The Congressional Budget Office now predicts record budget deficits. In fact, they are predicting that budget deficits will double the National Debt within 10 years… and they are using very modest assumptions to predict it. This story is big enough to be international news. Not everyone understands why this is a big deal (or even what this is) so let me explain.
Who is this Congressional Budget Office anyway? The CBO is a non-partisan office that provides Congress with financial and economic information they need to put together the Federal Budget each year. For what it’s worth, they are currently hiring for several positions.
How is the National Debt different from the National Budget Deficit? They both mean the Federal Government owes money, right? The budget deficit is just the money the Government will spend that it doesn’t have in one year. The National Debt is the cumulative money owed by the Government for all the years it has spent more than it has taken in, minus what it has paid off, but plus interest. All told, it’s a lot of money.
Alright, who do we owe this money to? The National Debt is owed to the people who hold United States Savings Bonds and Treasury Bills. These instruments are considered very safe because, after all, they are backed by the full faith and credit of the United States of America. Impugn the safety of these investments at risk of being labeled some kind of communist. Even if you don’t have any of these bonds yourself, some of the interest you earn from your bank or brokerage account is probably derived from such bonds.
Let me rephrase that, who owns the bonds? A large hunk of the debt is actually owned by none other than the Federal Government. That doesn’t mean it doesn’t exist, and it doesn’t mean you could slash the debt by invalidating bonds held by the Government. Agencies such as the Social Security Trust buy bonds because they know the day is coming when expenses will outstrip revenues. The next biggest holders are, in order, Japan, China, and the United Kingdom. In 1999, it was estimated that 55% of bonds were held by “private investors” including individuals, fund managers, and corporations.
Why is this such a big deal? I hear the political candidates talk about it, but how does the National Debt affect me? There are lots of ways the National Debt might affect you. Money the Government pays on the National Debt is money that can’t be used to pay for highways, schools, law enforcement, courts, and other important things in your community. Money that banks use to buy United States bonds is money they can’t lend you to buy cars and houses, and that means you will have a harder time getting a loan and you will have to pay more in interest. Money that banks use to buy bonds is also money they can’t lend companies to build new factories and create new jobs for you and your community. This is part of how the economy was able to create so many jobs during the Clinton Administration when there was a budget surplus and the National Debt was going down. Money the Government uses to pay the debt and the interest on the debt must ultimately be paid with taxes you pay. So far, your personal share is over $23,000. It’s a lot of money.
Who says we have to pay it off? Can’t we just keep making bonds? Heck, why not print money to pay off the debt? There is a ceiling on the amount of debt the nation is allowed to have, although Congress can vote to raise it. Besides which, just like your own credit rating, the national credit rating will suffer if we owe “too much.” And when a person or nation has a lousy credit rating, they have to pay higher interest rates (meaning it will cost even more to pay off the debt). Printing money is not a solution because it causes inflation (meaning it will cost even more for you to make ends meet). If that wasn’t reason enough, the standard prescription for inflation is for Agent Greenspan at the Federal Reserve to raise interest rates.
What can we do about this? Start by doing the normal democracy things, like voting and writing your elected officials. This thing is destined to become a political minefield. There’s nothing stopping you from campaigning for a candidate you feel will encourage more fiscal responsibility. In fact, if you meet the requirements, you can run for office yourself. Even if you lose, you will get your opinions out there in a big way.
One last thing. You said this CBO report used “very modest assumptions.” What do you mean? Could this be worse? Yes, there are several key assumptions that even the authors of this report know are unrealistic: that the tax cuts will be allowed to expire under current law with no new tax cuts; that there will not be another recession; and that there will be no large spending initiatives. Oh yeah, and the report does not forecast far enough out to reflect what happens when the Baby Boomers start to retire and collect Social Security.
And there you have the critical things you need to know about the budget deficit and the National Debt. Finally, as primary season is now in full swing, you might want to take a look at this little comparison of the Democratic candidates ideas on health insurance. It’s an interesting read.
There are two thing i have been touting about the economy in general, always assume the worst figures. If things come in better you end up ahead.
And secondly, any tax cut plan is essentially a spending plan. Removing your income is essentially no different than spending the money (on the balance sheet) except you dont get any goods or services from it being spent.
At most a tax cut is an ‘investment’ in the most general terms. You take money and ‘spend’ it somewhere in the hopes that you get a larger return in the future. It doesn’t always happen. Which is why if you treat it as a spending plan you will (hopefully) be more careful with it.