Thursday, July 12, 2012
Government Spending and Deficits
Have you looked at federal government spending lately? Take a look at the White House OMB. The first thing you should notice from Table 1.1 is that federal spending since 2000 has more than doubled. During the prior ten years from 1990-2000 spending "only" increased 42%. Now, inflation increased 34% since 2000 and 33% from 1990-2000. What does this tell you? Government continues to grow and the behemoth keeps getting larger, even after adjusting for inflation. There have only been two year-over-year periods where the government spending shrunk in the last 50 years. One was in 1965 and the other was 2010. Don't jump for joy yet as the spending decreased from their prior years 0.25% and 1.75% respectively. Actually, it is amazing that the growth in government spending is nearly monotonic. Government spending is akin to someone going into your wallet and spending your money because ultimately, the money comes from taxpayers and more money for the government is less money for them.
Spending is bad, but a deficit is even worse because you are borrowing to spend even more than you have. Everyone knows that consumption debt is a bad financial play (you can easily dig yourself into a hole that you cannot get out of), but the government fools people into thinking that it is free money. There have only been a few select periods where our country has been "debt free" and none of those periods have been in the last 100 years. The closest we've gotten to zero debt was in 1836. Interest paid on debt is money that the government must pull from private citizens to pay for. Sure, there is a circuitous loop if some of the debt is held by citizens where the money goes right back into the population, but 30% of it is currently owned by foreigners. This money is lost by the Americans populous. And the principle of kicking the can down the road is not only irresponsible financially, it is immoral because it is stealing from future generations. Current generations apparently do not have a problem with this and those not yet born don't get a vote.
Obama took office Jan 20, 2009, which means his budget went into effect in Oct 2009. In 2008, during President Bush's final full budget year, the budget deficit was $458 billion, a record at the time. In 2009, it was $1.4 trillion of which $700 billion was for the TARP loans authorized by Bush (and these were paid back with interest, so no penalty here). But during every year of Obama's presidency, the deficit has been over a trillion dollars. So where does this deficit "go?" As previously discussed, it goes into the national debt. During 4 years of Obama presidency, we will have added 44% ($4.8 Trillion!) to the national debt bringing the grand total to $15.8 trillion. Our GDP is $15.4 Trillion which means our national debt is now 102% of our GDP. This is bad. Why? Above the threshold of 90%, median growth rates fall by 1%, and average growth falls considerably more. Our massive government debt was a concern for the rating agency that downgraded USA credit quality. We can be so 'fortunate' that the rest of the world is also having serious problems because the downgrade did not affect our borrowing costs, which are currently some of the lowest borrowing rates on record. In the future, the markets might become concerned that we cannot pay off our debt and interest costs will rise steeply.
Our national debt reaching 100% of our GDP happened a lot faster than most were expecting. Even our acting president claimed he would cut the deficit in half by the end of his first term. Not surprisingly, he was not able to fulfill this grandiose claim.
So how could we equate this to an individual? Wouldn't it be great if we could spend all our money that we made during our lives, and then when it came time to retire, just borrow everything we needed until we died? The government seems to think so, because that is exactly what they are doing. The difference is, they are spending our money.