Thursday, January 10, 2013


Nilsa asked a question via comment yesterday, which Steffi re-iterated and one other person asked via email. In a classic case of my overly-ambitious writing, I sent the following response to Nilsa, and to save time I will just re-post it here. 
The question was: "Was the budget truly balanced when Clinton was in office? And if so, what the hell has happened since then that we've basically screwed ourselves out of ever balancing the budget again?"
Here was my email:
And to answer your, we have not balanced a budget "for real" since 1957.
The confusion is in the way that the Feds account for social security taxes. When the designated SS tax was instituted in the 1980's, it was done so for the purpose of building up a Trust Fund with which to pay future benefits. I'll use fake numbers for the example...
Imagine that they collect $1,000 in social security taxes (which are a tax on everyone's income, but are not called "Income taxes"). Now, imagine that the benefits paid out this year to Social Security recipients are $400. The extra $600 (the "surplus") is supposed to go into the Trust Fund for the purpose of paying out the benefits that it will eventually owe to the people who are paying that $1,000 in taxes. In this sense, it works very much like a normal pension.
Here is where it gets tricky. What happens to the extra $600? It gets invested by buying Treasury Securities. In other words, it gets loaned to the General Fund and used to pay the regular expenses of the Federal Government. The accounting problem is that the General Fund doesn't count that as a counts it as regular income. In essence, the $600 has been double revenue to SS used to fund the Trust Fund, and also as regular revenue to the general fund.
To keep going with the example, pretend that regular income taxes generated $1,200, and non-Social Security government expenses were $1,800. According to the Federal Government, there are $1,800 in expenses, and $1,800 in revenues ($1,200 in income taxes and $600 in social security surplus) and voila! the budget is balanced.
However, it isn't that easy...because the SS Trust Fund needs to show some assets, which means that it needs a Treasury Security in exchange for its $600. So the Treasury Department has to issue a $600 bond, promising to pay back the $600 that it borrowed from the Trust Fund. Therefore, even though the budget was "balanced", the Federal Debt went up by $600.
{What's worse...the $600 is almost certainly a lot less than the real value of the liability, which is the social security benefits that were accrued that year and payable in the future...whole other subject}
So the real measure of the Federal deficit is not the balance in the General Fund, but rather the change in the size of the Federal Debt. If you spend more than you take in, then the debt rises. If you spend less than you take in, the debt falls. During the Clinton "surplus" years, we still had to borrow money every single year in order to really balance the budget. The closest we ever got to being really in balance was in 2000, when the debt rose by only about $19 billion ($5.656T in 1999, $5.674T in 2000).
This also highlights why the deficit is getting worse. At it's peak, the annual surplus was like $400 billion...which had the effect of lowering the annual deficit by that much. But more people retired and lived longer as compared to those working, so that surplus fell and fell, until it disappeared entirely a couple of years ago and is now an annual deficit (which is paid for out of the General Fund). So, even if taxes and expenses stayed totally flat otherwise, the deficit would have grown on an annual basis by $400 billion just because of the way the accounting is done.
Add to that a new Medicare drug benefit ($90 billion per year), a couple of wars (as much as $100 billion per year) and slower growth, and you get a super-explosion of debt. Basic problem...since 2000, Federal spending has more than doubled, while revenues are up just 15%.

Simple, right? :-)


Mrs. Adventure said...

So this post made me add a little irish to my coffee (ahem). Thinking about deficit makes my butt-hole pucker (sorry for the visual).

PS: I love your posts like this, you are the only blog I read that actually branches away from the norm.

Have a great day friend.

Lpeg said...

Holy moly, that's a lot to take in. Although I am happy you take the time to post this (and answer my silly questions!)

Looking forward to the other 'parts' of this post.

Nilsa @ SoMi Speaks said...

I'm still recovering from our email exchange yesterday and have officially become scared to ask you questions (not because you're scary, but you have an uncanny ability of answering said questions in a way that scares the pants off me). =)