The National Debt

Deficits , Surpluses and the Public Debt

Is Debt a four letter word?

What is the difference between debt and deficit?

National Debt $9.1 trillion is enough to: - Give every 18-year-old a 4-year college education for the next 57 years. - Buy up every Super Bowl ticket for the next 100,000 years. - Drive 1 mil. cars around the world 1,368 times each . - A stack of $1,000 bills 4 inches high is a million. $ 1 trillion would be a stack of $1,000 bills 252.5 mil . high. $7.4 trillion would be 1,868.5 miles high. - A $1 bill is 6 inches long. If $7.8 trillion bills were laid end to end, they would form a chain 700 million miles long, enough to stretch from the surface of the earth to the surface of the sun and 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.

For another example, my wife and I own two cars

Our Car Bank’s Car

O.K., so we only own one car, the bank owns the other car, and we are in debt to the bank

However, the good news is that our car allows us to easily get to work, which helps us to earn a living. And since one of our cars is paid for, it allows us to put more money into savings.

Is this how the

government takes

care of its finances?

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

A deficit is

Deficits , Surpluses , and the P ublic D ebt [Iraq will cost 1 trillion dollars]

In 1999 the US National Debt stood at:

- $5,600,000,000,000

Folks, 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 2004 was…….

The budget deficit in 2004 was

- $ 412,000,000,000

The deficit in 2006 was…

-$248,000,000,000

Now our national debt in 2005 is…

Folks, that’s 9.1 Trillion dollars

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

Yearly deficits are added to the debt

A surplus may help pay down the debt , but it may not .

0 20 40 60 80 100 120 140 Japan Italy Belgium Canada France Spain Sweden Germany United States Netherlands United Kingdom Finland Denmark Australia GLOBAL PERSPECTIVE Public Sector Debt as a percent of GDP, 2002 Source: Organization for Economic Cooperation and Development

The “ Debt ” and The “Deficit ” Deficit ($412 bil.) Debt ($8 trillion) Reasons for Debt 1. Lack of political will 2. Tax cuts 3. Recessions (transfers) 4. Wartime financing Attention Deficit Hyperactivity Disorder [ADHD] Congressmen have trouble focusing attention on the deficit. $ 7.4

Porkmobile

Pork 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 chairman of the Appropriations Committee was responsible for most of this pork to Alaska.

… in the 2005 Federal Budget

Other 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. · 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 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 . · Mississippi: $750,000 for the Mississippi Museum of Natural Science. 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 . · Ohio: $750,000 for the city of Circleville's sewer construction project; $350,000 for music 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. · 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” so we might call this

our, “No shrimp left behind program.”

The “no” answer entails three points . 1. Refinancing – as portions of the debt fall due each month, the G does not cut G or raise T to retire the maturing bonds. It refinances the debt by selling new bonds and uses the proceeds to pay off holders of the maturing bonds. 2. Taxation – if bankruptcy were imminent the G could always raise taxes. 3. Creating Money – bankruptcy could be avoided by printing the money ( inflationary ). I’m not paying no $30,000 and I hope you will not either. Economic Implications of the Debt: False Issues [The “G” doesn’t have to pay the entire debt off because it never “dies.” ] [The “G” will live forever so it will keep “rolling it over in perpetuity” ] Going Bankrupt? Shifting Burdens Does every new born get slapped on the backside, then told he owes $26,400 ? Not quite. About 82% of the debt is owed to ourselves . Thus the public debt is a a public credit . It is a liability to the taxpayer but an asset to the people ( bondholders ). Therefore, retiring the debt would amount to a large transfer payment from U.S. citizens to U.S. citizens . The repayment would entail no decrease in the economy’s wealth or standard of living. So the babies who inherit $26,400 worth of debt will inherit almost that same amount . Whew! $30,000 each.

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 was $300,000,000,000 in 2004.

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

Chapter 18 Figure 18.2 The Crowding Out Effect

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, leading to a lower standard of living in the future

National Debt Clock 8 $24,000 National Debt Clock $7.9 $26,500 National Debt 9.1 $33,000 per second is added to the National Debt 3 4, and $4 mil per minute . or $1.3 Billion per day $124,000 $26,500

Deficits Since 1970

Sources of Government Revenue -Today Three major sources of federal taxes (90%) a. Individual income taxes b. Social Insurance c. Corporate income taxes

Proportional & Regressive Taxes

Think of your income as a L a y e r C a k e . The 1 st layer will not be taxed at all. ( $7,150 for singles) In the 2 nd layer , taxable income starts at 10% up to $14,350 . The 3 rd layer starts at 15% up to $29,050 . The 4rth layer starts at 25% up to $70,350 . The 5 th layer starts at 28% up to $146,750 . The 6 th layer starts at 33% up to $319,100 . The 7 th layer starts at 35% for those over $319,100 . With a tax cut, high earners not only get a tax cut on the top layer but all layers. Our Progressive Tax System Is Like A L a y e r e d C a k e 35% over $319,100 No tax on 1 st $7,150 10% up to $14,350 15% up to $29,050 25% up to $70,350 28% up to $146,750 33% up to 319,100

The Seven States With No Income Tax

State Sales Tax

Tax Debate (continued)

T ax B ased O n A Proportional (“Flat Rate”) T ax [“20%”]

$ 200 (tax of $ 40 so $ 160 to live on) [ now less likely to get in crime]

$ 350 (tax of $ 70 so +$ 280 to live on) [ also lessens crime potential]

$ 500 (tax of $ 100 so +$ 400 to live on)

$ 1,000 (tax of $ 200 so +$ 800 to live on

$ 5,000 (tax of $ 1,000 so +$ 4,000 to live on)

Progressive Tax System No tax up to $7,150, then 10%(The poor group made $10,400 a year) 0%....................Up to $7,150 10%...........$7,151 - $14,300 15%.........$14,301 - $29,050 25%.........$29,051 - $73,550 28%.......$73,551 - $146,750 33%.....$146,751 - $319,100 35%.....$319,101 +

Causes:

Wars

Recessions

Tax Cuts

THE PUBLIC DEBT Facts & Figures: Quantitative Aspects

Debt and GDP

International Comparisons

Interest Charges

Ownership

Changes in Marginal Tax Rates 35% 2000 1990 1980 1970 1960 1950 1940 1930 1920 Top tax rate, in percent 100% 80 60 40 20 0

Marginal Tax Rate 1913-2005 Top Marginal Tax Rates Year Tax Rate 1900 No Tax 1914 1% [over $3,000] [Only 1 in 270 paid this tax at all] 1930 30% [1 in every 32 was now paying taxes] 1940 81% [1 in every 3 was paying taxes] 1943 * Paycheck withholding (by the boss) was launched to stop cheating. 1950 91% 1970 70% [E veryone was paying with taxable Y] 1980 70% 2002 38.6% 2005 35% Medicare tax – 1.45% for an individual [ 2.9% for self employed ] for every dollar earned . Harrison 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 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 Wealthiest 5 % Pay 55 % of Income Taxes Ave. Tax Rate Top 1 % ($293,000) paid over 1/3 of all taxes – average 28% Top 5 % (+ $121,000; 6.3 mil.) paid 55% - average 24% Top 10 % (+80,000) paid 62% of all taxes – average 21.4% Top 25 % (+$50,000) paid 81% of all taxes – average 18% Top 50 % (+$25,000) paid 96% of all taxes – average 16% Bottom 50 % (63 mil. earned -$23,000) paid o nly 4 % of all taxes. There are 7.5 million millionaires & 341 billionaires . [691 in world] 40 millionaires are in the U.S. Senate

Billionaires of the World in 2003 [The U.S. has 50%] 691 in 2004 Worth 2.2 T [341 in U.S.]

0 20 40 60 80 100 120 140 Japan Italy Belgium Canada France Spain Sweden Germany United States Netherlands United Kingdom Finland Denmark Australia GLOBAL PERSPECTIVE Public Sector Debt as a percent of GDP, 2002 Source: Organization for Economic Cooperation and Development

Federal Expenditures Pensions and Income Security National Defense Health Interest on Public Debt Pensions & Income Security 38% National Defense 17% Health 21% All Other 15% Interest 13% 2002 Data Total Expenditures $2,011 Billion

$412