Many deficit spending apologists on the left are trumpeting the 2013 Fiscal Year deficit, which came in at $680 billion, as some sort of triumph. Originally, many of the same “spendthrifts” touted the projected $642 billion deficit. The actual deficit came in about 5% higher than that projection. Granted, $680 billion is a lot less than the trillion-dollar deficits that President Barack Obama and Congress have grown accustomed to since 2009.
At the same time, the 2013 deficit is not something that should be lauded as some sort of fiscal achievement. Here’s why:
1. The Fiscal Year 2008 deficit, the largest deficit to that date, was $438 billion. We’re still spending much more than that.
Is it really a triumph that five years after the biggest recession (euphemistically referred to as the “Great Recession”) since the Great Depression, we are posting deficits which are close to 50% larger than the biggest deficit prior to the Great Recession? Of course not.
What are we to conclude from this? Some may argue that the deficit spending is what ended the recession. Those people would be wrong. The Great Recession ended in the June of 2009, but deficit spending has continued for over four years (to date). The debt outstanding in the month that the Great Recession ended was roughly $11.5 trillion. So, in essence, America has spent well over $6 trillion more than it has taken in since the Great Recession ended.
Boy, if this is a recovery….
2. Big deficits add to the even bigger national debt.
Of course, some folks unfortunately do confuse “deficit” and “debt.” Here’s an easy way to remember the difference. If you make $30,000 a year and spend $35,000, you have a $5,000 deficit. If you already owed $15,000 to your credit card company, that is your debt. Now, your debt will increase to $20,000.
On more than one occasion, I have had someone tell me that during President Bill Clinton’s term the “surplus” meant that we had no debt. Wrong. In fact, an argument can be made that there was no true “surplus” under Clinton because at the end of each Fiscal Year, we owed more than the previous Fiscal Year. In other words, the debt never went down in a meaningful way during Clinton’s second term and the internet boom of the late 1990s.
Deficit spending of $680 billion adds to the near $18 trillion dollar national debt. What are we getting out of all of this deficit spending?
3. A large national debt costs more to service.
“Debt service” means the amount of money required to pay already existing debt. As the amount of the national debt increases, the cost to own such debt also increases. For example, America paid $415,688,781,248.40 to service its debt during Fiscal Year 2013. That’s just interest and not the “principal,” or the actual amount borrowed from our creditors.
Some may argue that the number is actually closer to $220 billion, because the rest is debt “owed to ourselves” and it should not be counted. I am skeptical. If we borrow money from Social Security, for example, if we are not paying interest on the amount of money borrowed, Social Security becomes even more underfunded since the money is not in the Social Security Trust Fund earning interest to pay to future and current beneficiaries. So, I don’t dismiss the actual $415 billion number out of hand.
What else could we have done with that $415 billion? Think about it — that’s almost half of the “Stimulus” bill which purportedly saved America from the Greatest Depression in 2009. What could an extra $415 billion do for Social Security? Or, more appropriately, what could it do for the American taxpayers if it was returned to them?
The point is we are spending an absurd amount of money every year and increasing our debt exponentially. There are costs for doing so.
4. Our debt service is actually artificially low, thanks to Ben Bernanke.
This is a simple one. If our interest rates doubled because the demand for U.S. Treasury Bonds waned, we’d have an even bigger problem. Our interest payments would double. Remember, because the Federal Reserve is buying a lot of our national debt, the market is artificially inflated. The Federal Reserve currently holds $2.1 trillion in Treasury Bonds (this excludes mortgage-backed securities).
The more money that someone owes, and the tighter and more precarious one’s financial situation is, the more sensitive that individual (or country) is to an interest rate hike or shock. When we owe well over $17 trillion, are servicing the debt at an artificially low rate, and are adding to the deficit to the tune of nearly $700 million a year — we’ve got a big problem should rates go up suddenly.
5. The likely cause of the “incredible shrinking deficit” is 2012′s “Taxmageddon.”
Although it would be nice if the deficit was really trending downwards at a fast clip, this is probably not the case. The CBO admits (albeit vaguely) that the likely reason for the deficit dipping in Fiscal Year 2013 was a big increase in tax revenues:
Nonwithheld payments of income taxes rose by $91 billion (or 26 percent), most of which occurred during the tax-filing season (February through April) and presumably resulted from gains in taxable income in calendar year 2012. Some of the increase probably occurred because some businesses and people accelerated wages and salaries, capital gains realizations, and dividends so that they would be income in calendar year 2012, to avoid the higher tax rates due to go into effect in 2013.
The CBO notes that a gigantic portion of income tax revenue sent to the government is a one-time deal. There is no Taxmageddon 2013 (thank goodness). Therefore, projected tax revenues are likely not going to be as high as the ones in Fiscal Year 2013.
Does Washington understand this? Probably not, since accounting tricks like baseline budgeting are routinely used.
As I’ve discussed before, when the government threatens higher tax rates, rational operators will take steps to minimize tax burdens. When it was unclear whether Congress would resolve “Taxmageddon” at the end of 2012 (which would have resulted in astronomically high capital gains rates), people harvested capital gains before the end of trading on December 31, 2012 so they could take advantage of 2012′s tax rates if the rates going forward would have been higher. These sales created taxable gains which benefited the government in Fiscal Year 2013.
The President’s Fiscal Year 2014 budget is projected to be over $750 billion. Granted, these numbers are subject to heavy revision and depend on many factors. At the same time, the projected deficit is $60 billion more than the actual Fiscal Year 2013 deficit.
Will the pundits on the left celebrate that?
So, how do we meaningfully cut the deficit going forward? Stay tuned….
As always, free markets are better markets.
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This week we can look forward to earning season continuing, as well as an initial jobless claims report projected at 330k. The stock markets will be open Monday, but since government is observing Veterans’ Day, the bond markets will be closed.
Have a great week and big “thank you” to our veterans for your service!