One of the reasons my posts have been scarce* lately is because, frankly, I’m frustrated and nearly speechless at the foolish talk and nonsense that currently passes for news about the economy lately. In particular, this year the politicians and reporters in Washington have been focused on the federal government deficits and debt. We are being bombarded by total nonsense from politicians from both parties. But the news reporting of the debates are even worse. Unfortunately much of this nonsense is couched in serious tones amidst appeals to emotional triggers with people. Result: folks are being misled.
So in a public spirited effort to help you sort out just when you’re listening to somebody who isn’t worth listening to, I’m starting a guide to How to tell if the politician or reporter is ignorant, foolish, or has a hidden agenda. This is part 1.
If the politician or reporter says anything about “reducing the government’s debt”, it’s time to stop listening. They don’t know anything, including basic words in English. They don’t know the difference between “debt” and “deficit” and the difference is huge.
Debt, in the context of the federal government, refers to the accumulated total of money that has been borrowed in the past by issuing bonds and T-bills. Sovereign national debt, unlike private debts, do not have to be “paid off” now or ever. When the bonds come due, the government issues new bonds to replace them.
Deficit, in the context of the federal government, refers to this year’s budget and whether taxes collected are less than the cash expenditures made. If taxes collected this year are less than expenditures, the government (any sovereign government) can either borrow the difference by issuing new bonds (additional debt) or by creating new money (coins, paper currency, or bank reserves). In the case of the U.S., the government has totally delegated the money-creation process to The Federal Reserve and promised that it would always borrow to make up the difference between taxes and expenditures.
There’s a relationship between Debt and Deficits. The Deficit each year (assuming money creation is not used) will lead to more borrowing which will increase the total Debt outstanding.
So back to our politicians and reporters. As official Washington tries to figure out how to politically raise the debt ceiling law (a foolish piece of legislation, but that’s for another post), reporters and politicians both have been reporting that talks are under way to “reduce the debt“. NO! AAAARGGGHHHH! The debt isn’t going to be reduced, but the deficit might be. To reduce the the debt, we would have to have a budget surplus, and that ain’t going to happen**. What they are talking about is how to reduce the annual deficit (a foolish goal that’s doomed to failure, but right now I’m focused on the words).
At times it’s worse. I’ve actually heard politicians (mostly Republicans) and reporters say on TV that they want to “eliminate the debt”. Come on folks! If you hear anybody say that, change the channel immediately. Shield your children’s ears. A person who talks about “eliminating the debt” can’t even do first grade arithmetic. The federal government debt is approximately $14 trillion. The entire GDP of the U.S. is only a little more. To eliminate the debt, the entire country, all of us, would have to produce and sell everything we’re doing now but then tax 100% of it and not consume a single thing – not even a single bottle of Coke.
Suppose you went to your medical doctor because you thought you had an eating disorder and wanted to reduce your appetite. If the doctor said her goal was to totally eliminate your entire weight, you’d think her crazy, leave, and find an knowledgeable doctor instead of a quack. But when politicians and reporters make equally absurd comments, we pay them and give them campaign contributions.
*neo-classical theory says they should be going up in price, but I’m still giving it for free.
** last time we were close to surplus was the last year of the Clinton administration (only time since mid-1950′s). To have a surplus we would have to have full employment. Even then, Republicans have shown (2001 and 2002) that they would continue to cut tax rates and tax collections faster and eliminate the surplus, putting us back in a massive deficit.