the debt, summary and chart love

July 30, 2011 § Leave a comment

Some useful information on the debt ceiling.  First, this is why it is a really, really bad idea to lose the triple A rating on the world’s reserve currency:

America’s AAA-rating on our sovereign debt is useful to the American people. But it also plays a crucial role in the global economy as a whole. People and firms want access to safe sovereign debt for a variety of purposes. If we lose that rating, can people just start using German debt instead?

Basically, no. There’s not nearly enough German or French or British AAA-rated debt out there to play the kind of global role that U.S. Treasuries currently play. The world’s second largest economy, China, doesn’t have liquid capital markets, and the third largest economy, Japan, has already lost its AAA-rating.

[UPDATE] Incidentally, the “other” AAA-rated countries are the Netherlands, Australia, Austria, Norway, Singapore, Switzerland, Sweden, Denmark, Finland, Luxembourg, and Hong Kong. So the issue, as you can see, isn’t so much a shortage of non-U.S. AAA-rated sovereigns, it’s that these are all small countries who are highly rated in part because they don’t have very much debt outstanding.

By Matthew Yglesias

Here is where the deficit is coming from:

The most important thing to understand about what we are going to cut is that there is no way that discretionary spending cuts,  with no change to the tax code, military or entitlements, are not ever going to fix our deficit.  In fact, you could cut the entire discretionary budget to zero  (minus defense) and it still wouldn’t eliminate the deficitHere is a good breakdown of what we’d need to cut if we leave all tax expenditures, interest on the debt, Social Security, military pay, and Medicare untouched:

  • You just cut the IRS and all the accountants at Treasury, which means that the actual revenue you have to spend is $0.
  • The nation’s nuclear arsenal is no longer being watched or maintained
  • The doors of federal prisons have been thrown open, because none of the guards will work without being paid, and the vendors will not deliver food, medical supplies, electricity,etc.
  • The border control stations are entirely unmanned, so anyone who can buy a plane ticket, or stroll across the Mexican border, is entering the country.  All the illegal immigrants currently in detention are released, since we don’t have the money to put them on a plane, and we cannot actually simply leave them in a cell without electricity, sanitation, or food to see what happens.
  • All of our troops stationed abroad quickly run out of electricity or fuel.  Many of them are sitting in a desert with billions worth of equipment, and no way to get themselves or their equipment back to the US.
  • Our embassies are no longer operating, which will make things difficult for foreign travellers
  • No federal emergency assistance, or help fighting things like wildfires or floods. Sorry, tornado people!  Sorry, wildfire victims!  Try to live in the northeast next time!
  • Housing projects shut down, and Section 8 vouchers are not paid. Families hit the streets.
  • The money your local school district was expecting at the October 1 commencement of the 2012 fiscal year does not materialize, making it unclear who’s going to be teaching your kids without a special property tax assessment.
  • The market for guaranteed student loans plunges into chaos. Hope your kid wasn’t going to college this year!
  • The mortgage market evaporates. Hope you didn’t need to buy or sell a house!
  • The FDIC and the PBGC suddenly don’t have a government backstop for their funds, which has all sorts of interesting implications for your bank account.
  • The TSA shuts down. Yay! But don’t worry about terrorist attacks, you TSA-lovers, because air traffic control shut down too.  Hope you don’t have a vacation planned in August, much less any work travel.
  • Unemployment money is no longer going to the states, which means that pretty soon, it won’t be going to the unemployed people.


The US government spends money on programs in 2 ways.  The first is direct payments from taxes collected.  The government sends out about 80 million checks per month to citizens, contractors and other businesses.  The second method is subsidies in the tax code.  Here, rather than collect a tax and send a check, the government rebates the amount of taxes owed.   Here is a chart showing where our direct payment tax money goes

That amounts to about 2.4 trillion dollars/year.   There is another 1.2 trillion/year in tax subsides that go to businesses and individuals.  For thes government programs, rather than send out a check, the amount of the government subsidy is rebated through a tax deduction.  In effect,  some  pay a lower tax rate while  others pay more to make up the difference.  These so-called “Tax Expenditures” are government subsidies designed to encourage certain types of investment( like R&D or home ownership) or behavior (like retirement saving or having children).  Some of these programs are nearly as large and every bit as popular as Social Security.  For example,  a self employed renter with no kids, no 401k and no employer provided health insurance pays lots of extra income tax so that people who do have kids and mortgages and tax free health insurance from their employer can pay less. A worker pays more in income tax so that an investor can pay less in capital gains tax. And a small business pays a corporate tax rate 10x higher the GE or Exxon Mobile because of all the breaks and subsidies they have acquired over the years.   Its important to remember that a cost is a cost no matter how it shows up on the books or if there was a middle man or not to write a check.  Here is some info on the size of these  tax expenditures:

  • Treasury Tax Expenditures by Sector (History and Projections, $ Billions)

    Tax expenditures by sector Source: Subsidyscope analysis of data 

A list and explanation of the top 10 most expensive tax expenditure programs is available  from Forbes here.  And here is a look at how big those programs are compared to some other government programs:


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