People are beginning to think I’m obsessed. “What’s the big deal about these deficits?” they ask. One person mentioned that even though the projected deficit is $1.56 trillion this year, it’s supposed to go down to $1.3 trillion next year. So I guess it’s time to explain why all of this is such a big deal.

Deficits vs Debt
I think this is the primary area where people get confused. People think these two terms mean the same thing. Or accidentally use these words interchangeably. But they are very different. The deficit is the one year snapshot of how much more our government spends than it receives. The converse would be a surplus which doesn’t appear to be a problem in the foreseeable future. The debt is like the ongoing scorecard of our deficits and surpluses.

Example: You make $40,000 this year. You spend $50,000 this year. You have a deficit of $10,000. Doesn’t sound that bad. But do that for ten years straight, and you now have debt of $100,000, plus interest (servicing the debt).

So saying that the deficit next year is going down to $1.3 trillion, still means we’re adding another $1.3 trillion to our debt.

Budgets and Deficits
The president puts together a proposed budget for the federal government, and passes it along to Congress. But it’s really Congress that has the power at this point. The Congress decides how much to spend, and where to spend it. Sometimes they pretty much do what the president has asked. And sometimes they ignore the president’s proposed budget and do what they want. Of course they also typically pass new spending bills throughout the year that were not included in their original budget.

Our government also has to project how much money they will receive through tax revenues — the lifeblood of government. The difference between revenues and expenditures is either a surplus or a deficit. These numbers are still just projections at this point. It’s not until the following year that we know for sure how much was spent, and how much was collected.

Guns and Butter
The old debate in government spending was how much to spend on guns (national defense) and how much to spend on butter (domestic programs). But as our debt grows, so does the amount of money it takes to service the debt. The more money we spend servicing our debt, the less money we have for guns AND butter.

Example: Many of us have gotten over our heads in credit card debt. I’ve done it twice in my life. You think I would have learned the first time. You reach the point where you’re barely able to make the minimum payments, and you realize that all you’re really doing is paying the interest, and not paying down the debt.

The dollars that will soon be required for servicing our national debt are staggering. A significant portion of our tax money is already spent servicing our debt. Not on guns. Not on butter. And not on paying down the debt.

Did You Know?
Did you know that our national debt is more than $12.3 trillion and growing?

Did you know that we have run federal deficits every year since 1969 except for four? See this report from the CBO. The four years of surpluses were from 1998-2001.

Did you know that are government’s “plan” is to grow our debt by another $1.56 trillion this year?

Did you know that in 2009, the Treasury Department spent $383 billion of our money on interest payments on our national debt? Compare that to how much is spent on other items such as NASA ($19 billion), education ($53 billion) and the Department of Transportation ($73 billion).

Large deficits and debts are the enemy to a robust economy. Want to fix the economy? Washington needs to get its own house in order. And economic prosperity has a chance to return.

President Obama during his State of the Union address said that the federal deficit was $1.3 trillion the day he “walked in the door”. This number didn’t make sense to me. It seemed too high. I did a little poking around, and here’s the rest of the story:

“In 2008, Bush ran a deficit of $485 billion. By the time the fiscal year started on October 1, 2008, it had gone up by another $100 billion due to increased recession-related spending and depressed revenues. So it was $600 billion. That was the real Bush deficit.

“But when the fiscal crisis hit, Bush had to pass TARP in the final months of his presidency which cost $700 billion. Under the federal budget rules, a loan and a grant are treated the same. So the $700 billion pushed the deficit — officially — up to $1.3 trillion. But not really. The $700 billion was a short term loan. $500 billion of it has already been repaid.

“So what was the real deficit Obama inherited? The $600 billion deficit Bush was running plus the $200 billion of TARP money that probably won’t be repaid (mainly AIG and Fannie Mae and Freddie Mac). That totals $800 billion. That was the real deficit Obama inherited.

“Then…he added $300 billion in his stimulus package, bringing the deficit to $1.1 trillion. And falling revenues and other increased welfare spending pushed it up to $1.4 trillion.

“So, effectively, Obama came close to doubling the deficit.”

If anybody has any numbers different than this, I’d like to see them. This quote is from Dick Morris’ website.

And today, the White House unveiled its new budget. According to Yahoo News:

“If Congress goes along with Obama’s election-year plan, the nation would still end the year with unemployment pushing double digits at 9.8 percent and this year’s pool of government red ink deepening to $1.56 trillion — by the administration’s accounting.”

That would basically be a doubling of our federal deficit in just two years. This is not fiscal responsibility. This is out-of-control expansion of our federal government.

As everyone discussed President Obama and the State of the Union speech on Thursday, the Senate voted 60-39 to raise the nation’s debt limit to $14.3 trillion — an increase of almost $2 trillion. The vote went purely along party lines. Obviously they couldn’t wait for newly elected Scott Brown to make his way to Washington. And the democrats knew they had to get it passed quickly. They also knew they had to raise it by at least $1.9 trillion or they’d risk having to vote for ANOTHER increase before the elections this fall. And that just wouldn’t be good politics now would it.

There was amazingly little press coverage. But of course why would the press be interested in such boring things as our nation’s debt when it could be talking about the iPad, Toyota or Lady Gaga.

Our nation’s debt should be one of our biggest concerns right now, and Congress just wants to keep on spending. The President talked about a new jobs bill that would cost billions of dollars. The last one worked so well. The President talked about a spending freeze on a very small percentage of the government’s overall budget, but that wouldn’t start till 2011. The President promised to veto bills filled with pork. He hasn’t. I guess his definition of pork and mine are a bit different.

Here are my thoughts on our debt and debt ceiling posted in mid-December.

There’s a reason I’ve chosen to write about federal tax revenues and tax policy. I’ll get to it in a moment. But first we have to debunk the biggest myth that seems to exist about tax cuts and tax revenues.

Tax revenues are the lifeblood of the federal government. It’s through the taxation of the American people and businesses that our federal government has the funds to support our military, protect our country, create social programs and run federal organizations such as the FDA and the EPA.

So the question is: What happens when we cut taxes?

If you ask a liberal politician, their (myth) answer is: “This will reduce the amount of money we have to spend on important social programs. We’ll have to fire teachers and policeman because we won’t have enough money to pay them. We won’t be able to take care of the elderly, the poor and needy children…”

If you ask a conservative politician, their (myth) answer is: “Our federal government is too big already. We’re wasting our money on all of these pork programs. By cutting taxes we can reduce the size of our federal government…”

We hear this from our politicians every time we discuss tax cuts. They’re both wrong.

Let’s take a quick look at the last 50 years. In this time, we’ve had three presidents who have promoted and passed sweeping tax cuts: Kennedy in the ’60s, Reagan in the ’80s, and Bush in the ’00s. (These figures below are provided by the Tax Policy Center, and have been adjusted to 2009 dollars.)

John F. Kennedy was elected in 1960. Though he was killed in ‘63, the tax cuts he championed were passed into law in 1964. In 1964, the government collected $112.6 billion. By 1970, just six years later, the federal government collected $192.8 billion. That’s an increase in tax revenues of more than 70%.

In 1980, Ronald Reagan was elected president, and passed sweeping tax cuts in 1981. In 1981, the federal government collected $599.3 billion. What year do you want to compare for future tax revenues? Within six years (1987) the fed was now collecting $854.4 billion, an increase of more than 42%. Tax revenues continued to grow every year. By 1992 when Bill Clinton was elected, the federal government collected $1,091.3 billion in tax revenues. That’s an increase of of more than 82% in about a decade.

And lastly, George W. Bush was elected in 2000, and lead the charge for a series of tax cuts in 2001, 2002 and 2003. In 2000 when GWB was elected, the fed collected $2,025.5 billion. And by 2008, the fed collected $2,524.3 billion, an increase of more than 25%.

All three presidents pursued tax cuts to stimulate the economy. And it worked every time. Taxes were cut. The economy was stimulated. And tax revenues went up.

So why is this important now? The Bush tax cuts will expire soon. And if they expire, the net effect is a tax increase, which will further damage our economy. The debate will begin soon. And expect to hear the same old misrepresentations from each side of the aisle.

Lots has been going on in politics lately and I’ve had little time to write about it. The health care debate continues. ClimateGate. Copenhagen. Afghanistan. The EPA considers naming carbon dioxide as a pollutant. The jobs summit. But right now, nothing has me more concerned than our ballooning national debt.

The Debt Limit
By law, Congress cannot surpass our federally imposed debt limit. So whenever our debt begins to get close to our debt limit, Congress just votes to increase that limit. Don’t you wish you could do that?

Congress is discussing raising our debt limit from $12.1 trillion to almost $14 trillion. This isn’t anything new. Congress has repeatedly raised the debt ceiling over time. In 2006, Congress raised the debt ceiling to almost $9 trillion. And they’ve raised it several times since.

Since 2006 and the democratic takeover of Congress, we’ve watched as Congress has raised the debt limit at least five times. I say at least because this has been a difficult subject to research. Congress tends to sneak these debt ceiling increases into other bills, making them hard to track. And our media does not always spend much time reporting on national debt. It’s not sexy news.

The most recent increase came earlier this year with the passage of American Recovery and Reinvestment Act of 2009 (the stimulus bill), which was signed into law on February 17, 2009. This bill raised the debt limit to around $12 trillion, where it now stands. At the time, this was the third increase within a year.

The Politics of Raising the Ceiling
U.S. Treasury Secretary Timothy Geithner began asking Congress to raise the debt ceiling a couple months ago. As we are quickly coming up on the cap, it appears likely that Congress will raise the debt ceiling before the end of the year.

So let’s do the math. In 2006 our debt limit was just under $9 trillion. And by late 2009, Congress will have raised our debt limit to almost $14 trillion. Which means they’ve raised our ability to go into debt by more than 50% in just over three years.

In a purely political move, the democrats are doing two things that I find distasteful:

1. They plan to raise the debt limit by $1.8 trillion so that they won’t be faced with having to vote for another increase before next year’s elections.

2. They’re including the proposed debt ceiling increase into a bill for the funding of our troops in order to make sure that the republicans must vote for it as well.

My goal isn’t to pick on the democrats. I’m an independent and have no love for either party. But Congress controls our government’s expenditures. And this Congress loves to spend our money.

Debt as a Percentage of GDP
These numbers are so big that they’re difficult to fathom. I have always found it more relevant to look at our debt as a percentage of our GDP (gross domestic product).

During the recent Bush years, this rate was on a slow but steady increase:

2000: 58.2%
2001: 57.74%
2002: 59.9%
2003: 62.31%
2004: 63.57%
2005: 64.29%
2006: 64.98%
2007: 65.67%
2008: 70.49%

Now look at the projected numbers for this year and next (projections from this site that tracks government spending):

2009: 90.36%
2010: 98.15%

So once again, look at the numbers since 2006 when democrats took over Congress. At the end of 2006, our debt was basically 65% of GDP. And it’s projected to be more than 90% by the end of this year. That’s an increase of almost 40%. And at almost 100% of GDP within a year, which would be an increase of more than 50%.

And in case you don’t trust this website, here’s information from the CBO (Congressional Budget Office) and their long-term budget outlook. Notice that both of their budget scenarios have significant increases in our debt level compared to GDP.

The Ugly Truth
The estimated population of the United States is 307,453,688 so each citizen’s share of this debt is $39,352.74. The National Debt has continued to increase an average of $3.84 billion per day since September 28, 2007!

What does all of this mean? We are witnessing one of the largest and most aggressive expansions in our federal government in the history of our country.

Just a couple of years ago, according to Gallup, 69% of those polled said that making sure that all Americans had healthcare coverage was the government’s responsibility. That number has dropped by 22 points. Today, Americans no longer think that this is the government’s responsibility. (See Gallup’s complete story here.)

This is a significant swing in public opinion over the last two years. And I think it’s easily explained.

1. In general, we are a giving people. And we want problems fixed. We’ve been told for years that we have a significant problem in our country. Health care is too expensive, and too many people are uninsured. And since individually we can do little to solve this problem, we believe that our government should fix this problem.

2. Most people do believe that health care is a right, and that we all deserve the same high quality of care.

3. On the surface, government run health care, or a public option, sounds fine. After all, this will solve our problems. Won’t it?

But as Americans learn more about government run health care, or even the public option, they don’t want it.

Overwhelmingly, Americans do NOT want to replace our current system with a government run system:

I continue to believe that the “public option” will lead us to government run health care.

Americans have watched how the government has mismanaged two wars, mismanaged our economy, and has failed to save or create jobs despite spending our money like a drunken sailor. We do not want government run health care. Unfortunately, Congress and the White House has decided that they know better.

The healthcare bill that recently passed the House is atrocious. It will not fix our health care problems. It will only further hurt our economy and destroy job creation. And put our country further in debt.

A friend of mine predicted early this year that unemployment would hit 10%. I didn’t believe him. Props to Billy. Unemployment is now at its highest rate since 1983.

We would have hit this number earlier, but with the last round of unemployment figures, the government removed many of the unemployed from the list. When people become unemployed long enough, many of them stop looking for work. Once you stop looking for work, you no longer count as “unemployed”. And these numbers don’t take into account the “under” employed — people who have accepted part-time work, and jobs at significantly reduced salaries. So in other words, it’s worse than it looks.

While unemployment is bad, it’s important to understand that it’s a trailing indicator. As the economy starts to go bad, employers hang on to staff as long as possible. Revenues drop faster than employment. But eventually, if things are bad enough, employers have to reduce staff to stay in business. I believe that most employers, small business owners in particular, are optimists at heart. They’d rather make other cuts than reduce staff if at all possible.

As the economy eventually rebounds, employers are often slow to start the hiring process again. If they’ve managed to stay in business, they’re likely still recovering financially. They have to play catchup, and make sure that the economy appears positioned for continued growth before committing to hiring new employees. With the length and depth of this recession, small business owners appear to be somewhat shell-shocked. It may take a while for them to feel good enough to start expanding payroll again.

The important question is this: Is the economy improving?

Many economists, including Moody’s, are declaring the recession to be over. I hope they’re right. But expect a bumpy recovery.

While my intent is to typically stay away from politics on this blog, I am a bit of an economics nerd. And there will be times that I’ll feel compelled to share some opinions about the economy or other business-related issues that might overlap into politics. This is one of those times. And to clarify, I’m a registered independent who has no love for either of the political parties.

Many in the media and in Washington have attempted to portray Cash for Clunkers as economic stimulus for our country. It’s not. It’s purely an environmental program. It’s the government telling us what kind of cars we should be driving — those of us who can afford cars. See their quotes about the benefits if you don’t believe me. It’s all about lowering fuel consumption, and improving the environment.

Example: “Cash for clunkers has been a proven success,” Obama said in a written statement issued shortly after the vote to extend the program. “The initial transactions are generating a more than 50 percent increase in fuel economy; they are generating $700 to $1,000 in annual savings for consumers in reduced gas costs alone, and they are getting the oldest, dirtiest and most air polluting trucks and SUVs off the road for good.”

Example: “The so-called cash for clunkers program has actually been far more successful than people expected, both in terms of the number of car sales it’s generated, and, I should say, in terms of the environmental benefit,” said National Economic Council President Larry Summers, appearing on CBS’ “Meet the Press.”

Those of us who cannot afford a new car are now subsidizing those who can. Plus by destroying these “clunkers”, which is required by the law, they are reducing the availability of used vehicles that people like me can afford. In the long run this will only increase the prices of used cars if we remove the availability of these “clunkers”, many of which are likely better than the old truck I currently drive.

Alan Greenspan, the former Chairman of the Federal Reserve, explained that the success of this program is not because it’s stimulative by nature, but it’s a sign that the economy is getting better:

“It’s an interesting issue. I mean, I have qualms about the concept, but there is no doubt that that very extraordinary response is a very important indicator that the state of confidence in the economy is beginning to pick up. If we had been — the clunker program had been put in place six months ago, it would have probably been a dud,” Greenspan said on ABC’s “This Week.”