Okay, so those aren't big surprises to anyone who has visited this blog in past seven years. But I expect they will surprise many readers at American.com, the online magazine of the American Enterprise Institute. Here's a link to my latest article there:
Why Growth Matters More than Debt
In the article, I used our familiar pie chart; I also thought of a more public-friendly name for the "debt burden"--specifically, I called it the "Interest Bite." [You may recall that I've tried its inverse, "Times Interest Taxed," at this blog before--but that most certainly does not compress down into a convenient acronym.]
USA's debt burden unchanged in ten years
Everybody knows that the level of the U.S. federal debt has been increasing rapidly. Less well-known is that the burden of the debt is the same today as it was ten years ago. Believe it or not.
Although that should be good news, there’s bad news, too: that situation cannot last if the economy continues growing at nothing more than an anemic pace. It only means we have some runway remaining in order to get the economy growing again.
Back to the main point, though. How could the burden of the debt be no higher than it was ten years ago? In short, it’s because the burden of the debt is not the same as the level of debt. The debt burden is the affordability of any given level of debt, not the debt level itself.
A good indicator of the debt “burden” is the portion of federal tax receipts it takes to pay the interest on the publicly-held debt. (The inverse of that is the number of times federal tax receipts cover the interest payments—closely mirroring a widely-used private sector measure for a company’s debt burden, dubbed “Times Interest Earned.”) The two graphs below show both ways of looking at the debt burden (...back to 1998, which is as far back as the Treasury’s website goes with historical data).
Of course, today’s near-zero interest rates are helping to keep the burden down. Those low rates are largely attributable to the dollar’s status as the world’s favorite currency in a pinch—but the longer it takes to get our economy back on track, the less we can expect to milk the dollar's favored status.
Paying the interest, rolling the principal
People with private-sector financial experience know that the “burden” of debt for a healthy, going concern such as a business or a multi-generation family is the affordability of the interest that must be paid to creditors. Why just the interest? Because a healthy going concern can roll the principal over and over, consistently retiring maturing obligations and replacing them with newly-issued debt instruments. That financial reality is also true of governments presiding over healthy economies. Some examples of going concerns that have been rolling their debt over for many years are ExxonMobil, the last three plus next three generations of a typical family, and the USA’s federal government.
A large number of Republicans, Democrats, and independents alike have experience managing private-sector businesses (although an even larger number do not). The ones who do have it can more-easily understand that the true “burden” of debt in a healthy, going concern is the affordability of the interest obligations; debt rollover makes paying down the principal a moot point. The cost of capital is almost always reduced when a mix of debt and equity is employed to finance a firm, and maintaining a constant mix in a growing firm requires an ever-increasing level of debt (...the opposite of “paying down” the debt). ExxonMobil and General Electric have been rolling their debt over for years. A typical multi-generation family rolls their outstanding debts for automobiles and houses into the future; as the older generation pays off its house and car loans, the younger ones take out new loans. The USA has a similar track record; meeting its interest payments with tax receipts and rolling its principal over in the world financial markets have not been problems, are not now problems, and—provided we get the economy back on track—will not become problems.
Those with business experience can more easily understand that the highest priority problem is to get the economy growing again—among other things, to maintain or improve our ability to afford the interest payments. But those without business experience (or those who forgot it) can be expected to continue barking up the wrong tree, insisting on “paying down the debt.” In any case, a healthy economy with robust growth is the root solution to just about every fiscal and monetary issue being debated today: unemployment, the debt ceiling, the deficit, the defense budget, the nondefense budget, unfunded liabilities, paying the interest, and rolling the debt over. If the economy were growing at a clip of 4.5% or more, none of those would be viewed as a major problem.
What a difference a healthy economy makes. Good thing we have some extra runway buying us time to get back to that condition.
Pie chart of who owns the national debt: mid-2011
My pie chart has been copied all over the web for several years, so I guess that means it's a hit. But the data got stale since the last time I published it, so it's time for an update.
Here's who owns the U.S. national debt as of mid-2011.
Data sources:
• Foreign holdings
• Treasury debt reports
National Debt Meter
I'm back, and it's the same old subject: the national debt (...more precisely, the federal debt).
Instead of the same boring debt clock we see everyplace else, I decided to display a debt meter, showing the debt as a percentage of the economy.
Notice where it is today compared with where it stood at the beginning of 2009; not good, to say the least. Also shown on the meter are the high- and low-water marks for the USA (1946 and 1835 respectively), as helpful benchmarks.
I presume we can all agree that the ratio has been growing much too fast. It grew from 45% in January 2009 to 64% today. That's not sustainable, and it begs the question, what should we do about it? Most of our politicians and pundits are talking about it, but almost all of them are trapped in a false dilemma: should we cut spending only, or should we cut spending and simultaneously increase some people's tax rates?
A false dilemma. It reminds me of something George Carlin said a while back: "Some people think the glass is half full, some think it's half empty. Not me; I think the glass is too big."
In reality, economic growth is the only way out. Robust growth rates of the Reagan-Clinton era are what we need, far more urgently than we need tax-rate hikes or generic cuts in infrastructure and national security "spending." (For a clue about where I'm coming from, check my 'about' page.) The best way to increase taxes is to leave tax rates where they are, and increase the number of people paying taxes (aka "job creation"). The best way to defend the country and to build the infrastructure our kids and grandkids will need is to grow tax revenues by fostering what Schumpeter dubbed "creative destruction."
Economic growth increases the denominator (GDP) over the long haul, which improves the debt/GDP ratio. Anemic growth as we have today is bad news; robust growth as we had in the '80s and '90s eliminates a lot of problems. Unfortunately, I hear almost nothing from either side's politicians about how any given generic "spending cut" or targeted "tax hike" will enhance private sector growth. I've become convinced that most of them don't understand growth -- just like they don't understand the arithmetic that explains why the ratio of debt to GDP improves when the denominator gets larger. And because they don't understand that, they have no hope of understanding the mathematical truth that the USA could continuously improve its debt-to-GDP ratio while running permanent deficits forever, as long as the economy grew faster than the debt. (Try that brain teaser out on one of the tea party politicians; I predict it will induce cognitive dissonance.)
In any case, I'll be posting here periodically again, and I suspect the national debt issue will be a central topic as it was before.
-------------------
End note: links to data sources for the National Debt Meter:
GDP - Bureau of Economic Analysis, Table 1.1.5
The USA's debt burden, according to the TIT Ratio
Because of the growing hysteria over the growing federal debt, I've decided it's time to introduce a new, objective measure for our debt burden — or, more accurately, for our federal government's ability to afford the federal debt. [Believe it or not, it's more affordable today than it was ten years ago.]
The publicly-held debt has been increasing rapidly because of recent actions by the Treasury and the Federal Reserve, and it will continue to increase rapidly until we get our economy moving again. The question is this: Can we afford all this debt, on top of the debt we already had on the books?
Well, that begs the question, How should we measure "debt affordability"—also known as "creditworthiness"? Few of the hysterical debt-phobes ever seem willing to answer that important question. Although ex-Comptroller General David Walker offered a ray of hope by touching briefly on the debt/GDP ratio in his doomsday movie, IOUSA (see my review here), my hopes were dashed when he devoted most of his film to the more sensational debt numbers ending in lots of zeroes. Too bad, but that's symptomatic of debt phobes — especially those who'd rather peddle fear, for personal or political gain, than solutions for aggregate economic gain.
Anyway, I think I've come up with a simple little number that could help steer the conversation away from hysteria, back towards objectivity: I call it the "TIT Ratio," which stands for "Times Interest Taxed." (I mentioned it at the end of my review of Walker's IOUSA movie.) It's simply the number of times our federal tax receipts covered the interest obligations on the publicly-held federal debt.
I like it a lot better than the debt/GDP ratio because it's more to the point. In debt/GDP, debt (a "stock") is just a crude proxy for interest payments because it ignores the interest rate, and GDP (a "flow") is just a proxy for tax receipts. In contrast, the TIT Ratio is a coverage ratio that directly measures interest payments and tax receipts (both "flows"), and it's more timely. It's similar in concept to "Times Interest Earned" used in private sector finance as one gauge of a firm's creditworthiness. Here's a chart of the USA's TIT Ratio since 1998. [I plan to take it back to at least 1980, if I can get the Treasury folks to point me to their older reports.]
Click to enlarge:
[source: Monthly Treasury Statement]
Notice that our current ability to afford the federal debt is better than it was at the end of 2000 — even though we've been adding debt at a fast pace recently. (Reasons: our economy has grown, and the interest rates have dropped.) The good news today: we have lots of room to borrow because there are plenty of investors willing to buy Treasury securities at low interest rates (near-zero rates, in fact). The bad news: nobody should interpret that to mean we have infinite borrowing capacity (as opposed to merely a comfortable cushion with no near-term limit in sight).
Federal debt: the principal, the interest, and the market
Keep in mind that (1) we'll never, ever have to pay back any of the principal on the debt if we just keep rolling it over (see this article); (2) the interest is the "debt service" we must never, ever, ever, ever default on; and (3) maintaining our status as the large, reliable, predictable borrower supporting the large, liquid, worldwide market for US Treasury securities should always be one of our top financial priorities. To maintain the bond-buying public's confidence that we'll always be able to afford to pay them their interest in stable-value dollars, and to roll the debt over into a large market full of willing buyers, the proceeds from the taxing power of the federal government must comfortably cover our interest obligations. Hence the TIT Ratio.
Growing the economy
Federal tax receipts grow when the economy grows, even when tax rates do not change at all. That's why "growing the economy" is so important for our future, and why getting it back on track is so much more important than worrying about short-term increases in the debt level. [Along those lines, I'm glad to hear Obama and his team now giving "growing the economy" a lot more emphasis than increasing anyone's tax rates; tax hikes for the rich now appears to have been merely tax talk for the votes—at least until 2010. I find that very encouraging.]
So far, the USA's declining TIT Ratio is saying that the debt we've added, in spite of the ratio's downward slope, is more easily affordable today than our debt level was a decade ago. [That's worth repeating: "The debt level is more affordable today than a decade ago." Try to think of anywhere else you've heard that besides this blog.] We should expect the decline to continue for months, but we should patiently understand that it's necessary to get the economy back on the growth track, and that it's therefore not yet cause for alarm, let alone doomsday talk.
In short, it's a level-headed, objective measure. For me, that's a nice respite from the caterwauling of the hysteria peddlers.
[I'll begin publishing the TIT chart once a month, soon after the Monthly Treasury Statement is available. Also, it's safe to assume that, for now, a bigger TIT is a better TIT, but don't forget that too much of a good thing is bad, not good. If the TIT ratio approached infinity, as it would if we eliminated the debt, we would be grossly underleveraged, and would be stifling economic growth.]
---------------------------
Last and possibly least...
Two years ago, I posted the graphic below in an article I wrote responding to the fear peddlers' road show. [You'll get the joke if you saw the movie Bill and Ted's Bogus Journey; if you missed it, that's too bad, because it was one of Keanu Reeves' finest performances.]
Anyway, David Walker and the Concord folks never gave me any feedback on it, so I guess they didn't think it was funny.
Here's the Bill & Ted graphic, just for fun.
Debt Clock craziness
I get a nontrivial amount of traffic these days from debt-clock watchers, so it's time for a reminder regarding how it's maintained here. Because of our current once-per-century upheaval in the financial sector, there's a half-trillion dollar difference in the debt numbers reported in two different places at the US Treasury's website.
Here's the comparison, both from the US Treasury website as of the morning of Nov. 11, 2008:
This page estimates the day-by-day debt balances; the balance for 10/30/08, the latest day available, was estimated to be as follows ("mm" = million$):
10530.9 mm Total
6257.6 mm Publicly held
6257.6 mm Publicly held
This page, on the other hand, is the source for the Treasury's official monthly report; the September report reads as follows:
10024.7 mm Total
5808.7 mm Publicly held
5808.7 mm Publicly held
I calibrate the clock (at right) once per month, using the official report. I also estimate the daily growth of both debt and GDP based on recent trends from monthly reports. Because those numbers and trends become ancient history very quickly in today's environment, we can expect some crazy-looking numbers as the government sells huge quantities of Treasury securities, then subsequently buys many (or all) of them back as the TARP program plays itself out.
My assessment of our federal debt situation
GDP is shrinking, debt is growing; consequently, the ratio of debt/GDP is growing more rapidly than we've seen in a while. Am I worried that we now have "too much" federal debt? No, not yet. Reason: the debt level per se will not hurt us; what would hurt is a significant increase in interest rates on Treasury securities, a jump in inflation, and a tanking dollar relative to other key currencies. But in the last several weeks, interest rates have dropped, we've had deflation instead of inflation, and the dollar has jumped in value. In short, the buyers of T-bonds and US dollars have been expressing confidence in the future of those instruments relative to their other choices, and therefore confidence in our creditworthiness. We have plenty of "borrowing capacity" as long as those conditions hold.
That's the good news. The concern is that we will soon be taking huge bites out of that "borrowing capacity" if next year's fiscal deficit comes to a trillion dollars, and if the TARP program ends up leaving an unexpected amount of new debt on the books instead of nearly breaking even. Will those bites cause high interest rates, high inflation, or a falling dollar? Time will tell.
The only certainty is that a strong, growing economy in the long run is the only way out. It is folly to place a higher priority on "reducing the debt" or "reducing spending" than on growing the economy. The raw dollar level of debt is infinitely less important than an economy sizable enough to sustain any given level of debt. (Would you feel comfortable with $100 trillion federal debt in a $200 trillion economy? I would.)
Once again: growth is the key. I've been saying that for four years here. But these days, it should be obvious that to get back onto the growth track, we'll need to stop the bleeding first (i.e., the shrinking GDP). While we're doing that, it's nice to know that we apparently have a substantial amount of "borrowing capacity" to fall back on, isn't it?
Glenn Beck falls for the fiscal doomsday message...
...without challenging much of anything. [Link to Beck's videos]
That's really too bad. The peddlers of the fiscal doomsday message have found a lapdog. Beck's interviews reminded me of the way Olberman interviewed Obama, or the way Hannity interviewed Palin. Hard-nosed journalism is supposed to ferret out the truth, but what I'm seeing these days looks more like slow-pitch softball.
Is it possible that Glenn Beck simply does not know the questions he should be asking? If ignorance is the problem, that's good news to me — because ignorance is fixable.
I've written many times here about what's missing from the debate: GDP growth. Without enough of it, doomsday is our destiny; with enough, easy street is possible; somewhere in between is probably more likely. But all we ever hear about is doomsday — and Glenn Beck has bought it, hook, line, and sinker, no questions asked.
So, instead of another lengthy explanation of why doomsday might not be inevitable, I'll simply attempt to spoon feed five yes-no questions for the Glenn Becks in the media to pass along to the doomsday crowd. In my mind's eye, I'm picturing the (highly unlikely) scenario of Glenn Beck asking ex-Comptroller General David Walker to answer each of the following five questions with a simple yes or no, followed by any elaboration he deemed necessary:
Question 1
Mr. Walker, you talk repeatedly of the $53 trillion shortfall in assets versus liabilities on America's balance sheet. But with regard to our nation's assets, is the following statement still accurate? It's by former Treasury Secretary Robert Rubin, excerpted from page 8 of the 1998 Financial Report of the US Government, signed by both you and Secretary Rubin:
The assets presented on the Balance Sheet are not a comprehensive list of Federal resources. For example, the U.S. Government's most important financial resource, its ability to tax and regulate commerce, cannot be quantified and is not reflected. [And that's not the only asset left out...]
—Secretary Robert Rubin, 1998 FRUSG
Question 2
On page 8 of that same report, Secretary Rubin also said this:
The expanding economy [i.e., growing GDP] over the course of the year brought a surge in tax revenue in 1998...
Mr. Walker, do you agree that, as in 1998, a faster-expanding economy would cause future tax receipts to rise faster, even if tax rates remain unchanged?
Question 3
Mr. Walker, you've said we won't "grow our way out of the problem." But given the overwhelming effect that GDP growth has had on tax receipts in the past, do you honestly think economic growth deserves only a terse dismissal — instead of a more detailed explanation?
Question 4
Mr. Walker, below is an important chart from page 16 of the 2003 Financial Report of the US Government, signed by you. The chart is important because GDP growth rates drive tax receipts, as Secretary Rubin explained above.
Would you please furnish us with an update of this same chart, extended out 75 years into the future? That would allow us to compare the GDP growth we have experienced in the recent past with growth assumptions you are using in your widely publicized forecasts for the long term future.
Question 5
Mr. Walker, you projected that we will eventually run our debt/GDP ratio far beyond our post WW2 high of 100+ percent. Would you agree that keeping the ratio of debt to GDP at approximately today's level (64%) would require an economy that grows at the same rate as the debt, but would not require a balanced budget — and would you therefore be willing to define the much ballyhooed term "fiscal responsibility" as "the condition achieved when the debt grows no faster than the economy"?
Try to picture Glenn Beck asking those questions. I know, it's bizarre; but I keep trying to picture it anyway.
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