A misleading quiz in The Boston Globe

Yesterday (April 8), The Boston Globe printed a "quiz" about the interest on our federal debt being paid out to foreigners.  It's really scary—that is, unless you're familiar with the real numbers, and also with the tools of propaganda, in which case the authors of the quiz are inadvertently answering more questions about themselves than they're asking about interest on the debt. 

The article was titled "How America owes the world."  Here's The Globalist Quiz:

US federal debt reached $11.4 trillion in late 2006. Of that amount, $3.2 trillion — or 28 percent — is held by foreigners. How much does the US government have to spend each year just on interest payments to its foreign creditors?

A. More than 1 percent of US gross domestic product
B. More than $1 for every American, every day of the year
C. More than combined spending on child nutrition, food stamps, and foster care
D. All of the above

[I tried to find this in The Globalist, the supposed originator of the quiz, but could not.  Maybe you have to be a subscriber, which I won't be.]

To end the suspense, the article says the answers to A, B, C, and D are all "True." 

That's odd, because I think the answers are all "False."  Except C, which is a red herring. 

First, "US federal debt" as defined by the US Treasury didn't add up to $11.4 trillion at the end of 2006.  The actual total was $8.7 trillion, according to this US Treasury document. 

Why does the very first sentence of the so-called quiz overstate federal debt by $2.7 trillion?  Here's my guess: the author(s) wanted to lead with a "sizzler" of a number to knock everyone out of their seats, so they somehow dug up an extra $2.7 trillion worth of debt instruments that could plausibly be called "government" instruments, even though they are not backed by the "full faith and credit of the US government."  It would have helped if the quiz authors had cited their sources, but they didn't.  In any case, I have no trouble assuming that the US Treasury's numbers are the correct ones for "federal debt."

To answer the rest of the "quiz," all it takes is a few government web pages and a little math.  The main question is this: "How much does the US government have to spend each year just on interest payments to its foreign creditors?"  Fair question; the answer starts with Table 9 of the Monthly Treasury Statement, showing the net interest paid to all (not just foreign) owners of federal debt held by the public.  For the 12 months from Jan'06 to Dec'06, the interest was $221.7 billion.  Of the $8.7 trillion total debt, the public owned $4.9 trillion; foreigners owned $2.1 trillion, or 43%, of that, according to this document.  Bottom line: interest payments to foreigners would have been close to 43% of $221.7 billion in 2006, or $95 billion.

Question A: Was $95 billion "more than 1% of US GDP"? 
Answer: No, it wasn't.  GDP in 2006 was $13.5 trillion; interest to foreigners was 0.7% of GDP.  Therefore, it was not more than 1%, it was less than 1%. 

Question B: Was $95 billion more than $1 for every American every day of the year? 
Answer: No, it wasn't.  There were 299.4 million Americans in 2006; 299.4 million times 365 equals $109 billion.  Therefore, it was not more than $1 per American per day, it was less than $1. 

Question C: Was interest to foreigners more than spending on child nutrition, food stamps, and foster care? 
Answer: Sorry, that's a red herring.  Didn't the principal we borrowed help pay for those?  What's wrong with paying interest to the people who lent us the principal to help pay for those things? 

Question D: Are all of the above true?
Answer: No, they aren't.  Two are false, and one is a diversionary red herring.

By the way, one question conspicuously absent from the quiz was this one: Has it been getting easier to pay the interest on the debt over the last ten years? 
Answer: Yes, it has.  Interest on the debt took less than 10% of tax receipts in 2006; ten years ago, it took 16%.  That's a 38% reduction (6 points out of 16). 

I know why that question was absent from the quiz: it's good news, and good news was obviously not part of the quiz's design criteria. 

Conclusion
"Misleading" is the nicest way I could think of to describe the Boston Globe's quiz.

---------------------------
End note:
The late Robert Gula, author of the book I recommended last week, would probably have chosen a different description of the Boston Globe's misleading quiz.  It's on page 20 of his book, Nonsense, and it reads as follows:

Arrant distortion.  Sometimes the propagandist selects his information to present a one-sided view; sometimes he may even make up data to suit his own purposes; sometimes he simply lies.  Since we [his audience] do not have the true facts, there is no way we can challenge him.  Since we are helpless, the cards are stacked against us and for him; hence, this technique is sometimes known as card-stacking. 

[Thanks to reader Jason for pointing me to the Boston Globe quiz.]

Comments

[B]

So, why the surprise? I submit that most journalists (?) who write these
columns have little credibility on the subject. Gone are the days, if they ever existed, when one could rely on the local rag for accurate, unbiased, fact based reporting.

Note: O'Reilly is on a rampage against this stuff. Say what you want about him (and he is no subject matter expert on economics or finance) but the man has had it up to here on distortion and propaganda. Heh. He refers to most MSM papers as "brochures".

[marmico]

Is it not a question of semantics? Does US federal debt include both Treasury-issued debt and GSE-issued (e.g., Fannie Mae) debt.

A rough approximation is $2.7T in outstanding GSE-issued debt. If GSE debt is owned in the same ratio as Treasury debt by foreigners, then the Globalist quiz makes sense and is essentially correct.

[Steve]

"Federal debt" is backed by the full faith and credit of the US government, and is reported by the Treasury. That's where the line is drawn.

[Jason]

marmico,

GSE debt was my first thought also, but the reason I was upset and emailed Steve was that this "quiz" was in the news section when it was clearly an editorial. This is the news equivalent of push polling. If they want to make a case for lowering the US Federal debt, don't hide it in the news section as a quiz -- write an editorial. This quiz is apparently syndicated and appeared or will appear in several other papers.

It only adds to the frustration that there are no sources. How can you give them the benefit of the doubt when there's no way to double check their figures? They do mention "agency securities" in answer C, but they seem to be switching terms. The quiz begins with "US federal debt" not "US federal debt AND agency securities, etc."

[Pelkabo]

If the total debt is $8.7 trillion, and the annual interest is $221.7 million, then the interest rate on the debt is something like 2.55%. That seems a little low to me considering that a 20-year T-bill is paying 4.9%.

[marmico]

Well, Steve and/or Jason, you can draw lines wherever you want. :-) To my mind, it is a semantic line.

It seems likely as noted that Globalist (and by implication the Bank of America which apparently is the source for the foreign owned debt number) is using TIC data which includes GSE securities.

See Table 2:http://www.treas.gov/tic/shlptab2.html which indicates foreign ownership of $1T of agencies as of June 30, 2006; and

See FAQ:http://www.treas.gov/tic/faq2.html#q13

[marmico]

Pelkabo, the answer to your question is another semantic distinction.

The $3.9T of non-publically held debt (primarily the social security and other federally sponsored trust funds) actually earn "phantom" interest from the federal government. The total federal interest bill now exceeds $400B annualized not the $221B posited by Steve.

See:http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

It's all about semantics. ;-)

[Stephen Reed]

Pelkabo, to clarify marmico's point, Steve counted foreigners as holding 43% of the public debt, not overall officially reported debt. His numbers are thus correct, the $221.7 billion of interest is on the $4.9 trillion of publicly owned debt, for an interest rate of 4.52%.

Another thing that is interesting to consider, how much of that interest paid is taxed again as interest income? If it is in the 25% tax bracket, the U.S. government is actually only paying out 75% in net interest since it gets 25% of it back anyway.

[Mike in NH]

Having lived in New England all my life, I'm not surprised by what the Boston Globe published. They are in the same camp as The NY Times when it comes to politics.

[Patrick]

Ive got to say Im a little dissapointed in this post.

I understand the frustration with this type of "journalism". However, isnt the core issue whether these numbers (even if true) are so outrageous?

1% of GDP? that seems exceedingly small to me. to the blogmaster's favorite topic, it seems that a little bit of economic growth could swallow that easily.

$1 a day? gladly paid. again, am I supposed to think that is a lot?

[Peter]

The correct interest figure for FY 2006 is $464 billion. Look at Table 3 of the September 2006 MTS.

Rigorous fact-checking is the distinction between optimist and cheerleader.

[Steve]

Peter:
Net interest means net paid to debt holders other than the government itself, the number from table 9 in the MTS.

All:
The doomsday bias is what we are exposing here. Why no mention the offsetting effects of economic growth? Why imply $1/day/American, when it's only the taxpayers that will be covering the interest? Why no mention that the rich taxpayers will be covering almost all of the interest? Why no mention of what the principal we borrowed has already bought? Why no mention that we are in effect using "other people's money" to help fund our antiterrorist measures? Borrowing to fund security and growth has at least as many positive attributes as negative -- yet we never hear about any of the positives. It's misleading, and it's not going to go unchallenged any more.

[Peter]

Steve said:
Net interest means net paid to debt holders other than the government itself, the number from table 9 in the MTS.

If you are going to use net interest, then you better compare it to net debt, which is $4.122 trillion.
----------------
Steve said:
Why no mention that we are in effect using "other people's money" to help fund our antiterrorist measures?

Actually we are giving away $2 billion worth of our assets every day to "other people."

[Bob]

"It's misleading, and it's not going to go unchallenged any more"

Go get 'em, Steve. Maybe you could become the O'Reilly of honest financial reporting. :>)

[Steve]

Peter: "Net interest" (MTS Table 9) is paid to the owners of publicly-held debt. "Gross interest" (Table 3) includes interest paid to and received by intragovernmental accounts.

Net interest (Jan-Dec '06) was 221.7B; publicly-held debt as of Dec '06 was 4.9T. FWIW, the effective interest rate paid was ~4.5%.

[john]

If we talk about foreign debt. Why do we not look at the " Gross external debt" numbers? On dec 31 2006 it was $10,731,769,000,000 and was growing at 13% a year. We also use GDP all the time when we talk about the economy. So with external debt why not use the GED position

[Steve]

John:
Gross external debt includes much more than the "full faith and credit" debt of the government; i.e., it includes nonguaranteed debt. (Most GSE debt is nonguaranteed.)

[Peter]

You fellow boomers are kind of funny holding up the debt jewel and turning it this way and that. The most corrupt, self-indulgent generation in quite a while. I just hope we all die before this comes home to roost.

[Steve]

Peter:
It's all about growth; debt demagoguery just gets in the way. Borrowing money for good investments is sound financial practice. Growth-sustaining and growth-inducing investments are good investments -- ask any banker.

FWIW, I hope our grandchildren inherit an economy with *$90 (ninety) trillion* debt and *$150 trillion* GDP, in today's dollars. That will be an IMPROVEMENT in debt-to-GDP ratio vs today, but we'll never get there if the debt demagogues keep succeeding in taking everyone's eye off the growth topic. I can accurately predict their headline: "Steve advocates a tenfold increase in the debt; what an idiot!" Demagoguery is a powerful and formidable enemy, because it's easier to fall for it than to think a little harder.

[Peter]

Funny, we grew just fine for 150 years before we had to puff up to debt being over 300 percent of GDP as it is now. The entire post-war, pre-Reagan era was marked by a debt-to-GDP level of 150-180%. Sent a man to the moon under those conditions.

The problem with you debt apologists is you can’t distinguish between debt-to-GDP and debt-to-assets. You think we can continue giving away the farm by allowing how our assets can support the debt that anemic GDP-growth is screaming we can’t repay. Our children may enjoy some sort of economic comfort, but it won’t be as owners. That will be given to all those we’ve promised to by taking on this debt. You should be ashamed of yourself.

[Steve]

I'd be happy to switch to debt to assets as soon as someone starts placing an accurate asset value on government's successful fulfillment of its fundamental public-good duties, such as national security, justice, an educated population, and economic infrastructure. Let's put an accurate value for those on the balance sheet, after which we can start tracking federal debt-to-assets.

Until then, I'll stick with one of the best available proxies: debt-to-GDP.

[Peter]

Huh, what's the government got to do with any of this? Debt-to-GDP = total credit market debt $44 trillion vs. 2006 GDP $13 trillion.

This is where the rubber meets the road. The government is just tail-wagging.

[Jason]

Peter,

Do you have a plan of action other than "I just hope we all die before this comes home to roost." Talk about the antithesis of optimism.

By "we are giving away $2 billion worth of our assets every day to 'other people.'" I assume you mean the trade deficit and not charitable giving. I would urge you to read this post about "Dark Matter" http://www.optimist123.com/optimist/2006/08/trade_deficit_o.html.

[Peter]

Well Jason, you're making the same mistake averyone else is making. I care not one wit about the "government's deficit." We are selling off our collective assets - debt, corporate enterprises and property - to foreign stakeholders at $2 billion per day. Look around you. Who owns the shares of the car you drive? Who has invested in the REIT that owns the office building across the street? One answer: Not the American citizen working increasingly as an indentured in the cubicle next to you.

[Jason]

Sorry, the link I posted has a period at the end and doesn't work. Correct link: http://www.optimist123.com/optimist/2006/08/trade_deficit_o.html
Also, check out: http://www.cid.harvard.edu/cidpublications/darkmatter_051130.pdf

Peter, you have plenty of people who agree with you. I even remember reading an article by Warren Buffett that expressed similar concerns. However, these concerns are usually one-sided -- look at how big the debt is, look at the trade deficit, look at how much those foreigners own. That's half the balance sheet. These figures involve transactions of two parties, they aren't giveaways.

It's even possible to argue that international investors are getting a raw deal some of the time (i.e. $1T in paper yielding what, 4.5%?, buying Chrysler at $38 billion and selling it for $4.5 bllion?). I believe on the whole, it's a non-zero sum game where investors and citizens living both in the US and around the world benefit. US economy and most economies around the world are growing along with US household net worth. It isn't perfect and I do worry about the economy, but I don't go into a panic about the current US Federal debt or trade deficit. I also plan on living a long time and enjoying the economic growth.

[john]

Steve you say:
"Gross external debt includes much more than the "full faith and credit" debt of the government; i.e., it includes nonguaranteed debt. (Most GSE debt is nonguaranteed.)"

But why do you compare government debt to GDP and not government income. The GDP includes much more than the piece of the pie the government can generate income from. So GED to GDP ratio is to me a better ratio to understand how america owes the world. And government debt to government income ratio is to me also a better ratio to understand. And debt about 4 times income is not to bad at all.

[Steve]

john:
I think a purer indicator than debt-to-GDP is net interest as a percent of tax receipts (the inverse of "times interest earned"). I keep track of both, but talk mostly about the former because of its ubiquity, and because the numerators and denominators are reasonable proxies for each other. (Interest roughly tracks with debt, and tax receipts roughly track with GDP; not perfect correlation, but the debt/GDP ratio is much more widely used.) In either case, the growth question is forced into the conversation by the denominator.