{"id":10652,"date":"2020-12-07T10:52:46","date_gmt":"2020-12-07T16:52:46","guid":{"rendered":"http:\/\/blog.uwsp.edu\/cps\/?p=10652"},"modified":"2021-01-05T10:48:36","modified_gmt":"2021-01-05T16:48:36","slug":"divisiveness-and-the-economic-challenges-of-2021-challenge-2-controlling-u-s-debt-and-federal-budget-deficits","status":"publish","type":"post","link":"https:\/\/blog.uwsp.edu\/cps\/2020\/12\/07\/divisiveness-and-the-economic-challenges-of-2021-challenge-2-controlling-u-s-debt-and-federal-budget-deficits\/","title":{"rendered":"Divisiveness and the Economic Challenges of 2021 – Challenge #2: Controlling U.S. Debt and Federal Budget Deficits"},"content":{"rendered":"\n

Let’s continue with our Divisiveness and the Economic Challenges of 2021<\/strong> series with Challenge #2 \u2013 Controlling U.S. Debt and Federal Budget Deficits<\/strong>.<\/p>\n\n\n\n

The Federal\nDeficit<\/em><\/h3>\n\n\n\n

The federal budget deficit refers\nto U.S. federal government spending exceeding government income. The necessity\nof the $2 trillion Covid-19 stimulus contributed to a record federal budget\ndeficit for fiscal year 2020 (year ended September). The graph below puts some\nhistorical perspective on the current deficit relative to previous years. The graph shows the U.S. federal budget\nsurplus or deficit since 1940. The shaded areas of the graph indicate an\neconomic recession.<\/p>\n\n\n\n

For fiscal year 2020 the deficit\ntopped $3.1 trillion, more than double the $1.4 trillion deficit that resulted\nin 2009 from the financial crisis. Federal\nbudget deficits didn\u2019t really start appearing on a regular basis until the\n1970s, with the deficit increasing through the first half of the 1980s.\nGenerally, an expanding economy leads to a decrease<\/em> in the U.S. federal\ngovernment budget deficit as tax revenues increase. The economic expansion in\nthe 1980s led to the deficit declining slightly in the late 1980s, and the\nstrong economic expansion in the 1990s led to budget surpluses. Following the\nrecession of the early 2000s and the financial and economic crisis of the late\n2000s, the deficit once again was reduced. However, the tax cuts of 2018\ncontributed to a growing budget deficit, and the 2020 stimulus brought the\ndeficit to record levels. <\/p>\n\n\n\n

Federal Budget Surplus or Deficit<\/strong>
Annual amount of Federal Budget Surplus or Deficit in Millions of Dollars (1\/1\/40-9\/30\/20)<\/em><\/p>\n\n\n\n

\"Federal
Source: Graph from Federal Reserve Economic Database (FRED) based on data from the U.S. Office of Management and Budget<\/em><\/figcaption><\/figure>\n\n\n\n

Federal\nDebt<\/em><\/h3>\n\n\n\n

To\nfinance a budget deficit the U.S. government borrows money from the public\nthrough the issuance of U.S. government debt securities called U.S. Treasury\nsecurities. Buyers include individuals, institutional investors, certain mutual\nfunds, and foreign investors and governments. Regarding the foreign investors,\nJapan and China are by far and away the major foreign investors in U.S.\nTreasury securities. As of August 2020, Japan owned nearly $1.3 trillion of\nU.S. Treasury securities while China owned nearly $1.1 trillion. Japan\u2019s\nholdings accounted for approximately 18% of the Treasury debt held by foreign\ninvestors while China accounted for approximately 15%. <\/p>\n\n\n\n

The graph below puts some historical perspective on the current deficit relative to previous years. The graph shows the total federal debt held by the public. From 2000 to 2009, the federal debt approximately doubled, from approximately $5.8 trillion to $12.3 trillion. In the past decade, the federal debt level nearly doubled again, from $12.8 trillion in 2010 to over $23.2 trillion in the further quarter of 2019. In 2020, a spike in the debt level occurred. By the end of the second quarter in 2020, debt approached $26.5 trillion, a 14% increase relative to the fourth quarter of 2019. <\/p>\n\n\n\n

Federal Debt: Total Public Debt<\/strong>
Amount of Federal Debt in Millions of Dollars (1966-2020 2nd qtr.<\/em>)<\/p>\n\n\n\n

\"Federal
Source: Graph from Federal Reserve Economic Database (FRED) based on data from the U.S. Treasury<\/em><\/figcaption><\/figure>\n\n\n\n

Federal Debt and Income<\/em><\/h3>\n\n\n\n

To better gauge the magnitude of\nfederal debt outstanding, the amount of federal debt outstanding is often\ncompared to the Gross Domestic Product (GDP). GDP not only measures output in the economy, it also reflects income.\nWhen goods and services are created, income is also created, split between\nindividuals, corporations, and the government. Federal debt as a\npercentage of GDP is a measure of a country\u2019s ability to pay its debt. If you\nhave $100,000 of debt is it a lot? The answer is probably yes if your income is\n$50,000; the answer is probably no if your income is $50,000,000. The more\nincome, the more debt you can generally financially afford. Federal debt as a percentage of GDP\nprovides a relative measure as to how the federal debt financially burdens the\ncountry.<\/p>\n\n\n\n

The graph below puts some historical perspective on the amount of federal debt outstanding relative to the amount of income (GDP) generated in the U.S. Relatively speaking, federal deficits and increasing federal debt were not much of an issue until the 1980s. Federal debt as a percentage of GDP rose to over 50% by the end of the decade. In the 1990s, following a decade early recession, federal debt as a percentage of GDP topped 65%; federal budget surpluses helped reduce the level to approximately 55% by the end of the decade. The return of budget deficits after the turn of the century increased federal debt as a percentage of GDP to nearly 65% prior to the financial and economic crisis of 2007-2009; it increased to 84% be the end of the crisis. The Covid-19 economic contraction and stimulus brought federal debt as a percentage of GDP new heights. At the end of the second quarter of 2020, federal debt to GDP stood at 135%, a 50% increase from a decade earlier. <\/p>\n\n\n\n

Federal Debt as a Percentage of U.S. GDP<\/strong>
1966 \u2013 2020 2nd Qtr.<\/em><\/p>\n\n\n\n

\"Federal
Source: Graph from Federal Reserve Economic Database (FRED) based on data from the U.S. Office of Management and Budget<\/em><\/figcaption><\/figure>\n\n\n\n

The Congressional Budget Office\nAnalysis of Debt<\/em><\/h3>\n\n\n\n

Does the United States have too\nmuch debt? <\/p>\n\n\n\n

On September 21, 2020, the\nCongressional Budget Office (CBO) released its Long-Term Budget Outlook for the\nU.S. It presents the fiscal challenges that will be faced by future\nadministrations. The CBO Budget Outlook includes the following assumptions<\/p>\n\n\n\n