When discussing the various aspects of the federal budget, one must be sure not to confuse the terms debt and deficit.
Debt refers to what we would call in the playground of economics as a “stock” variable, which is something measured at a point in time. The amount of money you currently have or do not have on your person at this moment would be a “stock”. The term deficit is what is known as a “flow” variable – something that is measured over time, such as income. As it pertains to the U.S. Federal Budget, the budget deficit is the amount the government spends in excess of its receipts in a given period of time. For fiscal year 2009, the federal deficit was around $1.4 trillion.
The gross federal debt is basically an accumulation of the, almost on an annual basis, deficits the federal government has run up over the years, which currently stands at a mind-boggling $12.5 trillion, 36 percent of which the government owes itself – and presently growing at $1 million per minute-giving us a debt to GDP ratio of over 90 percent!
Now that we have that straightened, let’s address a couple of what seem to be the most often discussed aspects of the whole debt/deficit controversy.
First of all, is the above scenario sustainable? Well, in the words of the late Herbert Stein, Ben’s father, a one time economic advisor to President Nixon (don’t hold that against him), “If something cannot go on forever, it will stop.” In other words, though China has recently reduced their holdings of U.S Treasuries, as long as foreigners continue to be willing to buy up our government debt, and their overall appetite has not yet waned, yes. Will they continue to do so in perpetuity? See the above quote.
And though sixty percent of Americans believe that deficit reduction should be the Administration’s top economic priority, I will stand by my claim last weak that now is not the time to get “deficit-squeamish”, and that jobs and getting the economy on a more steady footing should be its top priority. Certainly getting deficits under control is an issue-and though perhaps it will turn out to be primarily cosmetic, the recently created deficit-reduction committee could be step in the right direction-because the various projections for future unfunded liabilities, interest payments on the debt, not mention the federal debt itself, are truly disturbing. But let’s keep a few things in mind. By the late 1990’s, the federal government, which was in the black for the first time in decades, was projecting budget surpluses as far as the eye could see, and that projections are based largely on assumptions. Thus, allow me, this week to leave you with this little “joke”.
A physicist, a chemist and an economist are stranded on an island with nothing to eat but canned food. Problem is, they have no can opener. The physicist suggest they smash the cans open by dropping them from a tree, while the chemist suggests building a fire to heat the cans until they explode. The economist interjects, “Let’s assume we have a can-opener…”
