The Federal Budget Deficit and the National Debt

                                   By Andrew Maskin           
             
                            The Bronx High School of Science

                                   December l, l994






                           Like a Fire-Bell in the Night:
                        Deficit, Debt and America's Decline
                                  
                                The  Scope of the Problem

         The last time the United States of America spent within its 
means was 1969. Since then, our country has spent more money each year 
than it has collected in revenues. The difference, the money that must 
be borrowed to bridge this gap annually, is called the budget deficit. 
The sum of all the money we owe via the issuance of Treasury bonds, 
notes and bills over the years to finance our defecits is known as the 
National Debt. The National Debt increases by approximately one billion 
dollars every working day. Our debt currently stands at approximately 
$4.7 trillion.
 which breaks down to roughly $47,000 of debt per American family and 
over $l6,000 of debt for every man, woman and child  in the United 
States. 1
    What would it take, former Presidential aspirant Ross Perot 
rhetorically asked, to generate enough revenue to eliminate 1993’s $411 
billion deficit? He went on to cite some radical measures that would 
not come even close to accomplishing this goal. These included a 
complete shutdown of the Department of Defense and all of our Armed 
Forces, a complete shutdown of every public school in America, seizure 
of the last year’s and this year’s profits of all five-hundred Fortune 
500 companies, seizure of the entire wealth of the 400 richest people 
in America, and lastly, doubling everyone’s taxes. Not a single one of 
these measures would be enough to balance the budget.2

                                           Historical Roots of the 
Problem
    The historical roots of our  deficit and debt problems can be 
traced further back than 1969. Some say that the “prime the pump” New 
Deal policies of Franklin Delano Roosevelt sent the government on the 
road to its current spending practices. Others point to the 
administration of Lyndon Johnson who promised Americans that he could 
deliver both guns and butter. Johnson used government funds to fight 
two simultaneous wars:  one against the Viet-Cong in Southeast Asia, 
and one against hunger and poverty in the U.S.  While secretly building 
up forces in Viet-Nam ( and refusing to apply a surtax to pay for it 
because it would hurt his popularity), President Johnson launched his 
proposals to amend FDR’s Social Security Act, creating other 
entitlement (“Great Society”) programs,  such as Medicare and Medicaid. 
Johnson initiated the process of expanding the entitlement base, making 
more and more groups of people eligible for government aid. This 
practice would catch on like wildfire in years to come, because of its 
powerful positive political impact.3
   The Reagan years saw an intensification in the growth of budget 
deficits.   In many ways, Ronald Reagan has been compared to Lyndon 
Johnson, in that they both tried to provide both guns and butter. 
President Reagan wanted to accelerate the arms race, and by doing this, 
bankrupt the Soviet Union. During his tenure in office, President 
Reagan increased defense spending 116%, from $134 billion to $290 
billion. To pay for this new spending, he implemented tax cuts that 
would spur the economy and generate more revenue for the government. 
While his plan for generating more revenue did eventually pan out the 
way he had hoped, and inflation was finally brought under control by a 
tightening in the money supply, the new revenues generated were nowhere 
near the levels needed to pay for the accelerated arms race. And so, 
deficits soared, and by the end of his second term in office he had 
tripled the national debt.4
   Deficit spending during the Reagan administration has been blamed 
for the recession during the Bush Administration. As President Bush 
took office, Federal Reserve chairman Alan Greenspan commented on the 
negative effects of the deficits of the 80’s. He said that these 
deficits were  accompanied by little private saving, and this was 
eroding the economy and would lead to a possible recession. His 
argument was that deficits tend to draw investment away from the 
private sector and into Treasury securities. This puts pressure on the 
stock market, and gives companies less money to expand and to hire more 
people.5
                   
                             Out-of-Control Spending Policies
     
        Various spending policies have contributed to our current 
deficit and debt woes. The portion of the Federal budget classified as 
“mandatory spending” is often cited as a prime contributor to the 
deficit. Broadly defined, mandatory programs are those that are not 
directly controlled through the annual appropriations process. They 
account for a whopping 64% of our expenditures each year. In other 
words, Congress can approve or reject proposals for using only 34% of 
the money it spends on a yearly basis. This portion is called 
discretionary spending.6
   One type of mandatory spending is interest on the national debt, 
which is growing rapidly, and currently consumes 14% of our budget. 
These are interest payments; they do not feed the poor or educate 
children or build roads. They do nothing except pay for the deficits of 
the past.7
   The other type of mandatory spending is “entitlements.” Entitlements 
by far account for the majority of mandatory spending. They are 
programs that require the government to pay benefits to people based on 
eligibility criteria established by law. There are over 200 entitlement 
programs, but only 21 of them consume 97% of all entitlement spending. 
Most of these are social welfare programs, which can fall into one of 
two catergories: means-tested and non-means-tested. Means-tested 
programs, such as Medicaid, Food Stamps, and family support programs, 
give out benefits to those in need, to those who fall into a certain 
category of wealth (or lack thereof). These programs comprise 20% of 
all entitlement spending. To receive benefits through non-means-tested 
programs you could be a billionaire or you could be homeless. Rich and 
poor alike get checks from Uncle Sam through such programs as Social 
Security, Medicare, unemployment compensation, and retirement programs. 
These comprise 80% of federal entitlement spending.8  It has become a 
common thread of most serious deficit-reduction proposals to convert 
non-means-tested programs into means-tested programs, and then to put 
caps on how much the government can spend on them.
   The secondary cause of deficits, many say, is “government waste.” 
Entitlements have their defenders, and so does government waste. These 
defenders are different from the entitlements’ defenders because they 
openly and often vocally denounce government waste in general. However, 
they claim that their pet programs just happen to be absolutely 
neccessary, and therefore are not to be considered waste.9  A large 
portion of government waste has been classified as “inefficiencies.” 
Inefficiencies in the White House, the executive departments, 
congressional offices, independent bureaus and even the census process 
have all come under fire. One case often cited is how, since the 
1920’s, while the number of farmers in America has declined sharply, 
the size of the Department of Agriculture has increased 
signifigantly.10   
      Another class of waste comes in the form of subsidies and 
lop-sided financial agreements. The government spends billions 
subsidizing farmers by forgiving billions in loans, buying hundreds of 
millions of pounds of honey to prop up commercial beekeepers, paying 
the electric bills for the casino owners in Las Vegas, manufacturing 
fertilizer, producing helium for “military purposes,” buying land at 
well over its market value, selling off huge office complexes it seized 
as part of the S&L bailout at discount prices, and irrigating the 
farmland of muli-millionaires in central California.11  A third 
category has been the one that generally gets the most attention in the 
media - “perks.” Many common Americans have shown disgust at the 
healthy package of private airplanes, limosines, health clubs, and 
especially retirement benefits that senior Washington officials have 
access to.12
     Critics of deficit spending argue that such spending imperils our 
sovereignty. It has been said that our fiscal policy relies too heavily 
on the availability of foreign investment capital, because foreigners 
purchase a lot of U.S. government debt.13 This amounted to $503 billion 
in 1992, a three-fold increase from ten years earlier.14 In effect, the 
United States has become a capital importer; the richest country in the 
world has become a net borrower of goods and services from the rest of 
the world.15 Many fear that if a fiscal crisis should arise, our 
foreign creditors would have an undue amount of leverage over us 
because we are in debt to them for hundreds of billions of dollars.16
                                      Two Doomesday Scenarios
      Some experts who have studied our deficit and debt problem take a 
somewhat apocalyptic view. They argue that if these problems  are not 
dealt with soon America’s decline will be accelerated. Two scenarios 
are cited. The first is called “Death by Panic.” In this scenario, 
foreign governments decide to give up on the United States’ long-term 
ability to pay its debts.  The financial markets of the world would be 
flooded by sell orders on U.S. bonds, notes and bills and no one would 
be buying.  Desperate for buyers, the U.S. would have to raise interest 
rates to usurious levels, and practially overnight the dollar would 
become nearly worthless.  The next day Americans would wake to find 
that they have no jobs, no savings and no prospects.  The government 
would be completely broke and would have to shut down. Then would come 
the riots and the anarchy.17    
     The second apocalyptic scenerio is called “Death by 
Hyperinflation.”  This scenerio starts with the process of monetizing 
debt.   As a way of paying off its debts, the U.S. Treasury frequently 
sells bonds, notes and bills to the Federal Reserve.  When the Fed buys 
these securities it simply writes a check and the Treasury puts the 
money in a bank somewhere.  The bank credits the deposit
even though the Fed did not actually have real money to back up the 
check.  The moment the Treasury cashes the check, new money has been  
created. 18
     But using this new money to “pay down the debt” has a negative 
side.  The negative is that creating new money without corresponding 
economic growth leads to inflation.  Inflationary cycles can intensify 
to the point where hyperinflation takes over. In a hyperinflationary 
atmosphere the dollar becomes virtually worthless, foreign companies 
swoop down and buy up entire industries “dirt cheap,” and banks cancel 
all credit cards because they cannot collect money fast enough to keep 
pace with the rapidly falling value of the dollar.  This scenario ends 
as black markets spring up and riots and anarchy spread across the 
land.19

                                           Difficulty in Finding 
Solutions
           Even those observers who play down the likelihood of the 
above scenarios occurring admit that our deficit and debt problems are 
interrelated and in need of a solution. Over the years there have been 
various points at which the government has, in fact, tried to address 
the deficit problem. In February, 1982, President Reagan commissioned 
the President’s Private Sector Survey on Cost Control, otherwise known 
as the Grace Commission, to look for ways to eliminate waste in federal 
spending. In January1984, the members of the commission, which included 
some of the most illustrious and successful businessmen in America, 
submitted their report. The Grace Commission report contained 2,478 
cost saving recommendations. These included replacing the federal 
government’s 332 separate incompatible accounting systems with a single 
accounting system, and privatizing building-maintenance services. The 
total savings that would have resulted from the implementation of the 
Grace Commission’s recommendations reached into the hundreds of 
billions of dollars. Unfortunately, President Reagan (whose idea it was 
in the first place) and Congressional leaders politely thanked the 
Grace Commission and promptly ignored most of what was recommended in 
its report.20 
     The next real effort to bring about fiscal responsibility was the 
Balanced Budget and Emergency Deficit Control Act of 1985, otherwise 
known by the name of its three sponsors as the Gramm-Rudman-Hollings 
Act.  Gramm-Rudman-Hollings required that the deficit be lowered from 
1985’s $252.9 billion to zero by 1991, $36 billion per year. These 
restrictions were not optional; they had been passed into law. At the 
time it seemed iron-clad. But as it turned out, whenever Congress had 
the squeeze put on it by Gramm-Rudman-Hollings, they simply revised the 
law. First, they gave themselves more time to meet 
Gramm-Rudman-Hollings’ targets. Then, in an even worse move, and what 
proved to be the death-nail for the Act, they exempted entitlements 
from Gramm-Rudman-Hollings restrictions.21  
   Early in 1990, President Bush called an emergency meeting with 
Congress to address the hemorraging federal budget. While very few 
spending cuts could be agreed upon, increased taxes went through more 
easily, with a luxury tax, higher top marginal rates, higher excise 
taxes, etc. All in all it was the second largest tax increase in 
history, and many say it contributed to the recession. The problem with 
the Budget Reconciliation Act of 1990 was that it had two huge 
loopholes, which Congress quickly capitalized on. The first loophole 
stipulated that new spending could sneak its way in if it were 
classified as an emergency, and this clause was interpreted quite 
loosely. The second loophole was that spending estimates could be 
changed and manipulated to meet changing economic conditions. The 
recession reaked havoc over spending estimates, and Congress reaked 
havoc over the Budget Reconciliation deal of 1990, increasing spending 
$1.83 for every $1.00 raised in new taxes. Needless to say, the deficit 
soared.22
   The most recent legislative attempt to balance the budget was 
President  Clinton’s “deficit-reduction” plan, which he proposed 
towards the beginning of his Administration. In the budget that he 
submitted for FY-1994, he states that his serious deficit-reduction 
initiatives will stop government deficits from preempting the private 
investments needed to create jobs and raise living standards. Clinton 
also claimed that his plan made a decisive break with the past.23
   Clinton’s detractors dispute this claim. They point out that while 
the deficit initially goes down somewhat, the plan calls for an 
increase in the defecit back to current levels and beyond after 
bottoming out at in 1996 (an election year). Others quibble with the 
plan’s over-reliance on taxes. They claim that the spending cuts that 
are called for in the plan are not really cuts, but simply cuts in the 
rate of spending increases.24
     For many, the current Republican-sponsored balanced-budget 
amendment to the Constitution is an example of an automatic(and false) 
cure-all for the deficit problem.  Back in 1981, when the 
balanced-budget amendment was first discussed seriously, criticism 
centered mainly on the effects it would have on the Keynesian model, 
i.e., the government could no longer run up deficits during recessions. 
Today, however, the Keynesian model has lost much ground in Washington, 
and has been replaced in its role as nemesis to the balanced-budget 
amendment by the growing uncertainty of how to define the deficit. Many 
argue over whether the expenditures on such things as Operation Desert 
Storm, and the savings & loan bailout should be included. Others 
dispute the definition in terms of the primary deficit, which excludes 
interest and the inflation-adjusted deficit.25
   Efforts to reduce the deficit have encountered resistance because 
various interests and interest groups have fought to protect their 
pieces of the pie. Somewhat coincidentally, the most powerful of these 
interests, the AARP ( The American Association of Retired Persons), is 
dedicated to maintaining, if not enlarging, the biggest drain on the 
U.S. Treasury: entitlements. It has been able to do this because it has 
unrivaled clout. It is the second biggest organization in America, 
second only to the Catholic Church. It’s twice as big as the AFL-CIO, 
with a membership of 33 million (or one quarter of the U.S. 
electorate). Its magazine, Modern Maturity, is second in circulation 
nationwide. With an annual cash flow of about $5 billion, the AARP 
would be at or near the top of the Fortune 500, were it a private 
corporation.The AARP is dedicated to using its enormous financial and 
political power to prevent the trimming of entitlements.26
   The effect of lobbying groups like the AARP could be seen during the 
summer of1993 when debate over Bill Clinton’s budget was taking place. 
Part of President Clinton’s original “deficit-reduction” plan was to 
provide for an energy tax, assessed on the thermal content of fuels, 
which, over five years, would have raised $80 billion. This tax did not 
sit too well with some energy lobbying groups. As it turned out, two 
members of the President’s own party, Senators John Breaux of Louisiana 
and David Boren of Oklahoma, are both on the critical Senate Finance 
Committee. Given that they both are from energy-producing states, they 
both were strongly opposed to the energy tax, and it was eventually 
scrapped.27

                                        “Like a Fire-Bell in the Night”
   This paper has examined the roots of our current debt and deficit 
situation, analyzed the spending policies which have contributed to 
these problems and discussed the largely ineffectual solutions which 
have been offered by both Democratic and Republican administrations.  
While the degree to which the deficit and the debt are threatening the 
future of the United States is a matter of opinion and debate in the 
halls of Congress and in the media, all knowledgable 
government-watchers agree that the threat is there, and it is real. 
America, as the analogy goes, has been severely wounded, and as the 
politicians bicker over how to solve the problem, the bleeding 
continues, and will continue into the forseeable future, until the 
United States of America becomes one of history’s closed chapters.
     To avoid this doomsday finale a certain degree of bravery is 
required in our politicians.  A three-step approach must be adopted.  
First, a bipartisan consensus  must be reached on how to reduce 
government outlays. Democrats and Republicans must then act to cut the 
COLAs (Cost Of Living Adjustments) which are simply increases of 
entitlement spending on a yearly basis.  After this painful political 
act is accomplished, equally unpopular deeper cuts into actual 
expenditures and Federal employment levels can be made.  Failure to 
take these actions would only postpone our government’s need to come 
face to face with its habit of spending money which it does not have—a 
habit which, if not checked, will render insolvable  America’s already 
serious economic and social problems .














                  




               Footnotes

1. Newsweek, November 21, l994.
2. Ross Perot, United We Stand,  New York: Hyperion, l992, p.9.
3. Harry E. Figgie, Bankruptcy 1995, Boston: Little, Brown & Company. 
1993, pp.26-27.
4. Benjamin Friedman, Day of Reckoning, New York: Random House, 1988, 
p.145.
5. Peter  S. Nagan, “Deficit Ball Drops in Bush’s Court,” ABA Banking 
Journal, January 1989, p.10.
6. Warren Rudman, “Should Congress Place Limits on Entitlement 
Spending?” Congressional Digest, June-July 1992, p.180.
7. Peter Peterson, Facing Up, New York: Simon & Schuster, 1993, p.221.
8. “Capping Federal Entitlement Programs,” Congressional Digest, 
June-July 1992, pp.162-166.
9. Brian Kelly, Adventures in Porkland, New York: Villard Books, 1992, 
pp.12-13.
10. Martin L. Gross, The Government Racket, New York: Random House, 
1992, p.97.
11. Gross, p.56.
12. Kelly, p.32.
13. Ali F. Darrat, “Real Deficits and Real Growth: Some further 
results,” Journal of Post-Keynesian Economics, Fall 1992, pp. 31-32; Figgie, p. 127.
14. Michael Cayton, “The U.S. policy mix, foreign financing, and the 
consequenses,” Journal of Economic Issues, September 1986, p.748.
15. Figgie, p.115.
16. Cayton, p. 753.
17. Figgie,p.p. 95-100, 103.
18. John R. King, Chaos in America, Tehachapi: America West Publishers, 
1990, pp.73-74
19.  King, pp. 74-75.
20. Peterson, pp.86-90.
21. Figgie, pp.48-50.
22. Peterson,  pp.214-215.
23. Executive Office of the President of the United States, Budget of 
the United States Government