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Government's financial condition

The deficit is a measure of how much the government is overspending in a given year, or the difference between government spending and revenue. The deficit, however, does not account for the total of the government's liabilities, which include future payments to government employees and veterans and programs like Social Security. Created by Sal Khan.

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  • blobby green style avatar for user brad.b
    How do they value the Assets? Since most assets would not be for sale because of national security, is either net realizable value or cost appropriate? Interesting balance sheet!
    (62 votes)
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    • purple pi purple style avatar for user Peter
      For assets, the "old" definition was "anticipation of future income".
      That was the basis on which medieval kings borrowed money.
      Later, particularly after the Dutch revolt in the 16th Century and the subsequent establishment of the stock market, reliability of payment also counted as a "soft" asset.
      During the Eighty Years War, the Dutch paid a consistently lower interest rate than the Spanish on their Govt, borrowing because the Dutch always paid (and on time), and the Spanish defaulted twice.
      In modern times, one only has to look at home loans to see what "anticipation of future income" and "payment reliability" mean.
      And so it is with Governments.
      The USA has the "asset" of all the future tax money it will raise (discounted by an appropriate amount for the effect of future inflation - 10 dollars now is worth more to any of us (and the Govt.) than 10 dollars in 10 years time!
      The USA also has the "soft asset" of a reliability of payment - unlike, say, Argentina.
      So "funny money" issued by the USA has a much higher commercial value than "funny money" issued by some other national Governments!
      A mixture of future income and reliability of payment is pretty much what makes up a nation's (or, in the case of home loans, an individual's) "credit rating".
      That's how Japan can have much more debt than the USA, relatived to their GDPs, and yet no collpase, while Argentina (for example) has loads of problems, and has had for some time.
      So, don't forget the "assets" of future income and reliability of payment.
      (4 votes)
  • aqualine ultimate style avatar for user J.R.
    Where does Salman get this information. I can't find anything like this from news or anything else because they always have opinion and politician promotion mixed to it.
    (17 votes)
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    • leaf green style avatar for user Drew Culpepper
      Sadly, the general public doesn't like math, so real data doesn't get a lot of press. This is one of many things wrong with the modern media system. If you want numbers, in general you'll have to look them up on your own, in this case on gov't websites like Sal does here. Precisely phrased web searches can get you started if you're not sure where to look first.
      (21 votes)
  • blobby green style avatar for user pranjal tripathi
    Dear Sal
    For few months I have been trying to understand few basic questions of international monetary system but i have mot been able to understand. my questions are:-
    1. Before ww1 world followed gold and silver standard but just before ww1 it was changed to pure gold standard. why?? what was the need?
    2. after ww2 it was pegged to dollar. why??
    3. what Keynes and White wanted to achieve through "bretton woods system"
    4. 1973 abolition of gold standard. why?
    Sal.. i dont have anyone who can answer there question as m not in any college n I know only u who can answer my question. hope you will answer.
    (9 votes)
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  • leaf blue style avatar for user Mateen Alishah
    How does the social security benefits that senior citizens get how does that effect the government and the economy?
    (2 votes)
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    • old spice man green style avatar for user Don Spence
      The government is affected in that senior citizens (mostly on SS) can be a very powerful voting bloc. It is difficult for government to take action to cut benefits due to the reaction the elected politicians fear. Disclosure: I am a social security recipient.

      Many, but not all, SS recipients spend a large portion of their income rather quickly mostly due to need and limited resources. This money recycles quickly into the economy, and keeps consumer spending going more than money received by (on average) more affluent people.

      I hope this helps to answer your question.
      (8 votes)
  • old spice man green style avatar for user Kaveh Kiani
    what is the TARP? ()
    (5 votes)
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  • blobby green style avatar for user Kyle Walker
    Isn't true that failure to raise the debt ceiling would not necessarily have resulted in default? Couldn't we have just restructured so that we paid the principle and interest to force politicians to start reducing spending on everything else?
    (7 votes)
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    • orange juice squid orange style avatar for user Mathieu Hébert
      I would indeed be unrealistic to reduce all government spendings. A lot of American families are dependant on social services, which are also in a pretty bad shape. I think that the U.S. spendings on military are outrageous. Is America preparing for another war? They call it "defense," but another dozen of tanks can only help in the event of a full front traditional war, which is very unlikely to occur on U.S. soil (no need for "defense"). Or maybe the United States government plans to invade some other Middle East country.
      The problem I see with the debt is that government officials care most about being reelected and do not want to repay debt in good times, thus preparing for an eventual downturn of the economy. The system forces them to think short-term, while it takes many years to see the results of a change in economic policy.
      (3 votes)
  • duskpin ultimate style avatar for user UnrealDreamer989
    Where does the borrowed money come from? If we keep borrowing money, will there be a time when that source says "no more borrowing"?
    (3 votes)
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  • aqualine ultimate style avatar for user m96
    1. Will sending more troops into other nations help with debts?
    2. Will helping corporations and competition just like the cause of the Great Depression help the economy?
    3. Will raising taxes on poor while giving benefits to the rich help the nation?
    (3 votes)
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    • old spice man green style avatar for user Alf Lyle
      Using the same approach as I do at the theater, I will treat your questions as non-rhetorical.
      1) Only if they bring back sufficient loot/slaves/etc. The Roman Empire prospered using this approach; the US has failed to follow the Roman model.
      2) The large corporations and wealthiest folks in our economy have done very well with this approach, but the overall business economy, middle class, poor, and our children have not. I must say, however, that my 401K has recovered nicely during Obama’s presidency. I am not sure about your concern with competition. Competition is a good thing in a free market economy. However, please note that any good corporation’s immediate objective is to become a monopoly. “We’re going to crush the opposition” isn’t just corporate cheerleading; they really try their hardest to do it.
      3) See #2 above.
      (3 votes)
  • male robot johnny style avatar for user Plasencia.Josuel
    What are our options in order to stabilize this economy ? What are the candidates offering ?
    (2 votes)
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    • male robot johnny style avatar for user 10brucewaynealti
      It depends on what kind of economic method you prefer. A Keynesian model would say to increase spending and lower interest rates in order to stimulate the private sector, boost consumption, and maintain confidence.

      This sounds like a good plan, but I disagree with its effectiveness (it's short term). The classical approach is what needs to happen. The fact is that we are spending too much money and the government is getting too big. First we cut spending to our biggest most burdensome programs, such as welfare. Then we stop making guarantees on loans (student loans for example). Perhaps the best thing we could do is increase the attractiveness of businesses in the country. Reducing the corporate tax and any hindering regulations would help. A greater focus needs to be put on manufacturing.

      As far as stabilizing the economy, we need to let the recession work out on its own. The market will dictate this.

      The candidates on the Republican side don't go far enough, except for maybe Ron Paul. And Obama clearly is for more spending and bigger government.
      (2 votes)
  • leaf grey style avatar for user E Tolatovicz
    Why are we still spending more than we receive.
    (3 votes)
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Video transcript

Voiceover: What I want to do is this video, is dig a little bit deeper into the deficit. Just so that you can get the data yourself, they're all available at this document which is hosted by the Department of Treasury so you know that I'm not making up these numbers. Just to review, the deficit is really a measure of how much you are overspending in any given year. If you look at the deficit, and I'm going to focus on 2010 in this video, in 2010, the government spent, so the spending for the government in 2010, was about $3.5 to $3.6 trillion dollars, and it brought in in mainly tax revenues, but it has a few other sources, but mainly tax revenues, it brought in about $2.2 trillion dollars. Based on this the overspending, or the amount of spending beyond the revenues, or the deficit, the deficit in 2010 was $1.3 trillion dollars. What I want to be clear on, this is only one way to account for spending versus revenues. This is not the way that most companies would primarily report their own income over the course of the year, or their own cost, or their own loss over the course of the year. Most companies would not just have to account for their cash outlays. That's all we're considering in this $3.5 to $3.6 trillion dollars. A traditional company would also have to include any other liabilities or any other obligations they're taking on. For example, if I hire you and I promise to pay you $50,000 over the course of the next year, and I'm going to pay them to you in cash, but I also promise that when you retire, I'm going to pay you $10,000. I'm going to give you a $10,000 per year pension. On a traditional income statement, I would not just expense the $50,000. I would definitely put that in my expenses, and the government would put that in their expenses, but I would also have to account for this liability that I'm taking on. I would also have to say, "Look, in order for me to be able to afford a $10,000 "pension at some future date, I have to make some estimates "about when you would retire and how long you would live, "and what interest I could get on money, and all of the rest." But I would have to say I would have to set aside some amount of money so that in the future I can meet that obligation. Maybe I have to set aside $2,000 this year, and hope it grows properly over the course of the next 20-30 years until you retire so that I can afford to pay you that much. Who knows? But I would also have to account for it right here, that extra liability. The government, in the calculation of the deficit, does not account for that extra liability. It is taking on other liabilities. It is making these pension promises to government employees. It has obligations to the veterans and Veteran's Affairs and all of that. That is not accounted for in the deficit. It is accounted for in the gross costs. You see here, we said when we look at just the budget, we're talking $3.5 to $3.6 trillion dollars. That's direct cash outlays, or mostly direct cash outlays. If you include all of this other stuff, then it balloons to $4.5 trillion dollars, $4.5 trillion dollars. In a previous video I mentioned that the government right now for every dollar that it's spending, it has to borrow 40 cents of that dollar. If you really think about the total obligations that it has, and the total obligations being $4.5 trillion took on, viewed that way it only has about half of that. It only has about half of that coming in in revenue. So every dollar in revenue the government is taking on an equal amount of obligations that year. Some of that is going to express itself in terms of increased debt, and some of that is just going to show up as increased obligations. You can see both of those things are increasing year after year after year, and depending on who you talk to which side of the political spectrum, some people will blame it on Bush. They'll say, "Look at this." The spending increased under Obama, which someone on the right would say. But then someone on the left would say, "Yes, but the spending increased "because we have to do all of these bailouts. "The economy started to tank at the end of 2008. "We have to do all of these emergency things." As soon as the economy tanks, you automatically, the deficit position gets worse because you bring in less revenue. Not only do you bring in less revenue because corporate profits are down, fewer people are employed, people start earning less, but you also have higher expenses because all of these automatic obligations kick into effect; unemployment benefits, Social Security benefits, Medicare benefits. Those increase so deficits naturally get worse, but the whole point here is to say regardless of what party you're on, things are getting worse, and they don't seem to be getting better. Generally, you'll always see this net operating cost, sometimes the net operating costs will look lower than the actual deficit like it did in 2008. That's because there would be some type of actuarial or accounting reestimate of the future obligations maybe the pension obligations or whatever. But in most years, we're taking on more obligations than just our cash outlays. That's why you see the operating costs so much higher than just the pure deficit right over here. This chart right over here actually goes into what the difference is, the actual difference. You see that it's mainly things like liabilities for veteran's compensation, military and civilian employee benefits, government sponsored enterprises. There is some downward revision of the TARP. I don't think you can see that. All of a sudden you realize that the TARP is going to cost us more in the future than you thought it was going to be. Even though you don't spend that $86 billion this year, you realize that you have an $86 billion higher obligation. If you add all of these, or I guess you subtract all of these from the budget deficit, then you're going to get the net operating costs. You might already find that depressing, but the point of this video is actually, that's just the beginning, because if you look at where we're going, the trajectory, it gets even more depressing because not only do we have this huge budget deficit, or this huge operating cost, this loss I guess you could say on an annual basis, but it's going to get worse and it's going to get worse not just from the overspending, not just from the overspending on the government programs, and defense and all of that, but because our debt is increasing so much that the interest, the amount we spend on interest is only going to increase. That just makes matters worse. The more you spend on interest, the larger your deficits. The larger your deficits, the more you have to borrow, the more you have to spend on interest. This is a long time line right here. It goes out to 2080, but it's pretty clear that something, something is going to give. As a percentage of GDP, the government, the size of the government has historically been around this depending on different periods in history, but in the recent past it's been in the 20% range. If you just let things go the way they're going to go, and a lot of these are kind of mandatory spending, things we've already obligated ourselves to, or what we think we've obligated ourselves to, it looks like the size of the government is really just going to take over the economy. It's going to grow over the next 20-30 years to 30%, 35%, 40% of the entire economy. If that by itself is not scary or depressing enough for you, then we just have to look at this chart right over here. We've already gone over some of this chart. This is the gross costs. This is the total amount we're spending, outlays, cash outlays and other obligations we're taking on, and accounting for it in some way in the present. Then you have the taxes that you're bringing in, and you see that this is your net operating cost that we calculated already. Then it shows your assets, the assets of the government, mainly buildings and land and things like that. The government has a lot of nice land and buildings. Then you also see property, plant and equipment, and all of that; aircraft carriers, whatever you want to throw into the mix right over here. Then you see the debt and there's been a lot of talk of the debt, but you might be saying, "Wait. Even in 2010, "right now as we hit the debt ceiling we have $14.3 trillion, "but didn't we have like $13. something trillion in debt in 2010? "Why does this only say $9 trillion?" That's because we had another $4 trillion in debt that is not held by the public. This is just debt held by the public. The public includes things like foreign governments, but there's another $4 trillion that is held by the government itself so that is not accounted for. That $4 trillion is mainly excess funds from the Social Security Trust that are all invested in treasuries, but the government, at the end of the day, is responsible for the Social Security Trust. So it is not accounted for right over here. You have $9 trillion there. You have another $6 trillion that is seldom talked about which is benefits for federal employees and veterans. That's right over here, so huge obligation. A total of $16 trillion in liabilities. If that by itself doesn't scare you enough, or doesn't depress you enough, we just have to go down a few lines on the statement, and you'll see something that does. This right here is the expected, or the present value of the obligations for social insurance. The way that they talk about social insurance, it's both social security and things like Medicare. These things that we've promised we would pay to people in the future at least that we've told people that we will pay them in the future. The present value, and the easiest way to think about present value, and I've done videos that go into a little bit more depth on that is how much money given some assumptions, if you assume that if I put money aside, and that money grows at some rate, how much money would I have to put aside in order to fund those obligations? This value is over the next 75 years, and I want to make it clear. You might say, "Oh, 75 years, of course, "that's going to be a huge number." But remember, we're assuming that we can grow money. We're assuming that obligations that are 75 years from now that if i have to pay someone $10 75 years from now, I don't have to put $10 aside. I might only have to put 50 cents or a dollar aside and assume that that 50 cents or dollar will grow by some percentage so that by the time 75 years go by, I'll actually have that $10. This is actually a discounted value. This is assuming that the money that you could set aside today that the obligation today, that it would grow to actually fulfill the actual amount that you have to pay. This should scare you. These are huge numbers. This close group are what they call the current participants. We could read the footnotes. Includes current participants receiving and/or are eligible to receive benefits for the Social Security and Medicare programs ages 15 and over at the start of the 75 year projection period. That's $43 trillion. Then open group. They have current and future participants. This is slightly lower because it's including people who are going to be paying into the program, and not necessarily taking out of the program. but it's still a huge, huge liability. It's twice as big as the official liabilities that the government takes on.