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Understanding the Government "Deficit"

Wednesday, September 10, 2008, 7:47 PM

There is some confusion about what constitutes the federal deficit.  Below I explain the differences between what is reported and what is really happening.  

Reader TnAndy writes, "I keep hearing this figure of a "budget deficit" tossed around......why is it no one talks about the ACTUAL deficit rather than some smoke and mirrors number ????"

Great question.  It is important to note that "deficit" refers to the yearly operating shortfall, while "debt" refers to the sum total of all the past deficits.  Clinton did NOT eliminate the debt; that grew each year under his directorship.  The deficit fell during his tenure, and only under the narrowest of interpretations.   However, as we shall see, that narrow interpretation was not at all reflective of reality.

1) The ‘deficit’ is the headline number widely reported by DC and broadcast through the airwaves by journalists, who seem to remain confused, thinking that a "deficit" could simply be viewed as revenues minus
expenses. Instead, "the deficit" is a fantasy number that excludes all sorts of items, such as money borrowed from the Social Security program, and the cost of foreign wars plus any expenses accrued but not yet paid out as cash.  For example, injured veteran costs incurred in a given year do not count against that year, but are 'saved' for later years.  The deficit would be the equivalent of you stating your fiscal condition in any given month without factoring in your credit card, mortgage, or car loans.  This is what fell under Clinton's last term.

2) A so-called ‘audited deficit’ number is also released by the Treasury department, but they do it with as little fanfare as possible, often by silently updating the Treasury website late in December in the hope that nobody notices. This number consists of the headline fantasy number (see #1 above) released to the general public, plus a few other things, such as the impact of spending all the ‘surplus’ Social Security funds collected, but not distributed, each year. The difference between this number and the headline number is commonly several hundred billion of dollars. 
This is easily tracked by going to the Treasury website and subtracting the current level of debt from the one of a year ago.  For instance, subtracting the value reported today from 9/9/07 gives us an increase in government debt of $681 billion, as compared to the recently reported $408 billion number.

3)  And then we have the total US deficit,
which is what would be reported if the US government had to report the increase in unfunded obligations and all other forms of deficit spending.  It is also what’s known as “the honest number,” because it represents the true state of expenditures in relation to revenues. This number is never spoken out loud by DC politicians, because the House and Senate chambers are apparently composed of a dense form of ‘anti-reality,’ which, if exposed to ‘reality,’ would result in a massive explosion. Or at least cause elected officials to lose their jobs when an angry electorate finds out how badly they've been managing things. Either way, the true deficit number is widely avoided in DC. The US government’s total deficit is now pegged between $53 and $99 trillion  – figures that could never be repaid.
Over the past ten years, during times of both growth and recession, this deficit number has increased by over $40 trillion dollars. So we can say this is not something that we're likely to "grow out of," because it just keeps getting bigger and bigger, no matter what.

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3 Comments

srbarbour's picture
srbarbour
Status: Silver Member (Offline)
Joined: Aug 23 2008
Posts: 148
'The honest deficit'
[quote]It is also what’s known as “the honest number”[/quote] I disagree with that claim. Indeed, it is arguable that you can legitimately call the 'total US deficit' a deficit in the first place -- it is, after all, as much projection as reality.

Indeed, the only relevant aspect of the so called 'total US deficit' is the projection of future needed funds. The whole accounting silliness of the government owing the government X amount of money, is, in the end, just silliness. As such, at best, this number represents the future state of affairs if nothing is changed. (And given the severity evident, there is a 100% certainty that the policies will eventually change.)

Instead, I tend to view that the audited deficit -- as you called it -- as the most 'real' measure of our deficit. Primarily because it best tells us how much the United States was actually forced to borrow -- no projections, no hand waving, no magic accounting -- over the last year. It gives us very relevant information on how things will be in the short term, and I tend to view longer term predictions as dangerously out of touch, especially when the exact derivations are not made abundantly public.

To view it another way, using the total US deficit as a measure, is rather like calculating the change in the size of your bank account by subtracting your 'projected' living expenses post-retirement from the account balance. It tells you a good bit about a future that may never come to pass, but rather little the last year and the next.

I think, though, we can both agree that the claimed 'deficit' paraded around by the government is nothing short of propaganda.

--

Steve
cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5754
Two things I disagree with here...

 

1) To say that the entitlement obligations of the US government will "go away" if the rules change is not quite right.  They will merely shift.  Instead of paying out the Social Security and Medicare claims, you propose that they will simply change the rules and not pay them.  Fair enough, but then who will?  Unless we are ready to admit that our aged citizens will be left untreated and starving I think it's fair to say that the claims will be serviced.  So I ask you, what's the difference between the US government paying for those services and the taxpayers doing it directly?  Nothing but the loss of a middleman.  The net costs are still there, they are still magnificently huge and there is not much chance that either party can pay that bill no matter how it is structured.  It's a mess.  An honest mess.

2)  [quote]To view it another way, using the total US deficit as a measure, is rather like calculating the change in the size of your bank account by subtracting your 'projected' living expenses post-retirement from the account balance.[/quote]  You should review or watch the Crash Course chapter called "A national Failure to Save" (Ch 13).   There I review the fact that the stated deficit of the US government is a Net Present Value (NPV) calculation.  Your example would be comparable if all future expenses and revenues were brought back to the present and compared to your current finances. This would be a good thing to do as it would tell you the dimensions of your savings surplus or shortfall.  All good financial planners do this with their clients right out of the gate.  It's what responsible adults do - they plan for the future. 

Chris Martenson

srbarbour's picture
srbarbour
Status: Silver Member (Offline)
Joined: Aug 23 2008
Posts: 148
... and more
[quote]Instead of paying out the Social Security and Medicare claims, you propose that they will simply change the rules and not pay them. [/quote] I'd hardly say I propose such a thing. I'd instead say that this is the inevitable consequence of the current financial trends. Further, barring a miracle intervention of fate, the continuation of current neglect will inevitably reach a point where the obligations can no longer be met -- by any means. Hence, when given such an impossibility, it is simple common sense to declare: "it won't happen."

That is not to say that the consequences of the alternative route are desirable. [quote]Unless we are ready to admit that our aged citizens will be left untreated and starving I think it's fair to say that the claims will be serviced. So I ask you, what's the difference between the US government paying for those services and the taxpayers doing it directly?[/quote] While I generally agree that the government paying for something with taxpayer money, is no different than a private investment of the same scale, you are neglecting to account for an important variation. A change of rules and payers intrinsically changes the machine, and therefore the incentives. Consequently, so changes behavior.

In a world where the government pays, it is not (as much) to the 'retirees' advantage to continue working until, say the age of 75. Oposingly, an individual that must pay for himself is unlikely to retiree until forced by health reasons, or he acquires (what he believes to be) sufficient funds.

The distinction is important, especially in the 'modern' world where most jobs are white collar and aging has less impact on worker output. It is important because it is quite viable to move back the retirement age to both: decrease expenditures (less people on social security for a shorter period of time), and increase tax revenue (more people paying taxes for longer).

Granted, it is neither reasonable nor intelligent to force current retirees to 'resume work', cut existing benefits to those already retired, nor to force the alteration of the plans of those just about to retire. As such, any policy change would need to address those concerns and be made as soon as possible. (Better yet, five years ago!)

As a side note, as my opinions may be disguised, I am empathically for social security and medicare. I however, bow to the forces of reality no matter how great my disgust at the governments long term frivolous misspending. [quote]it's a mess. An honest mess.[/quote] I unhesitatingly agree. [quote]Your example would be comparable if all future expenses and revenues were brought back to the present and compared to your current finances. This would be a good thing to do as it would tell you the dimensions of your savings surplus or shortfall. [/quote] No disagreement. I think you misunderstand my argument. It is not that the total US deficit is an invalid number (though it should be taken with a grain of salt, like all numbers based upon projections into the future). It isn't that it isn't a useful number that tells us important things about future expenditures either.

It is, rather, that total US deficit is a terrible measure of our yearly deficit. Which is pretty much what the 'announced' number is supposed to be.

One doesn't use NPV when balancing their check book for a reason. [quote]All good financial planners do this with their clients right out of the gate. It's what responsible adults do - they plan for the future. [/quote] And good Financial planners should also thwack themselves, or the one they are planning for, upside the head if ever the number comes up negative, and say: "Stop dreaming."

Indeed, any well planned NPV should be significantly positive, because one should always plan for the worst while hoping for the best.

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