June 25, 2017

America's Four Deficits

The movie I.O.U.S.A. is organized around the "four deficits" that David Walker first spoke of while he was Comptroller General of the United States.  In a speech before the U.S. Naval Academy in March of 2007, Walker explained the interrelationship of these deficits-that "[t]ogether, these deficits have serious implications for our future role in the world, our future standard of living, our future domestic tranquility, and even our future national security."  These deficits are:


  • The Federal Budget Deficit: The U.S. federal government has been living beyond its means, spending more on public goods and services than it collects in tax revenues-the difference being the budget deficit. Although fiscal discipline coupled with a strong economy brought a return to surpluses in the late 1990s, since 2001 the fiscal outlook has deteriorated dramatically, and the federal debt-the cumulative sum of annual deficits since the start of our government-has increased by trillions of dollars. While the recent budget deficits are the result of a combination of extravagant tax cuts, a costly war, lack of effective budget controls, and a relatively weaker economy, the much larger budget deficits projected in the decades ahead are largely explained by a growth in entitlement spending that will outpace the natural growth in tax revenues, due to demographic changes (a swelling in the numbers of older Americans relative to younger Americans) coupled with rising per-capita health costs. Budget deficits are like the government's "credit card". They threaten future standards of living because the borrowed money must eventually be repaid, with interest, in the form of higher taxes or reduced government services-there is no such thing as a free tax cut or a free government program. In the meantime, today's budget deficits represent negative public saving that directly subtracts from our national saving-and hence the size and strength of the U.S. economy going forward.

  • The Savings Deficit: American households have been living beyond their means, too, with a personal saving rate (the difference between household income and household spending, as a share of income) that has been declining steadily since the early 1980s and has hovered right around zero (staying at less than one percent) since 2004. Easy credit offered by an under-regulated financial industry, recently stagnating real wages, and the "consumerism" endemic to American culture, may explain the trend. The problem is the near-sightedness inherent in such "deficit-financed" household budgeting, when families eventually find themselves lacking adequate resources for the costs of their children's college educations, the care of their elderly parents, and their own retirements. The U.S.'s very low personal saving rate has been another factor that has kept the national saving rate, and growth in the economy, lower than it should be.

  • The Trade Deficit: The U.S. government and American households have been able to live beyond their means because there are other nations who have lived far within their means. The U.S. buys more goods and services from other countries than it produces and sells to other countries, which is what is usually labeled the "trade deficit." (The slightly broader concept of the "current account deficit" adds to the trade deficit the difference between the income the U.S. earns on its assets abroad and what the U.S. pays on its foreign-owned liabilities.) A global economy has allowed the U.S. to consume more than it produces, and to spend more than we earn, both of which allow an immediately higher standard of living, but at the price of accumulated debts to those countries on the other side of those transactions (this is the origin of Warren Buffett's "Squanderville" and "Thriftsville" parable). The federal budget deficit has likely contributed to the trade deficit by providing an expansionary fiscal policy that has encouraged personal consumption and demand for imports; the budget deficit has also increased the demand for capital (credit), putting upward pressure on interest rates and the value of the dollar (which reduces the trade balance). The steady supply of capital from foreign investors to the U.S. has prevented U.S. interest rates from otherwise more steeply rising with our budget deficits and consumer loans. But our reliance on that foreign capital comes at the price of increased indebtedness to those foreign investors. When future generations of Americans are eventually paying back the bills that come due, most of the dollars will flow out of the U.S. rather than to other Americans-another factor that jeopardizes our future standards of living.

  • The Leadership Deficit: Our leaders in the public and private sectors of the U.S. economy have allowed the other three deficits to emerge because they are viewed as the easy and personally profitable courses to take. In the public sector, politicians are encouraged to propose fiscally irresponsible policies-proposing what only sounds like free tax cuts or free public spending-in order to "profit" in their elections. Campaigning on fiscally-responsible tax increases or spending cuts seems like political suicide. In the private sector, business leaders seeking financial profit have been all too willing to lure consumers into getting into an indebtedness that they cannot afford. Only a change in public opinion-with ordinary Americans holding their leaders accountable-can persuade America's leaders to "do the right (fiscal) thing" by aligning the "personal profit" motives with policies that are good for our nation as a whole.

These four deficits are interrelated and should matter to all Americans.  Economically, these deficits matter because reduced national saving jeopardizes the future strength of the U.S. economy and standards of living.  Ethically, these deficits matter because they result from choices made by current generations that involve large costs spread over future generations--Americans who as of yet have no political voice, except through their parents and grandparents.