Listen to this articleDEFICITS AND DEBT
In the unabridged version of the book The Age of Homo Sapiens Sapiens: Heaven or Hell, considerable time is devoted to a discussion of ways in which households could bolster economic security and prosperity in life. Based on the USA government's yearly budget deficits and its cumulative national debt, it appears as if the federal government ought to consider alternative ways to manage its day-to-day fiscal operations better.
One of the first principles of financial management is budgeting. How many of you actually budget? Probably not many. In the case of the USA government, it is not a matter of budgeting at all. It is a matter of balancing the budget. It is an inability to attain budget surpluses.
Admittedly, running the USA government is inherently different from running a private business. To be sure, the following types of unforeseen events can prove to be budget busters:
- Massive property damage caused by severe weather such as a devastating flood, hurricane, or earthquake
- Ecological catastrophes and accidents (such as a major oil spill or a fracking mishap)
- Unacceptably high unemployment, unacceptably high prices, or a stagnant economy requiring the governmental tools of fiscal and monetary policy
- The rise of medical emergencies or the outbreak of a public health pandemic (such as AIDS or the bird virus)
- The outbreak of war in response to, say, a terrorist attack (such as the 9/11 attack)
Economic and physical resources must be marshalled on a national scale to address these kinds of unforeseen events. It becomes a challenge to address these unforeseen events while at the same time trying to balance the budget. It takes a lot of money for the government to respond to these kinds of unforeseen events. Everybody knows that both natural and human-induced disasters will arise, but nobody knows exactly when or where on Earth they will arise.
THE WHAT: USA FISCAL WOES
What is the budget deficit? What is the national debt? The yearly federal budget contains both a spending component and a revenue component. If spending exceeds revenue, then there is a budget deficit. If revenue exceeds spending, then there is a budget surplus. When there are deficits, each yearly deficit accumulates and grows into the national debt.
The following table provides a simple illustration:
| Budget | Revenue | Spending | Balance (Deficit - / Surplus +) | Cumulative Debt |
|---|---|---|---|---|
| Year 1 | $75 | ($100) | ($25) | ($25) |
| Year 2 | $75 | ($100) | ($25) | ($50) |
| Year 3 | $75 | ($100) | ($25) | ($75) |
| Year 4 | $75 | ($100) | ($25) | ($100) |
| Year 5 | $75 | ($100) | ($25) | ($125) |
| TOTAL | $375 | ($500) | ($125) |
As the above table illustrates, a deficit occurs when the amount being spent exceeds the revenue on hand. In the above example, the government receives $75 in revenue each year, but it spends $100. As a result, the government runs a $25 deficit each year. In turn, each yearly deficit accumulates into the national debt. In the above example, the annual $25 deficits accumulated into a national debt of $125 over a period of 5 years. In other words, over the five-year period, the government received a total of $375 in revenue but spent $500. There was a shortage, net difference, or debt of $125.
How is that the government can spend more money than it receives? The government can spend more money than it receives through its power to borrow money (and also through its power to print money). In the above example, each year the government would borrow the additional $25 it needed to complete its spending decisions. The government would borrow the money by selling government securities to investors. In exchange for the privilege of borrowing, the government would pay interest to those who purchased its government securities. The interest that the government would pay to purchasers of its securities, too, would become a form of spending in the following year's budget.
The following link provides an historical view of yearly USA budget surpluses and deficits from 1789 (and projected) through 2017:
The following link provides an historical view of cumulative USA national debt and savings from 1940 (and projected) through 2017:
The following link provides an overview of the USA's national budget for the 2012 fiscal year:
Most students of finance agree that the USA cannot continue accumulating deficits and debt forever. At some point in time, a decision has to be made to tackle the deficit and debt problem, get it under control, and bring it into balance.
According to the website http://usdebtclock.org/, as of 2013, on average, each person in the USA would need to pay a total of approximately $185,000 to eliminate the national debt. Why delay the inevitable? The longer the USA waits to tackle its deficits and debt, then greater will be the financial burden on future generations to repay the debt. Ideally, you want to bequeath your children with an inheritance, not with a debt to repay.
THE HOW: SOLUTIONS
How can the USA balance its budget? How can the USA eliminate its national debt? There is a huge debate in the USA about how best to tackle the interrelated deficit and debt problems. Some (mainly Democrats) argue that more emphasis should be placed on increasing revenue to match spending. Some (mainly Republicans) argue that more emphasis should be placed on decreasing spending to match revenue. To use the simplistic budget illustration above, some (usually Democrats) argue that spending should remain unchanged at $100. Instead, revenue should be increased by $25 (from $75 to $100) to match the $100 in spending. Others (usually Republicans) argue that revenue should remain unchanged at $75. Instead, spending should be decreased by $25 (from $100 to $75) to match the $75 in revenue. There is a political stalemate in the USA over which of these approaches to adopt.
An alternate argument is to do a little bit of both, that is, the balanced approach. The balanced approach requires both an increase in revenue and a decrease in spending to reach a harmonic balance. Using the simplistic illustration above, the balanced approach would require increasing revenue by $12.50 and decreasing spending by $12.50 such that both revenue and spending are equal to $87.50. Under the balanced approach, citizens and businesses would be required to make sacrifices if the national debt is to be eliminated. Citizens and businesses would be expected to pay a little bit more (in taxes, for instance) to balance the budget while getting a little bit less in government goods and services (like, military defense, for instance).
| Budget | Revenue | Spending | Balance (Deficit - / Surplus +) | Cumulative Debt |
|---|---|---|---|---|
| Year 6 | $87.50 | ($87.50) | $0.00 | $0.00 |
| Year 7 | $87.50 | ($87.50) | $0.00 | $0.00 |
| Year 8 | $87.50 | ($87.50) | $0.00 | $0.00 |
| Year 9 | $87.50 | ($87.50) | $0.00 | $0.00 |
| Year 10 | $87.50 | ($87.50) | $0.00 | $0.00 |
| TOTAL | $437.50 | ($437.50) | $0.00 |
There is no shortage of proposals to eliminate the national debt. On the USA Welcome page of this website, I cited some of those proposals:
- Restoring America's Future
- The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform
- A Roadmap for America's Future | The Budget Committee Republicans
- Peter G. Peterson Foundation Solutions Initiative | pgpf.org
- Government Spending Reforms
There is, however, a shortage of political consensus and national will to tackle the national debt. Some argue that if the USA is smart enough to send humans to the Moon and if the USA is smart enough to send spacecrafts beyond the Solar System, then surely it must be smart enough to solve its national debt problem.
One approach to eliminate the national debt would be to let a debt-reduction model do the job. Such a debt-reduction model systematically and methodically would traverse through the budget. It would make targeted revenue increases and targeted spending cuts based on pre-determined constraints. The debt-reduction model would keep adjusting revenue and spending across multiple budget categories until it succeeded in eliminating the national debt.
Microsoft Excel offers one such systematic and methodical approach. It is called the Excel Solver. The Microsoft Excel Solver comes from the operations research/management science (OR/MS) field of study. The above balanced approach shows one way in which Microsoft Excel's Solver feature could be used to assist government decision makers in eliminating the national debt. Solver would proceed to select the balanced solution given the following assumptions:
- The national debt would peak at $125 with yearly revenue established at $75 and yearly spending established at $100.
- At its $125 peak, the national debit would be eliminated in 5 years
- To eliminate the debt, yearly increases in revenue cannot exceed $75 and yearly cuts in spending cuts cannot be more than $75
The following table recaps how Solver proceeded to eliminate the debt. Revenue increased from $375 to $437.50 for a net increase of $62.50. Total spending was reduced from $500 to $437.50 for a net decrease of $62.50. The combined savings from increasing revenue and decreasing spending came to $125, which was precisely the amount needed to eliminate the $125 national debt.
| Budget | Revenue | Spending | Debt |
|---|---|---|---|
| Period 1 - 5 | $375.00 | ($500.00) | ($125.00) |
| Period 6 - 10 | $437.50 | ($437.50) | $0.00 |
| Period-over-Period Change | $62.50 | $62.50 | $125.00 |
| Debt | $0.00 |
The following table is presented as another way to view how Solver eliminated the debt. Using the initial five-year revenue trend of $75 per year and the initial five-year spending trend of $100 per year, Solver increased revenue by a net amount of $12.50 per year and decreased spending by a net amount of $12.50 per year for a net change or savings of $25 per year. The yearly $25 savings were used to reduce and eliminate the debt over a five-year period of time. Given the above assumptions and constraints, Solver decided that the most efficient solution was to reduce the debt by $25 per year until it reached $0 at the end of five years.
| Revenue Trend | Spending Trend | Starting Debt | |||
| $75 | ($100) | ($125) | |||
| Budget | Debt at Beginning of Year | Increase in Revenue Over $75 Yearly Trend | Decrease in Spending over -$100 Yearly Trend | Net Yearly Savings | Debt at End of Year Due to Savings |
| Year 6 | ($125) | $12.50 | $12.50 | $25.00 | ($100.00) |
| Year 7 | ($100) | $12.50 | $12.50 | $25.00 | ($75.00) |
| Year 8 | ($75) | $12.50 | $12.50 | $25.00 | ($50.00) |
| Year 9 | ($50) | $12.50 | $12.50 | $25.00 | ($25.00) |
| Year 10 | ($25) | $12.50 | $12.50 | $25.00 | $0.00 |
| TOTAL | $62.50 | $62.50 | $125.00 |
Obviously, the above assumptions are for illustrative purposes only and are not meant to mirror how the deficit and debt, in reality, would be reduced each year. The point of the illustration is this: Microsoft Excel Solver is extremely capable of modeling complicated real-world optimization scenarios and finding solutions to those scenarios including unbalanced scenarios.
The following videos offer an introduction to the Microsoft Solver optimization technique:
The most challenging aspect of eliminating the national debt is devising an action plan or Solver-type debt-elimination solution that is acceptable to a majority of political leaders. After a Solver-type debt-elimination solution is found and accepted by a majority of political leaders, it simply would be a matter of putting the debt-elimination plan into action, monitoring it, measuring its progress, and evaluating the plan's overall performance. The evaluation process would determine if the national debt-elimination plan is performing as intended. If it is determined that the national debt is not decreasing as planned or if the national debt is continuing to rise, then the evaluation process should reveal what went wrong and what needs to be adjusted to correct the problem. Corrective actions would be taken to put the national debt-elimination plan on its proper course. It would be wonderful if the federal government would upload such a plan to its public website for all citizens to follow along as the debt is eliminated.
To make things interesting and exciting, the USA government might wish to consider soliciting debt-elimination solutions from the world public. The government could create a petition website for citizens all over the world to submit Solver solutions to eliminate the national debt. The government would establish a committee of experts to study the submissions. The top twenty-five submissions would be awarded monetary prizes. For example, the 1st place entry could be awarded $25 million, $24 million for the 2nd place entry, $23 million for the 3rd place entry, and so forth. The X PRIZE Foundation and the Knight Foundation already are doing something similar to find solutions to various global challenges:
Knight News Challenge OI Engine: How the Platform Works from Knight Foundation on Vimeo.
- Excel 2013 - data analysis, charts, and graphs - Microsoft Store Online
- OpenSolver for Excel
- Excel Solver, Optimization Software, Monte Carlo Simulation, Data Mining - Frontline Systems
- LINDO Systems - Optimization Software: Integer Programming, Linear Programming, Nonlinear Programming, Stochastic Programming, Global Optimization
- Federal Budget 101 - National Priorities Project
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