The Skeptical Optimist

Movie review of I.O.U.S.A.: TIT for tat.

[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.

...and this:

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.

Two myths: Paying off family mortgages, and paying off the national debt

Families have to pay off their mortgages; why is the national debt any different? And besides, why compare debt (or deficits) to GDP instead of tax receipts?

I could hammer away at the answer to those and similar questions for as long as I decide it might do some good to keep hammering away at them. So far, I’ve racked up eleven years doing it. I’ve also made several new friends, which is good, and an enemy or two, which is immaterial for now.

I’ve noticed that the objections to debt and deficits tend to come mostly from supporters of the party that does not occupy the White House. In 1995, Gingrich and friends tried to shut the government down to embarrass Clinton over the debt issue. (In the process, they shot themselves in the foot; it was a well-deserved wound). A few years later, the White House changed hands, and now it’s the other ideological camp peddling the fear that exceeding the debt ceiling will doom our grandkids to debtors prison.

Shouldn’t recent history be a big clue that maybe, just maybe, national debt fear-peddling is driven more by politics than by economics?

Will a “debt burden” of 40% (publicly-held debt %GDP) bankrupt our grandkids? How about 80%, or 120%? Oops, wait a minute, 120% debt is what my grandparents’ generation bequeathed to their future grandkids in 1946. Well, I became one of those grandkids, and here we are sixty years later: not only has the debt failed to eat us alive, but we’ve run it back down to 40% of GDP—not because we reduced the debt, but because we grew the economy.

That doesn’t faze the ideologues, though. Count on them to surface and become obnoxiously vocal about deficits and the debt, just as soon as their party loses control of the White House. They remain perennially fond of showing us hockey-stick charts of debt rocketing skyward—keeping carefully hidden the hockey-stick charts showing our economy rocketing skyward at a similar pace. And of course, it’s all the president’s fault. Debt is always “inherited” from the previous party; surpluses are always “squandered” by the subsequent party. Polarization is what politics has been all about, and politics is what the deficit/debt debate has been all about. It won’t change any time soon.

Families pay off their mortgages, don’t they?
No, as a matter of fact, they don’t.  My family’s outstanding mortgage balance, starting back in 1925 when my grandfather borrowed money for his first house, has done nothing but grow, grow, grow. That’s eighty-three years of family mortgage debt that’s done nothing but grow. But guess what else grew: the family did, and so did the aggregate family income, and consequently, so did the family’s aggregate ability to carry mortgage debt. As one generation finished paying off their mortgages, the bankers kept rolling their loans over to the next generation of home buyers, who were more numerous and had larger incomes than the previous generation of borrowers.

Bottom line: No, the typical family has most definitely not been paying off its mortgages; it's a false analogy.  The typical family has been growing its aggregate income, assets, and mortgage debt.  But the false analogy makes plenty of political hay, doesn’t it?

Why debt-to-GDP, instead of some other comparison?
I agree; I think there’s a better indicator that’s more to the point. Unfortunately for me, economists worldwide, on all points of the ideological spectrum, are virtually unanimous that the ratios of debt- and deficit-to-GDP are the key, cross-country indicators of nations' debt loads. Several economists have confirmed it to me personally, and the European Union has used it in their treaties to help constrain member nations’ economic policies. Debt-to-GDP is here to stay.

Too bad. I think the portion of tax receipts it takes to pay the net interest (interest on publicly-held debt) is more to the point. It’s affected not only by the size of the debt and the size of the economy, but also by interest rates. In the last ten years it has dropped from 15% to its current level of 10%. I think it’s more to the point, but economists have been using debt/GDP as their preferred indicator.  That’s why I’ll keep using debt/GDP; the numerator is a reasonable proxy for interest payments, as the denominator is for tax receipts, so it works for economics discussions.

Unfortunately, most discussions about the deficit and debt are political, not economic.  Any ideologue who makes the mistake of talking about the federal debt as a ratio that does not scare the audience (40% of GDP)—instead of a big number that does ($9 trillion)—becomes at best a duck out of water, if not a laughingstock. She would deserve a big fat 'F' in Spin 101. That’s why debt/GDP and deficit/GDP won’t become part of the political vocabulary for a long time.

Count on the talking points of the White House wannabees sticking with debt ceilings and debt dollars for the indefinite future (…and it won’t matter which party is the wannabees). And count on the public at large properly ignoring such political theater every time it happens.

Too bad; a debt ceiling of, say, "80% GDP" could spark the substantive debate we’ve needed for a long time.

==============
End note:
This was lifted from the comments. Grodge asked some good questions, and I decided to answer them up here instead of down there.

Deficit and Debt Burden Watch, March 2008

No balanced budget in sight yet, but the deficit (1.5% GDP) is low enough to keep the debt ratio essentially in balance (debt ratio = debt/GDP). 

Nothing from any of the candidates about that, of course, because during an election year, dollars of debt accumulated by the "bad guys" is always the headliner.  Nothing about our ability to service debt, nothing about the size of the economy, nothing about debt incurred by the government being the same thing as credit extended by the lenders—just dollars of debt.  Single-entry accounting, in other words.  It's financial nonsense, but the scare factor nonetheless makes it a political goldmine. 

I suppose it's time for some election-conscious journalist to calculate which planet all those debt dollars would stretch to if they were laid end-to-end.  Probably Jupiter or so.  (Good thing our GDP would stretch way beyond that—to Saturn or so—isn't it?)

In any case, the burden of the debt is still one-third lower than it was in the mid-1990s (burden = percentage of tax receipts it takes to pay the interest).  Below are the charts; click to enlarge.

The two biggest myths in American conventional wisdom

Myth #2
Don't you wish all of the water we drink could be of the same pristine purity as the crystal clear, refreshing water of our Rocky Mountain streams and lakes?  Almost everybody does . . .

. . . and that included me, up until one summer twenty years ago when my family spent a week vacationing in Rocky Mountain National Park.  The beginning of that week was when I promptly changed my mind about the desirability of drinking crystal clear Rocky Mountain water.  Reason: First thing the ranger told us, in no uncertain terms, was, "Please, do NOT drink any water from the streams and lakes.  Imagine for a minute what the bears, beavers, and moose are doing in the water upstream from here." 

The national park folks have been kind enough to repeat that warning on their web page, under the heading "Hazards":

Giardiasis ["beaver fever"] is a debilitating intestinal disorder, caused by drinking contaminated water, that you will want to avoid. Do not assume that stream and lake waters are safe to drink.

The "pristine purity" of Rocky Mountain water is the second biggest myth in American conventional wisdom. 

Myth #1
The biggest myth of all, however, is in first place by a wide, wide margin.  It was repeated last night by the President of the United States, George W. Bush, in his 2008 State of the Union Address:

American families have to balance their budgets.  So should the government.

Bipartisan applause broke out.  Even Vice President Cheney—Mr. Deficits Don't Matter—was applauding along with Speaker Pelosi. 

It's a powerful idea, but it's a myth.  One to which both parties feign allegiance.

The false idea that federal deficits are bad (and surpluses are good) seems to be an immovable object.  I've been trying to chip away at that dangerous myth for three years here, but the dogma is so engrained, and so easy to exploit for applause at political events (either side's), I'm starting to wonder if anything can ever dislodge the falsehood.  Maybe not. 

The federal government will run out of excuses for not balancing its budget—as soon as General Electric and Wal-Mart stop using a mixture of growing debt and growing equity to fund their growth—and as soon as the Smith, Jones, and Rodriquez families (all generations, moving through time) stop accumulating growing debt for houses, car loans, and family businesses even as their total family incomes continue to grow.  When everybody else stops borrowing, the federal government will be out of "excuses."  [Don't hold your breath waiting for that day to arrive, however.] 

Never mind that I could support a budget goal of holding the debt/GDP ratio steady—which means the debt can grow up to the same rate the economy grows, without violating the goal.  Never mind that the goal of steady debt/GDP would itself become a big challenge soon, due to demographic shifts.  Never mind that it would be far more realistic and achievable than the sophomoric sophistry of insisting on a balanced dollar budget.  A growing economy is what we need, far more urgently than a balanced dollar budget.  It's not the money, it's what we get for the money, and it's the real wealth we create that backs up the money we print. 

But apparently, few voters want to understand it—and politicians would much rather demagogue it than explain it.  (Those who do understand it, such as Mr. Deficits-Don't-Matter Cheney, immediately get their heads bitten off by those who don't understand it, and by those who know how to play false dogma for political gain.  No wonder those who understand it tend to back off; it's just human nature.  When you get struck by lightning two or three times, you tend to get off the hill.) 

Myth #1 is still the all-time champion political falsehood—way, way ahead of "pristine" Rocky Mountain water.  Just ask President Bush.  Just ask any presidential candidate still in the running, on either side.  In fact, Myth #1 is a good bet to outlive the cockroach, which has been around for 350 million years. 

Why so much fuss over the national debt? (A generic letter to the editor)

[Note: Please don't miss the end note to this article.]

False alarms about the national debt still flood the editorial pages, blogs, and candidates' press releases.  For hundreds of examples just in the past week, follow this link to Google news. 

Yesterday, while wishing I had more time to submit responses, I thought, Why not recruit some help from this blog's readers?  So, if you agree with the underlying message at this blog (i.e., that a managed level of debt can be harmless, even desirable, in a growing economy), and you'd like to help inject some sanity into the debate this year, here's the deal: Copy the two generic letters to the editor (below) to a convenient place on your computer; then, whenever you spot someone whining about the debt while ignoring our growing ability to service the debt, submit a response by using either the short or the long version below, whichever you think is more appropriate. 

Letter to the editor, short version:

I read [name of whiner goes here]'s sob story about the size of our national debt, and wondered why there was, as usual, no mention of our nation's growing ability to service the debt.  Yes, our debt is $9 trillion and growing . . . but our economy is $14 trillion, and has been growing faster than the debt.  Result: Just as the burden of my car payment decreases whenever I get a raise, the burden of our national debt decreases whenever the economy grows faster than the debt.  Why don't we ever hear that side of the story from the fear mongers? 

How about less whining about the debt, and more ideas about how to enhance economic growth, which improves our ability to service the debt? 

Letter to the editor, longer version:

[Name of whiner goes here]'s sob story about our $9 trillion national debt leaves out some very important information: Our national economy is $14 trillion, and it has been growing faster than the debt.  Guess what: That means our ability to service the debt has been improving. 

Think the interest on the debt is a problem?  Well, in the mid-1990s, it took around 15% of federal tax receipts to pay the net interest on the debt; but now, it only takes 9%.  That's a 40% reduction in the debt "burden" in a dozen years.  Again, our ability to service the debt has been improving. 

Think it would be a problem for future generations if, instead of paying down the debt, we allowed it to keep growing at a rate of, say, 2% every year, year in and year out?  Well, if our economy and our federal tax receipts grew at a rate of, say, 3% every year, our debt "burden" would decrease, year in and year out.  Future generations would be better off than we are, in spite of the debt growth. 

So instead of stirring up fear about the negative side (the debt), why don't we start giving at least equal time to the positive side: a growing economy?  That's the best antidote to a growing debt level. 

I, for one, have heard enough whining about the debt and the interest payments.  Does anyone have any ideas about how to enhance economic growth?  If so, let's hear them.  Steve Forbes said it succinctly:

You can't cut your way to prosperity; you've got to grow the economy.

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Important end note: 

A happy, healthy, and prosperous new year to all of you.  Thanks for spending a little time here. 

FQ.07.50: Favorite Quote for This Week

We should tax the private sector sufficiently to free the resources that we find desirable for the government to command, but no more than that.  This is likely to entail a stable debt/GDP ratio in a growing economy.
—Robert Eisner, The Misunderstood Economy

Fun with Deficits

Whether you're left of center or right of center (...or you don't care to be measured relative to whatever "center" means), today's budget deficit of 1.2% GDP is a non-issue. 

That is, unless you're one of those on the left or right who likes to play political games with deficits.  A few politicians and concerned citizens disliked the idea of deficits so much they formed an organization, in the '80s I think, called The Concord Coalition.  (I wrote them a letter nine years ago, but haven't yet received an answer.  I'm starting to think someone lost it at the bottom of her inbox, or buried it in Concord's too-hard-to-do file.  Too bad; back then we still had three years left to shift our priorities before 9/11/01 arrived.) 

Recently, I've noticed left-leaners having some rhetorical fun with the deficit.  Their typical assertion:

"No wonder the administration touts the 'unified budget deficit'; it looks really small.  Why don't we ever hear about the deficit that really matters, the dreaded, bloated General Fund deficit?  It's a sinister plot to keep you uninformed about the tragic raid of the social insurance trust fund surpluses." 

Yes, and I'm sure Karl Rove was behind that plot, too. 

Well, now it's my turn to have some fun with deficits.  First, let's review what has happened in the last fiscal decade (i.e., ten years ending October 2007).  The federal government's receipts and outlays net out to the surpluses and deficits shown in the far right column below:

The bottom right corner, $1.1 trillion, is the ten-year increase in publicly-held debt -- which most economists (...those who refuse to let politics get in the way of economics, anyway) say is the most important of several measures of federal debt.  Here's an excerpt from a summary page at the US Treasury website:

Debt held by the public is the most meaningful of these concepts and measures the cumulative amount outstanding that the government has borrowed to finance deficits.

So, let's see what the deficits look like under three different accounting scenarios.  The first is the way the feds actually chose to account for the receipts (because it's the law).  Here's what the deficits look like; the orange star is the additional amount that was borrowed from the public. 

Now for the fun part.  Let's "shore up" the General Fund, just by assuming the law mandated accounting for the receipts a little differently.  (Note: same total receipts, same total outlays, nobody's social security check changes by even a penny.)  All we do in Scenario 2 is call all social insurance receipts by a different name: "General Fund supplemental taxes." 

Note that there's no change in the amount borrowed from the public (see orange star); we just changed which government pocket owes government-backed money to the other government pocket. 

Now let's assume the law mandated that all trust fund surpluses be classified as "General Fund supplemental receipts."  (Again, same total receipts, same total outlays, nobody's social security check changes by even a penny.  Again, we just changed how much one government pocket owes government-backed money to the other government pocket.  Again, no change in the amount borrowed from the public.)

Bottom line: Because the unified budget deficit is the change in publicly-held debt, that is the important deficit number to track.  It is currently 1.2% GDP; it's small.  When you hear anyone assert that the general fund deficit is a more important number, start suspecting a political agenda attempting to masquerade as economics. 

The never-mentioned way to keep the publicly-held debt to a comfortable percentage of GDP is to grow GDP at least as fast as the debt grows.   Because sufficient growth makes debt a non-issue, I wonder which candidates have some positive ideas about how to enhance the growth of the economy.  [A few Republicans do (...not all); but I'm having trouble remembering any specific growth proposals from any Democrats.  Maybe I haven't been listening enough; help me out if you know of some.]      

=========
End note:
If you know anyone who asserts that the above analysis is invalid because it "steals from the trust funds"—including your Senators or Congressman or Congresswoman, ask them how they'd answer the following brain teaser:

If you were in charge of financial management for the federal government's social insurance trust funds, and the trust funds ran a surplus, would you:
(a) hoard the US-government-backed cash; or
(b) exchange it for interest-earning US-government-backed bonds? 

If they picked (a), ask them why they'd choose not to earn interest on their multi-trillion dollar financial asset.  If they picked (b), congratulate them for choosing the method by which trust fund surpluses are already being managed. 

The debt ceiling: a long-term remedy

Treasury Secretary Henry Paulson has asked Congress for an increase in the federal debt ceiling as soon as possible, from $8.965 trillion to $9.82 trillion.  That proposal leaves room for improvement; I'll explain why below. 

First, here's part of what he said yesterday:

"The full faith and credit of the United States, to which we all remain committed, is a national asset and a cornerstone of the global financial system," Paulson said in his letter. "In light of current developments in financial markets, which would be exacerbated by uncertainty in the Treasuries market, I urge the Senate to pass the legislation reported by the Finance Committee to increase the debt limit as soon as possible." 

He's absolutely right about US creditworthiness being a national asset.  Unfortunately, it's impossible to place a value on that asset, so we can't know how much it helps to offset the government's widely-publicized "unfunded liabilities."  That's too bad, because creditworthiness (not quantifiable) is one of several intangible assets helping to keep interest rates down in spite of the (quantifiable) unfunded liabilities. 

A better idea
Anyway, I think the recommended change to the debt ceiling could be much better.  Instead of changing the debt ceiling from $8.965 trillion to $9.82 trillion, I recommend changing it from $8.965 trillion to 75% of GDP. 

Making the debt ceiling dependent on the size of our economy—which is a good proxy for our ability to sustain a given level of borrowing—would immediately yield at least two major benefits.  First, it would put a stop to the meaningless, time-wasting debates and grandstanding about dollar limits.  Second, it would force Congress to introduce a new element into the fiscal debate: how to enhance the growth of our economy. 

I can think of several experts whose testimony would help Congress understand how the government might be able to enhance the economy's growth, starting with Paul Romer.  Robust growth will be especially important in light of the unanimously-recognized upward pressure on government obligations, coming within the next decade or two.  It deserves more time in the national debate. 

New debt ceiling: 75% of GDP.  How about it? 

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I explained this rationale in more detail a while back, in an article titled "Fiscal Responsibility Defined at Last."
If I sound like a broken record, it's for a reason.

Easy National Debt Quiz for the Candidates: Part 1 of 2

Here's an easy question for the next presidential debates, if only we could get somebody to ask it.  It's the first of two simple questions about the national debt; it's a question about today's circumstance.  (The second simple question will be coming soon; it will be a question about how the national debt situation might change in the future, both near term and longer term.) 

The question is simple enough, and it's intended especially for politicians fond of pointing only to the big, scary debt number of $9 trillion, while mysteriously avoiding any mention of the big, encouraging GDP number of $14 trillion.  When they talk only about a single debt number ($9 trillion), out of context, it's single-entry accounting—but that became obsolete several centuries ago.  It's time we introduced our politicians to double-entry accounting, don't you think?    

I do.  That's the reason for this two part quiz.  After seeing what kind of response this one brings in, I'll post the part two question (...the one about the future). 

Why not just drop the AMT, and forget how to "pay for it"?

The Alternative Minimum Tax was designed decades ago to prevent a handful of rich people from getting away with zero taxes.  Congress unsurprisingly "forgot" to index it for inflation; as a result, millions of today's non-rich people are getting unfairly snagged by the AMT. 

The tax code's complexity, even back in the '70s, had created loopholes permitting those few rich people to get away with zero taxes.  The solution, as usual, was to make the tax code just a little more complex, instead of simplifying the tax code to eliminate the loopholes.  Politicians haven't changed much, in other words. 

The question everybody is asking today:

"When we eliminate the unfair AMT, how should we pay for it?" 

That's the question Charlie Rangel and Jim McCrery (both Congressmen on the Ways and Means Committee) kept getting on Larry Kudlow's show yesterday.  Think about it: If we dropped the AMT, how would you "pay for it"?

Sorry, that was a trick question.  The key question—the one nobody is asking—is this:

Who cares whether we "pay for it"?  Why not just drop the AMT, PERIOD?

Just for fun, ask your friends to ponder that one over the weekend. 

===========
End note:

I can almost guarantee what your friends' reflex answer will be: It will contain the word "deficit" or "debt" or both.  The obvious followup question should then be, "Why, what's wrong with having a deficit?"  Before accepting any answers to that question, send them to the following links:

• The Debt Doomsday myth
• "Fiscal responsibility" defined