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November 4, 2011 / jeremycarr

US Government Deficit- Part 1

For even the most sophisticated of economists, the real world economy can be opaque and downright confusing.  This could prove lethal given the financial climate the US faces as we head into 2012: among other things we face massive unemployment, extreme private and public sector debt, wavering consumer confidence, and an embarrassingly large deficit.

To understand is to know what to do.  Before any prescriptions must come diagnosis.  Let’s look at the economy top down to understand the magnitude of the different challenges we collectively face.  For example, if we spend a lot of time trying to fix pork barrel spending and later find out these 10,000 projects are collectively responsible for less than 1% ($20bn) of government expenditures, we may win the battle only to lose the war.  To start, let’s understand the US government deficit.  Why is it important to balance the budget?  Borrowed money must eventually be paid back; any money we spend above our means today necessarily must be paid back later… by our children.  Robbing our children is not the legacy I want to leave.

In 2010, from an overall GDP of $14.5tn, the US government took in $2.2tn and spent $3.4tn, a deficit of $1.2tn.  ie- the US govenrment collected ~15% of GDP, while spending ~24% of GDP.  Is this normal?  Let’s get some historic context over the past 70 years (in constant 2005 dollars to account for inflation):

The spike in the 40’s is of course World War II.  Over the past 70 years, tax receipts averaged ~17.4% and expenditures averaged ~20.5%.  The problem is clear: the US is BOTH collecting less and spending more.

Collecting less:

Where does the $2.2tn the US government collected coming from?

  • 40% Individual Income Tax ($900bn)
  • 40% Social Security ($850bn)
  • 10% Corporate Income ($200bn)
  • 10% Other ($200bn)

Two important concepts to highlight:

  • – Tax receipts decreased ~20% from 2008 to 2009 due to the recession.  As a result, lower aggregate tax revenue is particularly acute in the past 2 years.
  • – The majority of national discourse centers around tax rates and income distribution; these discussions cover only 40% of tax income.

Clearly- the US government needs more tax revenue; the recession has had an ENORMOUS effect on total tax receipts, but if we want to boost tax revenue by 3%-5% of GDP, we’ll likely need to look at more than just income tax adjustments.

Spending more:

How is the US government spending $3.4tn?

  • 25% Medicaid/Medicare (~$800bn)
  • 20% Defense (~$700bn)
  • 20% Social Security (~$700bn)
  • 10% Welfare (~$400bn)
  • 5% Interest (~200bn)
  • 20% “Discretionary Spending”: such things as education, national, infrastructure, environment, etc.
Clearly- the US government eventually needs to spend less (we are currently spending 25% of GDP is 5% above historical norms).  We’ll need to take a hard look at programs other than “Discretionary Spending” if we hope to reach that desired outcome.

Following posts will dive deeper into the meat of how the US government can:

  1. Collect more
  2. Spend less
  3. Handle the recession

After addressing these year to year flows, we will dive into understanding the cumulative effects of perpetual unbalanced budgets- the US’s staggering $15tn+ debt and $60tn+ of financial obligations.

November 4, 2011 / jeremycarr

Welcome

The goal of this blog is to promote understanding.  To understand is to know what to do.  There can be no prescription without diagnosis.  Many problems are seemingly unsolvable due to straightforward lack of context.  Here, we strive to explore the context necessary to make good decisions.  The biggest waste of time in the world is working on the wrong problems, or spending 2 weeks in the laboratory to save 1 hour in the library.  Stop the madness!  Let’s get to work.