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
our Federal Government. A bibliography will be provided at the end.
will be looking at Government budget spending going back to 1913.
Government Spending Looking Back From the Carter Administration
Clinton had budget
surpluses for four of his eight years in office.
Bush numbers only for
seven years of his term, 2001-2007. FY 2007 surplus number was
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
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
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
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
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
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
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
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.
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
- Our Government historically runs deficits
- Our Government never seems to fully retire the deficits
- 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
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
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
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
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
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.
Annual Budget 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