The National Debt

DeficitsDeficits, SurplusesSurpluses and the Public DebtPublic Debt

National DebtNational Debt$8.8 trillion is enough to:-Give every 18-year-old a 4-year Give every 18-year-old a 4-year college education for the next 57 years.college education for the next 57 years.

-Buy up every Super Bowl ticket for the Buy up every Super Bowl ticket for the next 100,000 years.next 100,000 years.

--A $1 bill is 6 inches long. If $7.8 trillion bills wereA $1 bill is 6 inches long. If $7.8 trillion bills were laid endlaid end to to end, they would formend, they would form a a chain 700 chain 700 millionmillion

miles long, enough to stretch from the surface ofmiles long, enough to stretch from the surface of the the earth earth to theto the surface surface of theof the sun sun andand back –5 times. back –5 times.

Debt is the accumulation of yearly deficits plus surpluses.

The obvious question is, Is Debt good or bad?

IT DEPENDS

For Example, my wife and I own a home.

Well, we really don’t own our home, the bank owns the home until we pay off the loan (mortgage)

We are happy in debt, our house gives us a nice place to live and we know our loan will be paid off sometime in the future.

When the government spends more than it takes in taxes,

in a given year.

GS > T Gov’t spending greater than taxes

In a Year

DeficitsDeficits,, SurplusesSurpluses,, and theand the PPublicublic D Debtebt

In 1999 the US National Debt stood at:

- $5,600,000,000,000Folks, that’s 5.6 Trillion dollars

Also in 1999, the government had a surplus of:

$123,000,000,000 Which could have reduced the National debt to:

- $5,477,000,000,000- However our SUPERSIZED Deficit

in 2006 was…….

The deficit in 2006 was…

The budget deficit in 2009 was

Now our national debt in 2010 is…

Folks, that’s 12.8 Trillion dollars

DEFICITS AND SURPLUSES1992 - 2012

Source: Congressional Budget Office

$800

700

600

500

400

300

200

100

0

-100

-200

-300

Bu

dge

t D

efic

its

or S

urp

luse

s, B

illi

ons

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

ActualProjected (as of May 2003)

So again, debt is the accumulation of all our deficits and surpluses.

Yearly deficits are added to the debtA surplus may help pay down the debt, but

it may not.

The The ““DebtDebt”” and The and The “Deficit“Deficit””DeficitDeficit($1.4 T.) DebtDebt

($12.3 trillion)

Reasons for DebtReasons for Debt1. Lack of political will2. Tax cuts3. Recessions (transfers)4. Wartime financing

Attention DeficitAttention DeficitHyperactivity Disorder Hyperactivity Disorder [ADHD][ADHD]Congressmen have Congressmen have trouble focusing trouble focusing attention attention on theon the deficit. deficit.

$12.3

PorkmobilePorkmobile

Pork in AlaskaPork in Alaska

• The Bridge to Nowhere ($200 million!) rising to 200 feet above ocean level, going from Ketchikan, Alaska (pop. 14,500) to

Gravina Island (pop. 50 on a good day) • $950,000 for a recreation center and $150,000 for a

botanical garden in Anchorage. • $300,000 for a senior center in Fairbanks.• $900,000 for an aquarium in Ketchikan.• $500,000 for a quarry in Nome, Alaska.• Ted Stevens who is chairmanTed Stevens who is chairman of the Appropriations

Committee was responsible for most of this pork to Alaska.

…in the 2005 Federal Budget

Other Pork Barrel Legislation for 2005Other Pork Barrel Legislation for 2005• A selected list of hometown and special-interest projects in the $388 billion government

spending package:· Alabama: $4 million for the International Fertilizer Development Center in Muscle Shoals.· Alaska: $443,000 to develop salmon-fortified baby food.$443,000 to develop salmon-fortified baby food.· Arizona: $2.5 million for Lone Pine Dam Road.· California: $150,000 for the Girl Scouts Golden Valley Council bridge project.· Florida: $1 million for the Palm Coast Trail System in Flagler County.· Kentucky: $2.3 million for an animal waste management research laboratory$2.3 million for an animal waste management research laboratory in Bowling Green.· Hawaii: $4 million for mitigation of congestion in Kapolei City.· Illinois: $1.4 million for an Interstate-55 sound barrier in Darien.· Massachusetts: $1.2 million for Cape Cod Seashore Eastham/Dennis Bike Trail Repair$1.2 million for Cape Cod Seashore Eastham/Dennis Bike Trail Repair.· Mississippi: $750,000 for the Mississippi Museum of Natural Science. Missouri: $50,000 to control wild hogs in Missouri$50,000 to control wild hogs in Missouri

· Montana: $1.5 million for a ''fuels-in-schools'' biomass project.· North Carolina: $1 million for Garden Parkway in Gaston and Mecklenburg counties.

North Dakota: $335,000 to protect North Dakota’s sunflowers from blackbirds$335,000 to protect North Dakota’s sunflowers from blackbirds.· Ohio: $750,000 for the city of Circleville's sewer construction project; $350,000 for music $350,000 for music education programs at the Rock and Roll Hall of Fame in Cleveland.education programs at the Rock and Roll Hall of Fame in Cleveland.· Oregon: $6.28 million to Oregon State University for wood utilization research and $688,000 for a barley gene-mapping project.· Pennsylvania: $250,000 to promote tourism in the Allegheny National Forest area.· Tennessee: $2 million for the Fiery Gizzard Trail.$2 million for the Fiery Gizzard Trail.· Vermont: $500,000 for a wood products program.· Virginia: $500,000 for the Amherst County River Walk Trail; $200,000 for a Vermont Civil War Monument in Virginia.· Washington: $1 million for the Enumclaw welcome center; $1 million for the Norwegian American Foundation.· Wisconsin: $3.2 million for the Chequamego-Nicolet National Forest ''Wisconsin Wild Waterways.''There is also $1 million for a “Wild American Shrimp Initiative” There is also $1 million for a “Wild American Shrimp Initiative” so we might call this

our, “No shrimp left behind program.”“No shrimp left behind program.”

Congressional pork includes some real stinkers

• Federal government earmarks $29 billion for pet projects, watchdog says

• The World Toilet Summit in Belfast, Northern Ireland, is one beneficiary of U.S. spending on so-called “pork” projects. Congress allocated $13.5 million for the International Fund for Ireland, which helps fund the summit.

… msnbc.com Arpri 5th 2006

This is the way we used to get the first cry out of a baby

Now we tell them, “You“Youoweowe $39,000.”$39,000.” (as theirshare of the public debt)

We get the same result –their first crytheir first cry; no more of that “Take thatTake that.”

OOne ne GGood ood TThinghing Has Come From theHas Come From the Public Debt Public Debt

We no longer have to hit our newborn to get their first cry.

The Debt prevents The Debt prevents me from having to me from having to do this.do this.

The “no”“no” answer entails three pointsentails three points.1. RefinancingRefinancing –It refinances the debtrefinances the debt by selling new bonds and uses the proceeds to pay off holders of the bonds.2. 2. TaxationTaxation – if bankruptcy were imminent the G could always raise taxes.3. Creating MoneyCreating Money – bankruptcy could be avoided by printing the money (inflationaryinflationary).

I’m not paying no $39,000 and I hope you will not either.

Economic Implications of the Debt: False IssuesEconomic Implications of the Debt: False Issues[The “G”“G” doesn’t have to pay the entire debt off because it never “dies.”“dies.”]

[The “G”“G” will live forever so it will keep “rolling it over in perpetuity”“rolling it over in perpetuity”]

Going Bankrupt?Going Bankrupt?

Whew! $39,000 each.Whew! $39,000 each.

Where our debt comes from?

Negative Impact of the Debt

A problem is interest must be paid to the debt holders as the debt continues to grow.

This is the third largest federal budget expenditure.

Interest on the national debt projected to be 800 Billion $$ by 2019.

This takes away from other government programs, or increases the debt and/or taxes

Crowding Out Effect: Future generations will likely have to pay higher

rates to borrow money (the interest rate). Thus, there will be less investment in our

economy, less capital stock, and leading to a lower standard of living in the future

Chapter 18 Figure 18.2The Crowding Out Effect

• Income Distribution [the debt is transferred from all

taxpayers to the bond holders [the rich], so more income disparity]

• Incentives – larger taxes dampen incentives to bear risk,

to innovate, to invest, or just to work.

• **Children will not inherit as large of a “national factory”

• Foreign-Owned Public Debt

•External Public Debt

Economic Issues FEconomic Issues From rom TThe he DebtDebt

Abe Lincoln, with the Debt at $1 billion in 1864, said, “Men can readily perceive that they cannot be much oppressed by a debt which they owe themselves.”

Term LimitsTerm Limits

“If you had a well-paying position that comes withall kinds of perks and opportunities, would youvote to fire yourself? Is there another position inwhich you vote to set your own salary?

National Debt Clock

8$24,000

National Debt ClockNational Debt Clock

$7.9$7.9$26,500$26,500

National DebtNational Debt8.8

$33,000 per second is added to the National Debt$33,000 per second is added to the National Debt

3 4, and $4 mil per minuteand $4 mil per minute.or $1.3 Billion per dayor $1.3 Billion per day

$124,000$124,000

$26,500$26,500

Deficits Since 1970Deficits Since 1970

Sources of Government Revenue -TodaySources of Government Revenue -Today

Three major sourcesof federal taxes(90%) a. Individual income taxes b. Social Insurance c. Corporate income taxes

Proportional Proportional && RegressiveRegressive TaxesTaxes

Think of your income as a Think of your income as a LLaayyeerr CCaakkee..The 11stst layer layer will not be taxed at all. ($7,150$7,150 for singles)In the 22ndnd layer layer, taxable income starts at 10% up to $14,35010% up to $14,350.The 33rdrd layer layer starts at 15% up to $29,05015% up to $29,050.The 4rth layer4rth layer starts at 25% up to $70,35025% up to $70,350.The 55thth layer layer starts at 28% up to $146,75028% up to $146,750.The 66thth layer layer starts at 33% up to $319,10033% up to $319,100.The 77thth layer layer starts at 35% for those over $319,10035% for those over $319,100.With a tax cut, high earners not only get a tax cut on With a tax cut, high earners not only get a tax cut on the top layer but all layers.the top layer but all layers.

Our Progressive Tax System Is Like A LLaayyeerreedd CCaakkee

35% over $319,100

No tax on 1st $7,150

10% up to $14,350

15% up to $29,050

25% up to $70,350

28% up to $146,75033% up to 319,100

The Seven States With No Income TaxThe Seven States With No Income Tax

State Sales TaxState Sales Tax

Tax DebateTax Debate (continued)(continued)

TTaxax B Based ased OOn n A Proportional A Proportional (“Flat Rate”)(“Flat Rate”) T Tax ax [“20%”][“20%”]1. $200(tax of $40 so $$160160 to live on) [now less likely to get in crime]

2. $350(tax of $70 so +$+$280280 to live on) [also lessens crime potential]

3. $500(tax of $100 so +$+$400400 to live on)4. $1,000(tax of $200 so +$+$800800 to live on5. $5,000(tax of $1,000 so +$+$4,0004,000 to live on)

Progressive Tax SystemProgressive Tax SystemNo tax up to $7,150, then 10%(The poor group made $10,400 a year)0%....................Up to $7,15010%...........$7,151 - $14,30015%.........$14,301 - $29,050 25%.........$29,051 - $73,55028%.......$73,551 - $146,75033%.....$146,751 - $319,10035%.....$319,101 +

Causes:• Wars• RecessionsRecessions• Tax Cuts

THE PUBLIC DEBTTHE PUBLIC DEBTFacts & Figures:

Quantitative Aspects

• Debt and GDP• International Comparisons• Interest Charges• Ownership

Changes in Marginal Tax RatesChanges in Marginal Tax Rates

200020001990199019801980197019701960196019501950194019401930193019201920

Top tax rate, in percentTop tax rate, in percent100%100%

8080

6060

4040

2020

00

35%35%

Marginal Tax Rate 1913-2005

Top Marginal Tax RatesTop Marginal Tax RatesYearYear Tax RateTax Rate19001900 No TaxNo Tax19141914 1% 1% [over $3,000][over $3,000]

[Only 1 in 270 paid this tax at all][Only 1 in 270 paid this tax at all]19301930 30%30%[1 in every 32 [1 in every 32 was now payingwas now paying taxes] taxes]19401940 81%81%[1 in every 3 was paying taxes][1 in every 3 was paying taxes]1943 1943 **Paycheck withholding Paycheck withholding (by (by the boss) was launched to stop cheating.the boss) was launched to stop cheating.

19501950 91%91%19701970 70%70%[E[Everyoneveryone was paying was paying withwith taxable Y] taxable Y]19801980 70%70%20022002 38.6%38.6%20052005 35%35%

Medicare taxMedicare tax – 1.45% for an individual [2.9% for self employed] for every dollar earned.Harrison FordHarrison Ford – received $25 million for 20 days work on a movie. 1.45% of $25 million = $362,500 x 2 = $725,000 medicare tax. [Over his 35 years on the Big Screen, his films grossed over $10 bil.Jim CarreyJim Carrey – gets $20 million per movie, so his tax is $580,000. [1.45% of $20 million = $290,000 x 2 = $580,000.]

Nation’s Nation’s Wealthiest 5Wealthiest 5% % Pay Pay 5555%% of of Income TaxesIncome Taxes

Ave. Tax RateAve. Tax RateTop Top 11% ($293,000) paid over 1/3 of all taxes – average 28%% ($293,000) paid over 1/3 of all taxes – average 28%

Top Top 55% (+ $121,000; 6.3 mil.) paid 55% - average 24%% (+ $121,000; 6.3 mil.) paid 55% - average 24%

Top Top 1010% (+80,000) paid 62% of all taxes – average 21.4%% (+80,000) paid 62% of all taxes – average 21.4%

Top Top 2525% (+$50,000) paid 81% of all taxes – average 18%% (+$50,000) paid 81% of all taxes – average 18%

Top Top 5050% (+$25,000) paid 96% of all taxes – average 16%% (+$25,000) paid 96% of all taxes – average 16%

Bottom Bottom 5050% (63 % (63 mil.mil. earned -$23,000) paid o earned -$23,000) paid onlynly 4 4% of all% of all taxes. taxes.There There are are 7.5 million millionaires7.5 million millionaires & & 341 billionaires341 billionaires..[691 in world][691 in world]40 millionaires are in the U.S. Senate40 millionaires are in the U.S. Senate

Billionaires of the World in 2003Billionaires of the World in 2003

[The U.S. has 50%][The U.S. has 50%]

691 in 2004691 in 2004Worth 2.2 TWorth 2.2 T[341 in U.S.][341 in U.S.]

Of The 100 Million With Of The 100 Million With Full Time Employment:Full Time Employment:

1. Only 5.7%5.7% make above $100,000$100,000

2. 2. 10%10% make between $65,000 & $100,000$65,000 & $100,000

3. 3. 84%84% earn under $65,000$65,000

4. 4. More than halfMore than half earn less than $35,000less than $35,0005. One in four workers(28 M workers) earns $18,800 a year or less, with few if any benefits

Federal ExpendituresFederal Expenditures

Pensions and Income SecurityNational DefenseHealthInterest on Public Debt

Pensions &Income Security

38% NationalDefense

17%

Health21%

All Other15%

Interest13%

2002 Data

TotalExpenditures$2,011 Billion

$412$412

0 20 40 60 80 100 120 140

JapanItaly

BelgiumCanadaFranceSpain

SwedenGermany

United StatesNetherlands

United KingdomFinland

DenmarkAustralia

GLOBAL PERSPECTIVEGLOBAL PERSPECTIVEPublic Sector Debt as a percent of GDP, 2002

Source: Organization for Economic Cooperation and Development

THE END