Another Way to Look at Deficits
When Ronald Reagan accepted his party’s nomination for a second term as President, he criticized the economic plan of his opponent, Walter Mondale, by saying: “We could say they spend money like drunken sailors, but that would be unfair to drunken sailors. The sailors are spending their own money.”
At the time of Reagan’s speech, the federal budget deficit was $175.3 billion.1 By contrast, we note this recent statistic from the Centers for Disease control: “With the $1.9 trillion American Rescue Plan signed into law, total federal expenditures on the COVID-19 pandemic will come to roughly $5 trillion, surpassing the total inflation-adjusted cost of World War 2 at $4.1 trillion.”2
You read that right: COVID-19 cost us more than World War 2, in lives and in dollars.
There is a growing debate these days about how much money the federal government is spending – versus how much it takes in – and what damage it might be doing to the U.S. economy for generations to come. I addressed it in a recent blog post entitled, “Who’s Paying for This?”
I can’t imagine that spending more money than you bring in – in 78 out of the last 100 years and for 19 years in a row3 – is anyone’s idea of sound fiscal policy. The common argument is that you and I don’t have that option. We can’t (legally) print money when we spend more than we earn, and we can’t put life on the credit card indefinitely.
Or as someone once cleverly phrased it, “when your outgo exceeds your income, your upkeep becomes your downfall.”
In the interest of intellectual honesty, however (and to help make you feel better about this), we should at least examine these numbers from a different angle.
When you apply for a mortgage, your lender calculates your debt-to-income ratio (DTI), to see how big of a lending risk you are. They add up all of your monthly debt obligations and divide by your gross monthly income. If the answer comes up higher than 43%, you’re probably not getting that house.
If you apply the same standard to the federal government – divide how much interest it pays to service the national debt by how much it receives in taxes each year – and the most recent figure comes in at around 4.2%. That would seem to be a sustainable debt-to-income ratio even if interest rates increase substantially, as they clearly could.
That’s not to say that record borrowing and deficits are a good thing. Money spent on interest could arguably be spent more productively somewhere else or returned to taxpayers. The $3.1 trillion-dollar federal deficit in fiscal year 2020 was more than double that of 2009, when the U.S. economy was struggling with the worst downturn since the Great Depression. The 2020 deficit was the highest on record, and 2021 is projected to claim second place easily.
But it’s important to realize, however, just how much everything is getting bigger: your home’s value, gross domestic product, corporate earnings, federal tax revenues, the total value of stocks, the world’s population.
All of this borrowing might give us a headache, but it’s probably not life-threatening. At least for now.
1 The New York Times, October 25, 1984.
2 COVID-19 Tracker, week of March 11, 2021, First Trust.
3 U.S. Office of Management and Budget, Federal Surplus or Deficit, retrieved from FRED, Federal Reserve Bank of St. Louis.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, is not a statement of all available data necessary for making an investment decision, and does not constitute a recommendation. Any opinions are those of The Mike Brown Financial Group and not necessarily those of Raymond James.