A G E UIDE TO THE CONOMICS AND F P ISCAL ERFORMANCE OF THE F G EDERAL OVERNMENT (1976-2007) No part of this digital document may be reproduced, stored in a retrieval system or transmitted in any form or by any means. The publisher has taken reasonable care in the preparation of this digital document, but makes no expressed or implied warranty of any kind and assumes no responsibility for any errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of information contained herein. This digital document is sold with the clear understanding that the publisher is not engaged in rendering legal, medical or any other professional services. .
C ONTENTS Chapter 1 Introduction 1 Chapter 2 Gross Domestic Product 7 Chapter 3 Federal Government Revenues 13 Chapter 4 Federal Government Spending 19 Chapter 5 Federal Budget Deficits and Surpluses 33 Chapter 6 U.S. National Debt 39 Chapter 7 U.S. National Debt Held by Foreigners 49 Chapter 8 U.S. Current Account 55 Chapter 9 U.S. Unemployment Rate 61 Chapter 10 U.S. Inflation Rate 65 Chapter 11 U.S. Misery Index 69 Chapter 12 Strength of the U.S. Dollar 73 Chapter 13 Social Security 79 Chapter 14 Discussion: Where the U.S. is Now and Priorities for the Future 83 Chapter 15 Concluding Thoughts 93 Index 95 .
Chapter 1 I NTRODUCTION As Americans, we enjoy the benefits of living in a free and democratic country. But maintaining our freedoms and our democracy requires some effort on the part of the citizenry. We have a basic obligation to be informed about the issues and the actions of our government in order to hold our elected officials accountable for their decisions. Only then can American democracy flourish and continue to pursue the ideals upon which the nation was founded. Unfortunately, the overwhelming majority of us simply do not pay attention to what happens in Washington, and, in many cases, we do not understand how the government operates. This is particularly true when it comes to economic issues and the fiscal performance of the federal government. Most Americans simply do not know such basic financial facts as how much money the U.S. government spends per year, what the national debt is, or how the government covers cash shortfalls that result from deficit spending. Understanding the economic conditions of the country and the fiscal decisions of the government is critical for two reasons. First, all public policies in the country are subject to economic realities and limitations – the government’s resources are considerable, but they are limited by the amount of revenue it generates from taxes and the total amount it can borrow. Just as a household should never spend or borrow money without first knowing what its fiscal position is (i.e., household income, savings, existing debts, etc.), the federal government should operate within its financial means and recognize its fiscal position before spending or borrowing funds to pay for its public policy decisions. Second, the President, Congress, and all agencies of the federal government should be good stewards of American taxpayer money. While there are checks- and-balances within the government, the ultimate check-and-balance mechanism .
Chapter 2 G D P ROSS OMESTIC RODUCT One of the most widely used measures of how the economy is performing is Gross Domestic Product (GDP). GDP is the total market value – in dollars – of all goods and services produced within the U.S. in a year. GDP does not distinguish between U.S. and foreign-owned companies that produce products or services in the U.S., nor does it include products that are produced by U.S. companies in foreign countries. Thus, it is a great indicator of how well the country’s domestic economy is performing because the goods and services it counts are only being produced within the borders of the U.S.1 When GDP is rising, the economy is expanding, as the country produces more goods and services within its national borders. When it is rising rapidly – faster than about three percent – then all is usually well economically. More specifically, job growth tends to be strong, unemployment is low, and government revenues increase because as more is produced, there is more that can be taxed. When GDP growth falls below two to three percent, economic concerns grow and Americans start to feel pinched economically. Revenue growth for the government (i.e., tax collections) slows and less money is available to fund existing government programs or to spend on new programs. When GDP contracts for two successive quarters, we have an official recession, and the country feels even more significant economic pain. Obviously, a recession has significant negative impacts on government revenues, and forces elected officials to change government programs, tax policies, and debt accumulation in order to stimulate the economy. 1 For more information about GDP see the U.S. Bureau of Economic Analysis website (“www.bea.gov”). The GDP figures discussed in this book and illustrated in the figures can be found at “http://bea.gov/national/xls/gdplev.xls”. .
Chapter 3 F G R EDERAL OVERNMENT EVENUES The federal government has to have a source of revenue to generate cash which can be used to pay for government operations and services. While GDP represents the size of the entire U.S. economy, it is not equivalent to government revenues that can be spent on government programs and priorities. It is important for all Americans to understand where the government gets its money (revenue) because the government’s money is our money. The primary source of revenue for the government is taxes. “Tax” is a bad word for many people, but the reality is, through tax revenues the government pays for such things as the military, federal highways, and popular government programs such as Social Security. People may differ on what an appropriate tax burden should be for individuals and corporations (or even whether there should be any taxes whatsoever), but they are a necessary part of American society because they fund our government and the services it provides. In 2007, the U.S. government collected a record $2.57 trillion in revenues. The sources of the money were as follows:1 45% - Individual Income Taxes 14% - Corporate Income Taxes 34% - Social Insurance Taxes 3% - Excise Taxes 1% - Estate and Gift Taxes 1% - Customs Duties 2% - Miscellaneous Receipts 1 Historical revenue collection figures can be found at the Congressional Budget Office website (“www.cbo.gov”). The revenue figures discussed in this book and illustrated in the figures can be found at “http://www.cbo.gov/showdoc.cfm?index=1821&sequence=0”. .
Chapter 4 F G S EDERAL OVERNMENT PENDING One thing that all Americans know is that the federal government spends money. Every year, the President sends a proposed budget to Congress. While the budget provided by the President sets the agenda for government spending, it is not the final budget. Congress debates it and makes changes to the proposed budget, usually adding money for their own priorities. Once both Houses of Congress have passed the budget, they send the approved budget bill to the President who signs it into law or vetoes it. If it is vetoed, Congress can either work with the President to change the bill, or it can overturn the veto by voting to pass the budget over the President’s objections. (Overturning a veto requires super majority votes in both the House and Senate.) Once the bill has been signed into law by the President, or Congress overturns a presidential veto, the money for the budget is appropriated (i.e., committed) and the spending begins for the fiscal year. On top of the budgeted amount, supplemental spending bills are approved throughout the year. These spending bills are often needed to cover emergency war funding or federal relief efforts after natural disasters such as tornadoes, floods, or hurricanes. The end result of all of this spending is that the U.S. government is the single largest customer in the world. It purchases billions of dollars worth of goods and services from private-sector contractors. It is also the largest charity in the world. It pays out billions in foreign and domestic aid programs each year. The taxes and revenues that the government collects and generates are used to pay for this aid, contractor products and services, salaries for all federal workers and members of the military, and the thousands of other federal programs every year. The government pays for everything from the salary of the President, to the rebuilding of Iraq, to basic research conducted at the National Science Foundation, to education grants to fund Head Start programs for pre-school children, to border .
Chapter 5 F B D S EDERAL UDGET EFICITS AND URPLUSES The U.S. economy is difficult for most people to fully comprehend. Even highly-regarded economists and non-partisan policy analysts differ on what is best for the economy. However, one thing that most economists agree on is that significant ongoing deficit spending is bad economic policy. The reasons for this are explored in this chapter. What is deficit spending? Quite simply, when the amount of money the government spends in a given year is more than the amount of money that the government generates in revenues for that year there is a deficit (i.e., the government engages in deficit spending). If the government spends less than it takes in during the year, there is a budget surplus. Unfortunately, since 1950 there have only been nine years when our government has operated with a surplus.1 Integrating the spending and revenue figures from the prior two chapters, Figure 5-1 shows the historical budget deficits and surpluses since 1976. Clearly, and unfortunately, Figure 5-1 shows that deficits are normal for the U.S. government. However, it is also clear that fiscal performance, in terms of the federal budget, was best during the Clinton presidency. In fact, every year of President Clinton’s term in office saw improved figures for the budget. He inherited a budget deficit of $290 billion in the final year of the first President Bush, and following eight straight years of improvement, left office with a record budget surplus of $236 billion. Thus, the Clinton Administration oversaw an improvement to the annual budget of $526 billion. For this year (2008), President Bush has projected a deficit of 2.9 percent of GDP, which would amount to more 1 Timothy Bitsberger, “Treasury Debt Management” U.S. Department of Treasury (October 2, 2003). The information was accessed at “http://www.ustreas.gov/press/releases/reports/ bitsbergerpresentation.pdf” on June 16, 2008. .
Chapter 6 U.S. N D ATIONAL EBT There is confusion about the budget deficit and the national debt – they are linked but they are also two very distinct numbers. Budget deficits refer to the annual cash shortfalls that occur year after year (see previous chapter), but the national debt is the total amount the federal government owes. The national debt is the end result of the deficit spending. All of the deficits add up to make up the total national debt. Many people do not realize that the U.S. has a national debt, and those who do rarely know how large it actually is. Most Americans are probably not concerned about it because it seems abstract and irrelevant to their daily lives. However, it is real money that is owed by our government, and thus, by the American people to various creditors. It has been growing at a rapid pace in recent years, and if this trend does not change, it will become more and more difficult to finance the debt. This is problematic because as the costs to finance the debt increase, there are likely to be significant impacts on future government spending and services. As of October 23, 2008, the U.S. government owed over $10.5 trillion ($10,524,112,985,802.87 to be more precise1), and it is growing by more than $1.5 billion per day.2 This means that every man, woman, and child living in America is saddled with over $30,000 in government debt. The facts about the debt and complex issues it raises are explored further in this chapter. 1 U.S. National Debt to the penny can be found on the U.S. Treasury Department website at “http://www.treasurydirect.gov/NP/BPDLogin?application=np”. 2 See the U.S. National Debt Clock at “http://www.brillig.com/debt_clock/“. .
Chapter 7 U.S. N D H F ATIONAL EBT ELD BY OREIGNERS This chapter builds on the discussion and figures in the previous chapter. In addition to the explosion in debt over the last 30 years, there is an even more alarming trend – the willingness on the part of the federal government to borrow enormous sums of money from foreign investors. The national debt is a growing problem, but the rapid rise in debt owed to foreigners threatens the very sovereignty of the United States. As discussed in the previous chapter, much of the money the U.S. government raises to finance the national debt and pay for the deficit spending is raised through the sale of U.S. Treasury securities (i.e., government bonds and government notes). However, the massive accumulation of national debt and the record deficits we have seen in recent years requires the government to borrow heavily from foreign governments and foreign central banks through the sale of Treasury securities to the public. Quite simply, there are not enough investors or U.S. banks who are willing and/or able to fund our nation’s debt and deficits. As of August 2008, foreigners held over $2.7 trillion in U.S. government debt (i.e. U.S. Treasury securities).1 Consider what this really means – Americans owe $2.7 trillion to foreign governments, foreign sovereign wealth funds (i.e., mutual funds and investment funds owned by foreign governments), and foreign central banks. While still not necessarily in our nation’s best interest, it might not be so bad if all of our debt was held by our friends and allies in the world – but this is simply not the case. We owe China $541 billion and Russia $74.4 billion. We are not allies with these countries, and often oppose each other on various geo- political matters. We owe nearly $180 billion to OPEC nations which include openly-hostile nations to the U.S. Mexico and Carribean banking centers hold 1 The U.S. Treasury Department provides a summary of the Major Foreign Holders of U.S. Debt that is updated monthly. Available online at “http://www.treas.gov/tic/mfh.txt”. .
Chapter 8 U.S. C A URRENT CCOUNT Every year, the U.S. exports finished goods and services and imports finished goods and services. When the nation imports more than it exports there is a trade deficit. When exports exceed imports, the U.S. enjoys a trade surplus. As a general rule, it is better to export more than the country imports. When this happens, the country is drawing in more capital and accumulating wealth from outside countries. If, on the other hand, the country imports more than it exports, there is a net flow of U.S. wealth out of the nation and to other countries that the U.S. has a trade deficit with. The federal government tracks what is known as the current account for the nation.1 The current account is essentially a measure of the net flow of dollars in and out of the country. It is primarily made up of our trade balance (trade exports minus trade imports), but also includes such things as interest earned on foreign investments less interest paid out on U.S. debt held by foreigners as well as foreign aid (also subtracted from the current account). Just as with the trade of goods and services described above, when the current account is positive, the country enjoys a current account surplus. When it is negative, the U.S. has a current account deficit. At a minimum, the U.S. should remain neutral with respect to the current account. However, a measure of a nation’s economic power and financial strength is a positive current account (i.e., a surplus). Essentially, this means that products and services from within national borders are desired by customers around the world, and it also means that little debt is owed to foreign entities. 1 Current account figures can be found at the U.S. Bureau of Economic Analysis website (“www.bea.gov”). The current account figures discussed in this book and illustrated in the figures can be found at “http://www.bea.gov/international/bp_web/simple.cfm?anon=71 &table_id=1&area_id=3”. .