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There Never Was a Real Surplus
Not with a $6 trillion debt!
January, 2004

In 1998, President Clinton announced that he expected the U. S. budget to be balanced by the end of 1998. Seem too good to be true? It was.

Here's the scoop. The federal deficit declined sharply in the nineties. In 1993, the deficit fell over 12% from the previous year. 1995 and 1996 boasted deficit reductions of 30% and more from the prior year, and in 1997, the deficit fell a whopping 79.6% from the '96 level. 

Seeing the trend, legislators from both major parties joined with the President in June of 1998 to work out a deal that was designed to prevent the balancing of the budget in 1998. That's right, their budget agreement was designed to prevent a balanced budget. Of course, they didn't present it that way to the American public. They sold it to us as a terrific accomplishment that would provide for a balanced budget by the year 2002. They just forgot to tell us that their deal created a delay compared to what would have happened without their hard work. 

And they provided the citizenry with some tax cuts and spending increases to assure that we wouldn't pry into their chicanery. Those tax cuts and spending increases are, of course, the very mechanisms by which they postponed the balanced budget. Why would they do that? Because tax cuts and spending increases delight voters, and politicians like to be re-elected.

But the Dems. and Repubs. weren't bold enough in their subterfuge. No one reckoned that interest rates would go down significantly, and that the economy would grow as much as it did in the last half of 1997. By the way, the strong economy, and especially the low interest rates are the principal reasons that the deficit fell so sharply in those years in the first place. 

The economy did grow, producing greater than expected tax revenues—and interest rates did fall, reducing the still-appalling amount of interest we paid on the national debt. Those two circumstances resulted in a budget deficit for 1997 of less than $22 billion—the lowest since 1974, and some $40 billion lower than had been predicted earlier in the year. That is why the President could predict, with some confidence, that the budget would be balanced in 1998.

Of course the spending increases delayed the balanced budget a bit. Finally, in the year 2000, for the first time in more than three decades, for just a couple of heartbeats, we actually had a small operating surplus, and the debt actually went down by a little over a hundred billion dollars.

It didn't last, of course. Even though the debt at that time was $5.7 trillion, and the interest on the debt was still about $340 billion, congress set about spreading joy among the constituents with tax cuts and accelerated spending. The public cheerfully went along, and the debt rose by about 5% each year in 2001 and 2002, then shot up by nearly 9% in 2003. Now the Congressional Budget Office (CBO) is guessing that the 2004 deficit will be $477 billion, the largest ever. That will raise the debt by nearly 7%. The CBO thinks the debt will rise to nearly $10 trillion by 2013. That, by the way, assumes continued low interest rates, not necessarily likely—read on to the end of this article.

Think of this in personal terms. Suppose you owed credit card debts of nearly $50,000, and had been steadily increasing your debt for thirty consecutive years, seldom earning as much as you spent. Suppose you were paying well over $200 per month in interest on that debt. Then you get to a good year. For the first time in three decades, you actually earn a little more than you spend. But instead of paying off some of your debt, and reducing your interest payment, you start trying to figure out how to spend more money. That's exactly what the President and the legislators did. In fact, that $50,000 figure wasn't pulled out of thin air—that's the amount owed on the national debt today by the average working person in America. And $277 is what the average working American pays in interest on the national debt—every month. Every month!

(The figures above were correct in January, 2004. Interest figures can vary widely month-to-month; see the National Debt Numbers at a Glance page for the most recent payoff figures. Remember, these numbers might be higher or lower next month, but they are rising over the long term.)

If you ever want to stop paying that $277 per month, we have to reduce the national debt. And the only way to reduce the debt is to operate with a surplus, for many years into the future, allowing the surplus to pay off the debt. Today there is no surplus. There is a mammoth deficit.

We have a huge obligation—to ourselves—to our children—to our grandchildren—to eliminate the deficit and operate with a surplus until most or all of the $7 trillion debt is paid off.

Suppose we don't. What happens? At some point—and I don't have any idea when this will be—the government's insatiable demand for borrowed money will, combined with corporate and other demands for loans, begin to exceed the supply of money available for lending. Then interest rates will rise. Rising interest rates will significantly increase the U. S. deficits, and force even greater government borrowing. Then, still higher interest rates, bigger deficits, more borrowing, etc., etc., etc.

Interest rates could double or triple. That will certainly stall business investment. And how will the housing market and real estate values do with 18% mortgage interest? How will people buy new cars, or send their kids to college with loan interest at 20%? How will consumer spending fare with credit card interest at 25-30%?

The economy could actually collapse. Well, it might not. Should we take the chance?

   

copyright © 2008, J. C. Adamson