Friday, January 23, 2009

How can we afford to spend even more?

I.O.U.S.A. --- A 30 minute clip on the US Debt by pgpf.org


I wasn't sure at first if I wanted to embed this clip, but I finally decided that the good parts outweigh the bad. I will give you a summary, and a bit of a critique, and then you can decide if you want to invest the time to watch it. Given the push for more and more spending, I think it is critical to be aware of the facts about the size of our debt

The first few minutes are introductory and meant to be an attention getter, so you won't miss anything of substance if you skip that part. (Just click on and drag the button to the right of the the play/pause button and scroll to the time you want. I've given you the times for the various sections below.) The subject of our debt is introduced with the fact that, as of Feb. 2007, the federal government was in the hole for $8.7 trillion. (That's $8,700, 000, 000, 000--and it doesn't include state or local government debts.) With a GDP at that time of $13.5 trillion, it leaves us with a debt/GDP ratio of 64.4%.

I have found different figures on different sites. The CIA World Fact Book estimates the 2007 GDP to be $13.78 trillion, and lists a 60% debt ratio. The OMB Historical Tables for the Federal Deficit doesn't give a figure for the GDP, but estimates the debt ratio for 2007 as 65.5%, and for 2008 as 66%. However, as you can see from the table, significant pieces of the data are still not available.

Below is a graph of debt as a percent of GDP from 1950 to Sept. 30 2008. The website where this graph is posted uses the OMB figures and makes the claim that Bush's tax cuts and the Iraq war are major contributors to the deficit, a fact which is contradicted at the end of the video clip.



The above figures don't include the "unfunded promises" of Medicare and Social Security which if added in bring the total as of Sept. 2007 up to $53 trillion. (That's $53, 000,000,000,000.)

3:00 minutes: The Debt and the Four Deficits

Here starts the "business" part of the clip. By their analysis, we have four major deficits to be concerned about: budget deficit, savings deficit, trade deficit and leadership deficit. (I disagree that a trade deficit per se is a problem and will explain my objections later.) Next comes my favorite part of the clip: a moving graph of the US Debt throughout the history of this country. A ball rolls up and down a series of peaks and troughs as it travels in time from the American Revolution to today. I find the visual image provides a helpful perspective.

~8:00 minutes: The Budget Deficit

A pie chart shows where the money goes. The largest single slice is Social Security, with the military a close second. Next comes Medicare and then Medicaid. It's important to realize what a huge chunk of the budget these programs take and just how insignificant "earmarks" are in comparison. The second pie chart shows where the money comes from: tax, tax, and more tax...but still short by $410 billion. (That's $410, 000, 000, 000.)

9:45 to 11:00: Graphics of the federal budget deficits for the past 40 years.

12:30 to 13:25: Animated graph showing how expenditures blossom as baby boomers retire.

13:35: The Savings Deficit.

The clip claims that for the last two years, the savings rate has been negative, but the charts I found don't show it to be bad, but not quite that bad. Click to enlarge the charts to see the personal savings rates from 1959-2008 and for a close-up look at 1998-2008.



16:00: A graph of personal savings rate as a percent of disposable income, showing the plummet from 12.5% in 1950 to -2.9% in 2000.

17:00: The Trade Deficit.

Most analysts bemoan the existence of the "trade deficit." Even the name sounds dreadful! In the Mercantilistic days before the existence of capital markets, if a country's imports were greater than its exports, gold drained out of the country. Monarchs viewed this as "unfavorable." They wanted the gold to stay in their country, so they could tax it away from their subjects and wage wars. Today's situation is different. The "trade deficit" gives only one part of the equation. When all the relevant factors are taken into consideration, there is a balance of payments, not a deficit or surplus. And instead of a sign of weakness or vulnerability, imports greater than exports signal a growing, healthy economy. (I will expand this explanation of trade deficits sometime in the next day or two--I hope.)

The part of this section on trade that I am less sure about is the risk of having foreign ownership of the U.S. government debt. I'd love it if someone more knowledgeable could comment on this.

22:00: The Leadership Deficit

This section talks about the importance of balancing the budget but, in my opinion, fails to emphasize adequately the need to cut spending (as opposed to--gag--raising taxes.)

The last 5 minutes make offers some projections that seem questionable, but not enough data is offered to evaluate them. Here the important point is made that pork barrel and special interest spending is less than 1% of the annual federal budget, and that the cost of the Iraq war is less than 3 % than of the what we owe.

Sobering statistics. I wonder what the spending and promises of the past few months will do to these figures. And then there is the spending planned by the new administration... 000, 000, 000, 000, 000, 000, 000, ... ... ...

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4 comments:

Kendall J said...

So the fundamental question becomes, what is the most amount of debt that the US could take on and what do we risk by doing it? I think there are all sorts of reasons to not ever take on that much, but certianly it at least tries to articulate a cap. Sorry if I missed that conclusions. Does the vid summarize?

Beth said...

The first question to answer is: How much debt is there? The next question is: What are the consequences?
One consequence is that the money we have to spend on debt service can't not be used to invest in our future. Another is the shear magnitude of wealth which must be taken away from private ownership to fund this amount of public spending. If 65% of spending is decided by through political mechanisms instead of economic mechanisms, that means 65% of spending is via coercion instead of voluntary exchange.

Also, it is not just money we are loosing, but our freedom, as T. Hunt Tooley discusses in th latest article on Mises.org "Some costs of the Great War: Nationalizing Private Life." http://mises.org/story/3292 Someday we'll be reading about "The Costs of the Great Bailout."

Pete Murphy said...

Two points:

1. It's misleading to look at the national debt relative to the GDP. Yes, as a percentage of GDP, the national debt was higher during WWII. However, it is not the GDP that will have to repay the debt, it's taxpayers - the American people. When expressed in per capita terms, the national debt is far higher than in WWII and its rate of increase is accelerating. At the end of WWII, the national debt per capita was about $20,000. Today it's $30,000 and climbing rapidly. (These figures are in constant 2005 dollars.) Here's an even scarier statistic: in 1976, the average family's share of the national debt was about one third of their net worth. Today it's approaching 120%! We are literally bankrupt!

2. To shrug off the trade deficit as unimportant because we have a "balance of payments" is just wrong. All this means is that the trade deficit is financed by a sell-off of American assets - stocks and bonds (both private and government-issued), thus balancing the dollar flows in each direction. The net result is more foreign control of all of our institutions. And the supply of American assets is finite. Consider what will happen when the supply is exhausted. In fact, I believe that they are, in fact, nearly exhausted and that is the reason we had to resort to selling sub-prime mortgages to keep the foreign credit coming.

Pete Murphy
Author, "Five Short Blasts"

Beth said...

Hi Paul,

Thanks for the comments.

RE: #1 I like your point the "GDP doesn't have to pay back the debt." Where did you get your figures from? By my calculation, if the US debt is 10 trillion and the US population is 300 million, that would give a per capita debt of $300,000--which is even more alarming. Are your figures for the debt or the annual deficit?

RE #2 I will have more to say on the trade deficit later. It is a subject that requires its own post.