I could not really grasp how the country was such a hot mess. When asked by co-workers what the whole debacle was about I had a faint idea and feinted more than I knew. I knew Paul Krugman said they had a primary deficit. I merely nodded my head in agreement. Then headed off to the inter-tubes for some research.
Wikipedia states that a primary deficit is the pure deficit which is derived after deducting the interest payments component from the total deficit of any budget. Now I understand what the words mean but to a get a true understanding of I needed to dig into the data, play with it and return it back in my own words. However, there are two things at play with what comes next, a) I don't have as much access as I did in my graduate studies to robust data that would give me the information that Paul used to make his assertion and b) it would be far easier to look at the US data and it would be more meaningful to what I deem a US-centric audience.
I do not want to stray to far from the topic but this ancillary topic is important and probably deserves a post of its own. The deficit is the debt incurred in a single year and the national debt is all the debt accumulated over the past years that has not been paid off. When the debt comes due the Treasury, if there is not a surplus, will pay off the previous holders of the Treasury securities with new bond offerings. The cash received from the new offerings will pay the interest and principal on the old debt that is retiring. The structure of this debt is very important. As a country becomes increasingly risky it will find that it has to issue debt in shorter durations to achieve an acceptable funding rate because investors, here and abroad, will not want to take on a longer dated debt obligation due to the increasing risk of non-payment, i.e. default.
www.cbo.gov/budget/data/historical.pdf
Here is a historical chart. If you have eagle eyes you can see that we have been in a surplus in 5 of the 40 years that the chart covers. This chart does come with a caveat that you are looking at nominal holdings and thus inflation would erode some of the levity that this chart imbues.
Above is the average maturity of the United States debt as it has evolved over time and how it projects in the future. The Treasury is taking advantage of the need for US Securities by bringing back the 30 year bond and extending the maturity so that there will be less likely of a situation where there is need for short term issuance to pay interest payments. This is where the US and Greece diverge. Greece has its two year debt pre-bailout trading anywhere from 12-20% payments based upon the principal you would pay to get the coupons. The US is faced with the opposite, our rates are so low that we are extending out the maturity schedule to take advantage of the historically low rates.
Is the difference only a temporal one? No, Greece also has a structural deficit besides the primary deficit highlighted above. So think back to the total deficit above and ignore the primary deficit. The structural deficit is the portion of the debt that always exists because of expenses undertaken that it must pay either voluntarily or at its discretion, think social security versus military spending. Another way to view the structural deficit is via the business cycle. For simplicity, we hypothesize that there are only two states boom or bust. In boom there is low unemployment and tax revenues are growing. In the bust it is the opposite there is a high unemployment and tax revenues are declining. In the second status the deficit will grow because the government will be paying out the same amount of services but revenues will be down, hopefully though, the government planned for the rainy day and used it surplus in the boom to not only keep up the same amount of services but also to extend services that will need expansion during a recession. The biggest expenditure that needs expansion is unemployment insurance.
Let us next look at the latest information.
What we are looking at here is the entire budget (revenues and expenses) encompassed in the large circle. By accounting convention the three pie pieces must equal. We have in order the Revenues in yellow, the expenses in blue and the deficit in red. The deficit must be balanced by borrowing in the capital market. The funding for the deficit is received form both US investors and those from abroad.
We break out the revenues by source to glean insight into how our federal government funds itself. The key categories are in order: income taxes (45%), social security and payroll tax (40%), corporation income tax (9%) and other (3%.) It becomes quite obvious that the taxpayer is the major supplier of all the revenues of the Federal government. What is quite amusing is that when viewed through a political lens one always hears about the gift tax or the estate tax. Now, both of those when added together equal 84 basis points of the Federal government's income or 0.84% for the lay person. Thus, anyone pontificating about that should explain why that particular issue is more pressing than payroll taxes or income taxes.
This chart is slightly different in that revenues and expenses are reversed. So it goes expenses in blue, revenues in yellow and deficit in red. There is continued color coding in the breakout. With the bright red being the mandatory spending in a particular year, the black being the interest paid out (mandatory,) and then the bright yellow being the discretionary spending. I'll just list the categories and spending percentages:
| Social Security | $695 | 19.57% |
| Medicare | $453 | 12.75% |
| Medicaid | $290 | 8.16% |
| Potential Disaster | $11 | 0.31% |
| Other Mandatory Prog's | $571 | 16.08% |
| Interest on Debt | $164 | 4.62% |
| Defense | $663.70 | 18.69% |
| Govt Svc Programs | $704.10 | 19.82% |
So the key for the US will be the mandatory programs (SS, Mc, Ma, PD, Other and Interest on Debt) versus the income received. Bluntly stated $2,380 income versus $2,184 mandatory expenditures.
Is there one easy cut in this list? Obviously, the interest on debt is above all others. SS, and the Medicare/Medicaid funds are a no-no. You cannot cut defense in a recession unless you wish the unemployment rate to increase further. However, there must be some fat in the Government Services programs; waste, fraud, incompetence, etc. Below is the department, the spending and the percentage of the total ($704.10.)
| Health & Human Svcs | $78.70 | 11.18% |
| Transportation | $72.50 | 10.30% |
| Veterans Affairs | $52.50 | 7.46% |
| State | $51.70 | 7.34% |
| Housing | $47.50 | 6.75% |
| Education | $46.70 | 6.63% |
| Homeland | $42.70 | 6.06% |
| Energy | $26.30 | 3.74% |
| Agriculture | $26.00 | 3.69% |
| Justice | $23.90 | 3.39% |
| NASA | $18.70 | 2.66% |
| Commerce | $13.80 | 1.96% |
| Labor | $13.30 | 1.89% |
| Treasury | $13.30 | 1.89% |
| Interior | $12.00 | 1.70% |
| EPA | $10.50 | 1.49% |
| SSA | $9.70 | 1.38% |
| NSF | $7.00 | 0.99% |
| Corps of Eng | $5.10 | 0.72% |
| NIB | $5.00 | 0.71% |
| Ntl & Comm Svcs | $1.10 | 0.16% |
| SBA | $0.70 | 0.10% |
| GSA | $0.60 | 0.09% |
| Other Agencies | $19.80 | 2.81% |
| Other | $105.00 | 14.91% |
Here are some poll results from a YouGov/Economist poll of what and where to cut.
26. If government spending is reduced in order to balance the budget, which of the following government programs should receive lower federal funding than they currently do? (Please check all that apply.)
Social Security ..............................................................7%
National Defense ........................................................ 22%
Medicare ....................................................................... 7%
Aid to the Poor .............................................................17%
Medicaid ..................................................................... 11%
Veterans’ Benefits ........................................................6%
Health research ...........................................................13%
Education ................................................................... 12%
Highways ....................................................................12%
MassTransit ................................................................27%
Foreign Aid .................................................................71%
Unemployment benefits ............................................19%
Science and Technology ............................................22%
Agriculture ..................................................................27%
Housing ......................................................................27%
The Environment ........................................................29%
Maybe it's just a notion that Americans would like to keep all the government programs in place just not pay for them. A phrase Krugman called using Alabama's taxation policy to fund Connecticut's services. The problem is that the expenditures for Social Security, and Medicare and Medicaid are only projected to continue rising. Thus, the structural deficit will only continue to rise. Currently, we are just below the cut off point where the structural deficit is larger than the annual tax income. However, if maintained it plays out like a nationwide game of chicken. It seems that there is an inertia present to maintain the status quo until a disaster occurs and then, and only then, will the entrenched interests' lobbying power be set aside toward popular opinion. One only need look at Katrina, the financial reform act, the oil spill in the Gulf for recent, vivid examples of this terrible game being played out.
It is also the game that Greece must now play as they must make fiscal cuts as a percentage of GDP instead of just a percentage of government receipts just to balance the books.
The above graphs show that the United States is on a path towards what Greece is currently experiencing, however, Greece has arrived at its day of reckoning while the US only faces the prospects if those elected to power or rather those electing politicians to power do not begin to make the tough choices needed.
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