$1.2 trillion does not include Obama’s stimulus plan.  The stimulus will not come from cutting programs, this will be all “new” money.  This would knock the deficit to $2 trillion, but for now focus on the $1.2 since that is the known figure.

Let’s put $1.2 trillion into terms we can better understand.

$1.2 trillion:
$1,200,000,000,000
$3,934 for every man woman and child in the United States
Greater than the GDP of every country in the world except the top 11 (#12 is India)
28 billion barrels of oil at current prices
As stacked $1 bills the pile would stretch 81,439 miles
As $100 placed lengthwise it would stretch from Philadelphia to Boston as the crow flies (287 miles)

I think you get the point.  $1.2 trillion is a ton on money.  But do you even know what a budget deficit is? Probably not since I know none of you actually do a budget (I don’t either).  Companies and governments make a budget to make sure they don’t spend too much money.  On one side you have your incomes, on the other you have your expenses.  If at the end of the year your expenses are more than your incomes, you are left with a predicament.  Either you increase your income or decrease your expenses.  Technically there are other options.  You must take note that in a budget you don’t account for any savings you already have.  So if your income for the year is $40,000 and your expenses are $41,000, you can operate at a deficit by dipping into your savings for that extra thousand.  Budgets often refer to it as a “capital fund” or some other generic term that basically means “savings.”

To float a deficit you can also borrow money. Depending on how you organize your finances, a 30-year mortgage could look like a 30-year budget deficit for your family. Assuming you take on now additional debt, doing so would work out for you in the long run, and you’d operate at a budget surplus after you clear the debt.

So you can run a deficit as long as your income is stable or you have sufficient “capital” to float you through a rough patch and start making more than you spend again.  The media treats headlines like that as if the President had just been shot.  While that deficit is huge, it is by no stretch a cause for concern.

What will be the concern is whether or not reform can happen in the budget sometime during the Obama administration.  The man so far is making statements that he is aware of this.  Obama admits we cannot operate at a deficit like this forever.  Budget reform will be a top priority. But with his calls for various other reforms and tax cuts, we have not yet see evidence he has a clue how to do this.  Sadly there is nothing to figure out, to fix the deficit spending problem we have two options.

Option 1: Cut spending.  This means cutting so much spending that we operate at a surplus for many years.  This would allow the government to pay down some of that national debt.

Option 2:  Tax, tax, tax.  This means more money out of your pocket to pay back the debts.

I vote for option 1 because we all know what happens to Americans when they get more money in their pockets.  You know the feeling, you owe $5,000 on your credit card and you got a $2,000 bonus.  Do you put it on the card?  No.  You went to Vegas.  So I want the government to cut spending.  Yes this will have an impact on our economy and jobs will be lost.  I’m sorry, it’s one way or another.

At some point we will not be able to do this deficit stuff anymore.  But for now, we have to live with it.

Weakonomics Moment:
While my entire post basically says “deficits are OK,” I firmly believe they are not for the government.  Economists have shown how operating at a deficit is technically good for the economy, but this shouldn’t be an issue.  The federal government should be the poster-child for fiscal conservatism. All governments should operate on a balanced budget.  If there is a surplus, the people (through elected leaders) can decide if the surplus should be used on a new government program or returned to the people.  I strongly believe the government should stay away from “stimulating the economy” and feeling responsible for supporting every man, woman, and child in need.  Their hearts are in the right place, but big, national governments simply cannot fix these economic problems with the top-down approach they can implement.  It should be the law, that the federal government cannot operate on a deficit, sadly it does not.  Many states do have it in their constitutions.  There are exceptions to every rule, but during peace time and economic prosperity, the government should not be in the business of economic support.

The actual report via MarketWatch

By The Weakonomist

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categories: economics, government, loans