A look at the federal budget, debt, and deficit
This article is about the federal debt and deficit; it is not about weight loss. But to better understand the former, it helps to understand the latter. So allow me a brief tangent to talk about the Fitbit and my personal attempts and getting healthier. Last year, I bought a Fitbit and lost nearly 30lbs in just a few short months. I’ll spare you all the details of how I did it and why I did it, but I will say that it was a lot easier than you’d imagine. See I like to eat, and I don’t like to work out, so I did not starve myself, and I did not work out more than an hour a day. The key for me, was managing something called the “calorie deficit,” which is the difference between your calories consumed and calories burned.
Here’s how it works. Basically when you burn 3500 more calories than what you consume you lose a pound of fat. So if you burn 500 more calories than you consume a day, then in a week you should lose a pound of fat. Let’s say you want to lose 10 lbs of fat. Well, you simply need to maintain a 500 calorie deficit per day for 10 weeks, after which your calorie deficit should be zero in order to avoid gaining more pounds of fat.
So, what does this have to do with the federal debt and/or deficit? Simple…see, in order to lose weight you have 2 levers to pull. If you eat a lot one day, you need to work out more to get your calorie deficit to your target. If you work out a lot one day, you can eat more because you have already exceeded your daily calorie deficit goal. Why is this important? Because when it comes to our federal budget, politicians and voters seem to forget that there are two levers to pull as well; specifically, raising tax revenue, and reducing expenditures. Depending on the political party, we usually just hear about one of the two levers, and not both.
It takes two to make a thing go right
Stop me if you’ve heard this before…the GOP wants to cut taxes, and the Democrats want to raise taxes. The GOP believes in trickle-down economics, and the Democrats (as well as history) don’t believe it works. But taxes and tax reform are just one part of the much broader equation. So let’s take a quick look at where we are currently at with our federal debt and deficit, shall we? (All numbers below are from the Congressional Budget Office).
Currently, the US is approximately $14.1 trillion dollars in publicly held debt. Some indicators report the national debt to be approximately $20 trillion (see online debt clocks), and we are expected to run a budget deficit of just under $600 Billion this year alone. We presently spend 21.1% of our GDP and we currently bring in tax revenue of 18.2% of GDP. Translating that to absolute numbers, the US will bring in approximately $3.3 trillion in tax revenue and spend $3.9 trillion in expenditures.
So how do we solve this problem? Well we could get into the nuanced policy issues that have bogged down Washington for the past 16 years on this issue (the National Debt pre 9/11 was roughly $5 trillion), or we can first look at this issue like a simple story problem from grade school math that we would give a 10 year old.
Are we smarter than a 5th grader?
Story Problem: The US currently is in debt approximately $20 trillion (if we use high end reports) and is currently losing an average of $600 Billion per year (for this year and next year). So how do we get total debt to be $0 in 40 years?
Well let’s first imagine a world where we can use both levers (raising taxes and cutting expenses) and say we want 50% of the solution attributed to increase in revenue and 50% of the solution attributed to a decrease in spending. Where does that get us? Well we need to essentially accomplish a $1.1 trillion swing on our current national budget deficit to move in this direction.
Essentially we need to raise tax revenue from $3.3 trillion to $3.85 trillion, and we need to cut spending from $3.9 trillion to $3.35 trillion. That would erase the $600 Billion loss we are headed towards and give us an annual surplus of the $500 billion. Over 40 years, such a surplus would erase a $20 trillion debt. Now, as an Econ degree holder from a top tier University, I completely understand that the math is much more complicated than this, and that certain factors are interdependent upon each other, as well as impact GDP growth, but let’s keep this simple, as the complexities do not overwhelmingly change the directional solution we’re headed for here. If you know the 80-20 rule, you’ll understand what I’m saying here.
So what does a budget and tax structure look like that fits such a model? Well, first let’s look at expenditures. We’re basically calling for a 14.1% cut on government spending across the board. Early on that cut will hit all programs, however as time elapses and the debt decreases, the interest on our debt will also decrease which will result in a slightly lower net cut to the other government programs. Of course the more efficient our programs become, the less the actual cuts will impact program delivery. However, for the sake of argument let’s assume government programs are at optimal efficiency and utilize the optimal timing of payment terms, as well as the optimal time value of money terms on contracts as well as on interest owed / paid and interest received.
What does this mean for tax revenue? Essentially the US needs to raise tax revenue, in absolute value terms, by 16.6%. Now, to the extent that the US can close corporate tax loopholes and get non W-2 tax payers to pay a more representative tax rate on their income, such an increase in total tax dollars may not directly relate to a 16.6% increase in each individual tax payer’s tax bill. However, for the sake of simplicity, let’s assume it does. So if someone paid $10,000 in taxes this year, this plan would ask them to pay $11,667 per year for the next 40 years (all else being equal). For some this $1,667 is make or break with respect for paying the bills. For some, it’s less than a family’s annual cable bill or cell phone bill. But if we remove all emotion and political “sacred cow” biases on taxes and government programs, this solution comes very close to getting us where we need to be.
With real GDP growth, closing of tax loopholes, the reduction of interest paid on our debt (which naturally accompanies a reduced financed debt amount owed), and increased efficiencies in government programs, it is actually possible to accomplish this without crippling families, the economy, or government programs by the proposed 14%-16.67%. Manipulating currencies and interest rates also can impact the real dollar net effect of such a solution as well.
The rest of the story…
If you found this very rudimentary discussion interesting, let us know, and we can do a much deeper dive into what is actually behind these revenue and expense numbers. As in, where does this tax revenue really come from, and what programs is this money really going to? So let us know if you want a Part 2.