Let’s watch a great nation’s wealth burn away

Larry Kummer, Editor

13 years ago

Summary: Part of our year-end national festivities should be looking at the deterioration of the Federal government’s finances. Especially since the resolution of the fiscal cliff follies shows that neither party in fact cares. There are few deficit fighters, mostly arsonists. As for spending our money, it’s burnt for political profit and private gain. Here we review the damage, put it in context, and consider an alternative.

Contents

Deficit = our love of spending + reluctance to pay
The alternative
More details: the debt, and our liabilities
Comparing us to our peers
For More Information

(1) Deficit = our love of spending + reluctance to pay

One measure of the Federal deficit is the increase in the government’s public debt (ie, net debt — that not held by the social security trust funds). In 2012 the debt grew $1.1 trillion to $11.6 trillion (that’s our gross debt).

That’s a large number, but tells us little. More useful is to compare it to our national income: the deficit is aprox 7.2% of 2012’s GDP, the debt is 73% of GDP. Also important is the rate of growth: it grew by 11% in 2012.

See the numbers for yourself: the US Treasury website shows the Federal debt for everyday from 1993.

What did we get in return? Prosperity, one of the strongest economies among our peers. But like last winter’s snow, only an ephemeral gain. The failed hypersonic cruise missile, the insanely expensive F-22 and F-35 fighters, the massive domestic surveillance apparatus reading everybody’s email, the legions of domestic securities agencies busy entrapping dumb Arab-Americans, the vast flow of public funds into the maws of large corporations — and the wars. All these things comprise Federal spending beyond the baseline, funded by borrowing.

In brief, our recovery results from government borrowing on a scale other nations either cannot or choose not to do. We are borrowing and in effect burning the money, leaving behind little but a rotting infrastructure and memories of better days. Only the debt will remain.

(2) The alternative

We could use these borrowed funds to rebuild America’s infrastructure, preparing us for prosperity in the 21st century — putting tens of thousands of people back to work.

We have the ability to borrow vast sums at historic low rates; let’s not waste this opportunity.

(3) More details: the debt, and our liabilities

This post looks at debt, the result of past spending. It does not include obligations to spend money in the future (liabilities), which come in 4 forms.

Firm obligations: pension benefits to government employees.
Legislated obligations (ie, can be changed): Social Security, Medicare, TRICARE.
Contingent obligations: sums which might be owed, such as the mortgage guarantee programs (eg, FNMA, GNMA).
Implicit obligations: not legislated, but often assumed to be guaranteed (eg, FDIC, Pension Benefit Guarantee Corporation).

Categories three and four have received too little attention, and might be quite large. For more about these see the IMF’s “Contingent Government Liabilities, A Hidden Fiscal Risk“, Hana Polackova, March 1999.

(4) Comparing us to our peers

From “Taking Stock – A Progress Report on Fiscal Adjustment“, IMF Fiscal Monitor, October 2012 — Gross debt includes treasuries held by the public and the social security trust funds.

We’re on the upper right frontier: high debt, rapidly growing. We’re keeping company with (slightly behind) Spain, Portugal, Ireland, and Italy.