No Virginia, You Can’t Spend Your Way out of a Deficit

By Michael McCurley

You can’t really fly in any other place than Neverland, you probably won’t win that
lottery, and you can’t spend your way out of a deficit. Sad but true—that’s the way most
things are that defy the laws of physics. Gravity, probability and economics are not on our
side for these wishes, because that’s what they are. So how could it be that our government
makes these magical promises like dreams come true?

Putting partisan politics aside, let’s examine the dynamics of how deficit spending
works and consider what really happens. It may seem no less surprising than the
statements our government has made, but truth to tell it’s not as appealing. And appeal is
everything when it comes to politics .

Okay, let’s start with stimulus spending. Everybody likes to spend a little money,
right? If you’ve got it, why not? But what happens if you don’t? Not to worry, you can
borrow some money on good terms and pay it back tomorrow or some other time. No
problem. Or so it seems. Enjoy today, buy now, pay later—it couldn’t be easier. Can’t pay
your bills? You can fix that. Borrow a little more to get those damned creditors off your
back. Problem solved. Debt seems to be piling up? Refinance. Take that long term equity
out of your house and get a second mortgage. No problemo. Now that you’ve got a clean
slate, you can use your credit cards again.

Let’s consider government spending. The money has to come from somewhere,
right? No problem. They print the money, don’t they? Well, it may not be quite as easy as
that, but they can always count on our tax dollars to replenish the public coffers. A fiscally
responsible government would only spend the money it takes in. But who’s fiscally
responsible? What does that even mean? Like the rest of us, our government spends more
than it earns. And the difference between what the government spends and earns is our
public deficit. The accumulation of what we owe is our public debt. Again, the money has
to come from somewhere, so the government ‘borrows’ money (like we do) by selling
treasury bonds to other countries (like Russia, The United Arab Emirates, and China). Not
to worry, we’ll pay it back later with interest—perhaps much later. What if the economy
falters? We’ll inject some more money back into the economy. Never mind the fact that
borrowing has to increase even more. When you need money, you borrow it. When the
government needs money, it issues bonds. We’ll worry about payback later when we come
to it. Spend tomorrow’s money today.

Who ultimately has to pay for all this? We do. Or our children do, or our children’s
children. Or we might just decide not to have children. Neverland indeed.

Deficit, national debt, call it what you like, it’s the fastest growing business today in
America, but it’s growing negatively like a huge monster that will eventually consume us
all. How big will our monster grow? Its size never stays the same, so it’s difficult to
actually know how enormous it is at any moment. What we do know is how that monster
grows .

Our public deficit and national debt are constantly changing, but mostly they are
growing at a faster pace than we can earn to bring them down. This is like having an out of
control credit card with no limits. Every few years we elect another President, to make
sure he takes care of the payments, but he always finds more ways to spend money. And
so the debt and deficit increase—world without end. We are, after all, the biggest and the
best—or is that our debt we’re talking about?

Speaking of deficits and debt. The National Debt for the United States reached a
staggering as of February 13, 2010. For any
Who’s Who for National Debt We are certainly Number One. For an estimated U.S.
population of about 307, 800,000, every citizen owes about 40,140 dollars. (source—U.S.
National Debt Clock, http://www.brillig.com/debt_clock/). That means you, Virginia!
What’s 12 or 13 trillion dollars anyhow? Total debts in the United States may come
to 57 trillion dollars for household, business, financial and government sectors
(source http://mwhodges.home.att.net/nat-debt/debt-nat.htm ). So it’s about 60 trillion
dollars altogether. Let’s not do any more math to see what we really might owe. (You, sir,
are depressing)

Anyway, you might like to know that our national debt has reached 60 to 70% of
our Gross Domestic Product, which is most of what we’ll earn for this year of 2010. This
doesn’t count for whatever else we ourselves owe. But hey, they say we can spend our
way out of this difficult financial situation. As long as we’re earning money, the debt will
take care of itself (we hope). But what would happen if we don’t earn enough?

How quickly could our public debt grow? Let’s try an experiment and make a
hypothetical computer simulation model. It isn’t a scientific representation of true events,
but we can create a model which will project the mechanisms of growth trends in public
debt for the last 110 years. This doesn’t reflect actual year to year growth rates, but it does
give us an overall look at how fast public debt has increased. The schematic for the model
appears below. We’ll keep the model simple to explain basically how it works.

US National Debt Model 1903—2013

DEFICITRATE

current spending
deficit

US National
Spendingdeficit and Debt
Debt payments
interest payments

annual payment

balance of interest
RATEOF
PAYMENT

INERESTRATE
 For the specific overall assumptions of the model, the debt starts in 1903 at
$2,202,464,800 (2.2 billion dollars). Annual deficit spending is equivalent to 6.125% of
the national debt, and annual interest charges on that debt are 4.52%. Debt payments per
year amount to only 2.5% of the debt total per year, so the overall debt will grow at a rate
of 8.145% per year. Don’t expect to see these as real numbers. They only illustrate the
mechanisms.

Again, this is the representative idea for how the model works, not an actual
representation of real events, because annual rates fluctuate due to different economic
conditions of the nation. But the general idea of the graphical representation of the
National Debt is clear enough. It grows exponentially, reaching more than 16 trillion
dollars by 2013. That’s an increase of 7,272 percent! Take a look at the graph below.

US National Debt
2e+013

1.5e+013
Dollars

1e+013

5e+012

0
1903 1923 1943 1963 1983 2003
Time (Year)
US National Debt : Current

And now Virginia, without taxing your poor, sweet mind with any more of these
figures, I will only tell you (and this is the punch line of the story, by the way) that you
can only reduce a deficit by increasing income, reducing debt, or cutting your outgoing
expenses. So, you can’t really spend your way out of a deficit, but if you eventually cut
expenses and increase income, you’ll be on your way to balancing the National Budget.
Let’s not scare you any further by telling you that the real national deficit monster actually
increases its size at an accelerating pace. That would require me to tell you another story.

This article may be shared for personal or educational, non-commercial purposes only. It may not be
reproduced for any other reason without express permission from the author. © February 2010

About the Author. Michael McCurley is an alumnus of Massachusetts Institute of Technology’s Guided
Study Program in System Dynamics for Education that was offered through the Internet. He lives in
Liberia, Guanacaste, Costa Rica.