The headline screams, “National Debt Reaches $22 Trillion!” Another warns, “The Deficit is Expected to Reach $1 Trillion in 2019”. The problem with this shrill alarmism is the deceptiveness of these statements. They are of course intended to shock us. To attach sanity to these numbers, we need to set aside our common understanding of the terms ‘Debt’ and ‘Deficit’ from Accounting 101. They simply don’t apply in the same way to the Federal Government as they do to business, or to us mortals for that matter!
Economists and Accountants attach a variety of labels to financial statements. So, for example, a “Balance Sheet” is also known as a “Statement of Financial Condition”. An “Income Statement” is also called a “Statement of Operations”. Economics and Accounting are really boring, so forgive their practitioners for occasionally making up new terms just to keep things spicy.
For purposes of this article, I’m going to use Lemonade Stand accounting labels. With that, the two most fundamental equations are:
Assets – Liabilities equals Equity, referring to the Balance Sheet; and,
Income – Expense = Profit, referring to the Income Statement. (And if Expense is greater than Income, Profit becomes ‘Loss’ or, ‘Deficit’).
We all know pretty much what Assets are. Liabilities, on the other hand, are technically “claims on assets” but set that technicality aside for the moment. We often use the term DEBT interchangeably with Liabilities, so another way of writing the equation is: Assets – Debt equals Equity.
Another way of saying Equity is “Net Worth”. Very simply, if we add up all our Assets: bank accounts, the cash value of our life insurance, our cars (not the leased ones but the ones we own), our house and everything in it – that’s our total Assets. If we subtract what we owe on our mortgages, our car loans, our credit cards, and any other debt we may have, from our total Assets, the number we’re left with is our Net Worth. Another way of looking at it is: if we sold everything and turned all our assets into cash and used that cash to pay off our debt, the cash we have left over is our Net Worth.
Analogously, our salary or the top line of our paychecks is Income, while taxes, our mortgage or rent, our car payments, what we spend to live, represent Expense. What’s left over isn’t Profit, per se, but it represents cash we can spend on other things, so in a way that’s “profit”.
As an aside, what politicians have been adept at over the years is getting us to think of our “Income” as our net paycheck, i.e. the amount that goes into our bank account each payday. We rarely think about our Gross Income…we always think about our Net Income. When the government takes our money in the form of income tax, we don’t feel it because it’s withheld from our paychecks. If we actually received our full paychecks and had to immediately fork over the taxes we’d sure feel it a lot more wouldn’t we?
And let’s not forget the government taxes on goods and services!
Q. Do you know how much per gallon of gas is TAX???
A: As much as $.58 in North Carolina! Think about how much money that is!
If we add up income tax PLUS all the excise and other taxes and fees we pay government on a daily, weekly, monthly and annual basis, and received our Gross Income and had to fork over all that tax in dollar bills instead of just ignoring them as we are wont to do, we’d likely get indigestion at least, or more likely, throw up.
These are easy concepts to understand when we’re talking about lemonade stands and our personal budgeting. The confusion (often deliberate) arises when these same terms are applied to the Federal Government. Some terms are analogous, but many aren’t.
Politicians and pundits speak of the government all the time as if it were a business, and it is not! The National Debt that everyone frets over, for example, is not the same as business debt. And since the government doesn’t have an “employer” (yes, we’re supposed to be its employer, but it doesn’t really work that way does it?), Income for the government is the Taxes they extract from us.
Expense for the government, on the other hand, is everything from roughly $67 Billion for 200 F-22 fighters to $3.1 Billion on vacation pay for federal employees placed on administrative leave (really!), oh, and studies on what bugs do around lightbulbs, and subsidies to put solar panels on breweries so beer can be “greener”, etc. (really!)
The National Debt isn’t like our debt. Take our car loan and consumer debt. We owe money to a bank or credit card company. Who does the Federal Government owe money to? Well, yes, the Japanese and Chinese have loaned us a lot, each about $1 Trillion, but guess who the government owes the most to? US!
What is so often ignored when the alarms are sounded is the other side of the Balance Sheet! When talking heads shriek about the Debt and Deficits, you never hear anything about the Assets on the other side of the “Balance Sheet” do you? What comprises the Assets of the Federal Government? Well, yes, it owns land, and it owns equipment and it owns lots of financial securities and other monetary assets, but who has claim on those assets (remember the technical definition of Liabilities, above)? WE DO!
The reality is, the Assets of the United States of America DWARF its debts. And the vast majority of our assets don’t appear on the Balance Sheet! That’s because the Assets include the unmeasured value of things like our natural resources, the innovation of our people, our work ethic, our FREEDOM!
It’s the Assets on the other side of the equation from the National Debt, and it’s the income, and income potential of our national Income Statement that render the Debt and Deficits far more benign than the alarmists want you to believe.
Do they matter? Of course they do. The Debt CAN affect borrowing costs, but look at the past ten years and it’s evident that rising debt doesn’t necessarily mean rising interest rates. And some will argue that the National Debt “crowds out” business and consumer borrowers. That too, is a fallacious argument. Business and consumer debt have never been higher. And the Deficit is good for chicken-little headlines depending on your political point of view, and no doubt that affects sentiment, and sentiment affects spending and investment behavior. So yes, they matter.
But the ability of the U.S. Treasury to borrow money against the (my guess) QUADRILLIONS of dollars of Assets we have means deficits are just an arithmetic exercise. If we had to spend money to dig California out of the ocean if the really Big One were to hit, for example, could the Treasury print more money, and would it still be valuable? Of course it would, because what matters is not the arithmetic, but that we have the ability to pay it back, and we and the rest of the world (everyone but those who profit from whining about it) know it. Hell, we could always sell Alaska to the Russians, the Chinese or the Canadians and retire our National Debt in a heartbeat! (Don’t worry citizens of Wasilla, we’re not going to do that.)
I’ve vastly simplified the intricacies of our country’s finances here, of course, but what I’m advocating is to take what the alarmists on both sides of the political aisle say with a grain of salt. Rest assured that we are, and so long as we are free, will remain, the greatest and most financially sound nation on Earth. We aren’t in any danger of going bankrupt any time soon.
For a really substantive, plain-language read on why the National Debt and Deficits matter less than everyone thinks, I commend to you three articles written by people far smarter than I:
- University of Georgia economics professor William D. Lastrapes’ article entitled “Why the $22 trillion national debt doesn’t matter – here’s what you should worry about instead” here;
- John Tamny’s article in Forbes’ magazine entitled, “Ignore The Endless Talk Of Doom, Budget Deficits Really Don’t Matter” here; and,
- Neil Irwin’s New York Times (!) article entitled “How America Learned to Stop Worrying and Love Deficits and Debt”, here.
At least browse through them. You’ll sleep better.
