pay for expenditures only if Congress has approved the expenditure and if that expenditure will result in a deficit, then Congress must approve the government to borrow money for it (creating more debt). By law there is an arbitrary limit on how much the government can borrow and it is called a debt ceiling. Since 1962 Congress has increased the debt ceiling 73 times with nary a complaint because they understood what was at stake. The 74th time they balked and the entire world shuddered. If they had refused, it would have been an international catastrophe–this is no exaggeration.

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Comments
  1. mhasegawa says:

    Thanks for taking the time to do this. Now that I think about it I believe that many of the squabbles between states under the Articles of Confederation had to do with the share of debt from the Revolutionary War. So maybe we’ve never been out of debt.

    • drangedinaz says:

      You are absolutely correct and make a good point. There were always tensions between the colonies in the different regions (southern colonies v. northern colonies, root of later Civil War). They argued not only over if they should pay, but how should they pay, who should they pay and in what percentages would the colonies share that burden? None of them wanted to pay more than they believed was their fair share. Some colonies did indeed give more than others during the Revolution. Battles weren’t fought in every colony and some colonies bore the brunt of the battles, the destruction of their cities and their fields, feeding the Army, supplying them with clothing and housing, etc. Those colonies hadn’t already contributed a vast amount of resources to the country and didn’t want to pay as much in cash as the colonies that were hardly affected. They also argued over whether they should keep their own currencies or create a “national” one, to create a centralized bank, etc, etc. Money and debt was ALWAYS an issue.

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