The Sacramento Bee reported last month the State of California is projecting a surplus of $7 billion in the 2020-21 budget year. Meanwhile, in the morass known as Washington, D.C., the deficit is estimated at $1.1 trillion next year. In addition, California is expected to have a “rainy day” fund balance of over $18 billion, while the federal debt is in the rarefied neighborhood of $22 trillion.
That is a lot of numbers to absorb, so I am going to try to simplify the arithmetic. The term surplus means the amount of revenues that will exceed spending. A deficit is the opposite – spending exceeds revenue. The rainy day fund is the accumulation of surpluses. Your Credit Union has a rainy day fund we refer to as net worth or capital or reserves that we have accumulated for the 70 years of our existence. Our reserves are an accounting entry measuring the strength of our Credit Union. The state’s surplus is cash which is sitting waiting to be used in the event of an economic downturn which is a virtual certainty.
On the other hand, the federal government’s debt is an accumulation of loans called Treasury Bills, Notes, or Bonds made to investors. These loans have terms between a few days and 30 years. The economist John Maynard Keynes argued it was the government’s responsibility to stimulate investment and consumption with deficit spending. When unemployment is high and citizens are out of work, they are not spending or paying as much in taxes, but government spending for items such as entitlements and infrastructure still must go on. However, Keynes hypothesized the debt must be self-funding; in other words, the payback must yield a higher rate of return than the debit used to fund it.
Today, that is not happening. The belief of many elected officials is the tax revenue is there to be spent, and if the spending goes over into a deficit position, the federal government can just print more money. Typically, when economic times are good, budget deficits decrease which lowers the total debt. However, the deficit and debt have more than doubled in 10 years in a time period we should be experiencing a decline.
Some people have told me they are irritated there is so much money sitting idly in Sacramento while the homeless population gets larger and potholes are not being filled. That is understandable, but it was not that long ago that the state did not have enough money to operate during a recession and is unable to use Washington’s money printing press. For that reason, the states’ rainy day funds are more critical than the federal government.
Of course, the simple answer to a deficit is to raise taxes, but who wants that? My college freshman economics professor explained the theory of TANSTAAFL – There ain’t no such thing as a free lunch. Or, as Dr. Fred Brooks, the computer scientist who was instrumental in developing IBM’s most ubiquitous mainframe computer, once said, “You can only get something for nothing if you have previously gotten nothing for something.”
To summarize, California’s finances are good; the federal government’s finances are on life support. It can be both a good day and a bad day at the same time. It just depends on which side of the street you stand on.