The Federal Budget and Federal Debt: Bedevilling Issues (last revised Jan. 14, 2018 (11:40 PM))
Copyright?2017 Ronald David Greenberg. All rights reserved.
The Federal Budget and Federal Debt: Bedevilling Issues
Ronald David Greenberg
Table of Contents:?
1. Generally
2. Federal Budget Deficits
3. Federal Debt Versus Revenue-producing Improvement Taxable Activities
4. Conclusion
1, Generally
The federal budget and the federal debt are issues that continue to bedevil the nation. For example, what is the price tag of budget deficit spending and addition to the national debt?
2017 Key Facts
The U.S. government is estimated to collect $3.21 T in tax revenues and spend a total of $3.65 T in its 2017 budget, resulting in a deficit of $443 B. The deficit is expected to be 2.6% of its total estimated GDP of $17 T that year.
All numbers are adjusted for inflation.
. . . .
The federal debt – also referred to as the national debt – is the sum of all past deficits, minus the amount the federal government has since repaid. Every year in which the government runs a deficit, the money it borrows is added to the federal debt. If the government runs a surplus, it uses the extra money to pay down some of its debt.
In 2017, the government is estimated to have a total debt of $17.7 T. At 104.4% of GDP, this percentage is extremely high when compared to other years (avg. 59.0%). All numbers are adjusted for inflation.
2017 United States Budget Estimate, INSIDE GOV, GRAPHIQ (last visited Dec. 26, 2017) (emphasis added), https://federal-budget.insidegov.com/l/120/2017-Estimate.
See also, e.g., Stephen K. Cooper, Eyes Turn Toward 2018 Tasks as Tax Reform Becomes Law, TAX NOTES (Posted on Dec. 26, 2017) (emphasis added), https://www.taxnotes.com/tax-notes-today/tax-reform/eyes-turn-toward-2018-tasks-tax-reform-becomes-law/2017/12/26/1xg3l:
At his end-of-the-year briefing, Senate Majority Leader Mitch McConnell, R-Ky., brushed aside questions about the new law’s impact on the federal deficit. McConnell said the law’s $1.5 billion price tag would be offset by an additional 0.4 percent growth in the American economy over the next decade.
Demographic trends have presented opportunities in America as well as challenges:
A broad cross-section of American business has begun to decrease the proportion of its workforce in straight production and management in favor of an emphasis on planning, quality control, client service and communications, according to the Bureau of Labor Statistics’ Occupational Employment Statistics.
. . . .
Amid all this practical change, America in particular will also face a psychological challenge. Its people have always viewed themselves as embracing the virtues of youth – energy, physical vitality, impulsiveness, even insouciance. These attitudes have led them to assume a global economic role as the quintessential mass producers, overwhelming the competition with huge volumes of serviceable, standardized products — the economic equivalent of brute force. It is no coincidence that America invented the assembly line and interchangeable parts. But the transformation toward high-value products, impelled by these demographic trends, will require a workforce and an approach that embraces a different set of virtues — those of patience, care, refinement and attention to detail, virtues typically associated with age more than youth. It almost sounds un-American, but the situation calls for it, and the change is all but inevitable.
Milton Ezrati, How America can overcome the challenges of an aging population, PBS (June 18, 2014 1:30 PM EST), https://www.pbs.org/newshour/nation/how-america-can-overcome-the-challenges-of-an-aging-population.
Other challenges are, e.g., climate change, money in politics, education, polarization, and inequality. Anna North, The Biggest Challenges of 2016, TAKING NOTE EDITORIAL PAGE EDITORS BLOG (Jan. 6, 2016 9:24 am), https://takingnote.blogs.nytimes.com/2016/01/06/the-biggest-challenges-of-2016/.
See also, e.g., Challenges Facing the Nation, DIGITAL HISTORY (2016) (emphasis added), https://www.digitalhistory.uh.edu/disp_textbook.cfm?smtID=2&psid=2971:
Like other nations born in anti-colonial revolutions, the United States faced the challenge of building a sound economy, preserving national independence, and creating a stable political system which provided a legitimate place for opposition.
Further challenges to the United States are emerging. See, e.g., U.S. Faces New Challenges in a Post-American World, But Can Overcome Obstacles, RAND (June 23, 2008) (emphasis added), https://www.rand.org/news/press/2008/06/23.html:
Noted author and political scientist Francis Fukuyama said this weekend that the United States must adapt to a world in which military might is no longer enough, and needs to address its problems at home if it wants to continue to have global influence.
. . . .
Fukuyama listed three areas of weakness facing the United States that must be addressed: the diminishing capacity of the public sector; a certain degree of complacency among Americans about understanding the world from other than a U.S. perspective; and a polarized political system that is incapable of even discussing solutions.
See also, infra Taxes, Budget Deficits, and the Public Debt (last revised Dec. 22, 2017).
2. Federal Budget Deficits
Reducing the size of a budget deficit is desirable. Cf., e.g., Jugal K. Patel & Alicia Parlapiano, The Senate’s Official Scorekeeper Says the Republican Tax Plan Would Add $1 Trillion to the Deficit, N.Y. TIMES (updated Dec. 1, 2017) (emphasis added), https://www.nytimes.com/interactive/2017/11/28/us/politics/tax-bill-deficits.html
The report of the committee, Congress’s official tax scorekeeper, is the latest in a number of analyses that have found that the cuts could add a significant chunk to federal budget deficits, a move that would seem counter to years of Republican criticism of the deficits accumulated under the Obama administration.
In the Congressional Budget Office’s analysis of the Senate tax bill, the cuts would add $1.414 trillion to the deficit by 2027. That estimate does not include the amount that would be offset by the economic growth spurred by tax cuts.
. . . .
In a 2018 budget blueprint passed by Congress, lawmakers allowed enough room to lose about $1.5 trillion in revenue, but Republicans have said that the proposed tax legislation is designed to “pay for itself.”
How Much the Tax Plan Could Add to the Deficit
$10.1 trillion Projected deficits over the next 10 years under current law
$1.5 trillion Cost of tax cuts proposed by Congress
They have argued that economic growth spurred by the cuts would make up for the difference in tax revenue, eventually reducing the deficits. But there is no consensus among economists about the amount of growth that would occur, and few estimate that the bill would generate enough economic growth to offset the drop in tax revenue.
Query whether the conflicting conclusions and policies between Republicans and Democrats eventually can be reconciled with one another. See, e.g., Stephanie Barton, Parties For Taxes: Republicans vs. Democrats, INVESTOPEDIA (2017) (emphasis added), https://www.investopedia.com/articles/economics/09/us-parties-republican-democrat-taxes.asp
Political Dogma
Conservative think tanks denounce the Democrat tax policy and its Keynesian ideology as wasteful spending that injects only temporary money into the economy, as they praise Republican tax policy for protecting business, investments and personal income. The liberal establishment condemns the Republican tax approach - and supply-side economists - as funneling money only to the wealthy and big corporations, as they commend Democrats for spreading the wealth, supporting small business and reaching out to lower-income workers.
Both sides have their own experts and statistics lined up to support their economic dogma, but tax policy is complicated and tightly interwoven with many other aspects of government. The benefits of one approach may take years to materialize, which can frustrate our ability to distinguish which tax cuts or which tax increases fuel growth. (To learn more about party differences, read our related article For Higher Stock Returns, Vote Republican Or Democrat? [ https://www.investopedia.com/articles/financial-theory/08/political-party-democrat-republican-stock-returns.asp])
Fran?ois Quesnay, a 29 years' older contemporary of Smith (1723-1790), studied the issue of a nation's economic growth. See, e.g., Fran?ois Quesnay (1694-1774), LIBRARY OF ECONOMICS AND LIBERTY, LIBERTY FUND (last visited Jan. 7, 2018 (2008)) (emphasis added), https://www.econlib.org/library/Enc/bios/Quesnay.html
Fran?ois Quesnay was the leading figure of the Physiocrats, generally considered to be the first school of economic thinking. The name “Physiocrat” derives from the Greek words physis, meaning “nature,” and kràtos, meaning “power.” The Physiocrats believed that an economy’s power derived from its agricultural sector. They wanted the government of Louis XV, who ruled France from 1715 to 1774, to deregulate and reduce taxes on French agriculture so that poor France could emulate wealthier Britain, which had a relatively laissez-faire policy. Indeed, it was Quesnay who coined the term “laissez-faire, laissez-passer.”
Quesnay himself did not publish until the age of sixty. His first work appeared only as encyclopedia articles in 1756 and 1757.
In his Tableau économique , he detailed his famous zigzag diagram, a circular flow diagram of the economy that showed who produced what and who spent what, in an attempt to understand and explain the causes of growth. Tableau defined three classes: landowners, farmers, and others—called “sterile” classes—who consumed everything they produced and left no surplus for the next period. Quesnay believed that only the agricultural sector could produce a surplus that could then be used to produce more the next year—and therefore help growth. Industry and manufacturing, thought Quesnay, were sterile. Interestingly, though, he did not reach this conclusion by consulting his table. Instead, Quesnay constructed the table to fit his belief. Indeed, he had to make his table inconsistent in order to fit his assumption that industry provided no surplus.
These conflicts on deficits, and growth, as difficult as they may be to resolve, are not the only important difficult issues facing the nation. Consider the political climate in the nation and Congress as reported in the press. See, e.g., Clare Foran, America's Political Divide Intensified During Trump's First Year as President: Republicans and Democrats have grown further apart in their political views during the first year of the administration, the Pew Research Center finds, THE ATLANTIC (Oct 5, 2017), https://www.theatlantic.com/politics/archive/2017/10/trump-partisan-divide-republicans-democrats/541917/:
Disagreement among Republican and Democratic voters on a range of political issues has risen sharply in recent years, a political divide that intensified during the first year of President Trump’s administration, according to a new report from the Pew Research Center.
See, also, e.g., John Gramlich, Far more Americans say there are strong conflicts between partisans than between other groups in society, PEW RESEARCH (Dec. 19, 2017), https://www.pewresearch.org/fact-tank/2017/12/19/far-more-americans-say-there-are-strong-conflicts-between-partisans-than-between-other-groups-in-society/.
Cf., e.g., Mara Siegler, Salma Hayek: America’s political climate is like a ‘dark comedy,’ PAGE SIX (June 7, 2017), https://pagesix.com/2017/06/07/salma-hayek-americas-political-climate-is-like-a-dark-comedy/.
Cf. also, e.g., Leslie Wayne, What’s the Cure for Ailing Nations? More Kings and Queens, Monarchists Say, N.Y. TIMES (Jan. 6, 2018) (emphasis added), https://www.nytimes.com/2018/01/06/world/europe/monarchy-us-advantage.html?_r=0 (a version of this article appears in print on January 7, 2018, on Page A8 of the New York edition with the headline: The World Could Use More Kings and Queens, Monarchists Say).
3. Federal Debt Versus Revenue-producing Improvement Taxable Activities
More important, perhaps, is that the federal or public debt is a brooding omnipresence. Adam Smith describes the public debt as “pernicious” – a conclusion emphasized in the concluding chapter of his seminal work. See ADAM SMITH, WEALTH OF NATIONS (Random House (Modern Library Ed.) 1965) [SMITH, WEALTH] at pages 859-900, https://www.econlib.org/library/Smith/smWN.html. See also, e.g., https://www.amazon.com/Wealth-Nations-Modern-Library/dp/0679424733.
He is emphatic that revenue-producing economic activities are the desirable alternative to funding government activities with debt. He posits that the national debt is never fairly or completely paid resulting in loss to creditors by “transporting a great part of national capital from productive hands to those likely to dissipate and destroy it” – what he characterizes as “extremely pernicious.” SMITH, WEALTH at page 883, https://www.econlib.org/library/Smith/smWN.html.
Although the current United States tax regimen of lowered tax rates may well result in economic growth of the nation, the persistent issue is whether that growth will result in taxation that will be sufficient to defray the national debt. If not sufficient, Smith prescribes taxation be made sufficient to defray the debt since debt has a pernicious effect on the productive improvement of the nation’s assets by allocating a portion of the annual produce that had before been destined for productive improvements to that of creditors.
Adam Smith has focused on productive improvements. SMITH, WEALTH (emphasis added) at page 3 (Book I, Chapter I, ?1), https://www.econlib.org/library/Smith/smWN.html:
Book I
Of the Causes of Improvement in the productive Powers of Labour, and of the Order according to which its Produce is naturally distributed among the different Ranks of the People
Chapter I
Of the Division of Labor
I.1.1 The greatest improvement* in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labour.
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* This phrase, if used at all before this time, was not a familiar one. Its presence here is probably due to a passage in Mandeville, Fable of the Bees, pt. ii. (1729), dial. vi., p. 335: 'CLEO. . . . When once men come to be governed by written laws, all the rest comes on apace. . . No number of men, when once they enjoy quiet, and no man needs to fear his neighbour, will be long without learning to divide and subdivide their labour. HOR. I don't understand you. CLEO. Man, as I have hinted before, naturally loves to imitate what he sees others do, which is the reason that savage people all do the same thing: this hinders them from meliorating their condition, though they are always wishing for it: but if one will wholly apply himself to the making of bows and arrows, whilst another provides food, a third builds huts, a fourth makes garments, and fifth utensils, they not only become useful to one another, but the callings and employments themselves will, in the same number of years, receive much greater improvements, than if all had been promiscuously followed by every one of the five. HOR. I believe you are perfectly right there; and the truth of what you say is in nothing so conspicuous as it is in watch-making, which is come to a higher degree of perfection than it would have been arrived at yet, if the whole had always remained the employment of one person; and I am persuaded that even the plenty we have of clocks and watches, as well as the exactness and beauty they may be made of, are chiefly owing to the division that has been made of that art into many branches. The index contains, 'Labour, The usefulness of dividing and subdividing it'. Joseph Harris, Essay upon Money and Coins, 1757, pt. i. § 12, treats of the 'usefulness of distinct trades,' or 'the advantages accruing to mankind from their betaking themselves severally to different occupations,' but does not use the phrase 'division of labour'.
Id. at page 880 (Book V, Chapter 3, ?56), https://www.econlib.org/library/Smith/smWN.html.The practice of funding has gradually enfeebled every state which has adopted it. Id. at page 881 (Book V, Chapter 3, ?58)
When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has ever been brought about by bankruptcy; sometimes by an avowed one, but always by a real one, though frequently by a pretended payment.
Id. at page 882 (Book V, Chapter 3, ?60), https://www.econlib.org/library/Smith/smWN.html.
The raising of the denomination of the coin has been the most usual expedient by which a real public bankruptcy has been disguised under the appearance of a pretended payment.
. . . .
It occasions a general and most pernicious subversion of the fortunes of private people, enriching in most cases the idle and profuse debtor at the expence of the industrious and frugal creditor, and transporting a great part of the national capital from the hands which were likely to increase and improve it to those which are likely to dissipate and destroy it. When it becomes necessary for a state to declare itself bankrupt, in the same manner as when it becomes necessary for an individual to do so, a fair, open, and avowed bankruptcy is always the measure which is both least dishonourable to the debtor and least hurtful to the creditor. The honour of a state is surely very poorly provided for when, in order to cover the disgrace of a real bankruptcy, it has recourse to a juggling trick of this kind, so easily seen through, and at the same time so extremely pernicious.
Id. at pages 882-883 (Book V, Chapter 3, ?61), https://www.econlib.org/library/Smith/smWN.html.
Almost all states, however, ancient as well as modern, when reduced to this necessity have, upon some occasions, played this very juggling trick.
Id. at page 883 (Book V, Chapter 3, ?62), https://www.econlib.org/library/Smith/smWN.html.
By means of such expedients the coin of, I believe, all nations has been gradually reduced more and more below its original value, and the same nominal sum has been gradually brought to contain a smaller and a smaller quantity of silver.
Id. at page 884 (Book V, Chapter 3, ?63) (emphasis added), https://www.econlib.org/library/Smith/smWN.html.
Smith concludes with perhaps his ultimate insight of the enfeebling effects of borrowing on a nation's productive wealth. He refers to this borrowing as "funding" in a perception poignantly relevant to present times. SMITH, WEALTH (emphasis added) at 878, 880, 881, 882, 883, 884 (Book V, Chapter III, ??50, 56, 57, 58, 60-63):
When, by different taxes upon the necessaries and conveniences of life, the owners and employers of capital stock find that whatever revenue they derive from it will not, in a particular country, purchase the same quantity of those necessaries and conveniences which an equal revenue would in almost any other, they will be disposed to remove to some other.
Id. at page 880 (Book V, Chapter 3, ?56) (emphasis added), https://www.econlib.org/library/Smith/smWN.html.
To transfer from the owners of those two great sources of revenue, land and capital stock, from the persons immediately interested in the good condition of every particular portion of land, and in the good management of every particular portion of capital stock, to another set of persons (the creditors of the public, who have no such particular interest), the greater part of the revenue arising from either must, in the long-run, occasion both the neglect of land, and the waste or removal of capital stock. A creditor of the public has no doubt a general interest in the prosperity of the agriculture, manufactures, and commerce of the country, and consequently in the good condition of its lands, and in the good management of its capital stock. Should there be any general failure or declension in any of these things, the produce of the different taxes might no longer be sufficient to pay him the annuity or interest which is due to him. But a creditor of the public, considered merely as such, has no interest in the good condition of any particular portion of land, or in the good management of any particular portion of capital stock. As a creditor of the public he has no knowledge of any such particular portion. He has no inspection of it. He can have no care about it. Its ruin may in some cases be unknown to him, and cannot directly affect him.
Id. at page 880-881 (Book V, Chapter 3, ?57) (emphasis added), https://www.econlib.org/library/Smith/smWN.html.
The ordinary expence of the greater part of modern governments in time of peace being equal or nearly equal to their ordinary revenue, when war comes they are both unwilling and unable to increase their revenue in proportion to the increase of their expence. They are unwilling for fear of offending the people, who, by so great and so sudden an increase of taxes, would soon be disgusted with the war; and they are unable from not well knowing what taxes would be sufficient to produce the revenue wanted. The facility of borrowing delivers them from the embarrassment which this fear and inability would otherwise occasion. By means of borrowing they are enabled, with a very moderate increase of taxes, to raise, from year to year, money sufficient for carrying on the war, and by the practice of perpetually funding they are enabled, with the smallest possible increase of taxes, to raise annually the largest possible sum of money. In great empires the people who live in the capital, and in the provinces remote from the scene of action, feel, many of them, scarce any inconveniency from the war; but enjoy, at their ease, the amusement of reading in the newspapers the exploits of their own fleets and armies. To them this amusement compensates the small difference between the taxes which they pay on account of the war, and those which they had been accustomed to pay in time of peace. They are commonly dissatisfied with the return of peace, which puts an end to their amusement, and to a thousand visionary hopes of conquest and national glory from a longer continuance of the war.
Id. at page 872 (Book V, Chapter 3, ?37), https://www.econlib.org/library/Smith/smWN.html.
The return of peace, indeed, seldom relieves them from the greater part of the taxes imposed during the war. These are mortgaged for the interest of the debt contracted in order to carry it on. If, over and above paying the interest of this debt, and defraying the ordinary expence of government, the old revenue, together with the new taxes, produce some surplus revenue, it may perhaps be converted into a sinking fund for paying off the debt. But, in the first place, this sinking fund, even supposing it should be applied to no other purpose, is generally altogether inadequate for paying, in the course of any period during which it can reasonably be expected that peace should continue, the whole debt contracted during the war; and, in the second place, this fund is almost always applied to other purposes.
Id. at page 872-873 (Book V, Chapter 3, ?38), https://www.econlib.org/library/Smith/smWN.html.
When the public expence is defrayed by funding, it is defrayed by the annual destruction of some capital which had before existed in the country; by the perversion of some portion of the annual produce which had before been destined for the maintenance of productive labour towards that of unproductive labour.
Id. at page 878 (Book V, Chapter 3, ?50) (emphasis added), https://www.econlib.org/library/Smith/smWN.html.
It is only during the continuance of war, however, that the system of funding has this advantage over the other system. Were the expence of war to be defrayed always by a revenue raised within the year, the taxes from which that extraordinary revenue was drawn would last no longer than the war. The ability of private people to accumulate, though less during the war, would have been greater during the peace than under the system of funding. War would not necessarily have occasioned the destruction of any old capitals, and peace would have occasioned the accumulation of many more new. Wars would in general be more speedily concluded, and less wantonly undertaken. The people feeling, during the continuance of the war, the complete burden of it, would soon grow weary of it, and government, in order to humour them, would not be under the necessity of carrying it on longer than it was necessary to do so. The foresight of the heavy and unavoidable burdens of war would hinder the people from wantonly calling for it when there was no real or solid interest to fight for.
Id. at page 878 (Book V, Chapter 3, ?51), https://www.econlib.org/library/Smith/smWN.html. V.3.51
4. Conclusion
According to Smith, when a nation’s public expense is defrayed by borrowing, the results are the destruction of some capital that had existed in the nation by the “perversion of some portion of the annual produce” or revenues that would have otherwise been utilized from "productive labour" resulting in the addition of annual produce and improvements. See, e.g., ADAM SMITH, WEALTH OF NATIONS (Random House (Modern Library Ed.) 1965 (SMITH, WEALTH), at page 314 (Book II, Chapter III, ?1), https://www.econlib.org/library/Smith/smWN.html:
[O]ne sort of labour ... adds to the value of the subject upon which it is betowed. .... [A]s it produces a value, [it] may be called productive.
Furthermore,
the capital which the first creditors of the public advanced to government was, from the moment in which they advanced it, a certain portion of the annual produce turned away from serving in the function of a capital to serve in that of a revenue; from maintaining productive labourers to maintain unproductive ones . . .
SMITH, WEALTH at page 877 (Book V, Chapter III) (Book V, Chapter 3, ?48) (emphasis added), https://www.econlib.org/library/Smith/smWN.html.
A nation should pursue policies that promote desired productive improvements resulting in revenue to replace the need for a nation to borrow to fund these productive improvements. Given the current political climate in Washington, this goal may difficult, but by no means impossible, to achieve. The nation has come together when confronted with difficult diverse challenges (e.g., World War II, outer space developments, economic issues, women’s rights, civil rights movement) and it should be up to the current challenges.
The issue, basically, is whether America can be sufficiently innovative to create these productive improvements to meet these -- and new -- challenges.