Amateur Hour: What Is The Budget Deficit?

People do not seem to have a good grasp of what the federal deficit is. In my estimation, they do not know why it is bad when it is bad either. In order to do my small part, here is a short primer on what the deficit and debt is. If people like this post, I'll do another one on when deficits and debts are things one should be concerned about and why.



The federal government provides many services, such as defending our borders via the military, building infrastructure such as roads and sewers, and educating the masses. It also is a provider of insurance of many kinds, such as Social Security, Medicare, and Medicaid. These services cost money, for the services themselves and to pay for the people who make it happen, government employees. Altogether, we can call all the money the government devotes to these services "expenditures" (E).

Like any business, one needs revenue in order to keep producing products or providing services. To pay for the products and services supplied by the government, we pay federal taxes. There are many kinds of federal taxes. You might sometimes hear that half the country does not pay federal taxes. That is not true. About half the country does not pay federal income taxes, but that is only one kind of federal tax. Every employed person calls "payroll taxes," taxes which are legally devoted to Social Security and Medicare. Along with income and payroll taxes, there are corporate taxes, taxes on capital gains, the estate tax, and so on. Call the money the government takes in to pay for expenditures (E), revenue (R).

If we subtract E from R (R - E = Surplus or Deficit) for a particular year, we are left with some amount which can be either a surplus or deficit.  If R exceeds E in a given year, there is a surplus. If E is greater than R for a year, it is a deficit. As you can see, if you would like to avoid a deficit, you need R to be bigger, E to be smaller, or both. This seems easy to understand, but as Bartels points out in the linked article, many people believe that when taxes are raised, the deficit increases. In other words, they think that the higher R is, the greater the deficit will be. This does not make numerical sense and this confusion is the reason for this post.

Now you might think that numerically this view doesn't make sense, but that if we look at how things work in the real world, higher R does lead to greater deficit, since any time there is higher R there is much higher E. That is, whenever the government raises taxes, it also increases spending by even more. The problem with this view is (1) it isn't true and needn't be true in the future, and (2) it doesn't make sense. Notice that it require not only that R and E increase, but that E increase even more than R is, in order to result in an increase in the deficit. If you raise them by equal amounts, you will not get an increase in the deficit. But ,f you are willing to spend more in this way, why raise taxes in the first place? Just spend more without raising taxes.

So we get a federal deficit when the government spends more money than it takes in. The federal debt is the cumulative deficit year over year. Since we have a run a deficit over many of the last thirty years (the exception being the end of the Clinton years), the debt is far greater than the deficit. If you are concerned about the deficit and debt, you should want to know how politicians will address both R and E. Many people (Paul Ryan) suggest we can lower R and still lower the deficit. In order to get this to work, you simply must lower E even more than the decrease in R and that means reducing services or insurance. People should carefully consider whether they are happy with this trade.