In listening to or reading about the federal debt debate, it’s easy to get confused. Not just because there are so many opposing opinions on the topic, but more fundamentally, because there is confusing usage of some basic terms that could easily lead to a false expectation for the future. This viewpoint will not offer yet another tax and/or spend opinion, but will provide a better technical foundation for understanding the debate.
Just recently, I sampled various media sources that are covering the debt debate. Widespread coverage, for sure. I read a CNNMoney article, listened to CNBC, msnbc, FOX — including an interview with a senator — and read a commentary piece, as well as a few letters to the editor in The Tribune. Diverse opinions, for sure, but the one thing they all have in common is an apparent confusion between the terms “debt” and “deficits.” Many use the two terms as though they are interchangeable when talking about the potential impact of the various federal budget proposals, when in fact they are not synonymous terms.
The federal government only has one debt, which is now approaching $14.5 trillion. The government has a current debt because over the years it has cumulatively spent more than it has received. In fact, this country was “born” with a debt when, after the Revolutionary War, our new fledgling federal government assumed the liability for the debts incurred by the original colonies during the war. Much of this debt was owed to other countries, not unlike what we have today, but for very different reasons. In order to help repay that original war-induced debt, the government approved a 20-year charter for the First Bank of the United States. That was our original incarnation of the current Federal Reserve System, but that’s fuel for a future viewpoint. There have only been three years in our 200-plus-year history where the country did not carry a debt of at least $1 million.
In contrast to the debt, a deficit — or surplus, should we ever spend within our means — is the result of subtracting the government outlays from the government receipts in any one fiscal year. “Outlays” are money spent by the government and “receipts” are what the government receives, mostly obtained through taxes.
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Each year that we have a deficit, that amount is added to the debt. If we ever have another surplus year, it will reduce the debt by the amount of the surplus. We cannot reduce the debt without having a surplus, unless we just decide to default on our debt — not a good idea.
When we talk about reducing “the deficit,” it would be clearer if everyone would consistently mean this to be the current year’s projected deficit. Unfortunately, this is one of the key sources of confusion. For those of us who manage a household budget, when we talk about reducing our spending, we usually mean relative to what we have spent recently. In contrast, when politicians talk about reducing “the deficit,” they often are referring to reducing the spending that they plan to do sometime in the future — often over a 10-year period. So, for example, if they had planned to run cumulative deficits of $10 trillion over the next 10 years, and they reduce the spending proposal to “only” $6 trillion of deficits, the headline would read something like, “Politicians cut $4 trillion.” I understand the need for short, eye-catching headlines, but it would be more instructive to say, “Politicians reduce projected deficit spending $4 trillion over next 10 years.”
This leads me to the final and most egregious source of confusion: the current misapplication of the phrases “cutting the debt” or “debt reduction.” Just last week, there was an article published by a prominent Web publication that read something like, “That so-called ‘grand bargain’ would be worth up to $4 trillion in debt reduction over the next decade.”
As mentioned previously, the only way to reduce our debt is to run a surplus, and each 10-year budget proposal currently receiving serious consideration will incur a deficit every year during the next 10 years. Yes, they will increase the debt.
Perhaps this author meant there would be less debt accumulation than previously planned, but the phrase “debt reduction” is misleading, at best. Since each budget proposal would add to the debt, when you see phrases like “cutting the debt,” you’ll need to do a mental translation from political-speak into its plain English meaning, which is something like, “will not increase the debt as much as we had planned.”
Ron Workman has regularly taught economics and finance courses through the Osher Lifelong Learning Institute (OLLI) program at Cal Poly.