If you ask the average person the difference between the
deficit and the national debt, you're likely to get a blank stare. While you
are much smarter than the average Josephine, we'll go over that anyway,
just in case you were asleep during that session of your Econ class.
The
Deficit
The deficit is the amount of money we're spending THIS YEAR that exceeds the
amount we brought in.
The national debt is the sum total of all the deficits we've
had.
To give you a little perspective, here’s are the deficits from 8 years prior to
the Great Recession to the present.
- 1999
- $125 billion surplus (Clinton)
- 2000
- $236 billion surplus (Clinton)
- 2001
- $128 billion surplus (Bush)
- 2002
- $157 billion deficit (Bush)
- 2003
- $377 billion deficit (Bush)
- 2004
- $412 billion deficit (Bush)
- 2005
- $318 billion deficit (Bush)
- 2006
- $248 billion deficit (Bush)
- 2007
- $162 billion deficit (Bush) The
Great Recession begins Dec., 2007
- 2008
- $410 billion deficit (Bush)
- 2009
- $1.41 trillion deficit (Obama) The
Great Recession ends Jun., 2009
- 2010
- $1.29 trillion deficit (Obama)
- 2011
- $1.30 trillion deficit (Obama)
- 2012
- $1.09 trillion deficit (Obama)
- 2013
– projected $901 billion (Unknown)
Deficit
spending grew by 620% from 1999 - 2013
Let’s compare those deficits to an analogous period for the
1980 – 1981 recession (the second worst recession in our history).
·
1973 - $14.91 billion deficit
·
1974 - $ 6.14 billion deficit
·
1975 - $53.24 billion deficit
·
1976 - $73.73 billion deficit
·
1977 - $78.97 billion deficit
·
1978 - $59.19 billion deficit
·
1979 - $40.73 billion deficit
·
1980 - $73.83 billion deficit
·
1981 - $78.97 billion deficit
(Reagan) Recession began Jul., 1981
·
1982 - $128 billion deficit (Reagan) Recession ended Nov., 1982
·
1983 - $207.8 billion deficit
(Reagan)
·
1984 - $185.4 billion deficit
(Reagan)
·
1985 - $212.3 billion deficit
(Reagan)
·
1986 - $239.6 billion deficit
(Reagan)
Deficit
spending increased by 1,507% from 1973 – 1986.
There are two factors that make up a deficit: Revenues and expenses. During a recession, revenues drop, as
businesses lay off workers and less is collected in both a corporate and
personal taxes. Expenses also increase,
as government spending in areas such as unemployment benefits go up.
The
National Debt
From 1742 to 2010 (the last year complete data are
available), we've had a total of about $8 trillion dollars in deficit spending.
When you add interest paid on borrowing to pay that debt, it climbs to about $13.5
trillion.
Since 1900, we've had 31 years where our income exceeded our
expenses. The other 82 years have had deficit spending.
Again, as a matter of perspective, here is the cumulative
amount of the national debt for the last decade.
- 2000
- $5.628 billion (Clinton)
- 2001
- $5.769 billion (Bush)
- 2002
- $6.198 billion (Bush)
- 2003
- $6.760 billion (Bush)
- 2004
- $7.354 billion (Bush)
- 2005
- $7.905 billion (Bush)
- 2006
- $8.451 billion (Bush)
- 2007
- $8.950 billion (Bush)
- 2008
- $9.654 billion (Bush)
- 2009
– $11.88 billion (Obama)
- 2010
- $13.53 billion (Obama)
- 2011
- $14.76 billion (Obama)
Let’s look at our personal debt. Total US residential investment is $10,081
billion. Consumer debt is $2,725.6
billion. That’s $12,806.6 billion, and
there are currently 314,123,000 of us. Each
one of us holds, on average, $43,800. Some, including homeowners, owe far more.
Renters owe far less. Few would
probably have the ability to write a check and pay off all their debt,
including their mortgage. Some debt, or
leverage, is a good thing.
How Much
Do I Owe?
Those who express outrage regarding the national debt
sometimes express the debt in terms of the amount that is owed by every man,
woman and child in the US. Currently, that amount is nearly $34 thousand.
Again, to gain some perspective, let's look at a couple of facts.
In 1960, the national debt was $290 billion and the
population was 179.3 million. Every American owed about $1620 - $5432 in
today's dollars.
In 1970, the national debt was $380.9 billion and the
population was 203.3 million. Every American owed $1873 - $4908 in today's
dollars (less than the prior decade).
In 1980, the national debt was $909 billion and the
population was 248.7 million. Every American owed $3665 - $7479 in today's
dollars (+52% from the prior decade).
In 1990, the national debt was $3.206 billion and the
population was 248.7 million. Every American owed $12,879 - $20,589 in today's
dollars (+115% from the prior decade).
In 2000, the national debt was $5.629 billion and the
population was 281.4 million. Every American owed $20,002 - $24,980 in today's
dollars (+2% from the prior decade).
In 2010, the national debt was $10.526 billion and the
population is 308.7 million. Every American owes about $43,800 (+75% from the
prior decade).
Debt as a
Percentage of Gross Domestic Product
Realistically, the national debt will never actually be paid
to zero. We've had debt since 1900. The way to evaluate debt is as a percentage
of GDP.
- 1970
- 8.9%
- 1980
- 15.6%
- 1990
- 40%
- 2000
- 50.7%
- 2010
- 90%
Let’s put this in perspective. In a corporate structure, about the optimal
amount of debt is about 33%. Here’s
why. If you invest $2 million in a company
with no debt and that company earns $200,000, you earn 10% on your investment. If you invest $1.34 million in a company, and
have $660,000 in debt, and that company earns $200,000, you earn 15% on your
investment.
Too much debt is not a good thing, and we all know
very well that is true from a common sense perspective. If you earn $100,000 and your mortgage and
credit card payments are $100,000, you have no money. You need to earn more AND cut your
expenses. You can’t have garage sales to
raise money indefinitely.
It works the same way for the government. We see the effects of immediate, draconian
cuts in expenses into countries like Greece and Spain. Too many spending cuts, or reliance on
spending cuts alone, result in a decrease in earnings (taxes), which slows
growth, which decreases earnings further, which slows growth further. IMF Chair Christine Lagarde warned against this
strategy as exacerbating the European Union problem. http://www.reuters.com/article/2012/10/11/us-imf-economy-idUSBRE89A02O20121011
A more rational approach is to both cut long term expenses
and raise long term revenues by allowing the country to grow, creating
new businesses and more taxpayers. In
other words, spend less and raise taxes, but enact changes gradually, so not to
worsen the problem.
As always, I welcome your comments and questions.