Thursday, March 12, 2009

Learning Something New: Debt versus Deficit

Learn something new every day. That's what Grandma advised, and it's a good practice. For me, it often is an exercise in humility, in which I get a little taste of how wrong I can be about something I thought I knew.

Take a little term you and I have heard being discussed zillions of times: budget deficit. Hey, I always thought it meant debt, as in how much some person or entity owes. Nope. I just looked it up. Deficit means the amount by which a sum of money is too small.

That definition took me aback for a minute. (When was the last time a sum of money looked just right?) But I think I get it. A deficit is what Mr. Micawber was complaining about when he advised young David Copperfield:
Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
In this case, Micawber's deficit was the six pence difference between income and spending in a single year.

Debt is something else again. It is an accumulation of deficits. In other words, if Mr. Micawber were six pence short year after year, then the total of his deficits would equal his debt.

Ed Hall, who maintains the U.S. National Debt Clock, explains the U.S. National Debt this way:
Add up all the deficits (and subtract those few budget surpluses we've had) for the past 200+ years and you'll get the current National Debt.
Ed also warns:

Politicians love to crow "The deficit is down! The deficit is down!" like it's a great accomplishment. Don't be fooled. Reducing the deficit just means we're adding less to the Debt this year than we did last year. Big deal -- we're still adding to the Debt. When are we going to start seeing the Debt actually go down?

End of today's lesson. I've been fooled plenty of times in the past, thinking that reducing the deficit was getting our country out of hock. Not that we'll be hearing any politicians crowing about their reduction of the deficit anytime soon.

Now, if I can just figure out how to pay my tax bill . . . .

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