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The Federal Deficit

Claims abound this election season that the deficit and debt were inherited and not the responsibility of the current administration.  Is that correct?  Let us examine the following graph of annual Federal deficits from 1990 to today. Whereas the annual budget deficits under the last three Presidents prior to 2009 averaged $244 billion (not counting  surpluses), we have averaged  $1,335 billion deficits annually under the Obama administration.  These deficits are over 5 times the size of average deficits under the previous three Presidents!  Deficits between 1970 and 1990 averaged only $151 billion, which is even less than the deficits under the previous three Presidents.  Thus one cannot rationally claim that the deficits created by the last three Presidents were extraordinarily low – in fact they were extraordinarily high.  Therefore one can only conclude that the current problem wasn’t inherited but the creation of the current administration.

Clearly there has been a paradigm shift under the Obama administration; they appear to have consciously driven the federal debt to the tipping point.  The following email forward I recently received beautifully demonstrates the folly of this paradigm shift:

Lesson # 1:

  • U.S. Tax revenue: $2,170,000,000,000[1]
  • Fed budget: $3,820,000,000,000
  • New debt: $1,650,000,000,000
  • National debt: $14,271,000,000,000
  • Interest paid annually on debt:  $454,393,280,417
  • Recent budget cuts: $ 38,500,000,000

Let’s now remove 8 zeros and pretend it’s a household budget:

  • Annual family income: $21,700
  • Money the family actually spent: $38,200
  • New debt on the credit card: $16,500
  • Outstanding balance on the credit card: $142,710
  • Interest paid annually on the credit card:  $4,543.93 [2]
  • Total spending cuts so far: $3.85

Test question 1:  How long will it take to pay off the debt with these spending cuts?
(A)   Ten years
(B)   Twenty years
(C)   Never

Test question 2:  How much must the family’s spending be cut annually to pay the debt off in twenty years?
(A)   $14,271.00
(B)   $11,679.43
(C)   $23,635.50

Lesson # 2:

Here’s another way to look at the Debt Ceiling.  Let’s say, you come home from work and find there has been a sewer backup in your house, and your home has sewage all the way up to your ceilings.

Test question 3:  What should you do ?
(A)  Raise the ceilings so your home can hold more sewage
(B)  Pump out the trash and fix the sewer backup

 You will be tested on November 6, 2012.  Do you know the correct answers?  They are:

Test question 1:  C [3]
Test question 2:  C [4]     (PLEASE READ THIS FOOTNOTE IN ITS ENTIRETY !!!)
Test question 3:  B

(859)

All is not as it looks


[1] Source for receipts, expenditures, surpluses and deficits:  http://www.whitehouse.gov/omb/budget/Historicals, Table 1.1

[2] Source for Federal interest paid annually:  http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

[3] The total multi-year savings don’t even cover the annual interest payment.

[4] This is only an approximation based on the following logic:

  • Annual payments required = Debt payoff ($142,710 / 20) = $7,135.50
  • No additional debt can be acquired, so maximum budget available = income = $21,700.
  • Money spent last year, after interest and payoff = $38,200 – $4,543.93 – $0 = $33,656.07
  • Money available to spend next year, after interest and payoff = $21,700 – $4,554.93 – $7,135.50 = $10,020.57
  • Annual spending cut required = Difference = $33,656.07 – $10,020.57 = $23,635.50

Therefore to pay off the debt in 20 years, annual Federal spending cuts must be in the range of $2,360,000,000,000 ($2.4 trillion, or 62% reduction from current spending level) – assuming total annual revenue doesn’t change. 

But during the past 10 years Federal government revenue has increased on the average 4% annually.  Therefore let’s allow for that, and reduce the required annual budget cuts to 58% of total spending, (or a mere $2.2 trillion) so we can pay off the debt in 20 years.  Anything less is futile political delusion.

Now let’s play politician and claim that we can rev up the economy and increase Federal revenues by 10%.  Even then, the required annual budget cuts must be around 48% of total spending (or $18.3 trillion) to pay off the debt in 20 years!

Yet another politician will claim that we can handle the debt as is, increase Federal revenues by 10%, and everything will be OK.  So, let’s assume we just choose to saddle our kids with this debt and never pay it off, but don’t grow the debt either and grow the economy beyond anything we’ve experienced to date.  These are clearly most optimistic, unrealistic, unreasonable, and irresponsible assumptions!  But even under these most wildly unrealistic and irresponsible assumptions we still have to cut the annual budget by $11.1 trillion (about 29%) to achieve our objective!

Logic:  The revved up economy with 20 year pay off requires $18.3 trillion in cuts.  Removing the $7.1 trillion annual debt payoff requirement also reduces the budget cut requirement accordingly.  Thus we only need $11.1 trillion in cuts (difference due to rounding).

And our political leaders and economics experts are arguing about budget cuts of $38.5 billion ($0.0385 trillion)?  Shame on them!  Our founding fathers are writhing in their graves.

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  1. September 13, 2012 at 9:29 pm

    Please, let us not let Facts get in the way of Politics……

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