What is the deficit?
The word deficit goes along with the word deficient. When more money is being spent than received, the received amount is deficient; the deficit is the amount of money spent in excess of what is being received. For example, let’s say Joe has an after tax income of $400 a week ($20,800 a year, or about $1,733 a month). He has these basic monthly expenses:
- Rent: $900
- Utilities: $400
- Car payment: $400
- Gasoline: $200
- Other: $200
- Total: $2,100
Joe needs to pay about $367 more than he is taking home. His annual deficit is $20,800 – ($2,100 * 12) or $4,400. Since he can’t make his obligations, he starts to borrow money — first from friends, and then Joe gets several credit cards and starts charging some of his expenses. His debt level starts to build up and he has to make payments on the debt, which increases his expenses and thus his deficit gets larger. He realizes that at some point, he’ll run out of credit – becoming insolvent – and will have to face the consequences.
Joe’s scenario above is in many ways the same as the US government’s. The major difference is that Joe would likely do something about his problem. Maybe he would get a second job to increase income, or maybe he’d move to a cheaper apartment and go without cable TV to reduce his expenses. Instead, the US government just keeps on spending, spending, and spending some more, as if it doesn’t matter that there’s a deficit. The debt piles ever higher and they begin to resort to dangerous tricks to keep things going. Currently, the deficit is estimated to be around $1 trillion dollars, meaning, the government will spend $1 trillion more than they get.
There’s a second deficit as well, which we call the trade deficit. The United States imports a lot more goods than it exports. Exports generate revenue for the US economy, and imports cost money from the US economy, so the net effect is that the United States is losing money every year. Currently, the trade deficit is estimated to be around $750 billion dollars, meaning, the US economy will lose $750 billion dollars by spending that much more on imports than we get for our exports.
Finally, there is a third deficit: the government delaying maintenance on infrastructure such as roads and bridges so that the decay is greater than the maintenance. As the condition of the infrastructure worsens over time, it will cost more and more money to bring things back into good condition. It is difficult to make a good estimate of this deficit, but with more than 700,000 bridges and almost 4 million miles of roads, it is a high number by itself. Overall, only about half of all roads are in good condition, and 11% of bridges — almost 70,000 in total — have been rated as structurally deficient.
It’s difficult to make any sense of such large numbers. A trillion dollars? A thousand billion? A million million? It’s so far removed from anything we’ll ever earn or process that it seems like just a number. A good way to make the numbers easier to understand is to reduce them in size and apply them to a single person or company.
The US Federal government took in about $2.4 trillion dollars in revenue in 2012. This was from income tax, employment taxes, business taxes, estate taxes, and a few others that they collect. Let’s divide by 100 million to reduce the numbers to Joe’s level — $24,000 of after tax income, or about $2,000 a month. With a deficit of around $1 trillion, The government will spend about $3.4 trillion for budgeted items*. This is the same as Joe spending $34,000 a year, or $2,833 a month — $833 a month higher than he earns, racking up $10,000 in debt a year. In just two and a half years, Joe would be $25,000 in debt – equal debt to what he makes in a year.
* The US government uses various accounting tricks to hide their spending, such as off budget spending, so the real deficit is actually much higher than they admit. The US Post Office, for example, is not counted in the budget, even though it is paid for by the Federal government.
Next let’s add the second deficit to Joe’s problems — his company is spending more to pay its employees and buy its parts and materials than it is making selling its products — $7,500 a year more. The company is saying that it will need to reduce salaries to return to profitability, which will make Joe’s problems even worse.
Finally, let’s add the third deficit. Joe is so low on money that he isn’t performing the normal periodic maintenance on his car. He’s going a lot of extra miles between oil changes, he hasn’t rotated his tires, and he’s not changing his radiator fluid or doing tune-ups. Eventually, this will catch up with him in the form of either a major repair bill or worse, he will need to purchase a new car much earlier than expected.
Imagine the reaction of Joe’s friends if they found out what he was making, what he was spending, and the rest of his circumstances. They’d clearly recognize that he was on a collision course with reality and they would probably try to stage an intervention for Joe before it was too late.
Even if the US government were to get the deficit under control, which they won’t, we would still be in some very serious trouble with the debt already accumulated. The next post in this series expands on the debt.