[The relevance of the mountains will become clear near the end of this article.]
Two nights ago, I sat through the new doomsday movie, I.O.U.S.A., starring David Walker, former Comptroller General of the USA, and Robert Bixby of the Concord Coalition, both deeply committed to their Fiscal Wake-Up Tour, now in progress. I.O.U.S.A. is a documentary about what’s wrong with the USA. This review is about what, in my judgment, is wrong with I.O.U.S.A.
In the theater, I was (a) one of nine people watching, but (b) the only one taking notes. Halfway through, I started thinking to myself. . .
...why on earth did I pick economics as a hobby; I must have a screw loose. I paid $8.50 for an 85-minute lesson on single-entry accounting—a “skill” that became obsolete five hundred years ago. Instead, for a mere two bucks extra, I could have sent Mr. Walker a copy of this book (...not that it would have done any good; sounds like he’s committed to his doomsday message).
What’s wrong with the USA, according to I.O.U.S.A.
The movie’s message, in a nutshell, is as follows:
The USA is financially doomed. We are borrowing money like drunken, gambling-addicted sailors, and we’re about to die with our markers out. Our fiscal deficits are ballooning the federal debt, our central bank is printing Monopoly money, our live-for-today citizens aren’t saving enough, and our trade deficit is handing our assets over to the Chinese. Okay, okay, it’s not really an acute problem now; it’s where we’re going that’s the real problem.
Oh, and those of us in the Fiscal Wake-Up Tour don’t have any specific proposals for fixing the problems we describe. Sure, we know in general that taxes are too low, we’re importing too much, we’re saving too little, and will soon be spending too much on Social Security and Medicare—we know all that in a broad, general sense—but we mainly just wanted you to know how hopeless the nation’s finances are, wanted you to see all those big numbers with lots of zeroes, and wanted you to understand that our politicians aren’t even close to doing anything about it. Just so you know.
Believe it or not, Robert Bixby at one point said that was not a doomsday message. Hmm.
What’s wrong with I.O.U.S.A.
Concord’s Robert Bixby said,
“There are two ways to balance the budget: cut spending or raise taxes.”
There are two things wrong with that statement, never addressed in the movie: (1) it is not necessary to balance the budget, ever, in a growing economy; it is only necessary to manage the size of the annual deficit; and (2) there are two ways to raise taxes, not just the painful way of raising tax rates.
The “secret” solution, not addressed in the movie, is growth—economic growth. Think about this: Would you switch to a new job that would pay you more, and enable you to be more productive in the field you love? If so, that’s “economic growth” at the individual level. Scale that up to fifty or a hundred million job holders over a period of time, and that’s huge “economic growth” for the nation. Growth requires continual formation of new, better jobs, plus a government that fosters (or at least doesn’t get in the way of) the process of new job creation.
Why was growth not mentioned in the movie? If the economy (GDP) grows at the same rate the debt grows, the ratio of debt/GDP stays constant. That means we can run deficits for as long as we can grow the economy. And by the way, David Walker apparently thinks the debt/GDP ratio is important; he had it charted at the beginning and end of the movie. Unfortunately, not only did he say nothing about how growth would affect his chart, he abandoned the ratio for the balance of the movie, in favor of big dollar numbers that had lots of trailing zeroes. To me, those weren’t scary, they were yawners.
To his credit, Walker did project the debt/GDP ratio several decades into the future: he says it will be 244% in 2040, double the 120% peak we experienced after WW2. I sure wish he had revealed the annual growth rate assumption behind that number, but he didn’t. I’m guessing his economic model assumed 3.0% annual growth, give or take a half-point—which I consider to be a low-ball assumption.
What I’d like to see is Walker’s result for 2040, on the outside chance that Ray Kurzweil’s prediction about growth comes true (which I consider to be a bit too optimistic, but what do I know); Kurzweil said this:
We won’t experience one hundred years of technological advance in the twenty-first century; we will witness on the order of twenty thousand years of progress [at today’s rate of progress], or about one thousand times greater than what was achieved in the twentieth century.
Before the middle of this [the 21st] century, the growth rates of our technology... will be so steep as to appear essentially vertical. From a strictly mathematical perspective, the growth rates will still be finite but so extreme that the changes they bring about will appear to rupture the fabric of human history.
What would Mr. Walker’s doomsday model say about 2040 if Kurzweil’s growth prediction is directionally correct? A well-known economist, Arnold Kling, had this to say:
If Kurzweil is correct, then the mountain of debt that we fear we are accumulating now will seem like a molehill by 2040. We will pay off this debt the way someone who wins a million-dollar lottery pays off a car loan.
Another well-know economist, Paul Romer, confirmed the importance of growth:
By itself, faster growth could resolve all of the budget difficulties associated with the aging of the Baby Boom generation, and still leave ample resources for dealing with any number of other pressing social problems.
A second way to “raise taxes”
Back to the second half of Bixby’s platitude about cutting spending or raising taxes: Guess what happens to the amount of taxes you pay if you get that new job with that big raise. Right: you pay more taxes—even if our politicians didn’t increase your tax rate. Economic growth means more take home pay for you, and more tax revenue for the federal government.
Growth sure solves a lot of problems, doesn’t it? Growth is very, very important to our future. Why was it completely ignored in the I.O.U.S.A. movie?
Servicing the debt
Next, here’s one thing that was not ignored by the movie, and it’s important. Former Treasury Secretary Paul O’Neil said it, and he is absolutely correct:
If you can’t service your debt, you’re finished.
So, how can we gauge an entity’s ability to service its debt? One popular indicator for businesses is a ratio called “Times Interest Earned” (T.I.E.), which indicates how many times a company’s earnings would have covered its interest obligations (debt service). The T.I.E. ratio can be too low, indicating that the debt burden may be too high, and it can also be too high, indicating that its lack of leverage may be causing missed opportunities.
Failing to meet these [interest] obligations could force a company into bankruptcy . . . [but a] high ratio can indicate that a company has an undesirable lack of debt or is paying down too much debt with earnings that could be used for other projects.
Is the USA becoming less able to service its debt? That's what one would think based on messages like the one I.O.U.S.A. is delivering, wouldn't one? Well, let’s try a ratio that’s roughly similar to T.I.E., and let’s (just for grins) call it “Times Interest Taxed”—that is, the number of times federal tax receipts would cover net interest obligations. I ran the numbers; back in the mid-1990s, the federal T.I.T. ratio was 6.5; that is, tax receipts covered net interest obligations 6.5 times. Most recently, the USA’s T.I.T. ratio (Aug’07-Jul’08) was 10.4; that’s a 60% increase in our ability to service our debt, in one decade. These days, the number is bigger. C'mon guys, isn't that supposed to be GOOD news?
I wonder if anything like this came up at the big, Bernanke-and-friends financial conference last week in Jackson Hole, nestled comfortably in the valley beneath the beautiful Grand Tetons?
Anyway, here’s my main problem with I.O.U.S.A.: Why didn’t growth, or our improving ability to service our debt, get any mention in the movie? (If I were cynical, I might think the movie is more televangelism for a new religion and its leaders than anything else; but I’m an optimist, so I’ll just chalk it up to an oversight by the writers.) This movie can’t really be in the running for an Academy Award . . . can it?
JFK’s amputated message
One last observation. I.O.U.S.A. quoted one sentence from John F. Kennedy as he gave his 1962 State of the Union Address:
[A] stronger nation and economy require more than a balanced Budget.
At that instant, the film editors cut him off. I wondered why. Then I went home and looked up JFK's next sentence:
They require progress in those programs that spur our growth and fortify our strength.
Right! Growth and national security are important, too! What we get for the money we spend is at least as important as the money! But mentioning growth and national security might dilute the financial doomsday message, might it not? I wonder if that’s why they cut him off? Hmm. For now, I’ll assume not, because I’m an optimist.