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Abandon All Hope: An Overview of the US Budget Crisis

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My fellow Americans,


I don’t know about you, but I am a bit tired of hearing people say that, if they were president, they could fix the budget woes in a year or two. They would only need to cut taxes here or add a program over there. How we all wish it was so simple. The fact is that the US budget is much more complex.

I've put together a small guide to the current state of the US finances. This is for my reference as well as for anyone else who is interested. My goal was to answer 3 basic questions:
  1. Where does the US Government spend our tax dollars?
  2. What has caused the deficit to increase and who owns the US debt?
  3. What are the current problems in Washington and how will they affect me?
I have gathered all of the following information from government and news websites. You will find my source list at the bottom. I will attempt to refrain from any statements that would seem biased toward a particular viewpoint or party. This may take a while so let’s get cracking.




The first and most essential question here is:
Where do our tax dollars go?

In the 2010 fiscal year, US taxpayers paid $2.16 trillion in taxes. The US government spent $3.45 trillion during that year. Aha! We have found the problem. We are spending almost $1.3 trillion that we do not have. This has resulted in a national debt of, according to the US Department of Treasury’s website, $14.3 trillion to date.

Allow me to depart for a moment to mention a phenomenon related to this discussion. The human mind is incapable of comprehending extremely large numbers. To our brains, they are a very abstract concept. For that reason, there is not much difference in a million, billion and trillion. For this reason, let me provide a little perspective.

When you hear any senator or house representative get on the television or write an editorial about how they have single handedly saved the government 50 or 100 million dollars, don’t be impressed. That is the rough equivalent of the average American running to their accountant and telling him they ordered a water instead of a coke with their lunch. That’s right: 100 million dollars to the US economy = about 1 coke for the average tax payer.

Now, let’s get back to business. So how did we spend this $3.45 trillion in 2010, you ask? Here’s the basic outlay overview. This data was taken directly from the Government Printing Office’s website, which compiles official government documents.





The first question some will ask is: What is the difference between mandatory and discretionary spending?

Mandatory spending is that which is not dependent on an annual appropriation bill. In other words, this spending has been enacted by law to continue for a length of time and does not need to be approved by an annual bill. This mostly encompasses entitlement programs like Social Security, Medicare and Medicaid. Participants in these programs will get their money, regardless if it is approved at the beginning of the fiscal year or not. It also includes food stamps, unemployment compensation, some tax credits and supplemental security for the disabled, among others.

Discretionary spending, on the other hand, is that which requires approval by the House and Senate Appropriation Committees. This is every major government program from education to agriculture. The largest part of this spending is the Department of Defense’s budget.

As you can see from the chart, the majority of the US budget goes toward Social Security, Medicare & Medicaid. The next largest chunk is given to the Department of Defense. Depending on your personal politics, you might suggest cutting from one of these major programs. However, it should be noted that, in order to balance 2010’s budget, there would needed to have been a 37% cut overall. That means that no single program, even if it was cut in its entirety, could solve the problem.




Now, let’s get to the pressing question:
Why can’t Washington just balance the budget?

This question can be simply answered if we look at why the US government went from a surplus to a deficit budget since the Clinton administration. In 1999, the US Taxpayer was paying in $1.8 trillion and the US Government only spent $1.7 trillion. I’m sure the Washington economists certainly miss those days.

While our revenues have increased, as would be expected after 10 years of inflation and tax increases, the cost of running the US government seems to have more than doubled. Let us examine where this increase has taken place:






The culprits are quite obvious. Two wars and the continuing peace-keeping missions in the middle-east have driven Department of Defense spending to frightening levels. Furthermore, the tremendous population now in need of Social Security, Medicare and Medicaid has and continues to grow at an alarming rate.

I won’t go into the specifics of these programs (at least not in this blog). Suffice it to say that, at this moment in time, they are necessary and only major policy changes could significantly alter the status quo. I should mention that ceasing middle-eastern operations would significantly decrease the Department of Defense’s budget. Entitlement programs, on the other hand, are slated to continue rapidly increasing. Regardless of your allegiance to a party, entitlements must be made less costly or spending will outpace revenues, even if the US government were to significantly increase taxes. This is one issue on which there is a general consensus.

Before we continue, I should mention interest. Some might look at the above chart and say, “at least interest payments have gone down”. That is true. They will also double to $421 billion by 2014 and are estimated to be more than 15 percent of the budget at $863 billion by 2020. It is for this reason that we should be most concerned with, not only stopping the deficit spending, but paying off the US debt.

I would also like to clarify a commonly discussed issue. Who owns US debt? Most people in America have heard someone make the statement that “China owns us and once they call in their debt’s it’s all over.” I need not explain to anyone who has ever borrowed money that the bank rarely “calls in” on your un-defaulted debts. I’m pretty sure that is relegated to the realm of loan sharks. That said, we need to examine who holds the approximately $14.3 trillion in US debt.





Did everyone else just let out a sigh of relief? China doesn’t own us! Apparently, we own us. Perhaps not the best investment at the moment, but still it is a relieving revelation. Now we should move on.




In order to, as they say, stop the bleeding, a wide number of plans has been proposed. This leaves us poor, pitiful Americans wondering:
What is going on and how will this affect me?

The first thing you should understand is that the current fiasco in Washington has been caused by a vote to raise the debt ceiling. Our current $14.3 trillion ceiling has now been reached and, unless that debt ceiling is raised, the US government cannot legally continue to spend money. News agencies have typically been reporting on $2 trillion, $3 trillion and $4 trillion plans. That specifically relates to the amount that the debt ceiling would be raised.

If no plan is accepted by the August 2nd deadline, the President has warned that Social Security checks could be interrupted. This, in and of itself, would likely have major economic effects. Moreover, the major rating agencies have warned that they may lower the United States’ credit rating if a deal which includes a number of policies is enacted. This would likely have catastrophic effects within the financial sector. For these and a number of other reasons, not reaching an agreement would be a very bad thing for the United States Government and US taxpayers. If those in Washington do not find an acceptable compromise, it will likely be remembered as one of the biggest failures of the US government and our political system.

Because of the potential negative consequences, a plan will, in all likely hood, be reached before August 2nd. Among others policies, most of the current propositions incorporate tax reform, tax increases, discretionary spending cutbacks and entitlement reform.

Oops! It looks like I have hit a hard character limit. Seems like there may be a part 2 for this. I'll have to get some more information together to make it worth reading. Till next time...

Alex Megas


Resources:
FDsys - Browse BUDGET
The Dilemmas of Entitlement Reform - NYTimes.com
http://www.treasury.gov/resource-cen...uments/mfh.txt
Debt to the Penny (Daily History Search Application)
http://www.treasurydirect.gov/govt/r...opdm092010.pdf
11th-hour budget plan revives hope that US will avoid debt default - The National
Boehner: Obama tax stance caused debt talk collapse | Reuters
Americans for Tax Reform :: What is the Taxpayer Protection Pledge?

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Updated July 24th, 2011 at 12:30 AM by Flapjack

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Comments

  1. caelum's Avatar
    I'm not American, but I found this very interesting. Nice article.
  2. Flapjack's Avatar
    Thanks, Caelum. I'm glad you found it interesting. I read everything I can get my hands on about economics/politics and I tend to ramble about it to my friends & family, who really couldn't care less. It's nice to put it on a venue where someone might actually be interested.
  3. J.R. MacLean's Avatar
    I'm also not American but you've clarified what has happened very nicely. It is amazing that it has happened so fast.
  4. Flapjack's Avatar
    It is hard to image anyone could come up with 14.3 trillion as quickly as the US has. I would attribute it to our politicians either not understanding economics or ignoring the problem and focusing their efforts on impressing their campaign contributors and local constituents. In many cases, it is probably both.
  5. Gumby's Avatar
    I think you've hit the nail on the head with your statement, sadly.

    I would attribute it to our politicians either not understanding economics or ignoring the problem and focusing their efforts on impressing their campaign contributors and local constituents.
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