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September 24, 2017

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What is a few trillion here and there?

How quickly we have come from billions to trillions when we talk about deficits and the devastation wrought by this recession. Now we can contemplate the latest White House revised estimate of budget deficits over the next ten years. The administration anticipates that the accumulated deficit increase will amount to nine trillion dollars instead of seven trillion if nothing is done to curb burgeoning government spending.

Conservatives have long argued that huge budget deficits, expected to be nearly US$1.6 trillion for this fiscal year alone, will put an unbearable burden on our children and grandchildren. Some Republicans oppose spending as much as they oppose President Obama, and some blue-dog Democrats are intimating that the U.S. cannot afford high cost programs like universal health care.

Americans aren't the only ones squawking. Chinese leaders worry that the value of Beijing's more than US$800 billion in U.S. dollar holdings will tank, although they might wield more influence on that issue than Washington. The dollar certainly would plummet if China tried to sell a meaningful portion of its foreign exchange stash.

We can calculate that nine trillion one-dollar bills would circle the earth at the equator 37,729 times (more or less), but a more simplified analysis of the deficit projections suggests that the increase after ten years would average nearly US$30,000 for every man, woman and child in the U.S. now. At a pre-recession median family income of approximately US$60,000 per year and an assumed family size of four, an unadjusted calculation suggests that the increase in the government deficit could amount to 20% of that median income.

By all appearances, the national debt projections are staggering. The burden could hang on the shoulders of Americans like the proverbial albatross, and the interest to be paid on it will be determined in part by the willingness of foreign investors to purchase U.S. Treasury bonds.

This seems like a grim scenario, but there are other ways of looking at government spending and this amount of debt. The critical question is whether these huge deficits are necessary to revive the American economy.

Compared to what has been lost by Americans in the value of their homes, their retirement plans and their net worth in the past year, nine trillion dollars of deficit spending over ten years is not a large figure. The bursting of the housing bubble and its far reaching consequences have stripped an estimated thirteen trillion dollars from Americans in the last year alone, leaving tens of millions of households with no money to spend and no ability to contribute to an economic revival.

Another perspective on the additional deficit is to stand nine trillion dollars alongside projected total liabilities of the U.S. government. David Walker, who headed the Government Accounting Office (GAO) for ten years until 2008, asserts that Social Security and Medicare could bankrupt the U.S. because off balance sheet future obligations amount to some US$56 trillion. Another analysis of government liabilities calculated on a GAAP basis (Generally Accepted Accounting Practices that include the net present value of unfunded future liabilities in Social Security and Medicare) places the 2008 "real" federal deficit at US$5.1 trillion.

Few economists and political leaders doubt that Social Security and Medicare benefits must be adjusted and that revenue must be raised to pay for them. That said, the U.S. government operates on a cash basis, not GAAP, and Congress has taxing power. While the GAAP calculations obviously indicate serious long-term problems funding social insurance programs as they are presently constituted, it is a bold leap into specious reasoning to conclude that government must keep its hands off the economy and forget about meaningful health care reform.

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