Obama lied about paying down the debt. Why you should care.

Note: This was written before the election, but it is still important since many media outlets *never* questioned his lie, and the few that did downplayed it. People need to be aware of the obvious lies politicians tell to persuade them to be skeptical and question other statements which may be not as obviously false.

Obama said at the Democratic National Convention on Sept. 6th, 2012:

"I’ll use the money we’re no longer spending on war to pay down our debt"

In reality his own budget proposal on the White House site explicitly adds at least $900 billion each year to the national debt for the next decade, for $9.6 trillion more debt total ($4.3 trillion of that before the end of the next presidential term).  In fiscal year 2012 the government borrowed $1276 billion. He  implies   lower   war spending will save so much money the government  won't need to keep borrowing. Yet his proposal only cuts $82.3 billion per year  by 2014 for war spending compared to 2012. That is ridiculously far from being  enough to balance the budget.  

This isn't a minor issue. The debt is bad for  the economy, the poor, retirees,  and the future of this country's children as you'll read below. Those who prefer a  video summary can   watch a few minute cartoon  with clips of Obama's own words. Forward the short  1 minute  intro   to short attention span friends. Please spread the word about this issue to everyone you know.

Obama's lie. People cry fraud! if CEOs lie. (long version)

Obama's lie. People cry fraud! if CEOs lie. (short version)


This wasn't a one time gaffe, he first said this during the State of the Union address in January and repeated it for  months in a campaign commercial and almost every campaign speech up through the election. This link brings up a search of the White House for  all the  times he  said "pay down our debt". Many politicians need to be more honest,  but some lies are worse than others.  Often supposed political lies are merely issues open to debate because experts disagree, sometimes because the details of a proposal  haven't been worked out. Obama's own 2008 "hope and change" campaign was short of details which weren't worked out until he had a large government staff to do so.  In this case he is explicitly contradicting his own detailed financial documents in an obvious lie.

Some lies are a  slight shading of the truth or about minor matters, like a white lie that a relative looks thinner. This is an unquestionable big lie about something important. If a CEO lied about his company's finances to get people to buy stock, many in the public would cry "fraud! send him to jail!". The sentiment would be there, regardless of whether the liar did   anything  that literally violated a law. Why should we have lower standards for the president of this country?  Politicians won't be forced to be more honest if the public keeps voting for them anyway.

He seems to be implying   he   saved us money by cutting back on  military spending compared to what was planned. However Bush's last budget proposal gave his desired defense spending through 2013 including wars. Obama has spent around $500 billion more than Bush planned to spend. Obama's budget projects spending more  every year on defense and wars than Bush budgeted for  2013.

Why should you care about the debt?

To put the size of the debt in perspective, imagine everyone in the country had to pay their share. At the moment the national debt works out to $51 thousand dollars per person, or $121.9 thousand per household.  The national debt is over $16 trillion currently and the total household debt of everyone in this country is under $13 trillion.  The graph below from the Federal Reserve compares the total national debt (in blue, GFDEBTN is the: "Federal Debt: Total Public Debt") with the money owed by households, companies in the financial sector like banks, and all the non-financial corporations in the country. Our government now owes more money than each of those groups.



Obama's budget estimates that within a decade we will be spending more to  make interest payments on the debt than we will on the defense budget. It seems likely this will lead to pressure on the Federal Reserve to continue to keep interest rates artificially low. Unfortunately that may help the government, but it hurts  people who keep their money in bank accounts or bonds. Lower interest rates mean they earn less interest. If  interest rates were at more typical historical levels   estimates are people would be earning from $400 billion to $550 billion per year more (more on  damage done by low interest rates  here, here and here).  Rich people can risk keeping more of their money in stocks instead of bonds (which has driven up the stock market), but the poor and retirees need to keep a higher percentage of their money in safe investments so it hurts them disproportionately.

A high level of government borrowing hurts private employment and economic growth. Each dollar the government borrows is a dollar not invested in a private company to grow and create jobs. The money the government borrows has to come from somewhere, it  doesn't magically grow on trees. If you invest $1000 of your savings in  government bonds, you can't use that same money to buy corporate bonds.   In order to hire people, companies need equipment for them to do their job and a place for them to work. Often they need to borrow money for these things. This graph compares how much the government borrows from the public each year (inflation adjusted) with how much all corporations combined borrow (or more accurately, non-financial corporations, i.e. not things like banks ). You'll see that typically as the government (red line) borrows more corporations  (blue) borrow less, and vice versa.


If the government weren't borrowing the money it would be    invested in the private sector rather than stuffed into a mattress.  (see Alan Greenspan's comments on "crowding out" here, here, here, and a Stanford prof   here, GMU here and here) .  Usually banks need to lend out money to earn interest, but the Federal Reserve began paying them interest to keep their money at the Fed instead. It has  used much of that money to buy federal debt and is considering buying more. You   hear claims of   less demand for loans, but that is misleading since  it is harder to get loans.  Forbes reports "Bank loans cheaper, but still hard to get." and the Federal Reserve says

"Besides the firms that were denied credit, some firms that may have wanted additional credit may not have applied for it because they anticipated that their applications would be denied"

Fewer businesses will qualify for loans so  there will be less demand for them. Banks have less money to lend to the private sector, so they are  going to give out fewer loans. They wish  the loans they do make to be   less risky at the moment  (due to regulatory changes, and the aftermath of the financial crisis) so standards are higher. 

Fiscal Child Abuse

Politicians promise favors to the public  to get votes. They like having the government  borrow money since they can spend   more on favors  without being needing to risk being unpopular by asking to raise taxes   to pay for them. They think they will be out of office by the time the debt needs to be paid, or they can blame debt on the spending of other politicians.   Unfortunately they  find it even easier to simply promise to spend even more money on favors  in the future  without worrying about   where the money will come from when the future arrives.

When the government promises to pay more money in the future on a program than it plans to  actually have, that is called an unfunded liability, or a "fiscal gap". The Treasury Department puts out an annual report each year on the government's finances where they estimate the present value of   unfunded liabilities (i.e. how much money we would need sitting in a bank account now to pay for these promises). The most recent report from December 2011 shows $51.2 trillion in unfunded liabilities.  If you add the current national debt to that, it means the government needs over $67 trillion to pay its IOUs. That works out to be over $213,844 per person, or over $510,265 per household  to be paid by upcoming generations for the promises of today's politicians. Offloading costs to future generations is considered by some to be "fiscal child abuse". The Federal Reserve estimates the total net worth of everyone in the country combined as less than that at $62.7 trillion.

The impact of the future economy on those numbers is hard to predict so those are just estimates. Many people think  the figures are  way too low. William Gale of the liberal Brookings Institution and professor  Alan Auerbach, Director of the  Burch Center for Tax Policy and Public Finance at UC Berkeley wrote on August 27,2012:

" the fiscal gap under the extended policy baseline is 6.09 percent of GDP, or $115.5 trillion"

i.e. the government could need   around  a  $million  per household to cover IOUs when you add the national debt to that. That is closer to estimates the US Treasury made in the past. In 2009 they estimated  unfunded liabilities were $107 trillion. Some people objected when they began lowering the estimates that the new figures weren't plausible. It is natural to wonder  if they were caving to political pressure. In 2010 the Treasury Department said they were $77.9 trillion, and by 2011 they made that claim they were  now only $51.2 trillion. It will be interesting to see what they claim this December.

Others say different government data shows the problem is much worse than those estimates, and has been getting worse each year. Boston University professor  Laurence Kotlikoff  wrote on August 8,2012

"The U.S. fiscal gap, calculated (by us) using the Congressional Budget Office’s realistic long-term budget forecast -- the Alternative Fiscal Scenario -- is now $222 trillion"

i.e. the government could need over  $1.8 million per household. His numbers are also covered here, and here, and last year in the Economist where he wrote that "America is bankrupt".

Misleading talk of spending "cuts"

There are often concerns expressed in the media  about an upcoming a deal they made called "sequestration" which would supposedly automatically make "cuts". If you look at planned spending however it  would still increase each year:



Often politicians now talk about spending "cuts" in a way that is misleading.  They have a baseline budget which projects spending to increase every year in the future. If they change the budget to grow more slowly they call it a "cut". Pretend for  example they are spending $50 billion for department X this year, and the  baseline shows they plan to spend $60 billion next year. If they change that to $55 billion they will call it a $5 billion "cut" even though they are spending more than they did this year. They have recently begun trying to confuse the public even more by   often talking about changes to the total spending added up for all 10 years of their planned budget, partly to make the changes sound bigger. They would call a $5 billion a year reduction in the baseline spending a $50 billion cut, even if they still increased the budget every year.

In reality they are debating how much to increase spending. If they merely froze  tax rates this year, and froze spending or slowed its increase, the budget would balance within a few years as the economy grew and brought in more tax revenue (though they'd   need to make more changes to deal with the issue of unfunded liabilities that most of them are ignoring):


If they rolled back spending to where it was a few years ago the budget would balance. Government spending has been constantly growing for many decades. The population has grown also, so lets look at federal spending per capita (per person), adjusted for inflation.


You'll notice spikes for wars, but aside from that spending has mostly been steadily growing. It levels off a bit during periods of gridlock when different parties control Congress and the White House so they have trouble agreeing on what to spend money on.

The issue isn't unique to  the federal government. This is spending by government at all levels (federal, state, local) per capita, adjusted for inflation:


Pretend you had a friend with a six figure salary who always spent too much money no matter how many raises he got. If he said his debt was getting out of control, would you suggest he cut back on spending? Or would you accept his excuse that he can't possibly balance his budget without a raise, while he proceeds to spend even more? Why do we let politicians get away with claiming they can't possibly balance the budget unless we give them more money in taxes when what they really want the money for is to cover new spending increases?
 
While the government may have added some new programs, It seems likely government  has built up a lot of waste in its budget and could learn to be more efficient. In free markets private companies compete which provides them incentive to  keep costs under control. In the freest markets like consumer electronics prices fall while quality improves. There is little incentive for government to be efficient when people keep letting it spend more money all the time.  There is no reason to give it more money until   we are sure it won't merely waste it. 

Constant budget increases lead to governments  spending far more over time  (adjusting for inflation)  merely to perform the same tasks without showing much if any improvement in the end result e.g. here is a graph of government data on total spending on K-12 education compared to test scores:

"If music players had suffered the same cost/performance trends we’d all still be lugging around cassette boom boxes, but they’d now cost almost $1,800"

You often hear  about the rate of medical inflation being too high, since it isn't a competitive free market like e.g. consumer electronics. Government cost per person has been rising even faster than medical costs. This compares the rise in per capita government spending (blue line) and medical costs over the last half century:


One of the ways politicians now try to obscure how much money they are spending is by talking about it as a % of GDP (Gross Domestic Product, almost like our national income). How much money is spent is a separate issue from how much you earn, but they try to confuse the two. They hope you won't notice that if the government spends a constant X% of GDP that means its spending will grow as the economy grows. If you get a raise that doesn't mean you automatically need to spend more money for everything. You may choose to spend more if you earn more, but you don't need to, especially if you are in debt.  If someone asked you how much you spent on a computer you would give them a dollar figure, you wouldn't say you spent X% of your salary, or Y% of GDP. It is true that when planning  you might look at how much you spend compared to your earnings, but it isn't always relevant.  Comparing government spending to GDP is useful for some purposes, but it is more often now used as a tool to obscure information rather than a tool to understand it better.

Even if you look at total government spending as a percentage of GDP, although it shows larger fluctuations  up and down than the $ graphs, it has also  risen quite a bit overall the last hundred years:

 

The total federal debt has risen every year since 1956, even during Clinton's term. There is a myth he had a surplus, but as this page (and here) point out,  they  ignore the money government borrowed from social security which is a debt it needs to pay back just as much as the debt it borrows from private investors. (the graphs on this page that refer to  how much the government borrows each year are dealing with what it borrows from the public, not including what it borrows from the social security trust fund. The publicly held debt may have briefly gone down, but the total debt (including what the government has borrowed from social security and medicare) has been constantly going up.

Back to the the issue of the debt vs. the economy since there are some misunderstandings about it.

There are claims of companies having lots of  cash, and record profits.  Yes, some companies have cash, the problem is that   other companies that need cash don't have it. When an individual is concerned about their financial future (fearing they may lose a job or have their pay cut), they may save money and choose not to expand their family with a new child. If a company is concerned about the future the only way it can "save for a rainy day" is by taking a profit and not using the money to expand. In a slow economy a high profit may be a bad sign that a company doesn't see a way to grow.   Sometimes a company with a lot of cash (like Apple), is doing very well. Other times a company with cash and a high profit is saving for a future they think will be worse.

Fortunately other businesses see a brighter future. Even during a slow economy most people are employed. Creative businesses can find ways to get customers to spend money by offering a new product (like an iPad), or by cutting prices (due to  finding ways to cut costs, e.g. through buying modern production equipment). Unfortunately they often need to spend money on these things. Many high growth companies don't have a lot of cash the way Apple does, in part since they use any cash they get to expand. Some of these companies can't get more cash because the government is borrowing it. This graph compares how much the government borrows each year (red) compared to much money is spent on   investment (blue), both adjusted for inflation:


During good and bad economic times there are always some companies that are doing well and expanding and others that are stagnant or shrinking. Usually that means any money    companies scared about the future are hoarding is  invested in  other companies who need it to expand.  Companies that do have cash don't stuff it in a mattress, they either directly invest it or keep it in a bank or fund which invests it.  Unfortunately at the moment that means much of it is being lent to the government rather than being privately invested.

Throughout the economy companies spend a fraction of what consumers give them to invest in new facilities  and equipment   in order to hire people  and/or to modernize to compete better. This graph shows the ratio of investment spending to consumer spending. The rapid change in technology and rise of global competition   increased how much the economy needs to spend on investment to  successfully compete and grow, so you can see the level rise during the 90s.   Unfortunately  less money is being spent on investment now compared to consumer spending than was the case a few years ago.  This will likely slow future growth. A higher level of spending will be needed for a while to make up for lost time.


High lending standards keep interest rates on government borrowing lower but hurts the economy. The Federal Reserve does surveys of whether banks have tightened or loosened their lending standards, and how much demand there is. The graphs below show that as standards  (red lines) are tightened, demand (blue) naturally drops, and vice versa. They ask questions about small businesses separately from questions about large&intermediate businesses which is why there are two graphs. 


Demand has recovered very slightly it appears, and some standards have fallen. Things need to improve  even further to make up for lost ground (though the subjective&limited nature of that data makes it hard to be sure     what the exact levels  are now compared to before the recession. This just gives a clue to illustrate the point).

Other sources do explicitly say standards haven't loosened back to where they were before the recession, in part due to  pressure to take less risk after the crisis and banks preparing for more stringent future regulation now being planned.  Some people start companies using money they borrow against their house, and   mortgage standards are also still tighter than before the recession.

A different sort of investment money, stock investment in new companies  from individuals (called angels) and venture capital firms is also   down  from its peak , especially when adjusted for inflation. An even higher level of investment is  needed to start more companies to make up for the ones that weren't started during the slowdown, and to account for population growth..

Actual Deficit

The actual deficit is the amount the national debt rises each year. Often figures try to obscure this ignoring how much money is borrowed from trust funds rather than the public. Using the table of historic and projected future debt from Obama's FY2013 budget, this shows the amount added to the debt each fiscal year in the past, and what he wants to add in the future:

The data was from a few months ago. The  projection for fiscal 2012 (which ended the end of September 2012) was oddly for once higher than it turned out to be, the actual figure was $1.276 trillion.  It is unclear if  the amount they borrow varied  for operational reasons or if  for political reasons  they postponed end of year spending&borrowing until after the start of the new fiscal year. In October 2012 according to the US Treasury  they borrowed $195,230 million while in September they only borrowed $50,471 million.

Appendix A. Please Spread the Word!

Information the major media doesn't cover can only be spread by "word of mouth" virally so please use email and every other way you can to spread the word. Please pass around the "poster" below, you may even upload it to your own albums to be noticed. You can also share the page without a poster.  Advertising repeats since people may not notice it the first time so try more than once.

Share just the page:


Appendix B. Data information

Future Debt:

The White House site has Obama's   proposed fiscal year 2013  budget which contains Historical Tables  including "Table 7.1—Federal Debt at the End of Year: 1940--2017" (though its actually through 2022). That is a spreadsheet file, you can view it as a table in your browser here. It is also  on the last page of a PDF file in  "Table S--15. Federal Government Financing and Debt"

Fiscal Year 2012 Debt increase:

The US Treasury Department has a page where you can enter dates to get the "Debt to the Penny" . The official federal accounting year begins October 1st, so borrowing for fiscal 2012 ended 09/28/2012. It gives the debt on that date as:    $16,066,241,407,385.89. The debt the year before ended on 09/30/2011  at       $14,790,340,328,557.15. That is an increase of $1.276 trillion for fiscal year 2012.

War Spending:

Wars spending is called   "Overseas Contingency Operations" in  the budget. It can be found in  "Table S–11. Funding Levels for Appropriated ("Discretionary") Programs by Category". It is page 37 within that PDF file, though the page number written on it is 239 for when it is printed out with the rest of the budget documents. In 2012 the amount enacted  for "OCO"  was $126.5 billion. The budget proposes $96.2 billion for FY2013 and $44.2 billion for each year after that. i.e. the savings compared to 2012 will then be $82.3 billion.

Defense Budgets Compared:

Bush's last proposed  defense budget written in 2008, with planned spending for fiscal year 2009-2013, can be found in historical tables and Obama's most recent proposed budget for fiscal year 2013 contains historical tables showing how much was spent, or proposed to be spent.  It doesn't contain the actual final 2012 figures to check, but it appears Obama will have   spent around $500 billion more than Bush's proposal.

Population Estimates:

The US Census has a population clock which read  314,558,170 at the time this was written. The most recent estimate of the number of households found at the Census site was here and read  131,826,282 at the time this was written.

US Treasury Unfunded Liabilities:

The US Treasury Department's annual "Financial Report of the U.S. Government"  gives the present value of its unfunded liabilities in the "Supplemental Information" in  the total field for  "Table 6 Present Values of Costs Less Tax, Premium and State Transfer Revenue through the Infinite Horizon, HI, SMI, OASDI". The December 2011 report gives the value as $51.2 trillion, the 2010 report says $77.9 trillion, the 2009 report says $107 trillion, 2008 says $101.8 trillion,  2007 gives $90.1 trillion, and 2006 gives $85.8 trillion.