What’s wrong with deficit spending?
“Deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit; the opposite of budget surplus. The term may be applied to the budget of a government, private company, or individual.” Source: https://en.wikipedia.org/wiki/Deficit_spending
Personal deficit spending
I’m guessing most Americans have a checking account. As we earn money and deposit the money in a bank, the balance in our checking account grows. When we spend money, the balance in our checking account is reduced by the amount of money spent. This is a pretty simple concept. Almost everybody lives by this rule.
However, if we spend more money than is in our checking account, we are notified by the bank that we have insufficient funds. The abbreviation is NSF (non-sufficient funds). Customers are typically charged a premium (penalty) for returned checks and the debtor still owes the original amount. Writing bad checks also damages your credit rating and you can be sent to jail for attempting to defraud someone. Source: https://wallethub.com/edu/bad-check-laws/14289/
Business deficit spending
Okay, so there is a penalty for an individual who engages in deficit spending. What about a business? Deficit spending is also illegal for businesses. Penalties are imposed on businesses that engage in deficit spending. A business can be fined, its reputation damaged, loans may not be available, stock share prices will drop, the business can go bankrupt, and its officers may be imprisoned. Some of America’s largest corporations have declared bankruptcy due to non-sufficient funds.
For example, “A number of major airlines have declared bankruptcy and have either ceased operations, or reorganized under bankruptcy protection. Airlines, like any business, are susceptible to market fluctuations and economic difficulties. The economic structure of the airline industry may contribute to airline bankruptcies as well. One major element in almost every airline bankruptcy is the rejection by the debtor of its current collective bargaining agreements with employees. After satisfying certain requirements, bankruptcy law permits courts to approve rejection of labor contracts by the debtor-employer. With this tool, airline managers reduce costs. Terms of an employee contract negotiated over years can be eliminated in months through Chapter 11. Terms of the Railway Labor Act, amended in 1936 to cover airlines, prevent most labor union work actions before, during and after an airline bankruptcy.” Source: https://en.wikipedia.org/wiki/List_of_airline_bankruptcies_in_the_United_States
City and State government deficit spending
What about city and state governments? Are they permitted to engage in deficit spending? The answer is no. However, the penalties for deficit spending are different. When a state or city engages in deficit spending, the bond rating is reduced, the city may declare bankruptcy, elected officials may be put in prison, and the state can appoint a special manager for the debt-ridden city.
For example, “The city of Detroit, Michigan, filed for Chapter 9 bankruptcy on July 18, 2013. It is the largest municipal bankruptcy filing in U.S. history by debt, estimated at $18–20 billion, exceeding Jefferson County, Alabama's $4-billion filing in 2011.” Source: https://en.wikipedia.org/wiki/Detroit_bankruptcy
Petersburg, Virginia is currently in a budget crisis. “This city of 32,000 just south of Richmond is facing a financial crisis unusual for fiscally conservative Virginia — or any state. In at least the past four years, the city spent all of its reserves and then kept spending money it didn’t have. It took out short-term loans based on anticipated tax revenue to keep paying bills.
When the loans ran out, it stopped paying. Some fire and rescue equipment has been repossessed. The city trash hauler is threatening to stop pickup. And lenders will not give Petersburg any more loans.” Source: https://www.washingtonpost.com/local/virginia-politics/city-on-the-brink-petersburg-cant-pay-its-bills-and-time-is-running-out/2016/09/04/9327c962-6ef9-11e6-8533-6b0b0ded0253_story.html?utm_term=.094f181b9ab9
And here is an example of a state in financial crisis. “Illinois is on the verge of becoming America's first state with a junk credit rating. The financial mess is the inevitable result of spending more on pensions and services than the state could afford -- then covering it up with reckless budget tricks.
After decades of historic mismanagement, Illinois is now grappling with $15 billion of unpaid bills and an unthinkable quarter-trillion dollars owed to public employees when they retire.
The budget crisis has forced Illinois to jack up property taxes so high that people are leaving in droves. Illinois may soon have to take the unprecedented step of cutting off sales of lottery tickets because the state won't be able to pay winners.” Source: http://money.cnn.com/2017/06/29/investing/illinois-budget-crisis-downgrade/index.html
The Federal Government and its deficit
I can’t tell you how many times I have heard someone say, “Hey, the Federal Government cannot go broke because the government owns the printing presses and can just print more money!” Let’s see how that has worked in other countries.
Inflation in Zimbabwe
“From 1991 to 1996, the Zimbabwean Zanu-PF government of President Robert Mugabe embarked on an Economic Structural Adjustment Programme (ESAP), designed by the IMF and the World Bank that had serious negative effects on Zimbabwe's economy. In the late 1990s, the government instituted land reforms intended to evict white landowners and place their holdings in the hands of black farmers. However, many of these "farmers" had no experience or training in farming. From 1999 to 2009, the country experienced a sharp drop in food production and in all other sectors. The banking sector also collapsed, with farmers unable to obtain loans for capital development. Food output capacity fell 45%, manufacturing output 29% in 2005, 26% in 2006 and 28% in 2007, and unemployment rose to 80%. Life expectancy dropped.
A monetarist view is that a general increase in the prices of things is less a commentary on the worth of those things than on the worth of the money. This has objective and subjective components:
Crucial to both components is discipline over the creation of additional money. However, the Mugabe government was printing money to finance involvement in the Democratic Republic of the Congo and, in 2000, in the Second Congo War, including higher salaries for army and government officials. Zimbabwe was under-reporting its war spending to the International Monetary Fund by perhaps $23 million a month.
- Objectively, that the money has no firm basis to give it a value.
- Subjectively, that the people holding the money lack confidence in its ability to retain its value.
Over the course of the five-year span of hyperinflation, the inflation rate fluctuated greatly. At one point, the US Ambassador to Zimbabwe predicted that it would reach 1.5 million percent. In June 2008 the annual rate of price growth was 11.2 million percent. The worst of the inflation occurred in 2008, leading to the abandonment of the currency. The peak month of hyperinflation occurred in mid-November 2008 with a rate estimated at 79,600,000,000% per month. This resulted in US$1 becoming equivalent to the staggering sum of Z$2,621,984,228.”
Inflation in Venezuela
“Inflation in Venezuela is expected to rise by as much as 1500 percent this year amid an economic crisis that has left millions of Venezuelan’s starving and led to mass shortages of basic resources such as food, medicine, and electricity.
It is the third increase implemented in Venezuela this year. In January, Maduro raised the minimum wage by 50 percent and then raised it a further 30 percent in April.
The new minimum wage stands at 97,531 bolivars a month, which on Venezuela’s official exchange rate equates to around $70 a month but only holds a real market worth of $12.53, according to the unofficial Venezuelan exchange rate service dolartoday.com. People are also provided with a food ticket, which has a black market value of 153,000 bolivars a month, bringing the total monthly minimum income to around $30.
As part of his socialist economic program, the late Venezuelan dictator Hugo Chávez boasted that Venezuela had the highest minimum wage in Latin America, equivalent to $372 a month. However, inflation began to soar as early as 2007 and has now reached levels comparable to Germany’s Weimar Republic or Zimbabwe’s hyperinflation crisis, which saw people using wheelbarrows to buy products and the introduction of a 100 trillion dollar banknote.
As well as daily violent anti-government protests, instances of mass looting have broken out across the country as people fight for survival. Last week, in Maracay, the capital of Aragua state, people ransacked supermarkets, bakeries, butcher shops and pharmacies of their products.” Source: http://www.breitbart.com/national-security/2017/07/03/venezuela-hikes-minimum-wage-by-further-50-percent-amid-skyrocket-inflation/
What about the United States?
Both Zimbabwe and Venezuela are recent examples of excessive government spending. Many people in America choose not to read nor understand this important fact. They falsely believe, “It can’t happen to us.” Oh no? Our national debt is approximately 20 trillion dollars and is growing daily.
“The national debt of the United States is the amount owed by the federal government of the United States.
In general, government debt increases as a result of government spending, and decreases from tax or other receipts, both of which fluctuate during the course of a fiscal year.
Historically, the US public debt as a share of gross domestic product (GDP) has increased during wars and recessions, and subsequently declined. The ratio of debt to GDP may decrease as a result of a government surplus or due to growth of GDP and inflation. For example, debt held by the public as a share of GDP peaked just after World War II (113% of GDP in 1945), but then fell over the following 35 years. In recent decades, however, aging demographics and rising healthcare costs have led to concern about the long-term sustainability of the federal government's fiscal policies.” Source: https://en.wikipedia.org/wiki/National_debt_of_the_United_States
The Congressional Budget Office (CBO) reported in September 2011: "The nation cannot continue to sustain the spending programs and policies of the past with the tax revenues it has been accustomed to paying. Citizens will either have to pay more for their government, accept less in government services and benefits, or both.” Source: https://www.cbo.gov/publication/42761?index=12413
“There is an ongoing debate as to whether the government should limit its ability to borrow. Some consider deficit spending to be a hindrance to the government and the economy, arguing that a deficit only shifts the burden to future generations because it must be paid for eventually, just like any other loan.
Others see deficits as a crucial way for the government to stimulate the economy during an economic downturn. Proponents of this view believe that the role of government is not only to provide services that the private sector won't, but also to stimulate the economy during economic crises. They argue that deficits are necessary in times of economic hardship, but that during economic booms, budget surpluses should be used to pay down the debt.” Source: https://www.nationalpriorities.org/budget-basics/federal-budget-101/borrowing-and-federal-debt/
How much debt is acceptable? For Fiscal Year 2017, we will pay 27 billion dollars on interest alone. Source: https://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm
Warnings about deficit spending are being announced but our Congress and the President are tone deaf. Intellectually, most of our elected officials know that we cannot continue to spend money that we don’t have but politically, few are willing to risk alienating their public.
Psychology of the masses says that once you give voters something ‘for free,’ it’s virtually impossible to take it away from them. Here are two examples:
1. The Great Society
“The Great Society was a set of domestic programs in the United States launched by Democratic President Lyndon B. Johnson in 1964–65. The main goal was the elimination of poverty and racial injustice. President Johnson first used the term "Great Society" during a speech at Ohio University, then unveiled the program in greater detail at an appearance at University of Michigan.” Source: https://en.wikipedia.org/wiki/Great_Society
These programs included:
- “War on Poverty: forty programs that were intended to eliminate poverty by improving living conditions and enabling people to lift themselves out of the cycle of poverty.
- Education: sixty separate bills that provided for new and better-equipped classrooms, minority scholarships, and low-interest student loans.
- Medicare & Medicaid: guaranteed health care to every American over sixty-five.
- The Environment: introduced measures to reclaim our heritage of clean air and water.
- National Endowment for the Arts and the Humanities: created with the philosophy that artists, performers, and writers were a priceless part of our heritage and deserve support.
- Job Corps: provided enabling skills for young men and women.
- Head Start: program for four- and five-year-old children from disadvantaged families that gave them a chance to start school on an even basis with other youngsters.”
“Government safety net programs put in place since the War on Poverty have helped reduce the poverty rate from 26% in 1967 to 16% in 2012, according to a Supplemental Poverty Model (SPM) created by Columbia University, while the official U.S. Poverty Rate has not changed, as the economy by itself has done little to reduce poverty. According to the 2013 Columbia University study which created the (SPM) method of measuring poverty, without such programs the poverty rate would be 29% today. An analysis of the study by Kevin Drum suggests the American welfare state effectively reduces poverty among the elderly but provides relatively little assistance to the working-age poor. A 2014 study by Pew Charitable Trusts shows that without social programs like food stamps, social security and the federal EITC [earned income tax credit], the poverty rate in the U.S. would be much higher. Nevertheless, the U.S. has the weakest social safety net of all developed nations. Sociologist Monica Prasad of Northwestern University argues that this developed because of government intervention rather than lack of it, which pushed consumer credit for meeting citizens' needs rather than applying social welfare policies as in Europe.”
“President Barack Obama says he believes his signature health care law will survive, noting he has told Republicans over his two terms in office to come up with a different solution if the law doesn't work.
Asked by ABC News chief anchor George Stephanopoulos whether he thinks the Affordable Care Act will survive, Obama quickly replied, "I think it will."
"It may be called something else. And as I said, I don't mind. If in fact the Republicans make some modifications, some of which I may have been seeking previously, but they wouldn't cooperate because they didn't want to -- make the system work, and relabel it as Trumpcare, I'm fine with that," he said in an exclusive interview on “This Week” Sunday.” Source: http://abcnews.go.com/Politics/president-obama-obamacare-survive-presidency/story?id=44623528
Presidents Johnson and Obama were really clever politicians who understood psychology of the masses. After all, the most important thing for a majority of elected officials is to stay in office! What politician has the courage to drop ‘free’ programs - even if a specific program is not effective?
I’m not saying all social programs should be ended. However, there are some which are less effective than others. The real problem of ineffective ‘free’ programs is their cost. Social programs add to our deficit spending and we have to borrow money to pay for these programs.
For example, would you personally take out a loan to buy a car that did not run? If not, then why should the US Government borrow money to pay for programs which are ineffective?
Our elected officials lack the courage to cancel ineffective social programs.
Joe R. East, Jr.