{"id":9807,"date":"2019-12-19T10:00:24","date_gmt":"2019-12-19T16:00:24","guid":{"rendered":"http:\/\/blog.uwsp.edu\/cps\/?p=9807"},"modified":"2019-12-20T10:23:30","modified_gmt":"2019-12-20T16:23:30","slug":"the-economy-5-things-you-should-know-for-2020-and-beyond-part-4","status":"publish","type":"post","link":"https:\/\/blog.uwsp.edu\/cps\/2019\/12\/19\/the-economy-5-things-you-should-know-for-2020-and-beyond-part-4\/","title":{"rendered":"The Economy: 5 Things You Should Know for 2020 (and Beyond) \u2013 Part 4"},"content":{"rendered":"\n

Number 4: The Yet to be Paid Increasing Costs of the Federal\nDeficit and Debt<\/strong><\/p>\n\n\n\n

The Federal Deficit<\/em><\/p>\n\n\n\n

The\nfederal budget deficit refers to U.S. federal government spending exceeding\ngovernment income. According to the Congressional Budget Office, Government\nspending totaled $4.1 trillion in 2018; government revenues were $3.3 trillion,\ncontributing to a deficit of roughly $800 billion. Government income consists\nprimarily of tax revenues; spending consists of a variety of programs,\nincluding Social Security, Medicare, Medicaid, defense, education, infrastructure,\nand interest on government debt.<\/p>\n\n\n\n

Generally, an expanding economy leads to a decrease<\/em>\nin the U.S. federal government budget deficit as tax revenues increase.\nHowever, the 2018 tax cuts changed that. The graph below shows the U.S. federal\nbudget surplus or deficit since 1990. The shaded areas of the graph indicate an\neconomic recession. Note the economic expansion in the 1990s actually led to budget\nsurpluses. Following the recession of the early 2000s and the financial and\neconomic crisis of the late 2000s, the deficit once again was reduced. However,\nsince 2016, the budget deficit has increased.<\/p>\n\n\n\n

In the midst of an economic recession following the\nturn of the century, the Bush Administration cut income taxes in 2003 to\nstimulate economic growth. Following the financial and economic crisis of\n2007-2009, the Obama Administration cut payroll (social security) taxes in 2011-2012\nto stimulate economic growth. Both contributed to economic recovery; the\neconomy grew, federal tax revenues increased, and the deficit decreased<\/em>.\nThe tax cuts in 2018 were different. The tax cuts were not made to help the\neconomy recover from a recession; there was no recession. Taxes were cut, the\nrate of economic growth temporarily increased, and the deficit increased<\/em>.<\/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\/80-9\/30\/19)<\/em><\/p>\n\n\n\n

\"\"
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

In the current economic scenario, a growing budget deficit is problematic. For the United States, an unemployment rate below 4% pretty much indicates that the government is approaching the maximum amount it will receive from federal individual taxes (given current tax laws). In other words, given the extremely low unemployment rate, it may be hard to lower the rate and significantly increase individual and corporate tax revenues. Putting it another way, if you max out your income and still can\u2019t pay your expenses, you may have a problem if you already have a lot of debt. That discussion is next.<\/p>\n\n\n\n

Federal Debt<\/em><\/p>\n\n\n\n

How does the United States government finance a\nbudget deficit? It basically borrows money from the public through the issuance\nof U.S. government debt securities called U.S. Treasury securities. The\nTreasury issues four types of debt (securities) to finance government\nexpenditures: Treasury bills (short-term debt), Treasury notes (medium-term\ndebt), Treasury bonds (long-term debt), and Treasury Inflation Protected\nSecurities (TIPS). Who buys this stuff? Buyers include individuals (you could\nopen an online account with the U.S. Treasury and purchase these securities),\nlarge institutional investors, certain mutual funds, and foreign investors and\ngovernments. Regarding the foreign investors, China and Japan are by far and\naway the major foreign investors in U.S. Treasury securities, each holding\napproximately $1.1 trillion of U.S. Treasury securities and each accounting for\nnearly 17% of the Treasury debt held by foreign investors. The United Kingdom\nis a distant third, holding only $341 billion of U.S. Treasury securities and\naccounting for a little over 5% of the Treasury debt held by foreign investors.<\/p>\n\n\n\n

When the U.S. incurs several years of consecutive deficits,\nthe debt issued to fund those deficits starts to pile up. Federal debt actually\ndecreased slightly in the late 1990s, as the U.S. ran federal budget surpluses.<\/p>\n\n\n\n

Since 2002, the U.S. has incurred federal\ndeficits.  The graph below shows the\ntotal federal debt held by the public. From 2000 to 2009, the federal debt\napproximately doubled, from approximately $5.5 trillion to $11 trillion. In the\npast decade, the federal debt level has approximately doubled again, from $11\ntrillion in 2009 to over $22 trillion in 2019. \nIn the past 30 years, the amount of federal debt outstanding has\nincreased approximately six-fold to record level amounts.<\/p>\n\n\n\n

Federal Debt: Total Public Debt<\/strong>
Amount of Federal Debt in Millions of Dollars (1980-2019)<\/em><\/p>\n\n\n\n

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

Federal\nDebt and U.S. Income<\/em><\/p>\n\n\n\n

Does\nthe amount of federal debt matter? Well yes, holders of the debt do have to be\npaid. However, how much the debt matters kind of depends on how much income the\ncountry generates. That income could be taxed to generate revenues that could\nbe used to pay the debt. GDP not only\nmeasures output in the economy, it also reflects income. When goods and\nservices are created, income is also created, split between individuals,\ncorporations, and the government. Look at it this way. If you have\n$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\ngraph below provides a long-term perspective on the amount of federal debt\noutstanding relative to the amount of income (GDP) generated in the U.S.\nRelatively speaking, federal deficits and increasing federal debt were not much\nof an issue until the 1980s. Federal debt to GDP rose to over 50% by the end of\nthe decade. In the 1990s, following a decade early recession, federal debt to\nGDP topped 65%; federal budget surpluses helped reduce the level to\napproximately 55% by the end of the decade. The return of budget deficits after\nthe turn of the century increased federal debt to GDP to nearly 65% prior to\nthe financial and economic crisis of 2007-2009. \nFederal debt to GDP now stands at over 100%. <\/p>\n\n\n\n

Despite\nrecent economic growth and an extremely low unemployment rate, the budget\ndeficit has increased and federal debt has reached record levels. Any economic\ndownturn could significantly increase both and place increased pressure on\nfederal government programs and perhaps prompt further changes in federal tax\npolicy, or a reduction in program expenditures. For\nexample, a looming problem, it is estimated that by 2035 payroll taxes\ncollected will only be enough to pay only about 75 cents for each dollar of\nscheduled Social Security benefits. <\/p>\n\n\n\n

Federal Debt as a Percentage of U.S. GDP<\/strong>
1966 – 2019<\/em><\/p>\n\n\n\n

\"\"
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

For further information:<\/p>\n\n\n\n

  1. The Federal Budget from the Congressional Budget Office (CBO):       Federal Budget in 2018: An Infographic<\/a><\/li>
  2. U.S. Budget Surplus or Deficit from the St. Louis Federal Reserve database<\/a><\/li>
  3. Major Holders of U.S. Treasury Securities from the U.S. Treasury<\/a><\/li>
  4. U.S. Federal Debt from the St. Louis Federal Reserve database<\/a><\/li>
  5. U.S. Federal Debt as a Percentage of GDP from the St. Louis Federal Reserve database<\/a><\/li>
  6. A summary of the financial status of Social Security from the Trustees<\/a><\/li><\/ol>\n\n\n\n

    CBEI Blog Series: <\/strong><\/em>The Economy: 5 Things You Should Know for 2020 (and Beyond)<\/em><\/strong>
    Part 1: Economic Growth and Unemployment \u2013 Positive Trends for a Long Time<\/a>
    Part 2: What\u2019s Been Driving Economic Growth<\/a>
    Part 3: The Timing of Those Tax Cuts<\/a>
    Part 4: The Yet to be Paid Increasing Costs of the Federal Deficit and Debt<\/a>
    Part 5: Drivers of The Stock Market <\/a>
    Part 6: Summary and Future Challenges<\/p><\/blockquote>\n\n\n\n

    \"Kevin<\/figure>
    \n

    Kevin Bahr is a professor emeritus of finance and chief analyst of the Center for Business and Economic Insight<\/a> in the Sentry School of Business and Economics at the University of Wisconsin-Stevens Point. <\/p>\n<\/div><\/div>\n","protected":false},"excerpt":{"rendered":"

    Number 4: The Yet to be Paid Increasing Costs of the Federal Deficit and Debt The Federal Deficit The federal budget deficit refers to U.S. federal government spending exceeding government income. According to the Congressional Budget Office, Government spending totaled $4.1 trillion in 2018; government revenues were $3.3 trillion, contributing to a deficit of roughly […]<\/p>\n","protected":false},"author":136,"featured_media":9757,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[527],"tags":[124,343,344],"_links":{"self":[{"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/posts\/9807"}],"collection":[{"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/users\/136"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/comments?post=9807"}],"version-history":[{"count":4,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/posts\/9807\/revisions"}],"predecessor-version":[{"id":9834,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/posts\/9807\/revisions\/9834"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/media\/9757"}],"wp:attachment":[{"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/media?parent=9807"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/categories?post=9807"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/tags?post=9807"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}