The Skeptical Optimist

National Debt Microscope

This is a new feature.  Although the National Debt Thermometer (next article below) shows the USA’s debt-to-GDP number, in the interest of full disclosure I decided to set up this National Debt Microscope to reveal specifically how I’m calculating that ratio. 

There are five important concepts on the chart below:
1. Actual GDP (green), from the BEA tables.
2. Forecasted GDP (blue), using this method.
3. Actual Debt (red), from the US Treasury website.
4. Forecasted Debt, using a projected General Fund deficit.
5. The Debt Burden %GDP: current, and end-of-year forecast.

I designed the chart to make those five concepts easy to spot.  Please email me if you have any questions about it, or suggestions about how to improve the clarity. 

Click to enlarge.

June 2005 National Debt Thermometer

This is the third consecutive month the debt burden has dropped—this time to 64.2% of GDP (from 64.6% last month).

We should not expect that trend to continue.  The reason it’s been dropping is the combined effects of (a) higher GDP growth generating higher tax revenues, and (b) taxpaying season, which can create a short term minibubble in federal tax receipts.  In any case, the inflation number dropped slightly to 2.9%—good news for now—and real GDP growth turns out to be higher than the BEA had previously estimated, just as I suspected two months ago.

Bottom line: My estimates of GDP and debt indicate that the USA's debt burden will be 65.2% GDP at year-end.  (See the new National Debt Microscope for a diagram of that.)

Below is the updated National Debt Thermometer.  Canada readers might be interested in proceeding to the next image as well.  Reason: I’ve received three emails questioning the magnitude of Canada’s number, so I added a screenshot of the OECD table showing where the number came from.  (Lastly, if you’re interested in the detail, please see my final comments regarding data sources.)

Click to enlarge.

Below is the screenshot of the OECD table.  Click to enlarge.

Final comments on data sources
Currently, I use OECD numbers if they are available for a given country; if not, I use the number in the recently-updated CIA World Factbook.  However, I’ve noticed a few minor differences between the two sources; therefore, in the interest of consistency, I am seriously considering making the Factbook the sole source for non-USA numbers.  (For the USA, I can derive a more timely number from other sources.)  I’ll probably make that switch next month.  For now, the Thermometer numbers are dual-sourced.

The cure for Deficit-Attention Disorder

I’ll be spending most of this weekend with another page-turner of a book on my favorite subject, economic growth.  (It can’t be helped, I’m wired that way, as I explained a few months ago.)   

Because of that, today’s post will be brief, but in a few days, just before the long Independence Day weekend, I’ll post the updated National Debt Thermometer.  It’s time for an update, because the Commerce Department will finalize the first quarter GDP numbers this week, and the OECD has issued a new set of economic data for its member countries.  But for now, I’ll briefly explain why I keep hammering away at this topic.

Why am I so interested in the nature and causes of economic growth?  Largely because GDP growth is the most promising antidote to “Deficit-Attention Disorder.”  Our politicians and journalists continue to give far too much airtime to fear-mongering about deficits and debt.  (Reason: We pay attention to it, thereby perpetuating it.  The word “Debt” is scary; fear is the most effective motivator of all; most politicians and journalists know that—so they use it to gain our attention every chance they get.) 

I, for one, would very much like to see the national debate calm down a little—take a big step away from hysteria, towards objectivity—by including the dimension of economic growth whenever we talk about deficits and debt.  And what’s the simplest way to introduce economic growth into the debate?  A simple, easy-to-understand number: the Debt-to-GDP ratio, or debt as a percentage of the economy.  That’s the number we should be watching; it packs a huge bundle of highly relevant economic information into a tiny package.  It’s an objective beginning to rational economic debate—unlike the raw debt level, which is almost always an emotion-packed, fear-mongering façade for someone’s hidden political agenda. 

We should be watching the Debt-to-GDP ratio to ensure it doesn’t get too high; we should not be watching only the raw dollars of debt, a near-meaningless way of measuring financial health.  Sounds simple, but it’s a shocker to a lot of people.  To illustrate, see this simple little quiz I posted recently—and try it out on a few folks, because I predict it will cause a few double-takes. 

To further that cause, I'll continue to update the National Debt Thermometer monthly in this blog.  Additionally, this week I'll introduce a new feature that will help us keep a close eye on the debt-to-GDP ratio’s key components.  Is economic growth enough to offset the effects of debt growth?  Why or why not?  Is our debt burden worsening or improving relative to other countries?  We’ll be watching closely, and commenting frequently, right here in this weblog.  (To the chagrin of the fear-mongers, I hope.)

China's censorship is costing me millions

Nobody in China can read my blog.  This is an outrage; I figure it's costing me millions of dollars (...see my calculations below).

Background
Every time anyone clicks through to Amazon from this website and buys a book I've recommended, Amazon pays me twenty-five cents or so.  However, so far this year not many people have come to realize what a great deal that is for them, because the only books that have sold that way are the ones I've bought for myself. 

But NOW I know why book-buying traffic has been so much lower than I'd expected: China has banned the viewing of TypePad weblogs. 

Ouch; there go my blog revenue estimates—around the bowl and down the hole, as they say.  Below is my lost revenue estimate.

My estimate:
1,306,313,812 people in China
x 20% who would have seen my blog
x 50% of those who might want a book in English
x 10% of those who would have bought a book
x $.25 per book from Amazon

= $3,265,785 lost blog revenue due to China's stupid censorship law.

Time to revise my balance-of-year spending budget, I guess. 

A Fiscal Responsibility Surprise: How to cut our grandkids’ debt burden in half

[UPDATE, 6-21-2005: see corrections in red below]

Soon I’ll be a grandfather.  Because of that, just one of many things I’ve been contemplating recently is the debt burden my generation and the next will bequeath to our grandchildren. 

As a starting point, today’s debt burden is—in my opinion—not terribly high.  So I’d be comfortable if we could just keep it from getting any higher.  (The National Debt Thermometer illustrates why I’m not too concerned about today’s debt burden.)

However, others disagree with me.  Some say there’s absolutely nothing wrong with a higher debt burden—in the range of 80%-100% GDP.  Others say the opposite—20%-40% of GDP would be more desirable.  The people saying these things aren’t dummies, either; they’ve merely drawn different conclusions after weighing the evidence, and I respect all of them. 

To gain a better understanding of it, I decided to run some numbers myself, and also to run my assumptions past some experts.  I chose two scenarios: (1) cutting the debt burden in half over the next fifty years; and (2) holding it constant for fifty years. 

Hold onto your seat; this might surprise you
The two charts below summarize the results.  Just above each chart is a summary of what it’s telling us.  (Note: Both charts assume that current annual growth of nominal GDP, 6%, is sustained).

Finally, below the charts, I’ve reprinted the question I asked two well-known economists last week (in separate emails), followed by their responses. 

Chart 1 says this:  To cut the debt burden in half by the year 2055, it’s okay to run a fiscal deficit every year.  CORRECTION, thanks to an astute reader who reminded me about the difference between the unified deficit versus the general fund deficit: We should reduce the general fund deficit by almost half, bringing it to a level of 3%, then gradually taper down to 1.2% GDP in 2055.

Click to enlarge.

Next, Chart 2 says this:  To prevent the debt burden from growing (i.e., to hold it constant for the next fifty years), we should run fiscal deficits of 3.6% GDP every year.  CORRECTION, same reason as above: (Today’s unified deficit is lower than that, but it's being propped up by a social security surplus; we should reduce the general fund deficit by one-third to 3.6%, then keep it there.)

Click to enlarge.

Is this really true?  Here’s what the experts told me when I asked them:

I wanted to check my fundamental premise with a couple of experts before posting the charts, so I asked two of them last week.  Here was my question to each of them (separately):

“I have what I think is a simple question.  The debt-to-GDP ratio, if inflation is under control, is a reasonable benchmark for the ‘debt burden’ according to most economists.  (Inflating our way out of a debt burden is unacceptable, and therefore eliminated as a factor in the question below.)  The question: Isn't it true, then, that we can comfortably sustain permanent deficits—as long as GDP grows at least at the same rate as the debt?”

[Sidebar:  Ideology is not important to me in this analysis; however, it might be to you.  So, if you are a liberal, you should pay attention to the first expert below, and ignore the second one.  If you are a conservative, you should do the opposite.]

1.  Here was James K. Galbraith’s response (...some consider him a liberal; it's immaterial to me):

“Yes, it is a simple question, and yes, your insight is correct.”

2.  Here was N. G. Mankiw’s response (...some consider him a conservative; it's immaterial to me):

“I think the simple answer is yes.”

There you have it.  The conclusion is this:  In a growing economy, permanent deficits of a measured and managed amount, year in and year out, result in a fiscally responsible debt burden.  Our grandchildren will prosper if we can start executing this plan now. 

Please help me hold our elected leaders’ feet to the fire on this one; let them know we want them to be fiscally responsible, and—just as important—let them know specifically what we mean by "fiscal responsibility."

Obscene Debt Quiz

This little quiz is a warm-up for the subsequent article, Choose your weapon.  It’s a single-question quiz, so it won’t take long.  Here it is:

Feel free to download the image and send it to anyone you want.  (I’ve already thought of a few folks on Capitol Hill who might find it a bit of a brain teaser.  I have a few journalists in mind, too.)

Choose your weapon: How to debate the National Debt

Last February, I posted the chart on the right showing the full history of the USA’s debt burden (debt relative to the size of our economy, or 64 percent today)—and that chart has become a popular one; it’s all over the web now. 

Importantly, it should not be confused with the raw debt level (7.8 trillion dollars today, the chart on the left). 

Why has the chart on the right attracted so much attention?  Because it comes as a surprise to a lot of people.  Let’s face it, we’ve been carefully taught for generations that national-debt-doomsday is only a generation away.  (I waited a generation for debt-doomsday to arrive; it never did.  That was when I started thinking about economics a little harder.) 

A dichotomy
Based on my frequent visits to Google News to survey what people are saying about the USA’s National Debt, I can safely say that the whole crowd shakes out into two camps:

1.  Those who trumpet the raw dollar level of debt (or deficits) are usually trying to make a political statement, under the guise of “economics.”

2.  Those who are truly interested the economics of debt and growth tend to place debt into context by referring to the “debt-to-GDP ratio.”

Choose your weapon
Do you expect to engage in any debt discussions in the near future?  If so, what follows will help you prepare.

If your goal is to make a political point about the “obscene” level of debt, you should stick with raw dollars.  Go to Google images, search for “national debt history,” and support your argument by using the first image Google returns.  Also, when discussing the debt, keep hammering away at the raw dollar level of debt; use words like "obscene," "crushing," and "headed for bankruptcy" to leave a lasting impression. 

The following examples will help you build your talking points: 
•  Here’s how a liberal northern California politician uses the debt number to scare our kids. 
•  Here’s how a liberal, truth-loving blogger uses it to bash hated opponents. 
•  And here’s how a conservative author/talker uses it to sell books.

Warning: Be prepared to address the question “Do you really think Malawi, with a debt of ‘only’ $17 billion (228% of GDP), is in a safer debt position than the USA, with an ‘obscene’ debt of $7,800 billion (64% of GDP)?”

On the other hand, if you are truly interested in exploring the economics of debt and growth, focus on debt-to-GDP and inflation control (…it’s cheating when a nation inflates its way into a lower debt-to-GDP number).  Go to Google Images, search for “debt burden history,” and support your argument by using the first image Google returns.  When discussing the debt, keep hammering away at the debt-to-GDP ratio. 

Here are examples to help you build your talking points:
• Here’s how investors judge the implications of a nation’s debt.
• Here’s how Canada has explained “How big is the debt?”
• And here’s an American’s attempt to inject sanity into the debate.

Warning:  Be prepared to address the questions “How much of a debt burden is too much?” and “What is a safe level for debt-to-GDP?”  This graphic should help with that question.

Also, be prepared to discuss economic growth; it is a frequently-ignored but very important aspect of the debt-to-GDP ratio.  This article, and also this one, will help foster that discussion.

Who’s right, the market or the Fed?

When the market for federal debt instruments perceives no looming inflation problem, long term interest rates tend to move sideways or downwards.  When the Federal Reserve Board perceives rising inflation, it tends to increase its short term target interest rate. 

Quiz question of the quarter (Q2-2005): Who’s right, the market or the Fed?

Click to enlarge.

Brian Wesbury, one of my favorite economists, does see inflationary pressure these days; he and the Fed appear to agree on that point.  But the American, Chinese, and Japanese savers (among others)—i.e., those who choose to help us fund our deficit and roll over our existing debt each week by participating as buyers in the Treasury auction—are bidding long term interest rates down.  In other words, those market-makers aren’t seeing the same inflation problem that others are seeing.   Either that, or the safe-haven-attraction of the USA's debt instruments is more than offsetting whatever inflation worries they do have.   

This is a curious situation.  Alan Greenspan agrees:

In congressional testimony earlier this year, Fed Chairman Alan Greenspan described the unanticipated decline in long-term rates as "a conundrum." In a speech delivered Monday via satellite to the International Monetary Conference in Beijing, Mr. Greenspan observed that the development "is clearly without recent precedent."

I’m not in the business of forecasting interest rates (...I'm better at forecasting GDP), but I am strongly anti-inflation, so I’ll keep this chart updated each week.  I’ll post it whenever anything interesting seems to be developing.

-----------------------
UPDATE, June 9: Business Week has more on the Fed's "conundrum" . . .

Greenspan seems increasingly convinced low bond yields may be an enduring phenomenon, driven by a complex of international forces the Fed has yet to fully understand.

The Debt Clock

I’ve noticed that many politicians and journalists have not yet latched onto the concept of the “debt burden” used in the National Debt Thermometer each month.  They still seem to think the raw debt number—“7.8 trillion dollars”—is a sure-fire way to get voters’ and readers’ attention.  (Journalists who use the tactic, I’ve noticed, typically have a subliminal political point they are trying to make.) 

Consequently, for the benefit of those politicians and journalists, I’m adding a new feature: The Debt Clock, a continually-updated, odometer-like display of our raw debt level.  Here it is . . .

Tucker Carlson vs Bill O’Reilly: You decide.

[ *** UPDATE, 6/6/2005: Tucker Carlson is moving to MSNBC starting Monday, June 13, with a new show titled "The Situation."  My TiVo season pass mentioned below has now been changed to the new channel and new time.  Bonus: The new show will be daily.  *** ]

I have had a season pass to Tucker Carlson's weekly, half-hour PBS show "Unfiltered."  Looking forward to seeing it each weekend is was one of life’s little pleasures for me.  (Reason I have a “season pass”: That’s what TiVo calls it when you instruct it to automatically record every episode of a particular show.)   

Why do I enjoy Tucker Carlson’s show so much more than the others?  That’s what I asked myself last week.  After thinking about my impression of Tucker’s show compared to my impressions of the other talk shows, the answer became clear: Tucker chooses expert guests, concisely states his thoughts, asks simple, direct questions, and then—the big surprise . . .

. . . he actually listens to their answers—without interrupting!

Hard to believe, isn’t it?  Nevertheless, it’s true; I see it happen every weekend.  The graphic at the bottom of this article contains irrefutable evidence that Tucker is a good listener. 

Does he choose milquetoast guests who always share his views?  Definitely not.  Does he scoff when Zanny Minton Beddoes suggests alternative ways of thinking versus the conservative talking points?  No.  Does he grimace when Christopher Hitchens violates the rules of political correctness by speaking bluntly about Islamic fascism?  No.  What does Tucker do when a French intellectual, Bernard-Henri Levy, talks glowingly of his encounters with all Americans (possibly excepting his encounter with John Kerry) during his journey across our country?  He politely tests his guest’s unexpected assertions and conclusions, then welcomes them.  How does Tucker react when a leading geneticist, Dr. Francis Collins, who also happens to be a Christian, says that both sides of the “intelligent design” debate are making big mistakes?  He listens intently, lets him finish his points, then probes for more information or clarification. 

In short, I learn something every week from Tucker’s show, because he’s good at asking probing questions of his well-chosen guests, and then listening intently to their answers—in full, without interruption.  Tucker does give us his opinion in a brief, opening monologue; refreshingly, he does not interrupt his subsequent guests in mid-sentence to spew his own dogma—unlike some other talk show hosts I can think of.  Decorum is the ingredient Tucker provides, and it’s a scarce commodity these days. 

Testing the hypothesis using the "Talk-to-Listen Ratio"

Before I posted this article, I wanted to test my hypothesis that Tucker is a better listener than other talk show hosts.  I’m a skeptic; testing my hypotheses is my duty. 

Because I have less time than others seem to have for this blogging task (see my About page), I chose one other talk show host, chose two interviews each, and then started counting words.  MS Word made it easier with their word-count function, but it still took some time to compile the stats.  Anyway, it’s done.  Initial conclusion: my hypothesis survived the test.  (Feel free to count the words in as many other interviews as you'd like, to obtain a more statistically significant test of the same hypothesis; I'm all done counting.  Let me know what you discover.)

Below are links to the interviews I chose, followed by the results of the analysis. 

Interviews chosen:
•  Tucker Carlson interviewing Dr. Francis Collins
•  Tucker Carlson interviewing Bernard-Henri Levy
•  Bill O’Reilly interviewing Debra Saunders and Bob Kohn
•  Bill O’Reilly interviewing Jon Stewart

Click to enlarge.

Footnote:  Tucker Carlson's show is the only PBS program I have time to watch.  Therefore, based on my sample of thirty minutes per week, PBS is 100% objective, fair, polite, informative, educational, and entertaining.  I'll continue watching, and I won't be joining any debates about PBS being politically biased. [ UPDATE: Tucker is moving to MSNBC starting June 13, 2005.  So much for my 30-minute weekly sample of PBS talk shows. ]