Balancing the Budget

$14,587,727,605,443.44……is a big number. It is the total amount of US government debt outstanding as of June 11, 2011. This number, which changes every day, is reported by the US Treasury Department at the Treasury Direct website (http://www.treasurydirect.gov/NP/BPDLogin?application=np). The debt of the United States is the subject of a growing political storm in Washington. Indeed, in August 2011 there seemed to be a very real possibility that the US Congress would refuse to raise the “debt ceiling”—an upper limit on the size of the government debt. Had that occurred, the government would no longer have been able to fulfill all its obligations. Many commentators believe that the US government is facing a crisis with respect to its budget policies—specifically, the fact that the government is running persistent budget deficits. The issues are not the stuff of dry academic debate. If you are a typical reader of this book, you will be working and paying taxes over the next 50 years.Yours is the future generation that will be called on to deal with present-day deficits; debates about government deficits today are debates about your standard of living. If deficits matter to anyone, they should matter to you. Just like a household, a government has income and outlays. If a household’s outlays exceed its income, then it must borrow to finance its spending. And if a household borrows repeatedly, it builds up debt. The same is true of governments. If a government spends more than its income, then it is running a deficit that must be financed by borrowing. Repeated government deficits lead to the existence of a stock of government debt. In recent decades, the US federal government has run a deficit much more often than not. The federal government has been in deficit for all but 4 years between 1960 and 2011. As a consequence, the stock of debt outstanding in the United States has increased from $290 billion to more than $14 trillion. Most of us cannot really conceptualize what this sum means. We can try visual images: if we stacked up 14 trillion dollar bills, we would get a pile half a million miles high—more than twice the distance to the moon. But it is easiest to get a handle on the deficit if we divide by the number of people in the economy to obtain the debt per person. As of August 9, 2011, according to the US National Debt Clock (http://www.brillig.com/debt_clock), this number is $46,905.36. This means that if the government wanted to pay off its debt today, each and every woman, man, and child in the United States would have to be taxed by this amount, on average, to pay off the obligations of the government. US citizens hold more than half of the debt—about 60 percent. So if the government were to pay off its debt, the majority would end up being redistributed in the economy from taxpayers to holders of US government bonds. Foreigners hold the remaining 40 percent, so this money would be transferred from US taxpayers to citizens of other countries. The US government is not proposing to pay off the existing debt, however. To the contrary, the government is projected to run budget deficits for the foreseeable future, meaning that the stock of debt, and the obligation of future generations, will continue to grow.