Federal spending, taxes, and debt are quite obviously huge political topics nowadays and little wonder since we are fast approaching 200 years since the nation was fiscally “in the black.” In my day-to-day dealings, however, I find that more often than not this is a subject whose details are lost on many of us. Accordingly, I feel it is appropriate to share some key points and elements I have learned that are crucial to understanding the overarching issue.
First, it is important to identify and understand the difference between the terms deficit and debt, as they are often erroneously used interchangeably in casual conversation and by the media and politicians (sometimes intentionally so with the intent to confuse and mix facts). The national deficit, in its simplest form, is the fiscal year (October through September) difference of money between internal revenue raised in that year (i.e., taxes) versus federal spending that has been approved and appropriated in that year. An annual deficit indicates that spending totals are greater than revenue totals in a given year (the opposite is called a surplus), and this deficit is the fiscal year total that must be borrowed from lenders (e.g., foreign nations and private bondholders). Debt, including the interest payments on that debt, is the cumulative balance owed to the United States’ creditors (those aforementioned lenders that finance our borrowed money). This debt increases every year when deficits exist, and is further added to by compounded interest in similar fashion how a credit card functions (the simple symbolism is appropriate here considering most of us cannot control our own spending with credit cards either). The following graphic illustrates the relationship between revenue and spending in FY 2010, which resulted in a then-record setting $1.5 trillion deficit.
It is also important to distinguish between discretionary spending and non-discretionary spending. Discretionary spending is exactly what it sounds like – the funds voted on by Congress and appropriated to the executive branch for distribution from year to year. This is commonly referred to as the annual budget, and can go up or down between two successive fiscal years (appropriations programs can be added or subtracted as well). Non-discretionary spending, on the other hand, are entitlements that must be expended by law and take their most recognizable form in Social Security, Medicare, and federal Medicaid. Non-discretionary spending must be paid by law without new, annual votes to appropriate them. These two types of spending both contribute to government spending and the national debt as a whole but are themselves funded by different mechanisms. The annual budget is generally funded through corporate and income taxes, other revenues (e.g., tariffs, capital gains taxes, estate taxes, etc.), and borrowing. Social Security and Medicare are funded through payroll taxes (the ones marked F.I.C.A. on our paychecks) and yet more borrowing.
Often, pundits and politicians will use statistical trickery by mixing and matching these terms inappropriately to make their policy goals fit into their desired framework and this is exactly why it is so important to understand, even if in a general sense, how this process functions. For example, anti-war advocates are known to point out the percentage of defense spending in the annual budget but will typically not included entitlement programs in their assessments as they are conveniently derived from entirely different “pots” of revenue and are not annually appropriated. In this way, defense spending equated to roughly 54% of the FY 2010 budget, an incredibly high portion to be sure. But taken with all government spending in FY 2010, including Social Security, Medicare, Medicaid, and the interest payments on the debt, that figure decreases to about 20%. It is easy to see how these numbers can be used in two entirely different ways depending on how one might wish to frame the debate. It is political hocus pocus at its finest and is often times difficult to track. The following graphs present a spending breakdown of FY 2006 – 2010 spending, by administrations and executive departments (note that Health and Human Services largely represents Medicare and federal Medicaid expenditures).
In FY 2010 the nation had an overall deficit of ~$1.3 trillion. To give that figure some perspective, the long form is $1,300,000,000,000.00, or about 26,000,000 times the median annual American household income in 2010 – and that was just a single year. The attached video also demonstrates for those of us who learn visually just how insignificantly small even billions of dollars can be in relation to this overall staggering huge amount of money. The current overall national debt is about $14.3 trillion and growing by about a billion dollars a day in the month of April. The interest on the debt alone is so large that it has resulted in an average payment rate of over $1 billion dollars a day thus far in FY 2011. What is of more concern, however, is that unfunded liabilities (entitlement promises that have not yet come home to roost, so to speak) are, according to the CATO Institute, projected to reach between $50 and $100 trillion – for Medicare costs alone. One can easily see just how untenable this situation is. According to historian Thomas Flagel, the United States debt is so monstrous that in 2008 we were still paying off debt and interest accrued during the Second World War, when my grandfather was barely entering his teens!
Many of us are largely going to disagree on what needs to happen to address this debt but I doubt anyone can reasonably disagree that something must be done. I certainly have my own opinion as to a solution that I will put forth in the near future for consideration, but for now it is important to ensure that we have a decent grasp of the details involved and the potentially grievous future that the devil in them presents. For those further interested in researching fiscal- and debt-related national issues, I recommend the Daily Bail.
Final note: Thanks Mark for the graphics research assistance!