The Federal Budget Deficit and the National Debt
By Andrew Maskin
The Bronx High School of Science
December l, l994
Like a Fire-Bell in the Night:
Deficit, Debt and America's Decline
The Scope of the Problem
The last time the United States of America spent within its
means was 1969. Since then, our country has spent more money each year
than it has collected in revenues. The difference, the money that must
be borrowed to bridge this gap annually, is called the budget deficit.
The sum of all the money we owe via the issuance of Treasury bonds,
notes and bills over the years to finance our defecits is known as the
National Debt. The National Debt increases by approximately one billion
dollars every working day. Our debt currently stands at approximately
$4.7 trillion.
which breaks down to roughly $47,000 of debt per American family and
over $l6,000 of debt for every man, woman and child in the United
States. 1
What would it take, former Presidential aspirant Ross Perot
rhetorically asked, to generate enough revenue to eliminate 1993Õs $411
billion deficit? He went on to cite some radical measures that would
not come even close to accomplishing this goal. These included a
complete shutdown of the Department of Defense and all of our Armed
Forces, a complete shutdown of every public school in America, seizure
of the last yearÕs and this yearÕs profits of all five-hundred Fortune
500 companies, seizure of the entire wealth of the 400 richest people
in America, and lastly, doubling everyoneÕs taxes. Not a single one of
these measures would be enough to balance the budget.2
Historical Roots of the
Problem
The historical roots of our deficit and debt problems can be
traced further back than 1969. Some say that the Òprime the pumpÓ New
Deal policies of Franklin Delano Roosevelt sent the government on the
road to its current spending practices. Others point to the
administration of Lyndon Johnson who promised Americans that he could
deliver both guns and butter. Johnson used government funds to fight
two simultaneous wars: one against the Viet-Cong in Southeast Asia,
and one against hunger and poverty in the U.S. While secretly building
up forces in Viet-Nam ( and refusing to apply a surtax to pay for it
because it would hurt his popularity), President Johnson launched his
proposals to amend FDRÕs Social Security Act, creating other
entitlement (ÒGreat SocietyÓ) programs, such as Medicare and Medicaid.
Johnson initiated the process of expanding the entitlement base, making
more and more groups of people eligible for government aid. This
practice would catch on like wildfire in years to come, because of its
powerful positive political impact.3
The Reagan years saw an intensification in the growth of budget
deficits. In many ways, Ronald Reagan has been compared to Lyndon
Johnson, in that they both tried to provide both guns and butter.
President Reagan wanted to accelerate the arms race, and by doing this,
bankrupt the Soviet Union. During his tenure in office, President
Reagan increased defense spending 116%, from $134 billion to $290
billion. To pay for this new spending, he implemented tax cuts that
would spur the economy and generate more revenue for the government.
While his plan for generating more revenue did eventually pan out the
way he had hoped, and inflation was finally brought under control by a
tightening in the money supply, the new revenues generated were nowhere
near the levels needed to pay for the accelerated arms race. And so,
deficits soared, and by the end of his second term in office he had
tripled the national debt.4
Deficit spending during the Reagan administration has been blamed
for the recession during the Bush Administration. As President Bush
took office, Federal Reserve chairman Alan Greenspan commented on the
negative effects of the deficits of the 80Õs. He said that these
deficits were accompanied by little private saving, and this was
eroding the economy and would lead to a possible recession. His
argument was that deficits tend to draw investment away from the
private sector and into Treasury securities. This puts pressure on the
stock market, and gives companies less money to expand and to hire more
people.5
Out-of-Control Spending Policies
Various spending policies have contributed to our current
deficit and debt woes. The portion of the Federal budget classified as
Òmandatory spendingÓ is often cited as a prime contributor to the
deficit. Broadly defined, mandatory programs are those that are not
directly controlled through the annual appropriations process. They
account for a whopping 64% of our expenditures each year. In other
words, Congress can approve or reject proposals for using only 34% of
the money it spends on a yearly basis. This portion is called
discretionary spending.6
One type of mandatory spending is interest on the national debt,
which is growing rapidly, and currently consumes 14% of our budget.
These are interest payments; they do not feed the poor or educate
children or build roads. They do nothing except pay for the deficits of
the past.7
The other type of mandatory spending is Òentitlements.Ó Entitlements
by far account for the majority of mandatory spending. They are
programs that require the government to pay benefits to people based on
eligibility criteria established by law. There are over 200 entitlement
programs, but only 21 of them consume 97% of all entitlement spending.
Most of these are social welfare programs, which can fall into one of
two catergories: means-tested and non-means-tested. Means-tested
programs, such as Medicaid, Food Stamps, and family support programs,
give out benefits to those in need, to those who fall into a certain
category of wealth (or lack thereof). These programs comprise 20% of
all entitlement spending. To receive benefits through non-means-tested
programs you could be a billionaire or you could be homeless. Rich and
poor alike get checks from Uncle Sam through such programs as Social
Security, Medicare, unemployment compensation, and retirement programs.
These comprise 80% of federal entitlement spending.8 It has become a
common thread of most serious deficit-reduction proposals to convert
non-means-tested programs into means-tested programs, and then to put
caps on how much the government can spend on them.
The secondary cause of deficits, many say, is Ògovernment waste.Ó
Entitlements have their defenders, and so does government waste. These
defenders are different from the entitlementsÕ defenders because they
openly and often vocally denounce government waste in general. However,
they claim that their pet programs just happen to be absolutely
neccessary, and therefore are not to be considered waste.9 A large
portion of government waste has been classified as Òinefficiencies.Ó
Inefficiencies in the White House, the executive departments,
congressional offices, independent bureaus and even the census process
have all come under fire. One case often cited is how, since the
1920Õs, while the number of farmers in America has declined sharply,
the size of the Department of Agriculture has increased
signifigantly.10
Another class of waste comes in the form of subsidies and
lop-sided financial agreements. The government spends billions
subsidizing farmers by forgiving billions in loans, buying hundreds of
millions of pounds of honey to prop up commercial beekeepers, paying
the electric bills for the casino owners in Las Vegas, manufacturing
fertilizer, producing helium for Òmilitary purposes,Ó buying land at
well over its market value, selling off huge office complexes it seized
as part of the S&L bailout at discount prices, and irrigating the
farmland of muli-millionaires in central California.11 A third
category has been the one that generally gets the most attention in the
media - Òperks.Ó Many common Americans have shown disgust at the
healthy package of private airplanes, limosines, health clubs, and
especially retirement benefits that senior Washington officials have
access to.12
Critics of deficit spending argue that such spending imperils our
sovereignty. It has been said that our fiscal policy relies too heavily
on the availability of foreign investment capital, because foreigners
purchase a lot of U.S. government debt.13 This amounted to $503 billion
in 1992, a three-fold increase from ten years earlier.14 In effect, the
United States has become a capital importer; the richest country in the
world has become a net borrower of goods and services from the rest of
the world.15 Many fear that if a fiscal crisis should arise, our
foreign creditors would have an undue amount of leverage over us
because we are in debt to them for hundreds of billions of dollars.16
Two Doomesday Scenarios
Some experts who have studied our deficit and debt problem take a
somewhat apocalyptic view. They argue that if these problems are not
dealt with soon AmericaÕs decline will be accelerated. Two scenarios
are cited. The first is called ÒDeath by Panic.Ó In this scenario,
foreign governments decide to give up on the United StatesÕ long-term
ability to pay its debts. The financial markets of the world would be
flooded by sell orders on U.S. bonds, notes and bills and no one would
be buying. Desperate for buyers, the U.S. would have to raise interest
rates to usurious levels, and practially overnight the dollar would
become nearly worthless. The next day Americans would wake to find
that they have no jobs, no savings and no prospects. The government
would be completely broke and would have to shut down. Then would come
the riots and the anarchy.17
The second apocalyptic scenerio is called ÒDeath by
Hyperinflation.Ó This scenerio starts with the process of monetizing
debt. As a way of paying off its debts, the U.S. Treasury frequently
sells bonds, notes and bills to the Federal Reserve. When the Fed buys
these securities it simply writes a check and the Treasury puts the
money in a bank somewhere. The bank credits the deposit
even though the Fed did not actually have real money to back up the
check. The moment the Treasury cashes the check, new money has been
created. 18
But using this new money to Òpay down the debtÓ has a negative
side. The negative is that creating new money without corresponding
economic growth leads to inflation. Inflationary cycles can intensify
to the point where hyperinflation takes over. In a hyperinflationary
atmosphere the dollar becomes virtually worthless, foreign companies
swoop down and buy up entire industries Òdirt cheap,Ó and banks cancel
all credit cards because they cannot collect money fast enough to keep
pace with the rapidly falling value of the dollar. This scenario ends
as black markets spring up and riots and anarchy spread across the
land.19
Difficulty in Finding
Solutions
Even those observers who play down the likelihood of the
above scenarios occurring admit that our deficit and debt problems are
interrelated and in need of a solution. Over the years there have been
various points at which the government has, in fact, tried to address
the deficit problem. In February, 1982, President Reagan commissioned
the PresidentÕs Private Sector Survey on Cost Control, otherwise known
as the Grace Commission, to look for ways to eliminate waste in federal
spending. In January1984, the members of the commission, which included
some of the most illustrious and successful businessmen in America,
submitted their report. The Grace Commission report contained 2,478
cost saving recommendations. These included replacing the federal
governmentÕs 332 separate incompatible accounting systems with a single
accounting system, and privatizing building-maintenance services. The
total savings that would have resulted from the implementation of the
Grace CommissionÕs recommendations reached into the hundreds of
billions of dollars. Unfortunately, President Reagan (whose idea it was
in the first place) and Congressional leaders politely thanked the
Grace Commission and promptly ignored most of what was recommended in
its report.20
The next real effort to bring about fiscal responsibility was the
Balanced Budget and Emergency Deficit Control Act of 1985, otherwise
known by the name of its three sponsors as the Gramm-Rudman-Hollings
Act. Gramm-Rudman-Hollings required that the deficit be lowered from
1985Õs $252.9 billion to zero by 1991, $36 billion per year. These
restrictions were not optional; they had been passed into law. At the
time it seemed iron-clad. But as it turned out, whenever Congress had
the squeeze put on it by Gramm-Rudman-Hollings, they simply revised the
law. First, they gave themselves more time to meet
Gramm-Rudman-HollingsÕ targets. Then, in an even worse move, and what
proved to be the death-nail for the Act, they exempted entitlements
from Gramm-Rudman-Hollings restrictions.21
Early in 1990, President Bush called an emergency meeting with
Congress to address the hemorraging federal budget. While very few
spending cuts could be agreed upon, increased taxes went through more
easily, with a luxury tax, higher top marginal rates, higher excise
taxes, etc. All in all it was the second largest tax increase in
history, and many say it contributed to the recession. The problem with
the Budget Reconciliation Act of 1990 was that it had two huge
loopholes, which Congress quickly capitalized on. The first loophole
stipulated that new spending could sneak its way in if it were
classified as an emergency, and this clause was interpreted quite
loosely. The second loophole was that spending estimates could be
changed and manipulated to meet changing economic conditions. The
recession reaked havoc over spending estimates, and Congress reaked
havoc over the Budget Reconciliation deal of 1990, increasing spending
$1.83 for every $1.00 raised in new taxes. Needless to say, the deficit
soared.22
The most recent legislative attempt to balance the budget was
President ClintonÕs Òdeficit-reductionÓ plan, which he proposed
towards the beginning of his Administration. In the budget that he
submitted for FY-1994, he states that his serious deficit-reduction
initiatives will stop government deficits from preempting the private
investments needed to create jobs and raise living standards. Clinton
also claimed that his plan made a decisive break with the past.23
ClintonÕs detractors dispute this claim. They point out that while
the deficit initially goes down somewhat, the plan calls for an
increase in the defecit back to current levels and beyond after
bottoming out at in 1996 (an election year). Others quibble with the
planÕs over-reliance on taxes. They claim that the spending cuts that
are called for in the plan are not really cuts, but simply cuts in the
rate of spending increases.24
For many, the current Republican-sponsored balanced-budget
amendment to the Constitution is an example of an automatic(and false)
cure-all for the deficit problem. Back in 1981, when the
balanced-budget amendment was first discussed seriously, criticism
centered mainly on the effects it would have on the Keynesian model,
i.e., the government could no longer run up deficits during recessions.
Today, however, the Keynesian model has lost much ground in Washington,
and has been replaced in its role as nemesis to the balanced-budget
amendment by the growing uncertainty of how to define the deficit. Many
argue over whether the expenditures on such things as Operation Desert
Storm, and the savings & loan bailout should be included. Others
dispute the definition in terms of the primary deficit, which excludes
interest and the inflation-adjusted deficit.25
Efforts to reduce the deficit have encountered resistance because
various interests and interest groups have fought to protect their
pieces of the pie. Somewhat coincidentally, the most powerful of these
interests, the AARP ( The American Association of Retired Persons), is
dedicated to maintaining, if not enlarging, the biggest drain on the
U.S. Treasury: entitlements. It has been able to do this because it has
unrivaled clout. It is the second biggest organization in America,
second only to the Catholic Church. ItÕs twice as big as the AFL-CIO,
with a membership of 33 million (or one quarter of the U.S.
electorate). Its magazine, Modern Maturity, is second in circulation
nationwide. With an annual cash flow of about $5 billion, the AARP
would be at or near the top of the Fortune 500, were it a private
corporation.The AARP is dedicated to using its enormous financial and
political power to prevent the trimming of entitlements.26
The effect of lobbying groups like the AARP could be seen during the
summer of1993 when debate over Bill ClintonÕs budget was taking place.
Part of President ClintonÕs original Òdeficit-reductionÓ plan was to
provide for an energy tax, assessed on the thermal content of fuels,
which, over five years, would have raised $80 billion. This tax did not
sit too well with some energy lobbying groups. As it turned out, two
members of the PresidentÕs own party, Senators John Breaux of Louisiana
and David Boren of Oklahoma, are both on the critical Senate Finance
Committee. Given that they both are from energy-producing states, they
both were strongly opposed to the energy tax, and it was eventually
scrapped.27
ÒLike a Fire-Bell in the NightÓ
This paper has examined the roots of our current debt and deficit
situation, analyzed the spending policies which have contributed to
these problems and discussed the largely ineffectual solutions which
have been offered by both Democratic and Republican administrations.
While the degree to which the deficit and the debt are threatening the
future of the United States is a matter of opinion and debate in the
halls of Congress and in the media, all knowledgable
government-watchers agree that the threat is there, and it is real.
America, as the analogy goes, has been severely wounded, and as the
politicians bicker over how to solve the problem, the bleeding
continues, and will continue into the forseeable future, until the
United States of America becomes one of historyÕs closed chapters.
To avoid this doomsday finale a certain degree of bravery is
required in our politicians. A three-step approach must be adopted.
First, a bipartisan consensus must be reached on how to reduce
government outlays. Democrats and Republicans must then act to cut the
COLAs (Cost Of Living Adjustments) which are simply increases of
entitlement spending on a yearly basis. After this painful political
act is accomplished, equally unpopular deeper cuts into actual
expenditures and Federal employment levels can be made. Failure to
take these actions would only postpone our governmentÕs need to come
face to face with its habit of spending money which it does not haveÑa
habit which, if not checked, will render insolvable AmericaÕs already
serious economic and social problems .
Footnotes
1. Newsweek, November 21, l994.
2. Ross Perot, United We Stand, New York: Hyperion, l992, p.9.
3. Harry E. Figgie, Bankruptcy 1995, Boston: Little, Brown & Company.
1993, pp.26-27.
4. Benjamin Friedman, Day of Reckoning, New York: Random House, 1988,
p.145.
5. Peter S. Nagan, ÒDeficit Ball Drops in BushÕs Court,Ó ABA Banking
Journal, January 1989, p.10.
6. Warren Rudman, ÒShould Congress Place Limits on Entitlement
Spending?Ó Congressional Digest, June-July 1992, p.180.
7. Peter Peterson, Facing Up, New York: Simon & Schuster, 1993, p.221.
8. ÒCapping Federal Entitlement Programs,Ó Congressional Digest,
June-July 1992, pp.162-166.
9. Brian Kelly, Adventures in Porkland, New York: Villard Books, 1992,
pp.12-13.
10. Martin L. Gross, The Government Racket, New York: Random House,
1992, p.97.
11. Gross, p.56.
12. Kelly, p.32.
13. Ali F. Darrat, ÒReal Deficits and Real Growth: Some further
results,Ó Journal of Post-Keynesian Economics, Fall 1992, pp. 31-32; Figgie, p. 127.
14. Michael Cayton, ÒThe U.S. policy mix, foreign financing, and the
consequenses,Ó Journal of Economic Issues, September 1986, p.748.
15. Figgie, p.115.
16. Cayton, p. 753.
17. Figgie,p.p. 95-100, 103.
18. John R. King, Chaos in America, Tehachapi: America West Publishers,
1990, pp.73-74
19. King, pp. 74-75.
20. Peterson, pp.86-90.
21. Figgie, pp.48-50.
22. Peterson, pp.214-215.
23. Executive Office of the President of the United States, Budget of
the United States Government