The U.S. government is living beyond its means – far beyond its means. As a result, we’ve built up a staggering amount of national debt.

Worse yet, we have put ourselves in this fiscal hole at exactly the wrong time, because we are committed to paying enormous amounts in Social Security and Medicare as the huge baby boom generation starts to retire over the next few years. This means that the future of our economy and way of life may be dramatically affected by the choices we make today for managing the nation’s finances. And if we delay facing up to these choices, we will likely experience even more difficult economic conditions in the years to come.

To understand how we got into this mess—and what we’ll need to do to get out of it—we don’t need to understand the technical aspects of the federal budget, but it is extremely helpful to understand at least a few key points.

 

The Deficit and the Debt

The first point to understand is that we are really talking about two tightly interrelated problems here, the deficit and the debt. The short-term problem we face is that the federal government routinely runs a deficitthat is, in most years the government is spending much more than it takes in.


Federal deficit/surplusFederal deficit/surplus

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deficits require the government to borrow money to cover its bills, and the government is routinely running big deficits, not just for emergencies or during recessions, but for everyday operation expenses. This adds to the long-term problem, the ballooning national debt, which is the total amount owed by the federal government. And just as when there's a huge balance on a credit card, interest payments continue to grow.

 

Gross federal debt in billionsGross federal debt in billions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

So if the government can’t cover its bills it runs a deficit. And every time it does this, it increases the national debt, which is like having a huge balance on your credit card. (Find out more about the two kinds of federal debt).

 

GDP

One of the key concepts economists use when they’re talking about the federal deficit and the national debt is how big these numbers are in relation to the gross domestic product (GDP), which is the total value of all goods and services produced in the United States. In effect, this means the size of our deficit or debt in relation to the total size of the U.S. economy.

Most economists say this is an important benchmark and the best measure of how the deficit and debt are affecting the rest of the economy. The larger these are in proportion to GDP, the greater the impact they’re likely to have. The national debt, for example, could start taking up too much investment cash that could otherwise be put into private industry, pushing up interest rates for everybody.

Current projections by the White House budget office and the Congressional Budget Office show the deficit and the debt both declining in relation to GDP over the next few years. Those projections, however, make some major assumptions, such as that there will be no new spending programs over the next few years. The projections also largely ignore one looming problem, which is the next concept you need to know.

 

Fiscal Exposure

The third term that gets thrown around is unfunded liabilities, or fiscal exposure, a much larger number than the official national debt. Whereas debt is money we’ve already borrowed, fiscal exposure is how much we’ll need to spend in the future to keep the promises we’ve made, such as to Social Security and Medicare recipients.

See the Government Accountablity Office's estimates of fiscal exposures in 2007 here:

Long-term fiscal exposuresLong-term fiscal exposures
 

 

 

 

 

 

 

 

 

 

 

 

In this chart, fiscal exposure dwarfs the national debt, $42 trillion to $10.8 trillion. Combine the exposure, the debt and various other liabilities, and the Government Accountability Office estimates we face about $53 trillion in unfunded liabilities over the next 40 years. Spending on Social Security, Medicare, interest payments on the debt and other mandatory spending already outstrips defense and domestic discretionary spending, and would completely crowd such spending out within a generation if nothing is done.

In sum, because we fail to live within our means we’re mortgaging our future and preparing to leave a big mess to young people and to future generations. That’s why it's vital to face up to the nation’s finances and do something while we still have time. These are daunting problems – but fortunately, as anyone who has ever dug him or herself out of debt knows, they’re not impossible.

 


6 comments on this entry

Re: Heading for Trouble

Tom Foreman

I commend Public Agenda for initiating this joint effort to draw citizens' attention to the fiscal disaster that is looming on the horizon. I especially like the way in which you have attempted to present the central problems in as simple a fashion as possible, so as not to "turn off" those of us who may be seriously considering this issue for the first time.

Having said that, I would like to point out some errors and confusing data/terminology on this extremely important page:

1. In the GDP section's first paragraph, there are links for "deficit" and "debt." When I clicked on them, I got a message saying that, "You are not authorized to access this page." These links should be removed until they lead to something worthwhile.

2. In the third paragraph in this section, the word "show" somehow got thrown twice into the first sentence. The one falling after "Current projections" should be deleted.

3. The Fiscal Exposure section is confusing, especially in regard to the national debt. In a previous chart that fell under the heading "Historical trend of national debt," the national/federal debt is shown to be just under $5 trillion in 2006. By contrast, the first sentence of the paragraph under the chart in the Fiscal Exposure section says that, "In this chart, fiscal exposure dwarfs the national debt, $38.8 trillion to $8.6 trillion." Some clarification is obviously needed!

I believe a good start would be to have the publicly held debt listed separately in this section, instead of being lumped together with "Military & civilian pensions & retiree health" and "Other."

4. In the same chart referenced above, "E.g., PBGC, undelivered orders" is listed in the Commitments & contingencies section. These items need to be explained elsewhere or reworded so that the general public can understand what they refer to.

5. In the Implicit exposures section of this same chart, "Future" benefits are listed, without any explanation of what future means. If it means a 40 year projection, as the paragraph below seems to indicate, then that should be clearly stated. That would help to explain why these future benefit obligations jumped from $20.4 trillion in 2000 to $50.5 trillion in 2006.

Having been an online citizen activist for decades, I am keenly aware of how important first impressions are in our short attention span society. It would be a shame to discourage anyone from taking part in this long overdue national debate merely because errors such as these turned them off.

 

 


Re: Re: Heading for Trouble

Dear Tom:

Thanks for your comment and I apologize for not responding more quickly. Your first two points have already been fixed. The third point turns on the difference between "debt by the public" and the gross federal debt (which is both the public debt and the intergovernmental debt one part of the government owes to another). We'll review that section and the fiscal exposure section for clarity.

Thanks very much for the feedback -- we appreciate your thoughts.


Re: Heading for Trouble

The debt of the US is staggering. The problem is epidemic, and with the stimulus package that Obama is proposing, it is likely to only increase in the coming years, though not having the stimulus package would be far more detrimental. This is something that our children are going to have to deal with - it is going to take a very long time to pay off such an enormous debt to government creditors, and that isn't even touching on the problems of Social Security and Medicare/Medicaid, which will be on the brink of bankruptcy in the next 20 years, if not sooner. The irony is how many Ivy League MBA's are in government, and the rules of not spending more than you make hasn't seemed to occur to them.


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Re: Heading for Trouble

I am keenly aware of how important first impressions are in our short attention span society. It would be a shame to discourage anyone from taking part in this long overdue national debate merely because errors such as these turned them off.
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Re: Heading for Trouble

The problem with our government is that it us living beyond its means! Government officials, I think, forgot the basic concept in Economics! With this problems, citizens should be smart enough to be aware of their credit score. A person's credit score is of vital importance in this day and age. It makes more difference than just about anything else, and according to Suze Orman; Hitler would be redeemable if his FICO score was high enough. However, some things don't affect your credit score as much as others. For instance, your credit score and credit ratings are impacted by credit cards and any personal loan from a bank, and especially if any late fees are assessed. However, payday lenders don't check your credit if you apply for any payday loans. Alternative short term financing doesn't rely on credit scores for eligibility, so keep it in mind that your credit score doesn't come into play with cash advances.


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