Wrapping Your Head Around the National Debt, Deficits, Surpluses, and the Debt Ceiling

The following is not a perfect explanation of the concepts of our national debt, deficits, surpluses, and the debt ceiling. But hopefully my readers will find it helpful in understanding what these terms mean and how they differ from one another.

Lets say we start a country and we have zero debt. In the first year, we collect $10,000 in taxes and spend $10,000. So we had no deficit, because all the bills were covered. We had nothing left over, so no surplus either. And we did not borrow any money, so no debt.

Year 2, we still collect $10,000 in taxes on $10,000 in expenses but we also decide to light a new national Christmas tree. This will cost $300 extra for tree, lights and electricity. We print 10 pieces of paper with the words "IOU $30.00" printed on them and tell people we will pay back $30 plus some interest on them in 5 years. 10 people buy our bonds, so we now have the $300 to cover the Christmas tree. Result: no deficit, no surplus, but now we have a $330 debt (including a flat 10% interest rate on the $300).

In year 3, we will need to set aside a little more than $10,000 (around $66 more) to make sure we will have the $330 ready to pay back the people who bought our bonds when they come due. However, if we still only bring in $10,000 in taxes, we will incur a $66 deficit for the year. The way we cover that is to print more IOUs and sell them so the money is set aside and our creditors believe we are taking our responsibilities seriously. So we see that the deficit incurred this year causes the debt to grow.

Skip ahead 230 years... We now have a military, a department of social services, tons of federal employees in each, etc, etc. All of these programs were approved over time by the people's representatives -- including the financing schemes to pay for them over time with future tax receipts. The amount of all the bonds we've permitted ourselves to print and sell (to cover our past and future spending commitments above the taxes that have come in) is our "debt ceiling".

Let's say the total amount we've agreed to pay above all of the combined tax income so far is now $17 Trillion. That's the debt. If, in this year, we incur more expenses (including payments on the debt) than we bring in from taxes, we have a deficit for the year. If we had a deficit last year and we have a deficit this year, but the amount we went "over" this year is half of what we went over last year, we have cut our deficit in half. If we bring in more tax revenues this year than this year's expenses, it is a surplus - but that doesn't help us pay down the debt unless we agree to apply some or all of this year's surplus toward paying off the total debt.

No Such Thing as Refuge

Last week, the CEO of the corporation I work for announced they are going to make cuts (including closing entire facilities) in order to lower costs and focus more resources on fewer game titles. The following day, the Orlando studio president met with all of us. He told us that while no specific decisions had been made yet, there would likely be cuts here even though our is (by far) the most profitable facility in the global corporation. More will be revealed after the new year.

"Ha ha ha!" I can hear the Universe belly-laughing at me. "Silly boy, there is no such thing as security. There is only paying attention to what is happening in the moment, following your heart, and doing your best." Well, to be fair to me, I lived through the dot-com crash so I chose the way I chose as a gesture toward "learning from the past." As if. As if the past were ever a reliable gauge for the future. (c.f. Real Estate marketing in 2006, "Historically, housing prices have always gone up.") I'm not saying I should have gone with a Silicon Valley startup instead or even that I'm expecting to be laid off. But my imagination that a large corporation would automatically be a safer bet in troubled times has not borne out to be true. As far as I know, the companies I turned down have not announced cutbacks.

An NFL football coach once called a "trick" play that fell apart badly - so badly in fact that the opposing team was able to steal the ball and run the other way for a score. After the game, the press asked the coach how he felt about that play. "You know," he answered, "It's one of those things where if it works, you feel like a genius and if it doesn't work, you feel like... well, let's just say I don't feel like a genius right now."

The Bigger Big Picture

One of the things I love about the age of the Internet is that we are no longer beholden to a single version of any given story. One who pays attention to this dynamic over a period of time comes to the conclusion that there is no one truth, no really objective voice out there. Unless you want to be content being spoon-fed by your favorite information provider, curiosity and intellectual rigor are required in order to come to reasonable, satisfying conclusions.

Take the current so-called economic "crisis". I have heard Barak Obama and other Democrats say that Republicans' penchant for deregulation has been the root cause of the irresponsible lending and opaque securitizing that led to our present difficulties. Interestingly enough, Republicans tried repeatedly in the last 15 years to increase regulation of Fannie Mae and Freddie Mac, only to be blocked at every turn by Democrats. Why would Democrats block stricter regulation of these government sponsored enterprises? They blocked regulation because they felt they had fought hard to ensure fairer mortgage lending to Americans through the various incarnations of the Community Reinvestment Act. Tightening Freddie and Fanny's capitalization requirements would have required stricter lending policies which were seen at the time to be a euphemism for denying credit access to under-served portions of the population.

Why were Democrats concerned that stricter lending policies would put fair house ownership opportunity in danger? Because stricter lending laws _had_ been used for this purpose in the past. The Community Reinvestment Act was sponsored in 1977 to counteract the practice of something called "redlining". Until then, many lending institutions would literally draw lines around low-income communities on municipal maps in red pen and automatically deny mortgage applications from these areas. This lazy, crude strategy for financial risk management meant that lower income whites were able to get loans that middle or upper income blacks and latinos could not obtain. Which tends to piss you off if you happen to be in the latter category.

Obviously, we could continue further back in history to see more examples of this kind of back and forth, but these two snippets are enough for the point I'd like to make: In both of these cases (lenders unfairly redlining and politicians being unwilling to effectively regulate) we have a group of people who were paralyzed from doing what was clearly reasonable due to an irrational fear that any movement in the "opposite" direction would cause some kind of cascading domino effect to an undesired outcome. What is ironic is that, in both examples, it was not the perceived enemy, but their own misguided obstinance that produced an outcome they were hoping to avoid.

Bankers have no one to blame for disruptive community organizations like ACORN but themselves. Indeed, they produced them. And Congressional Democrats could do well to take to heart the words of one of their own, Rep. Arthur Davis of Alabama, who recently said, "Like a lot of my Democratic colleagues I was too slow to appreciate the recklessness of Fannie and Freddie. I defended their efforts to encourage affordable homeownership when in retrospect I should have heeded the concerns raised by their regulator in 2004. Frankly, I wish my Democratic colleagues would admit when it comes to Fannie and Freddie, we were wrong."

What I am interested in is that we as a nation (and as a species) make progress toward noticing this tendency to irrational obstinancy and interrupt the pattern. It is not sufficient in any particular circumstance to say, "This is the situation I find myself in, I guess I'll just perpetuate it." It takes guts and a determination to transcend the mental paths of least resistance so that we can create the kind of world we'd all rather have. But nothing less that this makes anything worthwile of us.