Why the US Deficit is Everyone's Problem and How to Fix It.

And yes. This means you. It all starts at home.

It’s revenue vs. expenses. Image by Jeff x Ideogram

What is the US Budget Deficit?

The federal budget is just like your household budget. Only bigger. Much bigger. Revenue comes in through taxes. Spending goes out for government programs. Programs like Social Security. Medicare, defense, infrastructure, and interest payments on existing debt.

annual budget data and image from : fiscaldata.treasury.gov

When you spend more than you make, you get a deficit. String year upon year of spending more money than you make, and you have a problem. You’ve just created a deficit that becomes harder and harder to manage. You’ve created the US National Deficit which is the largest debt in the history of civilization. (a note: it’s not the largest debt-GDP percentage. The US debt-GDP percentage is 120%.)

The US can’t just put it’s excess expenses on a credit card. But they do borrow money to fill the gap. They issue treasury bonds, bills, and notes. It’s a let me borrow from you today and I’ll pay you back, plus a little extra in the form of interest, tomorrow.

It’s a debt. It creates interest that must be paid back. The three basic vehicles the US uses are:

Treasury Bonds - Long term security that matures between 10 - 30 years

Treasury Note - Medium-term security that matures between 2 - 10 years

Treasury Bill - Short-term security that matures in less than a year

The US makes up the difference between spending and revenue with these types of securities which investors purchase with the expectation of repayment plus interest.

You might say, so what’s the problem. Borrowing isn’t that bad. I do it all the time. Well, it’s just like a credit card. If you pay it off quickly it’s no big deal. But if you start carrying a balance every year the interest builds. It gets bigger and bigger. And soon you’re payments are barely covering the interest. Consistently borrowing - issuing treasury notes - to cover your deficit leads to an exploding national debt. Huge debt brings lots of risks and dangers.

Challenges of the Deficit Problem

Running a deficit year after year creates several serious challenges:

1. Rising Interest Costs:
   As the debt grows, so does the cost of servicing it. The government must pay interest on its debt, and as interest rates rise, these payments take up a larger portion of the federal budget, leaving less for other priorities like education or infrastructure.

2. Aging Population:
   The US population is aging, meaning more people are retiring and drawing benefits from Social Security and Medicare. These programs are both in the top 5 of US expenses. And as more people retire the expense grows. If an increased expense is not offset with an increase in revenue or a deduction in other expenses, like defense or infrastructure, the deficit will grow and require more spending.

3. Economic Vulnerability:
   High deficits limit the government’s ability to respond to economic downturns or crises. Think of it as the opposite of a ‘rainy day fund.’ You probably have or are working towards a savings account that can be used for emergencies. This is a surplus. With a high baseline debt load, you have a more difficult time responding to emergencies. You can’t borrow as much. Or you have to use a form of debt with higher interest rates. This compounds the problem.

4. Political Gridlock:
   Addressing the deficit requires tough choices, but partisan disagreements often delay meaningful action. While, the deficit problem may be acknowledged by all, the remedies to fix it are not. Therefore it is often used as a political leverage point or as a talking point to squash programs without a true focus on addressing the underlying debt. i.e. Our defense budget - under Republican and Democrat leadership - is roughly $916 billion. Collectively, China, India, Russia, Saudi Arabia, and the United Kingdom spent approximately $522.5 billion on defense in 2023. This would seem to be an area where expenses could be cut but political infighting inhibits any real progress. And the same can be said for most of the top expenses. This inaction can worsen the problem over time.

5. Global Risks:
   The US depends heavily on foreign investors, to buy its debt. If these investors lose confidence in the US government’s ability to manage its finances, they may demand higher interest rates, making borrowing even more expensive. Large debt can also influence international politics. The largest international holders of US debt are:

• Japan: Approximately $1.1 trillion

• China: Around $749 billion

• United Kingdom: About $690 billion

• Luxembourg: Approximately $373 billion

• Canada: Around $329 billion

Why Not Just Print More Money?

At first glance, printing money to pay off the debt might seem like an easy solution. If I had a money tree in my backyard, I’d be plucking dollar bills off every day. Mo’ money. Mo’ good. Right? Not really. Print more money and we’re faced with the following:

1. Hyperinflation:
   Printing too much money devalues the currency, leading to skyrocketing prices. Higher prices. Higher interest rates. Historical example: In 1923, Germany was faced with huge war reparations. They couldn’t keep up. So they just printed money. The value of the German mark plummeted. By November of ‘23, the rate of exchange was 4.2 trillion german marks to $1 US. The German mark collapsed leading to wide-spread instability, the destruction of the middle class, and some say to the rise of Hitler.

2. Loss of Confidence in the Dollar:
   The US dollar is the world’s reserve currency, meaning other countries hold it as a reliable store of value. Printing excessive amounts of money could erode trust in the dollar, reducing its global demand and status. It also devalues the US currency reserve other countries are holding. China has been pushing to increase the use of it’s currency in the world marketplace and lessening the dependance on the US dollar.

3. Economic Instability:
   A flood of newly printed money could destabilize markets, leading to financial crises and long-term damage to the economy.

What Happens if the US Defaults on Its Loans?

What if we just refused to pay our debt? Others have defaulted on loans to us. What’s the big problem?

Other than the loss of faith in the US and as a viable financial partner on the world stage, the consequences would be catastrophic. A default occurs when the US government fails to meet its debt obligations, such as missing an interest payment on Treasury bonds, or not paying the full amount when the security matures. The impact would be felt world-wide and include but not be limited to the following:

1. Loss of Investor Confidence:
   Investors would view the US as an unreliable borrower, leading to higher interest rates, and reduced willingness to lend in the future. This would increase the deficit and compound the problem.

2. Financial Market Turmoil:
   Treasury bonds are considered one of the safest investments in the world. A default would cause global markets to panic, potentially triggering a financial crisis.

3. Higher Borrowing Costs:
   Even a brief default would result in higher interest rates on future borrowing, increasing the deficit further.

4. Economic Fallout:
   A default would lead to layoffs, reduced consumer spending, and a deep recession. This would be a deeper disaster than the 2008 financial crisis.

Five Ways to Fix the Deficit

Yes, I said 5, but there are really only two ways; increase revenue or cut spending. Here are some potential solutions:

1. Reforming Entitlement Programs (cut spending):
   Social Security and Medicare are significant contributors to the deficit. Adjusting eligibility ages to reflect longer life expectancies or implementing means-testing for wealthier recipients could make these programs more sustainable. Many recipients in the US have been financially successful and do not need payments from these programs. Yeah, it might not be fair. They likely paid in more. But cuts such as these could sustain the programs needed by millions and reduce the costs of the programs.

2. Raising Revenue (increase revenue):
   The government could increase revenue by closing tax loopholes and introducing targeted taxes, such as a carbon tax or wealth tax. These measures could boost income without raising rates for most Americans. Approximately 85% of revenue comes from individual taxes, payroll taxes, and another 7% from corporate taxes. Reducing taxes on wealthy individuals has a significant impact. Corporate taxes are relatively low and include many loopholes for those companies and individuals that can afford to set them up. Reducing these loopholes would increase revenue without having to raise the tax rate. Reducing tax rates would need to have a corresponding cut in expenses.

3. Spending Cuts (cut spending):
   Reducing waste and inefficiency in government programs could save billions. Caps on discretionary spending growth could also help reign in expenses. It’s a balance. The first step before we cut programs should be to make sure the programs are being run efficiently. These are huge budgets. It will take professional managers. The focus should be on reducing the cost of programs and not on reducing the reach of these programs.

4. Economic Growth Initiatives (increase revenue):
   Investing in infrastructure, education, and technology can boost long-term economic productivity. A stronger economy generates more tax revenue, reducing the deficit without raising taxes. Will AI technologies lead to new business opportunities and/or new business technologies? Investment in these promising technologies may lead the way to an economic boom. Historical example: During Bill Clinton’s presidency the US had the following surpluses (raised more revenue than expenses); 1998 $69 billion; 1999 $126 billion; 2000 $236 billion; and 2001 $128 billion. The surplus came from the boom in tech. It was a new industry which sparked innovation and growth. The economy skyrocketed. In addition, taxes were generally raised, discretionary spending was limited, and a balanced budget plan was passed. The cold war also ended so defense spending was cut.

   Note: Why’d our surpluses go away? Bush tax cuts (reduced revenue) plus increased defense spending due to our 9/11 response (increased expenses).

5. Debt Reduction Strategies:
   Setting long-term goals - or a balanced budget amendment - to reduce the debt-to-GDP ratio can help stabilize finances. Bipartisan agreements on spending and revenue are essential to make this happen.

Why Addressing the Deficit Matters

Debt doesn’t go away. It grows. And grows. It must be addressed. Failing to tackle the problem risks leaving future generations with fewer opportunities and a weaker economy. High debt levels will eventually lead to slower economic growth, a big tax increase, and reduced government services. It also may leave many of our citizens without the services they need to support themselves and the economy. Worse, a financial crisis stemming from unchecked debt could permanently damage the US’s position as a global leader.

It is possible. The US can reduce it’s deficit. It isn’t rocket science. It’s a practical approach to revenue and expenses. The time to act is now.

How Can You Help?

Or can you? Most of these problems must be addressed by elected officials and the development of government policies.

But you do vote? Right? You can make a difference.

Focus on candidates that take a practical, non-extremist point of view on these fiscal issues. Cutting expenses for the wealthy and corporations has not shown to reduce the deficit or increase revenue. Increasing revenue and becoming more efficient in our discretionary spending has proven effective.

Also, take responsibility for your personal finances. Do not spend more than you make. If you don’t manage your finances on a personal level how can you expect your government to do the same.

Invest. Learn to manage and grow your finances. Look at starting a new business. New businesses increase revenue.

And do not rely upon government programs to support you in retirement. Build a nest egg. And if you don’t need the benefits of social security or medicare, don’t take them. Be self-sufficient.

It may be raining before you know it.

Pay your taxes on time and in full. It’s the law. And it’s patriotic.

Advocate for transparency in government. Especially in spending. Get involved.

Study. Learn. Vote.

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