Every Dollar Matters

Understanding Government Deficits

April 19th, 2009

Governemnt deficit spending is not a recent happening. It has been going on for decades, and even for centuries.

Both the left and right are crying wolf on one another as being irresponsible on this matter. But, what are the facts? In this short dissertation I am going to offer information that will help you better understand that our Government deficit spending is not something new. I will be using figures that come directly from our Federal Government. A bibliography will be provided at the end.

We will be looking at Government budget spending going back to 1913.

Government Spending Looking Back From the Carter Administration


President Party Surplus(Deficit)in billions CPI Adjusted Surplus(Deficit) in billions CPI Avg Annual Surplus(Deficit) Note
Carter Democrat (227.40) (673.89) (168.47)  
Reagan Republican (1338.56) (2630.48) (328.81)  
Bush Republican (933.23) (1444.79) (361.20)  
Clinton Democrat (192.15) (514.64) (64.33) Note 1
Bush Republican (1630.53) (1897.82) (271.12) Note 2

Note 1: Clinton had budget surpluses for four of his eight years in office.

Note 2: Bush numbers only for seven years of his term, 2001-2007. FY 2007 surplus number was estimated.

Additional Note: These numbers differ from another page I recently created on this subject as this page credits the party in the majority with the budget numbers. In reality the new party coming into power is saddled with the budget created by the previous party in majority. My new pages addresses this reality.

From the table above you can see that Reagan deficit spent over 1.3 trillion dollars during his administration. George Herbert Bush deficit spent close to 1 trillion. And George Walker Bush (when all the numbers are in) will be close to 2 trillion in deficit spending. 

In fairness to either political party government spending is not 100% the responsibility of the President. After all, there is a House and Senate! It should be noted that during the 31 years these statistics are for the Democrats had control of both the House and Senate for 14 of those years, whereas the Republicans only control both for 8 years. 

While the deficits of Reagan and the two Bush's are staggering they do not tell the whole picture if we only look at them "real dollars."  I used the consumer price index to adjust these numbers so we could look at them in context to history more fairly when comparing one administration to another. To put into simple terms the Consumer Price Index (CPI) is a measure of the average change in a "basket" of consumer goods over time. As you all know prices (typically) rise over time. CPI is a reflection of this. If you want more information on CPI the government has a nice CPI FAQ

By using the CPI in recalculating budget spending we can obtain a more balanced picture of deficit spending over time. A few observations we can make here. Republicans have recently admitted that the Bush spending was "out of control" as they are calling for less government and less governement spending. They look back to the Reagan administration as one that reprensented the true ideals of the Republican party. Yet, if we look at the data above it is quite clear that both Reagan and Bush I outspent Bush II. 

It is not possible to look back at an administration in-vitro. Reagan inherited from Carter a serious recession. His own administration had high unemployment. When Bush II took over from the Clinton administration he too inhereited a recession. I do not think it is important to pin blame to one party or another which seems to be exactly what the media does, and what each party does.

Instead, I would like to just take a look at the numbers in context to a big theme that is currently being played out on the media. This theme is... 

By deficit spending we are leveraging the furture of the next generation.

First, how long is a generation. According to ancestry.com a generation is 25 years. We will go with this figure. Going back exactly 25 years from today places us smack-dab middle in the Reagan administration. His administration deficit spend 1.3 trillion dollars in "real money." How has his deficit spending alone impacted the current generation in the workforce?

Deficit Spending to Finance WWII


President Party Years Surplus(Deficit)in billions CPI Adjusted Surplus(Deficit) in billions CPI Avg Annual Surplus(Deficit)
Roosevelt Democrat 1942-1946 (186.10) (2192.09) (438.42)

First, how long is a generation. According to ancestry.com a generation is 25 years. We will go with this figure. Going back exactly 25 years from today places us smack-dab middle in the Reagan administration. His administration deficit spend 1.3 trillion dollars in "real money." How has his deficit spending alone impacted the current generation in the workforce?

If we go back to the "New Deal"  which is roughly 3 generations ago you will see that we spent a considerable sum of money on WWII. If you look at the money in terms of adjusted CPI it is staggering. In fact the annual amount spent when adjusted so we can look at it in todays dollars blows away what either Reagan or both Bush's spent. But if we look at the actual amount of 186 billion. That deficit seems to be "chump change" when compared to todays deficit numbers. But, here is the rub. We did not pay off WWII debt officially until the Clinton administration! And, that is a fact.

You can prove this on your own by adding up all the Government surpluses from 1947 onward until you come up with 186 billion. The problem with this is that from 1947 until 1997 our Government deficit spent 2.97 trillion dollars!!! These are "real dollars", not dollars adjusted using the CPI.

The Great Depression was Preceeded by 9 Consecutive Years of Budget Surplus

The first two years of the great depression (1929-1930) the Government ran a surplus. While there is some debate as to the year the Great Depression ended. So we can look at some numbers we are going to define the period of the Great Depression from 1929 until 1941. 

Today, we contantly hear from the right how reckless Roosevelt was with deficit spending. Now, with all of the number you have seen thus far I want to take a look and see if the numbers bear this out. 

President Party Years Surplus(Deficit) in billions CPI Adjusted Surplus(Deficit) in billions CPI Avg Annual Surplus(Deficit)
Hoover Republican 1929 0.73 8.91  
Hoover Republican 1930 0.74 9.16  
Hoover Republican 1931 (0.46) (6.30)  
Hoover Republican 1932 (2.74) (41.39)  
Roosevelt Democrat 1933 (2.60) (41.50)  
Roosevelt Democrat 1934 (3.59) (55.49)  
Roosevelt Democrat 1935 (2.80) (42.42)  
Roosevelt Democrat 1936 (4.30) (64.20)  
Roosevelt Democrat 1937 (2.19) (31.58)  
Roosevelt Democrat 1938 (0.89) (1.30)  
Roosevelt Democrat 1939 (2.87) (42.45)  
Roosevelt Democrat 1940 (2.92) (43.25)  
Roosevelt Democrat 1941 (4.94) (69.70) (48.84)

First, if we add up all of Roosevelts spending during the Great Depression using the CPI numbers, Roosevelt only spent 391 billion (26 billion in "real dollars").  His average yearly deficit was slightly under 49 billion using adjust CPI dollars. This is actually quite modest compared to budget deficit averages of every single President that followed him, with the exception of Eisenhower.

Lies, Damned Lies, and Statistics

I am citing a lot of statistics, and it would be easy for you to conclude that budget surpluses can have negative consequence on our economy. I DO NOT want you to draw this conclusion as it would be a false one. The Great Depression was started, just like this ecomonic meltdown (I beleive we our in the early stages of a depression) based on one word. 

OVERLEVERAGE

Though not often cited, Federal Reserve actions on February 2nd, 1929 actually led to the the Stock Market crash of 1929.  On February 2nd, 1929 the Federal Reserve reversed a ban on bank loans for margin trades. But, this is a different story for a different time. Click to read the Federal Reserve minutes from their meeting on February 2nd, 1929. This document was obtained from the "Federal Reserve Archive System for Economic Research."

Albiet to say, with overleverage, we tend to forget, and history tends to repeat itself.

Back to Budget Deficits

There are three things that are crystal clear from the budget numbers. 

  1. Our Government historically runs deficits
  2. Our Government never seems to fully retire the deficits that is creates
  3. This has been happening for multiple generations going back to 1850. Even the Harding,Coolidge, and  Hoover administrations that were fiscally responsible and ran 11 consecutive years of budget surplus never managed to payoff the debt we created to finance WWI.

I have been working steadily since 1978. In that time I have seen my personal income rise. I manage my financial affairs in a very conservative manner. I am not advocating here that government deficits do not matter. One only needs to look at the hyperinflation of the Weimar Republic in Germany and in Argentina from the mid 70's unit 1991 to realize what un-restrained, reckless Government spending can do to a nation.

So, the fundemental question really is how much Government debt is okay? This is an easy question to ask, but a very difficult one to answer. One important factor is how much debt is owned by foreign entities. The Governement has two predominant means to finance its expenditures. 1) Taxes; 2) Sale of Treasury Bills. As of February 2009  foreign owned debt of US Treasuries amounted to 3.16 trillion dollars. 

Another key factor is the interest rate the Govenerment is obligated to pay for its outstanding securities. Treasury interest rates and terms vary and so we really cannot calculate here. Current debt is being financed at very low interest (under 4% for 30 year notes).

It is also interesting to note that we are not the only country in debt. What is unclear and hard to find is how much foreign debt the U.S. has helped to finance. 

Digging Out or Do We Need To?

Much of how macro economies work are so complex and interconnected that even the scholars and gurus are not really sure. According to Wikipidea which is getting its information from CIA World Factbook every single industrialized nation, including China is in debt. If you do go to these links you will notice the numbers are higher. This is because they are reporting both public and private debt. I am only looking at Governement financed debt. 

It should be interesting to ask that with every industial country in debt where is the balance?  Everyone seems to holding everyone elses debt to some degree. 

It is my contention that debt is acceptable to the extent that is does not lead a country into hyperinflation or deflation of its currency. 

As a percentage of GDP (Gross Domestic Product), our annual GDP is roughly 14 trillion dollars. Our foreign debt obligation is current 3.16 trillion. This is roughly 23% of annual GDP. Put another way, assuming a U.S. population of 360 million, our Government debt for foreign obligations represents about $8777 per U.S. citizen. 

Assuming a healthy GDP growth rate of 2.5% per year, if we were to apply 100% of the growth rate dollars to retiring our foreign debt it would take over 9 years to take it to 0. I will let you draw your own conclusions from this data.

Bibliography/References

Annual Budget Statistics

CPI Statistics

Treasury Debt Statistics

Please Note: As I have no control over the longevity of these links I have archived exact data from these references on my site for historical reference