Why We Should Worry About the U.S. Deficit

On January 17, departing Secretary of the Treasury Yellen sent a letter to the Speaker of the House of Representatives. Below, I’ve copied the first paragraph:

The new limit is $36.1 trillion.

U.S. Deficit

While the U.S. debt is the total amount we owe, the U.S. deficit is an annual number showing the difference between spending and revenue. Feeding the debt, the deficit brings us closer to the debt ceiling:

The last time we had a surplus was 2001. Otherwise, since then, spending has exceeded revenue. As a result, we had to borrow to make up the difference. However, as you can see from Secretary Yellen’s letter, we will soon move beyond the new $36.1 trillion debt limit that kicked in on January 2. So yes, we need a new limit.

Even without the Covid pop, the trend is up:

As the former Secretary explained in her letter, without a new limit, extraordinary measures will be necessary (like waiting to make mandated investments for several agencies so we have the cash). However, CNN tells us that we have a cushion that delays the “x-date” by several months. Combining extra cash with April’s tax receipts and extraordinary measures gives the Trump administration some time to manage a shortfall.

Meanwhile, we can contemplate how to cut the deficit.

Spending Cuts and Tax Hikes

U.S. deficit concerns are nothing new. In 2010, President Barack Obama’s National Committee on Fiscal Responsibility and Reform (aka Simpson-Bowles) had something for everyone to dislike. Groups on the left opposed the provisions that cut Social Security and Medicare. Meanwhile those on the right were against the plan’s higher taxes. Everyone though might have been happy that by 2014, we would have had a stable debt. (They even suggested a 3-year pay freeze for members of Congress!)

Specifically, the 65-page report dealt with six categories:

1. Discretionary spending cuts
2. Comprehensive tax reform
3. Health care cost containment
4. Mandatory savings (like cutting agricultural subsidies)
5. Social Security
6. Process changes (like measuring inflation more accurately)

The Congress did nothing.

Now we have similar suggestions. CBO is the Congressional Budget Office:

Our Bottom Line: Debt Levels

The U.S. debt is the total amount the U.S. has borrowed. Unlike you and me, the U.S. borrows by selling bonds. Investors want to buy those bonds because of the interest they earn. And now, with interest rates up, they earn more. However, since the borrower has to pay more, their debt shoots up further.

The percents in the following graph represent debt-to-GDP ratios. Comparing debt to GDP is sort of like using your income to determine the size that your mortgage should be. For most of us, a million dollar mortgage would be too large when we compare it to our income. However, for a Bill Gates or Elon Musk, it would be tiny.

Similarly, we can decide if government debt is too much by comparing it to a country’s GDP. We just need to think of the debt as what you borrow for a mortgage and the GDP, as the value of goods and services produced in a year, rather like your income. The percents in the graph display the U.S. debt (numerator) to GDP (denominator) ratio:

Comparing Different Ratios

Shown in brown below, the U.S. debt to GDP ratio is approximately 120%.

Pondering the debt ceiling, we can think of debt-to-GDP ratios and also spend a minute with West Wing:

My sources and more: For background on the U.S. deficit, I recommend former Secretary Yellen’s letter, the U.S. Treasury’s excellent deficit graphics and CNN. Then, the Peterson Foundation presented the solutions, and we had much more in a past econlife, here and here.

Please note that several of today’s sentences were in a past econlife post.