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I'm sorry, this video is no longer available.

No you can see it if you click the "high quality" button.

Like all thing in moderation. Debt in moderation is OK but at some point debt has negative consequences.

So for instance the Republicans and Bush have added some $4 trillion to the debt during their tenure increasing the interest on the debt by as much as w might need to fund (in addition to what we already spend) a universal health care plan. Or at some point if the debt is better controlled you can actually cut taxes.

The economy boomed during Clintons debt reduction years and has faltered during the tax cut and spend years of Bush. So definitely I'll be thinking about this as it pertains to the presidential candidates.


I'm not an economist or economics student, but I think that there's a bit of a causation/correlation issue about attributing Clinton's strong economy to debt reduction. It makes more sense to me to attribute it to other factors, like the tech bubble.

Steve, I really enjoy your blog. I find it cheers me up amidst all the doom and gloom! ;-)

I am 41 years old. I've managed to grow my net worth to about $300k. I have no debt save $12,500 left on my mortgage.

But I still feel really worried about the future. I hear so many conflicting opinions about our true national debt... it's $9 trillion, no wait, $50 trillion... no wait, $100 trillion! The big numbers are supposedly because we can't pay for social security over the next 20-30 years and that's going to bankrupt America.

So I guess my question is, what are the odds here? Are that we going to make this work through growth or technological advancements in energy and health care? Or is it that we are running the planet dry and my generation and the next are in for a ton of pain?

I am also a skeptical optimist, but these days it's getting harder and harder to believe in a bright future.

RJ, SS is actually in pretty good shape. What will happen if there are no changes sometime near the end of the next decade bonds that are part of the trust fund will be re-written and offered to the public. They are already on the books as debt so the reality is they will change hands from that +40% now owed to the Govt and switch to the +20% currently owed to the public. No overall change in debt.

Here are some interesting facts few tell us about the Nat debt. We have carried debt continuously since the Civil War. Your grand parents, parents, you and me, your kids, and probably their kids will still be paying for the Civil War.

BTW, except for a few short periods we have carried national debt since the country was created. Worried about that debt still?

Following this reasoning, then why don't we just borrow MORE money, ie, sell more Treasury bonds?

Then we can put all that money, say, another $3 trillion in "our grandkids piggybank"? and then they'll be even richer.

Seriously, that is what the video is saying, right?

Again, no discussion of household debt and no discussion of what the borrowed capital is being used for (Iraqi occupation, etc.)

Grodge, isn't that exactly what we are doing when we buy a savings bond and give to our kids or with the trust funds?


When I buy a savings bond for my kid's college fund, you and the other taxpayers are borrowing money from me. That loan has to be serviced, so it would behoove you to only borrow money that would be put to good use. Return on investment. If you cannot add 5% of value to society with that borrowed capital, then maybe you shouldn't borrow it in the first place.

One problem with the video is that no mention is made of all the other debt outstanding such as credit card, auto loans, mortgages.

Steve says that the economic models just don't include such household debt, so we'll never consider it now because then we would be comparing apples and oranges. So be it, but many economists (eg, Pete Peterson, David Walker) feel this is ignored to our own detriment.

The video-maker commits a very basic $6 trillion mistake at the close, but I'll get to that in my next comment.

First, as to "paying down the debt", it is important to realize that the total debt that causes all the IOUSA-type concern consists of two different parts, with very different natures.

1) The debt owed to the public, payment on which is guaranteed by the Constitution. This is $5.5 trillion ($2.8t owed to Americans and $2.7t owed to foreigners). This never has to be paid down, nobody is proposing to pay it down, and nobody is worried about it bankrupting the US. In the past it has been a good deal larger than it is today. It's paid for defense, infrastructure, moon landings, and a lot of other stuff.

2) The unfunded promises of future entitlement benefits (Medicare, Social Security, Medicaid, federal & military pensions etc.) for which the government now is legally on the hook, and which thus is an "accrued debt". These total $47 trillion discounted to present value, and are growing at well over $2 trillion a year. (It includes the $4.1 trillion of intra-governmental debt.)

The thing is, this amount *must be paid off*. It is not carried debt like item #1, it is an amount the government has promised *to spend*. It cannot be "carried" like the debt held by the public because it is a spending promise.

And it is not "investment" in anything, like defense or infrastructure, that will help future growth from there. It is all plain old transfer-payment spending.

To *spend* all this money the gov't is going to have to raise taxes *a lot* (projected 50% income tax increase by 2030, or equivalent, rising up from there). Or alternatively, borrow to fund the payments and "carry" that borrowing. This would entail exchanging all the intra-governmental debt for $4.1 trillion of debt owed to the public, and issuing another $43 trillion of debt to the public. Assuming the gov't could borrow that much (which it can't) it would bring total cash interest owed on the debt, at 5%, to $2.65 trillion annually -- all to be paid by taxes. Income taxes would have to be 2.5x today's level just to cover the interest.

What has the IOUSAers alarmed is this really huge promised future spending, with no provisions made to pay for it.

The good news about it is that, unlike the debt held by the public, payment of these promises is not guaranteed by the Constitution. They are just spending programs, and the politicians can always cut them to reduce tax hikes.

Of course that way lays political warfare, with people who want to avoid getting killed by big tax hikes fighting people who don't want their long-promised retirement benefits being slashed big-time. That's not nearly as bad as *real* warfare, with the German army coming over the border, but still...

If the $47 trillion present value imbalance between the cost of and provision for future entitlements was addressed today, the future political war could be downgraded to a major skirmish. Instead, its scope is getting bigger by >$2 trillion a year. That's the warning of IOUSA and of "doom and gloom" credulous pessimists like me.

OK, the $6 trillion error in the video....

The narrator rounds numbers to say the US owes $3t to the US public, $3t to foreigners, total $6t. Then he supposes the govt collects $6t in tax to pay off the bonds.

Before the tax collection, he says the wealth distribution is:
[] US individuals, $6t cash + $3t bonds = $9t total.
[] Foreigners, $3t bonds.

After the swap of $6t tax cash for $6t of bonds, he says the wealth distribution is:
[] US individuals, $3t cash = total of only $3t.
[] Foreigners, $3t cash.

Thus he concludes our children and grandchildren "won't thank us" because they are inheriting $6t *less* from us, only $3t instead of $9t.

But that is flat wrong. He's forgotten what he noted right at the beginning of the video, that for every $1 of bond assets there is a $1 bond liability -- he's forgotten the liability distribution. Half the balance sheet. Including liabilities, we get this change....

Before the bond payoff...
[] US individuals, $6 trillion cash assets + $3 trillion bond assets - $6 trillion liability on bonds = $3 trillion total, net.

[] $ 3 trillion cash, + $0 bond assets/liability = $3 trillion net. Zero change. No $6t loss.

Moreover, while our grandkids' net wealth is unchanged, *dynamically* they are better off because they are now avoiding the "deadweight cost" of the taxes needed to service $6t -- with the taxes for $3t of it being paid to foreigners -- so their economic growth rate will be faster than if they had to pay all those taxes. In addition, what they don't pay to foreigners will be invested or spent in the US, further increasing their growth rate. "Thank you, Grandpa!"

I should make clear that my last comment was *not* suggesting in any way that we should actually pay off the debt to help our grandkids by cutting their taxes to increase their economic growth rate. It was merely trying to point out a logical error in the video.

The video maker made the totally unrealistic assumption that people somehow ("scared by the politicians") had accumulated $6 trillion in savings to give to the govt to pay off the debt.

Given that unrealistic hypothetical, giving that money to the gov't to pay down the debt would result in zero loss to our kids (decline of their bond assets = decline of their bond liabilities), reduce their taxes and increase their investment, and thus increase their growth.

But in the *real world* there is no such $6 trillion saved for the purpose. So for *us* to pay off the debt in time for our kids to inherit a debt-free, lower-tax nation, we'd have to pay much higher income taxes than we do.

The deadweight cost of taxes rises by the *square* of the increase in the tax rate. Thus a tax hike from a given level is much more costly than a tax cut from that level is beneficial ... and a big tax hike on us would cost the economy (and us!) much more than the resulting tax cut for our kids would help them.

So no, definitely do *not* raise taxes to pay off the debt. I am not that generous to my kids.

Jim: He also didn't mention the $6T *real* assets (tangible and intangible, but not financial) the bonds helped create. Nor did he mention the $6T real assets the stashed cash *could* have created, had it not been stashed away.

Steve and everybody,

Off balance sheet liabilities are somewhere between 60 and 70 trillion. It is unknown just how much of that OBS obligation will be brought onto the balance sheet. Example: The Federal government might have just taken on an additional 5 Trillion in debt from the FNMA / FHLMC bailout.

So the nonsense about the "national debt" being $9 Trillion is just that ... nonsense.

The "assets" that are supposed to have been a plus to the economy (taxes that didn't cover the expenditures which had been covered by borrowing) have already been consumed. The net effect on the economy is to add costs without benefit: a huge huge negative.

Example: I borrow $100 Billion to establish a new set of bureaucracies that do little beneficial but manage to usurp the private market or smaller state solutions to problems (like education). In my personal case, I have to spend large amounts of time and effort to educate my children because the public schools wont. That tax money spent - for me at least - is ** wasted ** however the debt remains for my children to pay (who didn't vote for it, Steve -- which is why I have a problem with a "social contract" which doesn't exist by any factual evidence but is supported by state run tax violence: you don't pay, they throw you in jail, although not a jot or tittle can be found that you agreed to it).

Hence the debt in large majority is negative. And to boot, we have a central bank that simply prints money into existence (everyone else has to work for it) which creates massive incentives to game the system. With debt-based money, any group of people will take excessive risk to make the gains, because to gains go to them, but the losses are socialized (bailout) to "save the system".

What we see now is the problems coming rapidly to a head -- and a perfect example how there isn't cause for optimism, but serious need for shutting down 75% of the Federal Government (perhaps more if the Constitution were followed) as they have no legal authority to do what they have been doing. And even more important, they have no ** moral ** authority either.

JIMB: The "federal debt" is precisely defined by the Treasury and the GAO. The additional liabilities you mention are an estimate of the present value of future, off-balance sheet liabilities. The former is accounting, the latter is forecasting. It is important to keep them separate.

Here's a GAO brochure circa 2003-4, signed by Comptroller David Walker, that is helpful regarding the accounting, and not quite as helpful regarding the forecasting:

The definition of federal debt is on pages 5-6. The doomsday chart of publicly-held debt to GDP is on page 40 (...and by the way, with today's ratio at 38.5%, it appears that doomsday is once again falling behind schedule -- same pattern it has been exhibiting for decades). The discussion of future liabilities is on page 65.

Don't try to find any assumptions about GDP growth rates behind those forecasts; they aren't even in the fine print. I had to dig for them elsewhere, and the few answers I did get turned out to be lower than we've actually been experiencing. (No wonder doomsday appears to be falling behind schedule.) Likewise, don't try to find any sensitivity analyses around GDP growth in the brochure. The forecasters seem determined to limit their message to how bad things could be fifty years from now. Although I am interested in that, I'm also interested in things they seem unwilling to tell us -- namely, how *good* things might be, and what growth rates, productivity rates, immigration rates, etc., it would take to make the difference. I'd like to see charts similar to the one on page 40, but with (for example) productivity growth as the independent variable; unfortunately, that's just wishful thinking on my part.

Anyway, I prefer to keep the accounting separate from the forecasting. The way things are *today* is far less debatable than the way things *will be* in the future.

"The 'federal debt' is precisely defined by the Treasury and the GAO."

Steve, if I understand that that's what you are talking about in your discussion of the debt (that $5.5t), then I agree 100% with everything you've said about it from back in sci.econ days until today.

It's not big, it is easy to carry, has paid for a lot of good, and the AAA+ risk-free securities it creates provide all kinds of "Hamiltonian" benefits as the foundation of the nation's financial system, if not the world's.

You're right on all counts there.

Actually "paying it off" would be such costly foolishness that thankfully there is no risk of it happening.

Can't agree with you about the future entitlement liabilities though, and don't understand why you seem to extend a similar attitude towards them, when they are so different in nature, many times larger, and provide *none* of the investment benefit of the debt held by the public.

"The additional liabilities you mention are an estimate of the present value of future, off-balance sheet liabilities. The former is accounting, the latter is forecasting. It is important to keep them separate."

Well, the latter is forecasting that is required in the accounting of every business in the private sector, as the present value of accrued pension liabilities has to be counted on the financials. That's why the value of the stock of two of the "big three" auto companies has fallen to squat and the third has gone private.

George Will today noted local governments that are being driven to declare bankruptcy after running up these costs while keeping them "off the books" in the past. The feds are going down the same course.

This liability is *hugely* larger than the debt held by the public and growing > $2t each year. (The debt held by the public reached $5.5t only after 220 years!) This is what growth won't be able to come close to keeping up with -- the "off the books" future becoming the present.

"Don't try to find any assumptions about GDP growth rates behind those forecasts; they aren't even in the fine print. I had to dig for them elsewhere, and the few answers I did get turned out to be lower than we've actually been experiencing"

Don't know about GAO or CBO, but the SS trustees in their "intermediate" scenario (which I think I linked to previously) project the average growth components of the last 40 years forward into the future. It's a straight projection of past average = future average.

This results in GDP growth rate dropping to 2.1% by 2025, because the growth rate of the working population drops from 1.6% annually to 0.4% annually, and that reduces GDP growth by 1.2% annually. There's no way to get around that working population drop, it is just counting heads.

GDP growth components for the last 40 years:
Working population, + 1.6%, x average hours worked, -0.3%, x productivity, +1.7%. = 3.1% annually.

SS Trustees' projection for the 2020s and later:
Working population, + 0.4%, x average hours worked, 0%, x productivity, +1.7%. = 2.1% annually.

The only way to boost GDP growth from there to the historical 3.1% -- without making people work more years and more hours (or boost immigration a ton) -- is to increase productivity gains to 2.7% annually, a 60% increase over the historic level. (The highest actual level sustained over any 10 of the last 40 years was 2.1%, way short of needed).

All suggestions as to that will be gratefully accepted, I'm sure.

"Example: The Federal government might have just taken on an additional 5 Trillion in debt from the FNMA / FHLMC bailout."

Uh, what? So you're saying that all $5 trillion of FNMA/FHLMC mortgages are worthless? Any way, I thought that the "bailout" wouldn't cost a dime as we'll have first claim on future earnings. Right?

Steve - You can't drive looking in the rear view mirror.

RJBullock - The Feds are probably putting at risk (with the Paulson Plan) 1.5 Trillion and perhaps 2 Trillion. If the Gov starts paying for greed and soaks the good guys, then what happens to the economy the next cycle, and the next?

Really the only way out of this is to cut off the source: the Federal Reserve. Let's divorce monetary policy from politics just like we divorce speech from politics. Free speech and market money ...

RJ - That's 1.5 - 2 Trillion for both the FNMA / FHLMC bailout and the "Paulson Plan" over the shorter run.

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