DrunkenBlog

Debt

Over in Proof is the Bottom Line for Everyone, Taylor is asking if using the ratio of debt to the GDP is some sort of voodoo economics. It's not, although you'll only hear dems talk about the deficit in terms of dollars (and I'm sure the repubs would do the same thing- but much of this talk is very alarmist and getting old, but either side doesn't really have much to talk about besides it), not % of GDP.

And no, I'm not a republican, but the alarmist talk from the left gets old, when its not put into context (the alarmist talk from the right would too, if not put into context), and election rhetoric doesn't really help solve the real problems... and its telling that Kerry & Bush are basically offering the same things when it comes to the deficit.

Some things to remember: deficit is short a country will be on what it will be spending in the current year, the national debt is how much is owed total, and debt service is paying interest & principle on the debt owed such as when savings bonds mature.

Bush's proposed (and current) deficits as a % of GDP aren't even the highest in history, even if you exclude WWII. Hell, for some fun, look at the size of the 1993 budget deficit when Clinton was in office. When using nominal dollars instead of constant (nominal dollars have been adjusted for inflation) Bush's current and proposed deficit spending doesn't sound nearly so insane. The upcoming 2004 deficit when adjusted for inflation, considered to be the end of the world by some, only ranks 21st since 1940.

A good example would be to look at Reagan, who is credited with starting the largest national deficits ever, and Word War II, arguably the largest war america has ever been involved with:

• WW II deficit: $50 billion
• Reagan deficit: $300 billion

Reagans deficit looks to be six times as big as the deficit racked up in WW II, and it is, in constant dollars. But, if you google on the percent of the debt: WW II's deficit was about 25% of the GDP, reaching a peak of 30%, whereas Reagans was about 5%, and suddenly things don't look quite the same. And there are a LOT of reasons to carry debt, and a lot of ways in which debt can become a real problem.

About the easiest way (at least for me) are mortgages and credit card debt. You have to be careful about national debt also (what the government has to pay), but these generally work:

Lets say:

• You make $50k/year
• You buy a house, and have a mortgage payment of $700/month over 20 years.
• On the face of it, you have a debt burden of $8.4year
• You have a total debt burden of $168k

This would leave you with a debt burden (service) of 16.8% GDP (if you can think of your earnings as gross domestic product). On the face of it, owing $168k looks pretty fucking scary when are making $50k/year, but it doesn't mean its horrific. Of course it would be better if you were making $100k/year and paying $700/mo, as it would give you more fiscal freedom to do other things with your money. But there are advantages to the above scenario, so lets take two:

• Equity
  You aren't just dropping money into a bucket, you're building equity in an actual investment... the house itself. At some point in the future, the money you have paid out may actually show gains when you resell it. You're giving now to get get it later, which is why Kennedy first started running a deficit in order to give tax cuts because he wanted to spur economic growth. Equity also gives you leverage in case you get in trouble and need to borrow again (say, borrowing against the equity in your home if you lose your job instead of just being out on your ass if you are renting).
• More manageable than the alternatives
  Depending on where you live (figures pulled outta my ass, but realistic), the cost of renting a decent 3 bedroom home might be $800-$1,500k. Which means you're paying 19%-36%. You get none of the other benefits, but gain one: increased freedom. You end up carrying a larger debt but for a shorter period of time.

As a juxtaposition, the estimates of debt as a % of the GDP are:

• 2004: 4.5%
• 2005: 3%

A quick google will back that up, although be careful as there are lower numbers out there- I'm using the updated numbers released & spread around in February. And yes, I trust those numbers, as every other economist backs them up, some even saying 2004 is too high.. but they don't generally account for a lot of the war-related expenditures.

For historical reference, the %debt/GDP of past presidents & budgets:

1943: 30.3% FDR
1944: 22.8% FDR
1945: 21.5% Truman
1946: 7.1% Truman
1982: 4% Reagan
1983: 6% Reagan
1990: 3.9% Bush
1993: 3.9% Clinton
2004: 4.5% Bush 2.0
2005: 3% Bush 2.0

Before the war and other expenditures that came up are factored in (which they are), Bush's budget was actually less. The problem of course is that while debt isn't all bad, it isn't all good, either, and the government isn't a person. There are some good things to that (ie, they dont die and have to settle up) but other things factor in too.

Some of the dangers? Well, without going into a lot of voodoo, if your deficits become too high (it gets really wiggy here, as different people have different views on just what "too high" is) you start inviting higher interest rates which starts inviting inflation. You also get into a situation where you lose economic freedom when you need it, just as a person would.

For example, go back to the mortgage example: if you're making $50k, that's one thing. But what if suddenly you had to take a drastic paycut, and only made $30k? You might have to borrow more, and more, setting up a scary chain of events.

Not that we're anywhere near that point- but the scary word is "unsustainable". We're not anywhere near that, but if you take a look at some other countries- it can be a real drag, and the scary word becomes insolvency.

Which isn't to say that debt is good, just that isn't not necessarily bad. A lot of it has to do with the focus of the government at the time: expansion versus stability, etc. IE, do a google on france pissing off a hell of a lot of europe (their national debt & deficits are rising to a point where they are tipping off of what the EU considers acceptable) by shunning the Stability Pact, because they wanted to focus on economic expansion.

At either rate, again I think the dems are completely missing out on what Bush is doing, even though his administration has a pretty clear MO: ask for two to three times what you really want, so the other side can save some face but you end up walking out the winner because if they can't meet you at least halfway they look like a*holes to the swing vote.

The republicans are being stupid at the moment because they think the swing vote can actually understand or care about anything economists say... not that only the republicans are, look at Kerry and his free trade stances.

And what he's asking for is telling: 7% increase in defense, 10% increase in homeland security, and 0.5% increase in discretionary spending (discretionary spending is stuff not mandated by law), and some large foreign aid to africa AIDs initiatives.

Going to be really hard to:

• Go into an election year promising to raise taxes. Kerry & the like are trying to get around this by saying they'll only raise taxes on the rich, but no one, not even the dems who are voting for him really know that (look at some exit polls).
• Not spend money on homeland defense
• Not spend money on Iraq & the counter-terrorism, especially in places like africa where its getting scary. The dems are talking a good game, but no credible candidate is saying we don't have to do this stuff
• Fight against the relief for africa for AIDs, which is just ravaging the continent in incredible ways, and we haven't seen the worst of it

Where, exactly, are you gonna cut and not look like an asshole especially when Rumsfeld is cutting long running military projects like the comanche in order to streamline the military? Worst case scenario, Bush walks out with half his relief for Africa, half of his defense increase, and half of his increase in funding for homeland security. And the dems are walking right into it again, primarily because they aren't offering anything else, and are (if you actually listen) banking on the same thing GWB is: the economy growing.

So, back to debt: There's a reason why Greenspan is coming out and saying he is worried about our long term fiscal situation: his job isn't just to say how things are now, but where they are going. The left trumpets him saying we are heading for real problems, and right trumpets his saying the tax cuts should more assuredly stay permanent just as they are.

And we are heading for some real problems: the main problem being social services, as Greenspan brought up. Something is going to have to be done, one way or another. Which is why Greenspan is sending out those warning shots: its fine and dandy to run large deficits when the economy needs it, but Greenspan doesn't believe congress will be able to restrain itself when the times turn really good soon and take care of some of the debt. And it is incredibly hard to cut anything, and everyone always thinks their projects are worthwhile and for the public good.

But its not sustainable, and that's what Greenspan is trying to warn against: 10-20 years, ending up in a position where we are paying an enormous amount of money to service our debt and then something big happens, like having to seriously bail out social security or medicare.

I'll spare the credit card analogy in regards to national debt because I've got other things to do, I doubt anyone would care, and I'm depressed enough about the government and both the parties as it is. Plus, I'm not an economist, so I prolly barely know what I'm talking about anyways.

 Posted by drunkenbatman
    February 29, 2004, at 07:30 AM