There are a lot of claims going around

about the deficits and debt

run by various national governments

including the U.S.

So let's dig into

the deficit and debt debate.

The first step is understanding

the difference between deficits and debt.

Let's look at Pangean,

a small country that's only four years old.

This year Pangean's national government

brings in $10 million in tax revenue

but spends 12 million

on various government projects and programs.

In order to make up the difference

the Pangean government borrows $2 million.

That means that this year

Pangea has a deficit of $2 million.

However, Pangea's national debt

is the sum of

all those accumulated yearly deficits.

So if over the 4 years of its existence,

Pangea ran deficits

of $3 million, $4 million, $1 million,

and then $2 million,

then it would have a total debt

of $10 million.

You can think of deficits and debt

like a bathtub.

Every minute a certain number of gallons flow

into the bathtub.

Those are the yearly deficits

and they can be large or small.

The amount of water in the bathtub

is the accumulation of

all of those inflows over many minutes.

That's the overall debt.

Of course, for countries larger

and older than Pangea

we're talking about yearly deficits

in the billions of dollars

and debts accumulated over decades

or centuries in the trillions of dollars,

but the raw dollar amount

is not necessarily the best way

to look at it.

For example the U.S. national debt has climbed

from 372 billion to 20 trillion

between 1970 and today,

but there's been a lot of inflation

over that time too.

So instead

we could look at the inflation adjusted debt.

In today's dollars

that was 2.3 trillion in 1970.

So it's still a pretty big jump

but we also need to take into account

the nation's income

which is used to service that debt.

After all if I owe $1,000

that's actually less of a problem

than my seven-year-old owing $100.

My $1000 debt

is a much smaller share of my income

than the $100 is for my kid

who gets $2 a week in allowance.

The US economy is much bigger

than it was in 1970

even after accounting for inflation.

We have many more workers

and those workers produce more.

So economists preferred way

of measuring both deficits and debt

is as a percent of GDP.

From 1970 until today

that percent has gone from 35% to 105%.

Now is that a problem?

That depends critically on the interest

that a government has to pay on its borrowing.

Let's go back to Pangea.

As we've seen over the four years

of its existence

Pangea has built up a $10 million debt.

Suppose the Pangean government

is paying 1% interest on those loans

that means that $100,000

in interest payments

must be included

in Pangea's spending next year.

So if next year's deficit

was going to be say $1.3 million

without interest payments,

now it's going to be $1.4 million.

That means that the debt

will grow a bit bigger

and the interest payments

will be larger the following year too,

but at a 1% interest rate

it's going to take a very long time

for that to snowball.

In the meantime

if the Pangean economy grows a bit

or if the government raises taxes

or trims spending somewhere,

the debt is sustainable.

In fact, as long as the debt grows more slowly

than the overall economy,

debt as a percent of GDP

will actually fall

but suppose that for whatever reason

the Pangean government

has to pay 7% interest

on its loans.

That means for a $10 million debt

it will owe 700,000 in interest next year.

So if next year's deficit

was going to be $1.3 million

without interest payments

now it will be $2 million.

The following year it will owe 7% interest

on a $12 million debt,

that's $840,000.

That widens the gap

between expenditure and revenue

even further leading to a larger deficit

which leads to a larger debt

which leads the larger interest payments

even if the rate stays at 7%.

In this case it's pretty easy for the debt

to spiral out of control.

Quick reality check

the U.S. government pays

some of the lowest interest rates

on the planet for its debt.

So as long as that remains true

modest deficits

aren't going to cause a vicious cycle

of interest payments and debt.

Let's take a quick look

at government spending

at the national level.

In many countries

there are two types of spending;

mandatory or entitlement spending,

and discretionary spending.

Mandatory spending happens

more or less automatically

according to rule

set in place years ago.

The government obligates itself

to pay a certain amount to people

in a certain category

and the volume of spending

changes automatically

with increases or decreases

in that number of eligible people.

Examples of mandatory spending

for the U.S. federal government

include social security,

medicare, and medicaid,

and anti-poverty programs.

In order to change these payments

the government would have to pass

new laws.

On the other hand

discretionary government spending

must be agreed on

by politicians every year.

Funding for a discretionary program

can be higher, lower,

or the same as the previous year

depending on what policymakers decide.

Examples of discretionary spending

for the United States Federal Government

include defence, highways,

federal courts,

the EPA, the FBI, the FDA,

national parks, scientific and health research;

basically everything

that buys things or pays salaries.

For the U.S. Federal Government

mandatory spending

is about 65% of all spending.

29% goes to discretionary spending

and the remaining almost 6%

goes to interest payments on the debt.

Looking just at mandatory spending

about 40% goes to social security,

and another 40% goes to health care programs

like medicare medicaid

and children's health insurance.

The rest goes to anti-poverty programs

like food assistance, income support,

and housing assistance.

Looking just at discretionary spending

a little over half is for defense.

The rest is split between

a variety of education,

scientific, transportation, environmental,

and law enforcement agencies.

So to sum up the U.S. Federal Government

spends about two-thirds of its budget

on mandatory programs

like medicare, medicaid

and social security.

Almost 30% on discretionary programs

like defence, courts, highways,

scientific research,

and the rest on interest on the debt.