Most Americans are rightly worried about the financial condition of the U.S. government as deficits soar to amounts that are almost inconceivable. The recession of the last few years has only aggravated the situation, forcing the federal government to resort to a massive stimulus program to keep the situation from getting even worse.
The Obama budget for fiscal 2011 and the estimates of future budget deficits for the rest of the decade seem to leave no hope for the government as it descends into a debt spiral. But as bad as things might seem, there are some facts about the situation that are usually not discussed in the mainstream media. Here we examine six important facts about the U.S. budget deficit that you may not be aware of.
1. We've Had Bigger Deficits
The U.S. federal deficit as a percent of gross domestic product reached 9.92% in 2009. While this is an alarming deficit, it is nothing compared to the highest in our history. During World War II, the government ran deficits as a percent of gross domestic product in the 20% range, reaching a high of 28.05% in 1943. It was also higher during World War I, when it reached 16.86% of gross domestic product in 1919. This isn't to say that it's OK to have deficits this large, but only that the U.S. has come through periods of worse deficits and survived. (For background reading, see Breaking Down The U.S. Budget Deficit.)
2. China Isn't So Scary
Many people believe that the U.S. is overly dependent on the Chinese government to finance its debt. The obvious danger here is if China ever walked away from the table, the U.S. government would be left holding the bag, and with disastrous consequences for the economy. While it is true that the Chinese government is the largest foreign owner of U.S Treasuries, with $789.6 billion as of November 2009, it has only been a net buyer of $76 billion in the previous 12 months. This, in effect, means that we have financed the largest dollar amount deficit in our history with barely any assistance from the Chinese government.
3. Assets Count Too
Another thing to consider is that when considering the U.S. and its financial situation as a whole, you can't just focus only on the liability side of the balance sheet. The U.S. also has considerable assets that might offset those liabilities. (Get to know how a balance sheet works by checking out our Balance Sheet Video.)
4. Tax Receivables
The federal government has a huge tax receivable on its balance sheet in the form of untaxed IRA and 401(k) accounts held by Americans. At the end of 2007, IRAs held $4.75 trillion in assets, and private sector defined-benefit and defined-contribution 401(k) plans held a total of $5.82 trillion. This amount has obviously declined over the last two years along with the market, but is still a considerable sum. When this money is slowly withdrawn, it will be taxed.
5. Americans are Undertaxed
Here's another bombshell for you: the top marginal rate peaked at 94% in 1944, and then was cut to 71% in 1964, and 50% in 1980. The top marginal rate reached a modern-day low of 28% in 1988. This is not an effective tax rate, but the rate on income over a certain amount. There is considerable debate by economists on whether higher rates produce more or less income; we'll avoid wading into that debate here. The point is that there is some room here for rates to go up, and an increase is not an outrageous notion: many other developed countries pay much higher personal tax rates than Americans are subject to.
6. Land Ho!
Another major asset to consider is the huge land holdings of the United States government, which according to the General Services Administration (GSA), total 650 million acres. While much of this land may not be suitable for habitation, some of it has immense value.
For example, the Green River Basin in the Western United States is 70% owned by the federal government, and this region is estimated to hold as much as 1.8 trillion barrels of oil shale. If we assume that 40% is recoverable, that's 720 billion barrels of oil locked up in rock on government-owned land.
If the peak oil theorists are correct and the price of oil moves much higher per barrel, this stash of oil will one day have to be developed, and the government will reap the royalties from this development. Since this rock is so expensive to develop, it will literally be the last fossil fuel on earth to be exploited. This means that one day, the U.S. will be the last game in town, long after Saudi Arabia has depleted its resources.
The Bottom Line
It has been tough to be an American lately as the economy works its way through a brutal recession, with much of the world seemingly cheering on the country's economic demise. But don't despair - fundamentally, things may not be as bad as they look, and even if they are, the country has survived through much worse!