Are Deficits More Political?

Chapter 17 Budget Deficits

Return to Quick Economics Notes Updated 11/11/18  
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I. Three Budget Philosophies

II. Federal Tax Receipts are Complicated

III. Relative Size of Federal Debt

IV. Should the Federal Debt Be Paid 5 Videos

V. Should America Be Unhappy With Her Federal Debt?

VI. The Future of Social Security

VII. Predicting Deficits

VIII. Latest Data

Videos M. Blyth Devastates Congress' Approach to Budget 3/14/15

M. Blyth's Liberal View of Balanced Budgets  6/17

What if the Federal Budget Was Only $100

Fiscal Foundations, History of Successful for US pp181-224

2017 Financial Report of the U.S. Government



I. Three Budget Philosophies
    A. A government defect occurs when expenses are
           greater than revenue.
     B. Peacetime deficit spending became continuous
         after WWII as we were forced save for their future
         with Social Security and Medicare. Source
     C. Three Budget Philosophies
     1. Annually balanced budgets
classical economists)
              a. The problem with this type is it reinforces the
                  business cycle
                  1. Governments spend less during a recession
                      as tax revenues decline. 
                  2. Governments increase spending during
                      expansion as revenues increase.
              b. Many disagree with this philosophy as it is
                  counter cyclical especially in recession.

          2. Cyclically balanced budgets Keynesian
              a. Balance over the business cycle with deficits
                  during recessions and a surplus during
              b. Problem is getting politicians not to spend
                  revenue increases which occur during
         3. Functional finance
              a. A balanced budget is not important.
              b. Deficits are expansionary and somewhat self-
             c. Money can be printed and taxes increased.
             d. The interest burden of the debt is falling. 
                  Interest on the debt as a percent of GDP 
                  was projected to be down to 2.5% in 1999
                  from 3.0% in 1992.
             e. Great Recession lowered tax collections
                 while federal spending increased taming
                 the recession and now increased economic
                 activity has brought spending back to normal.
                 See Financial Crisis Lessons ... It's extensive.
             f. Will Growth Be High Enough to Return Debt
                 to GDP to Pre-Recession Levels?
Will Inflation/Growth Slow Deficit Growth?
2. Will Debt Bring Down U.S. Capitalism?
The Terrible Price Of Austerity

Editor's Note: I'm sure one could find a conservative economic analysis attributing the success of taming the Great Recession to non-governmental factors.

Understanding Fake News

National Debt is a Catastrophe

America's Budget Outlook 2018

Who Got the Money

WW2 Deficits Piled Up Increasing Debt But Growth Helped!
Debt Grew Again to Counter the Great Recession

Debt breached 100 percent of GDP because of World War II and then returned to normal.

The Crash of 2008 caused a big spike but much debt was intergovernmental with no interest.

Efforts Worked and Growth
Again Made the Annual Deficit Reasonable

       D. The History Of The American Economy, Debt And Inflation video
       E. Experience of the 1990's

           1. The deficit turned into a surplus  in the early 1990's
           2. Causes
               a. Refinancing to short-term bonds lowered interest costs
               b. A strong economy increase  payroll taxes receipts
               c. A 1993 Omnibus Budget Act increased revenue
               d. By the year 2000, the Treasury was retiring debt which
           3. In November of 2001, the Treasury decided to stop
               issuing 30-year bonds.
               a. Long-term Treasury bonds carry a higher interest rate
                   because inflation risk increases with time.
               b. Issuing shorter-term Treasury bonds should lower the
                   interest paid on the federal debt.
               c. People who want 30-year bonds will now buy 10-year
                   bonds pushing their rate down. 
                  1. Since 10-year bond rates are used to set mortgage
                      rates, the resulting mortgage refinancing would
                      provide consumers with the ability to increase
                  2. Low mortgage lowers the risk of recession.
           4. Sundry
               a. The government spends less of its income on interest
                   than most businesses and individuals
               b. Democratic Capitalism vs. a Capitalistic Democracy
                   explores running government as business.

        F. Experience of the 2000's
           1. Dot com bubble begins the decade.
           2. 9/11 adds to insecurity
Fiscal Policy of tax cuts and reform plus cash
               payment keeps growth high, deficit reasonable.
Financial Instability cause by 1980's finally leads to
               Deep-Do-Do or D3 for mathematicians.
           5. US Bailout Using Debt Works
           6. Austerity Fails Europe

       G. Readings
            1. Functional Finance and Full Employment

                2. U.S. Federal-Debt Basic

                3. A Taylor Rule for Public Debt

                4. Economist Mark Blyth and the future of the Eurozone
                    Video 45 min a historical view of why we have debt

                5. A Tale of Two Debts Japan vs. Greece  is an interesting 
                    read for understanding why some are not bothered by U.S.
                    recent debt build-up.

                6. CBO 2015-2025 Budget Projection Note: Ten-year budgets
                    projections are notoriously inaccurate

                7. The Incredible Shrinking Budget Deficit

                8. Seven new federal debt data series  from FRED,
              data service of the St. Louis   Fed. 1/11/12
Editor's Note: y
ou can get in Excel with FRED pluginsat at

Source Moody's

Government debt began the 20th century at
less than 20 percent of GDP.

It jerked above 45 percent as a result of
World War I creating a New Normal.

Debt went above 70 percent in the depths of the Great Depression then returned to normal.


Who Paid the Federal Debt

End of
Fiscal Year
US Gross Debt
in Nominal USD billions
US Gross Debt as % of GDP Question Answer
1940 43.0 52.4 No One
1950 257.4 94.1
1960 290.2 56.1
1970 389.2 37.6
1980 930.2 33.3 No One
1990 3,233 55.9
2000 5,674 58 TBD
2005 7,933 64.6
2007 9,008 65.5
2008 10,699.8 74.6 (EST)
2009           11,046.2   TBD
United States public debt - Wikipedia, the free encyclopedia

Obama continued the Bush policy of fighting the Great Recession with debt and by 12/16 it was apparent that this policy had working better than Europe's austerity policies,

Trump's Tax Cut Had Better Work

Not Yet

Waiting for Trickle Down



The largest single institution holding U.S. government-issued debt is Social Security's Old Age and Survivors Insurance Trust Fund, which is considered to be an "Intragovernmental" holder of the U.S. national debt, and which holds 13.9% of the nation's total public debt outstanding. The share of the national debt held by Social Security's main trust fund is expected to fall as that government agency cashes out its holdings to pay promised levels of Social Security benefits, where its account is expected to be fully depleted in just 17 years. Under current law, after Social Security's trust fund runs out of money in 2034, all Social Security benefits would be reduced by 23% according to the agency's projections.

The largest "private" institution that has loaned money to the U.S. government is the U.S. Federal Reserve, which accounts for nearly one out of every eight dollars borrowed by the U.S. government. It lent nearly all of that total since 2008, mainly through the various quantitative easing programs it operated from 2009 through 2015 in its attempt to stimulate the U.S. economy enough to keep it from falling back into recession. In September 2017, the Fed announced that it would begin reducing its holdings of U.S. government-issued debt.

Overall, 69% of the U.S. government's total public debt outstanding is held by U.S. individuals and institutions, while 31% is held by foreign entities. China has resumed its position as the top foreign holder of U.S. government-issued debt, with directly accounting for 6.9% between institutions on the Chinese mainland and Hong Kong.



On the Supply of, and Demand for, U.S. Treasury Debt


Source has much information by year.


II. Federal Tax Receipts are Complicated

Tax expenditures the loss in tax revenue from items that lower taxable income
have a substantial affect what is paid by tax entities.
Tax deductions and Tax Credits affect the bottom line the same as
traditional expenditures.
2. They are designed to benefit select groups with political clout
3. Politicians have made increased tax expenditures dramatically since
1986 because they hide political maneuvering from all but experts.
4. Taxing the Rich

Distribution Tax Expenditures CBO


Spending Through the Tax Code Skews Towards the Top

Figure 4: Examples of Six Types of Tax Expenditures


But Corporate
Tax Reform Can Help























25 Lessons Learned for our Fiscal Future


III. Relative Size of Federal Debt

Federal Debt as % of GDP


Federal Debt in Trillion

Federal Debt
Debt Held by
Public (not FRS)
Debt held by
gov. accounts
Debt Held by
Federal Reserve
2014 $17.8 $10.3 $5.0 $2.5

Editors Note: Because federal assets are not accounted for there is no way to calculate federal worth.

Household Net Worth Hit 81 Trillion in 2013


IV. Should the Federal Debt be Paid
     A. Pay it 
         1. The external debt (owned by foreigners) has gone up from
             5% in 1960 to 13% in 1988, 22% in 1999 and 43% in 2005.
         2. The crowding-out effect slows growth as Federal
             dissaving causes high interest rates lowering private
         3. Paying $230 billion in annual interest causes incentive problems
             as this money could be used to solve many problems.
         4. Recently foreigners have been willing to invest their export
             earnings in America helping to minimize the effect of the  
             high federal deficits on interest rates.
             a. If foreigners decided not to make these investments, interest
                 rates would increase, slowing economic growth. 
             b. Interestingly one of the reasons the Federal Reserve was
                 unable to lower long interest rates quickly during the 1990-91
                 recession and its recovery may have been the Japanese
                 decision to dramatically curtail their U.S. investments. 
         5. Annual interest on the federal debt increased 50% (from
             1.9% to 3.3%) during the 1980's. By 1999 it was down
             to 2.5%.
         6. How To Tell Debt Facts From Political Hype
Good Is Bad Up Is Down
   B. Don't Pay It 
       1. The debt was caused by wars and recessions. 
       2. We are not going bankrupt, the debt is about 100 %
            of one year's GDP. 
a. First-time homeowners go a few salary years into debt.
           b. Much of the annual deficit goes into capital expenditures
and because the U.S. does not have a capital budget, 
               these items are all expensed in the year of purchase. 
               During periods of growth, the result is an over statement
               of the deficit.
       3. Paying it would overtax the average American.
       4. Most Americans would rather spend tax
           money to solve problems rather than lower the deficit.
           a. This attitude changed substantially in the early 1990's. 
           b. By the end of the 1990's, projection had
               the debt paid off in 10 years. By 11/01
               the impending recession and events of September 11
               cast a shadow on this 10-year projection
What is the Federal Debt: a primer for politicians
The Big Lie
        6. 2 Concerns: U. S. Governments Debt
Deflating National Debt Through Inflation 5 min video

Balance the budget is a simulation that allows
    participants to make changes and balance the budget.














Editor's Note:
The Debt to GDP ration headed up with Ronald Reagan, dropped with Clinton, then headed up again with Bush 2 and finally leveled off killing Obama's second term projections could force reductions in entitlements unless the economy really takes off. The effect of Obamacare are not known. Entitlements are not contracts. What congress gives it can
take away.

  D. Modern Money & Public Purpose 1 hour plus
1, The Historical Evolution of Money and Debt
     2. Governments Are Not Households

       3: The Eurozone
       4: Real vs. Nominal Economy

Projection probably include an increase in current low rates.




Editors Note: Revolutionary War debt had been piled up by both state and federal governments. Secretary of the Treasury Alexander Hamilton orchestrated the first federal tax on imports in 1789 to pay federal and state debt . This debt was our largest federal debt related to GDP until 1933 when the Great Depression crushed revenue collections which caused deep- do-do (d-cubed).

Secretary of the Treasury Alexander Hamilton began the practice of increasing taxes to pay for war expenses. Printing money causing inflation usually helped. 

This practice continued for over 150 years. Then both Hover and Roosevelt borrowed not for war but to help people survive the Great Depression. Then Bush II reversed over 200 years of logic as he cut taxes during good times so as not to pay for wars in Afghanistan and Iraq plus he created entitlement Medicare Part D. 

Hamilton's paying state war debts began federal government practice. Today many states take the money and show their appreciation by telling the federal government to stay out of state and local business.  

Individuals also follow the practice of taking and saying stay out of my business. 
Retires and poor people don't want the FEDS involved with their lives even though much of our debt is caused by the big four of Social Security, Medicaid, Medicare and Defense.

State and Local Governments can't print moneys so they can't have deficits. They use unfunded pension and health liabilities to cover future spending. Unfunded state and local employee and retiree benefits would head list of major contributors to state and local liabilities.

I don't like the term entitlement programs when they are financed by individuals paying into a fund. This is especially true since there is not a contract so what the government gives it can take away so the word entitlements is a sham.

Governments spend so much more than is taken in that balancing the budget is futile. Living at such a peaceful and prosperous time should allow cuts in the gravy train but Greed, Guns, God, and Government get in the way.  Source


V. Should America Be Unhappy With Her Federal Debt?

Few Pay More Income Taxes

Inflation To Date Has Paid Much of the Bill

But some were hurt by government financing with debt and inflation.

Revolutionary War  veterans were paid in worthless currency which they sold at a large discount to wealth people who were then helped by Hamilton's decision to redeem at full value. This could happen again as debt is bought by the wealth on margin on borrowed money at low Federal Reserve sponsored interest rates.

Some states had paid their revolutionary war debt and were not helped by Hamilton's decision to assume all war debts.

Financial stress caused by financial excesses were substantial during the 19th century and early 20th century.

Inflation during the 1970's hurt fixed income often retired older residents and fixed asset people. SS was not indexed to inflation until early 1980's.

BUT, recent financial crisis's have been moderated by government
action and the debt has been much larger.


Continental currency depreciated 
badly during the war, giving rise to
the famous phrase "not worth a continental".



Economy Is Soaring, And Now So Is The Deficit. Thatís A Bad Combination.


2018 Financial Report of the U.S. Government

This is who paid the $3.4 trillion in revenues:

  • 80% from Individual income tax and tax withholdings, including Social Security
  • 9% from Corporation income taxes
  • 11% from other revenue.

Wo Got the $4.5 trillion in spending:

  • 24% Department of Health and Human services
  • 22% Social Security
  • 15% Department of Defense
  • 11% Department of Veterans Affairs
  • 22% All other
  • 6% Interest on Treasury Securities held by the public

VI. The Future of Social Security

In 1980, my friend Mr. Average lamented his Social Security pension would be small. He wished the government would take more out of his pay to increase his expected pension. This would be difficult as Social Security was having  financial problems soon to be solved by a bipartisan commission chaired by a man named Greenspan. It recommended, Congress passed, and the President signed a social security tax increase, an increase in the wages subject to Social Security, and a delay in the normal retirement age. My friends normal retirement age increased from 65 to sixty-six. What have these changes accomplished over the past 25 years.


Uncle Samís Unfunded Promises October 8th, 2017 
in governments USA - all fed, state, localmacroeconomics

"Of course, Congress could always authorize the Treasury Department to authorize the Federal Reserve to monetize a certain amount of the Social Security and Medicare debt, which is essentially what Japan is doing (and seemingly getting away with it). I think we should all be grateful to the Japanese for being willing to undertake such a fascinating experiment in monetary and fiscal policy."

Outlook for Short-Term SS Trust Fund Adequacy?

2013 Trustees Report  measure short-range adequacy of OASI, DI, and HI Trust Funds by comparing  fund asset reserves to projected costs for the ensuing year (the ďtrust fund ratioĒ). A trust fund ratio of 100 percent or moreóthat is, asset reserves at least equal to projected cost for the next yearóis a good indicator of a fundís short-range adequacy. That level of projected reserves for any year suggests that even if cost exceeds income, the trust fund reserves, combined with annual tax revenues, would be sufficient to pay full benefits for several years.

 By this measure, the OASI Trust Fund is financially adequate throughout the 2013-22 period, but the DI Trust Fund fails the short- range test because its trust fund ratio was 85 percent at the beginning of 2013, with projected depletion of all reserves in 2016.  
The HI Trust Fund also does not meet the short-range test of financial adequacy; its trust fund ratio was 81 percent at the beginning of 2013 based on the yearís anticipated expenditures, and the projected ratio does not rise to 100 percent within five years. Projected HI Trust Fund asset reserves become
fully depleted in 2026. Chart E shows the trust fund ratios through 2040 under the intermediate
The 2013 report explores cost relative to GDP, the value of what we
 produce. Editors Note: What do you spend money on that is more important than retirement and health care? Current consumption, highway accidents, mental health of children, education, military safety,  death and carnage from terrorism, death and carnage from lighting strikes?

click on graph for underlying data

White House delaying Social Security trustee report to factor in Health reform


What to do! Options include increasing the wage base being taxed, the tax rate, and delaying the maximum benefit date. All were done in 1981. Ignoring the problem and borrowing the cash will be difficult as borrowing much more than we already have will push interest rates higher on Treasuries and lower the value of the dollar. So they will  increase from $90,000 base soon because it is politically easier although Republicans won't be happy. Then a bipartisan commission will be formed to increase rates, wages subject to Social Security taxes, and the normal retirement age. A commission shares the political burden. 
All have been done before. What bothers me is a new option.

Indexing Social Security to wages has caused Social Security pensions to increase. Wages go up because of inflation and productivity. A plan indexing  pensions to inflation lowers pensions and a Presidential/Congressional cash crisis is avoided for a while. The Center for Retirement Research at Boston College  analyzed this change. My friend Mr. Average just retired at 65 and receives $14,689. Had we indexed to inflation in 1951, the average Social Security pension would be lowered by $2,131 to $12,558.  To be candid, my friend Mr. Average needs this additional income. Let us move ahead to 2025. Under the current system, Mr. Average will receive $16,205 in 2005 dollars, a $1,516 increase.  If indexing to inflation passes Congress and is approved by the President, Mr. Average will receive only $14,689 in 2005 dollars. No real increase because he would not share in productivity increases. His pension would be larger in 2025 because it was but he could only buy the same amount of goods and services as in 2005.

The Real Story  

The Center for Retirement at Boston College also reports the entire mess can be solved by increasing the normal retirement age from 67 to 70 over a period of years for people under 45 or people under 55 could receive a benefit cut of 20%. Becoming Oldest-Old: Evidence from Historical US Data from MIT shows we are living longer. Since Social Security was adopted in 1935, life expectancy for someone 65 has increase by almost 5 years to almost 17 years. Since these numbers are going up, my friend Mr. Average is making out very well. My normal retirement age is 66 years. Hopefully I will pay for one more year and collect for 4 more years. Not bad! Boston College has more on Social Security.

Read Historical Development of Social Security (In Adobe PDF format)
A section from SSA's publication, "Social Security Programs in the United States." (7 pages)

Not All Debt is Created Equal.

VII. Predicting Deficits

Assumptions Equals Problems

The most recent projections from the OMB indicate that, if current policies remain in place, the total unified surplus will reach $800 billion in fiscal year 2011, including an on-budget surplus of $500 billion. The CBO reportedly will be showing even larger surpluses. Moreover, the admittedly quite uncertain long-term budget exercises released by the CBO last October maintain an implicit on-budget surplus under baseline assumptions well past 2030 despite the budgetary pressures from the aging of the baby-boom generation, especially on the major health programs.

The most recent projections, granted their tentativeness, nonetheless make clear that the highly desirable goal of paying off the federal debt is in reach before the end of the decade. This is in marked contrast to the perspective of a year ago when the elimination of the debt did not appear likely until the next decade.



VIII. Latest Data

  visualizes Donald Trump's-$20-trillion dollar Problem/


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 Many industrial countries have debt.  

Country 2003 Central Government Debt as a percent of GDP All are higher in 2015.

Japan 155% and stagnate population makes problem
more difficult to solve.
Italy 106% and tendency toward socialism
makes problem more difficult to solve.
Canada 77% and tendency toward socialism makes problem
 more difficult to solve.
Germany 64% and tendency toward socialism
makes problem more difficult to solve though a major decrease in the social safety net should help
United States 62%
Great Britain 51%
Source: 2004 World Fact Book of  CIA


What makes 2015 difficult is the large contingent liability
for SS, Medicare, and Federal Retirement. Unless US has
a real prosperous decade or two similar to after WW 2
she will have Inflation, a substantial change in benefits
unless Obama Care works! Net Debt looks a little better.

Image result for Federal Debt graphs


Image result for Federal Debt graphs


The Burden Of Taxation In The United States And Germany