Wednesday, October 19, 2011

Deficit, Debt And Law Of Large Numbers

This evening I had a conversation with an individual whose career is working as an economist. The discussion topic focused on taxes and the deficit. He was adamant that the risk for the U.S. was centered around the "law of large numbers" as it relates to this countries debt level.

This brought to mind the article post written by Terry Horan, the CEO of our business partner firm HORAN Associates, on his blog today, Parties in the Park and Dancing in the Dark. In his post he discusses the 99 Percenters argument that they believe the system is rigged, they are not getting a fair shake and it is time for change.

In Terry's post he shows the below table of federal tax receipts, spending and the government deficit, which was detailed in a recent Wall Street Journal article. In the table the deficit is also shown as a percentage of GDP. What stands out is the growth in the deficit due mostly to an increase in spending. Tax receipts for 2011 are higher than 2010 and 2010 is higher than 2009. For 2011 personal income tax collections were higher by 21%!

Also reported by the Wall Street Journal, "revenue rose 6.5% billion to $2.3 trillion, the equivalent of 15.4% of gross domestic product, largely due to higher income-tax receipts in fiscal 2011, the Treasury said. Spending climbed 4.2% to $3.6 trillion, or 24.1% of GDP, largely due to higher spending on interest, Medicare and Social Security. Thirty six cents of every dollar spent by the federal government in fiscal 2011 was borrowed (emphasis added).

The fallacy of showing the deficit as a percentage of GDP is, at some point, the debt grows to a level where it can't be repaid within any reasonable time if at all. Or, in looking at Greece, there are no buyers of the debt. For the U.S., it's buyer is China.

What makes the discussion about our $14 trillion debt difficult for the average person to comprehend is the absolute size of the number where billions and trillions simply do not seem like real numbers--the "law of large numbers". A recent article at the American Thinker website, The National Debt is Beyond Our Comprehension, attempts to put the amount into perspective.

"We can probably get our minds around a million dollars, but beyond that the numbers become mere abstractions. They simply cease to be real. They are not real, because we really cannot visualize them in a meaningful way. We may have gotten used to hearing about billions, but trillions are really beyond our mental grasp. How many of us, for example, can state the number of zeros in a trillion without having to count them? There are twelve. Now try to mentally visualize the number one trillion. Can you do it? Can you really see a "1" followed by twelve zeros in your mind? I can visualize a billion, but that is only nine zeros: three groups of three. It takes some effort to mentally see four groups of three zeros.

Suppose someone was going to give you $1 every second of every minute, of every hour, of every day without stopping. How long would it take them to give you $1 trillion? Well, let's see. There are 60 seconds in a minute, so that is $60 every minute. Then there are 60 minutes in every hour, so that means we would receive $3,600 every hour. Wow! Even my plumber doesn't charge that much. In a single day, therefore, you would receive $86,400. Most people don't get that much in a year.

Since there are 365¼ days in a year, at the rate of $1 per second the pile of dollar bills would amount to only $31,557,600. Now we are talking real money. That is a lottery jackpot most of us would love to win. But that is still just a number in the low millions.

So, at a dollar a second how long would we have to wait before we could see the pile grow to $1 trillion? Are you ready for the answer? Drum roll, please. It would take over 31,688 years. Even at $10 per second they would still have to have started handing you the money more than a thousand years before the birth of Christ! And even at $100 per second none of us could live long enough to get it all.

At $100 per second we are still only talking about $8,640,000 a day. So in a year you would have accumulated only a little over $3 billion. It will take more than 316 years to reach $1 trillion.

A trillion dollars is so much money that you and I would probably not be able to spend that much for ourselves unless we bought a small country somewhere. Most of us would have trouble trying to spend a billion dollars, and a trillion is a thousand billion. So, if the government wants to reduce the deficit by a trillion dollars, it would have to do the equivalent of cutting a billion dollars from each of one thousand government programs...

The frightening truth is that Congress cannot easily cut $1 trillion from the deficit. The reality is that if you gave a new congressman on his first day on the job a copy of the budget, and told him to cut $10,000 from the budget every second of every day nonstop, his term in Congress would be up before he had cut out $1 trillion."
As much as the government would like taxpayers to pay more into the treasury, the real answer is spending cuts need to be the primary focus immediately. This is something the Deficit Panel or so-called Gang of 12 committee in Washington is having difficulty agreeing on.

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