The Skeptical Optimist

Pie Chart of Who Owns the Debt, and Bar Chart of Who’s Been Buying It

[ THIS PAGE IS OBSOLETE; click here to see the latest pie chart. ]

A lot of web traffic has been coming this way to see the pie chart I did last year (showing who owns our national debt), and I realized it’s time I updated it, because the US Treasury now has newer estimates of who owns our debt and how much they’ve been buying. 

The updated “Pie Chart of Who Owns the National Debt” (below) is a slightly different mix, but still looks much the same as before.  In other words, the holdings of the Chinese mainlanders still don’t look scary to me. 

Here’s the Pie Chart; click to enlarge.

But that pie chart isn’t enough any more.  Several months ago, debt phobes began asserting that “Asians” have been propping us up by buying more than half our debt.  (Notice the slight difference in the message?  “They might not own half yet, but they’ve recently been buying up more than half of the new treasury instruments.”)  So, I checked the facts on that, too.  The results, once again, were no surprise. 

Here’s the Bar Chart; click to enlarge.

If we’re supposed to be scared of the foreigners who are buying up our debt, I guess we’d better stop looking across the Pacific for the culprits, and start keeping an eye on the Brits—because in the six months through March ’06, they increased their holdings almost six times as much as the Chinese did ($84B vs $15B).  Not only that, but the Canadians were right behind the Chinese ($12B vs $15B). 

In that environment, it’s tough to figure out who we’re supposed to be scared of, isn’t it?  I gave up a long time ago; I’m just grateful they’re helping (indirectly) to fund our economy’s growth, and helping (indirectly) to keep our tax rates lower than they’d otherwise have to be to keep our debt burden (debt-to-GDP ratio) from growing.  (Thank you, foreigners!  Maybe you should consider immigrating...)

In any case, the two biggest groups of T-bond buyers swamped everybody else (see the two longest bars at the top of the chart).  Those two groups are made up of you, me, our families, our friends, and our neighbors. 

That gives me an idea: Let’s keep our economy growing, and let’s keep buying those T-bonds for our children and grandchildren, how about it?

FQ.06.21: Favorite Quote for This Week

Unlike most forms of geometric expansion, there is no reason to believe that the expansion of knowledge has any inherent limits. 
—Nathan Rosenberg

May 2006: USA GDP growth revised upwards

The US economy’s growth rate has been revised upwards.  Yesterday morning, the Bureau of Economic Analysis released its latest estimates for real and nominal GDP growth, shown below. 

[UPDATE: Click here for a brief, explicit summary of the math.]

Here’s an oddity, good for a chuckle:  The Associated Press speculated that the stock market jumped up yesterday (DJIA +94, 5/25/06) because of a triple negative: GDP growth is lower than “expectations,” which lowers inflation “expectations,” which lowers the “expectation” of future Fed rate hikes.  All of that supposedly yields a positive outlook for stocks.  In short, slower-than-expected real GDP growth is supposed to be good news.   

I don’t happen to agree with that, because I’m not ready to subscribe to the notion that real growth is inflationary.  (Think about that. "Real growth" means "growth excluding inflation."  I'm having trouble giving a lot of weight to the assertion that "growth-excluding-inflation causes inflation."  Sounds like outdated Phillips curve thinking to me.)  Besides, nobody asked me what my "expectation" was, so they didn't have a very good sample of "expectations"—in my opinion.

But I’ll set that quibble aside for now; I’m just happy that the BEA now thinks the economy is growing faster than they thought it was growing a month ago.  And I’m happy that the stock market bulls, today, seemed to approve of the growth situation more than the bears disapprove. 

By the way, I recalibrated the debt clock using the new GDP numbers. Faster GDP growth slows down or reverses the tick rate on the debt-to-GDP ratio—which is still increasing, but at a rate that’s only noticeable about a mile to the right of the decimal point, and there aren't many monitors that give me enough room to display all those decimal places.  Word to the wise: don't go on a hunger strike waiting for the ratio to tick up a tenth.

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ps- I was trying to post this article all day (Thu), but high traffic volume from reddit.com was blocking my upload attempts.  Everybody was coming to see the pie chart of who owns the national debt.  I sure wish I was getting a nickel for every hit... but then, I guess this wouldn't be a hobby any more, would it?

Look Mom, Cheap Gasoline!

As I was browsing the Energy Information Administration’s website, I encountered an interesting chart.  It shows that gasoline is cheaper for us today than it was for our parents, one short generation ago. 

Sure, we’re paying more for it than we were ten years ago.  But we’re not paying as much as our parents were paying twenty five years ago.  They paid a lot more per gallon, in constant dollars.  In other words, it took them a lot higher fraction of a week’s paycheck to buy twenty gallons of gasoline than it takes us today.

If I remember correctly, there was a bit of hysteria about it back then, too.  Come to think of it, wasn't the earth supposed to run out of extractable oil about ten years ago or so? 

In any case, here’s the chart from the Department of Energy (with a few cosmetic modifications by me, for clarity; click to enlarge.) 

Size matters, but so does "government spending"

Smaller is better—with one important qualification I address in the bottom half of this post. 

Tech Central Station has a good article today, comparing the economic and environmental results achieved by two categories of developed countries: those with “leaner governments” versus those with “larger governments.”  The data show that governments with lower taxation rates and lower spending are showing better results. 

Not only do the leaner governments show higher total (public + private) healthcare spending and education spending, but they also show higher savings, higher investment, lower inflation, higher wage growth, and lower carbon dioxide emissions per unit of output.  Here’s an excerpt from the TCS article Less Is More:

When it comes to government spending, less is more.  Less government spending and involvement in the economy—both in terms of regulatory interference and taxation burden—are associated with higher rates of economic growth, better productivity and more diverse markets for products. This is supported by country-specific evidence and several long-running international indices ranking economic environments...

Overall, the study concludes that "It may be surprising, even counter-intuitive, to find that countries with leaner governments spend more on health and education than those with larger governments (and have been growing that expenditure at a faster rate), that they have a better standard of living, better employment records and similar spending on income support...

The lesson is a simple one. If the real objective of European governments is to improve social and personal well-being, they should lower taxes, cut state spending and let the private sector do its job. 

It’s more evidence supporting the hypothesis that countries with lower taxation rates and lower government spending rates do better than the larger-government models. 

Important qualification regarding “government spending”

To be clear, I do have one not-so-minor nitpick with the way the term “government spending” is typically used in the conservative press.  Its implied meaning is that a dollar spent by government is a dollar set ablaze. 

That’s not good; it's too broad.  It’s ambiguous, it is equivocation, and in my judgment it may well have been a root cause of our major catastrophe five years ago (Sept. 11, 2001).

Adam Smith told us that a government has at least two fundamental duties that cannot be left to the private sector: providing the nation with defense and justice.  (He also mentions two more that, in some cases, fit the same criteria: infrastructure and education.) 

Let’s consider the first duty of government: defense.  Effective national defense requires—no surprise—“government spending.”  But in the 1990s, after the Republican-controlled congress kept repeating the mantra calling for reduced “government spending,” the Clinton administration gave them what they’d been asking for, and submitted budgets that delivered—you guessed it—significantly reduced national security spending.  Here’s a chart I published a long time ago; it’s worth another look, to illustrate my point.  (Click to enlarge.)

I’ll be the first to admit that I cannot prove the negative; i.e., I cannot prove what would have happened had Congress and the President kept defense spending at an even-keel 4½% GDP in the 1990s, instead of reducing it to a fifty-year low of 2.9%.  I can only speculate, as follows...

One possibility: It would have been wasted money, spent on the age-old mistake of preparing for the “last war”; not much different from burning the money. 

An alternate possibility: It would have been spent on new defenses against new, asymmetric threats, including better intelligence, diplomacy, and preventive military force capabilities—i.e., spent on measures sufficient to thwart the 911 attacks, thereby preventing or mitigating subsequent costly wars. 

Two possible outcomes, neither provable—but food for thought as we hear new, oversimplified political cries to “reduce government spending.”  For me, it's déjà vu all over again.  I keep envisioning what today’s fiscal situation might be, had we refused to sacrifice national security on the false altar of surplus worship in the 1990s. 

Try this brain teaser: Which would have been better, starting in the mid 1990s:

(a) Three or four politically popular small-surplus years, followed by six huge-deficit years caused largely by war; or

(b) Ten consecutive years of war prevention through superior intelligence, diplomacy, and appropriate military strength, funded by even-keel annual deficits of a hundred billion or so? 

It’s a retrospective daydream I engage in every now and then.  In any case, the conservatives' matra should change.  The appropriate slogan should be to "reduce nonproductive government spending."   That would exempt productive national security spending from the budget ax.  Adding the new word would spark a healthy national debate: Are Adam Smith's priorities for government spending still appropriate for today, or are they obsolete?   

I think Smith's advice is still good advice, because I think national security is a good investment.  And I know for a fact that borrowing money to help fund good investments is sound financial practice.  Deficits, invested in the right things, can pay for themselves—in spite of all politial rhetoric to the contrary.

FQ.06.20: Favorite Quote for This Week

The perpetual error of demand economics is the vision of human beings essentially as mouths, not minds - as "consumers" of goods and services, but not producers of them, as users of jobs but not as creators of new work. 
—George Gilder

Tax cuts cutting the number of taxpayers

I spotted the chart below at the Tax Foundation website.  It’s compiled from IRS data, and shows the percentage of tax filers who paid zero or negative income tax, going back to 1950.  (I added the parts in red, to give it a few reference points.)

Recently, the portion of filers who need pay no income tax has grown to almost one-third of the total.  That means those who recently joined those ranks in effect got a 100% (or more) tax cut. 

That, I believe, is about as big as a tax cut can get for any given taxpayer.

Rep. Tancredo’s immigration stance: A sad, costly irony

Isn’t it ironic that Tom Tancredo’s “solution” to the problem of foreigners-in-our-midst will unwittingly become a major factor in the gradual turnover of world economic dominance to mainland China, at the expense of the United States of America?  How ironic, how sad, and how costly—for America, anyway.

If you have already read my earlier article (below this one), you know what I think about the mistake the U.S. House of Representatives is about to make.  To put it mildly, I do not hold it in high regard.

Colorado’s Rep. Tom Tancredo, a Republican, is largely responsible for the xenophobe-fever that has paralyzed the House.  He obviously cannot stand “illegal” immigrants—those who “broke the law” to get in, and his published policy statements highlight why we should be so afraid of those scary, dangerous people.  According to Tom Tancredo, not only do some illegal immigrants sneak in to commit terrorist acts, many other illegals come in to:

• Steal our identity, murder us, and rape us;
• Erode the purity of our culture;
• Destroy our environment;
• Spread deadly diseases;
• Steal our kids' jobs.

Strange thing: I found no mention by Tancredo of the positive things other immigrants have done, such as build our nation into the superpower it is today . 

And I found no consideration of the other possible reason for the large numbers of “illegals” in our country today: could it be that the current situation is less because of the persons who "broke the law," and more because of a bad, counterproductive law to begin with?  Is it possible that we should be thankful that good, productive people have found a way around our current, growth-stifling law and policy?   

Has xenophobia-fever gone too far by now, such that it’s too late to even ask those questions?  I certainly hope not.  In any case, it certainly is hard to be a Republican when knuckleheaded thinking like that is prevailing.  Neolibertarianism is looking better and better...

PLEASE: Click this link and tell all three of your representatives what you think about the immigration question. 

Immigration policy: Solving half the problem is no solution

I am strongly in favor of "controlling our borders"—but that requires solving two problems, not just one.  Below are the two problems we need to solve to gain proper control of our borders and avoid a sizeable economic problem down the road.

Problem 1 of 2: 
Today, too many immigrants are here illegally.  Half arrived legally, then overstayed their visas; the other half came in illegally.  It’s not that the vast majority are not contributing to our economy, or desirous of becoming good, productive citizens; it’s mainly that it only takes a few bad eggs to do a lot of damage, and we don’t know who they are when they come in illegally.

Problem 2 of 2: 
Today, too many would-be immigrants are kept out by an inept, incompetent process for “legal” immigration.  Scientists, engineers, entrepreneurs, doctors, inventors, artists, and productive would-be contributors to our economy and society are loath to break our laws, and loath to put up with our incompetent immigration process.  So they stay away voluntarily.  If we’d fix the ineptness of the current “legal” immigration process, we’d unbottleneck the system.  Added bonus: we’d know who they all are, because they’d all have come through legally.

Unfortunately, the US House of Representatives is on its way to solving problem 1, but not problem 2.  In other words, the US House of Representatives is about to shoot our country’s foot off with a shotgun. 

The image at the top of this article is what I think would be an appropriate logo for the one-sided policy, if it passes the House.  Do you think Bill O'Reilly might be willing to pose for it?  He'll deserve a lot of the "credit" for it.  Or how about Rep. Tom Tancredo, who will probably deserve even more "credit" than O'Reilly if it passes?

Growth-minded Republicans should know better than this, and ought to be ashamed of themselves.

Here's the economic problem we face:
The baby boomers start retiring en masse in just a few short years.  Who will replace them in the workforce?  Not immigrants, if the House has its way.  Not our school systems, either.  The consequence: keeping our economy growing will be far more difficult, and that greatly increases the chances of a lengthy recession, or even a deflationary depression, as a result of the boomers exiting the workforce.  [And anyone who thinks productivity per worker will grow fast enough to compensate sufficiently for the workforce hit is a bit more optimistic than I am.  I'm not ruling it out, but I'm not ruling it in, either.] 

In the May 8 issue of InformationWeek, Editor-in-chief Rob Preston gave us a warning in his article titled Job No. 1 For The U.S.: Build A Tech Workforce:

...the biggest obstacle to our continued economic prosperity is our [in]ability to produce enough skilled workers to meet the tech demands of the coming decades.

Our schools are not producing them.  Nor is our inept “legal” immigration process providing them.  Both of those facts add up to a looming problem for our economy, because...

...technical innovation drives productivity gains, which in any country is the source of wealth creation.  Therefore, if U.S. companies don’t have ready access to that ingenuity, the domestic economy will stagnate. 

If the U.S. House of Representatives ends up shooting our country's foot off in today’s myopic convulsion of xenophobia, instead of providing us the leadership we need on this issue, my optimism about the future will have to be revised downward a notch or two.

Sorry about that; I know a lot of readers come to this blog to read about the brighter side of things, but I've just about had it with the one-dimensional, oversimplified excuse for thinking that's getting all the headlines and cable-TV airtime on the immigration question.  At this blog, I've been hammering away for a long time at a fundamental truth: A growing economy mitigates the effect of a growing debt.  But the converse of that is just as true: A shrinking economy exacerbates the debt burden.  We are ignoring that half of the debate, though.  Reason: Politics trumps economics.  Xenophobia makes for effective bumperstickers, and very bad economics. 

==============
I’ve written about this before.  Here’s the suggested-reading list again:
• ...by George Gilder
• ...by Steve Forbes
• ...by Nobel laureate economist Gary Becker
• ...by my favorite economist/columnist, Alan Reynolds
• ...and another one by Alan Reynolds

How to Raise Taxes on Our Kids and Grandkids

It’s unanimous: Deficit spending today will require tax increases in the future.  No ifs, ands, or buts.  It simply cannot be denied by anyone who can think logically. 

But if there's a coherent proposal on how to extract all that extra tax money from our kids’ and grandkids’ generations, it certainly hasn't gained a wide audience yet.  That’s not good, because with every month that passes, those youngsters are that much closer to taking responsibility for paying all those extra taxes.  Don’t we baby boomers owe them at least some kind of explanation about how we thought they could pay for the effects of today’s deficit spending when it came their turn to pony up the dough? 

Of course we owe them that explanation.  And I hereby volunteer to step up to the plate.

First, here are some federal taxation statistics, including my rough estimates of how much we should raise our kids’ and grandkids’ taxes compared to 2006:   

• For reference, in 2006, federal taxation brings in $2.3 trillion.

• 25 years from now, I recommend federal taxation of $9.8 trillion/year; that’s a $7.5 trillion increase. 

• 50 years from now, I recommend federal taxation of $42.2 trillion/year; that’s a $39.9 trillion increase. 

Those are just my rough estimates.  To be honest, I’d be a lot happier if our kids’ and grandkids’ federal tax payments turned out to be a lot higher than that... 

...but before you assemble a lynch mob to come and get me, take a look at the following three charts.  Click on each one in turn to enlarge it.

The principle in play above is that the federal government’s “take rate”—the percentage of the economy that the federal government taxes away from individuals and businesses—remains less than or equal to today’s take rate: 18% of GDP.  The charts above assume a steady, annual GDP growth rate of 6% nominal—lower than the rate we are experiencing right now in 2006.

A federal tax take rate of 18% in a $13 trillion economy yields $2.3 trillion in federal tax receipts; in an economy ten times as large, it yields ten times as much in tax receipts.  In short, eighteen percent of a GDP that grows each year is the important concept here. 

Our grandkids' paychecks
Let’s translate that into its implications for a typical individual’s paycheck over time.  Yes, it’s true that the federal taxes being extracted from that check will grow, grow, grow.  But because GDP growth (for the entire economy) translates to gross-pay-growth for the typical individual, the gross pay on that paycheck will also grow, grow, grow. 

What does that mean for that typical paycheck’s “after-federal-tax” dollars?  Obviously, it will grow, grow, grow.  In order for federal taxes to grow by a factor of ten without taking a bigger percentage bite out of the economy, it requires gross pay and after-tax pay for a typical worker to grow by a factor of around ten ("around" ten because it depends on the size of the economy's workforce).  When our grandkids inherit that kind of growth tradition, or better, they’ll be paying $42 trillion in federal taxes (in 2056) with no more trouble than we have paying our taxes today.   

In short, the right way to raise taxes on future generations is to raise their pay.  The right way to raise their pay is through real economic growth.  And the pathway to real economic growth includes growth- and productivity-friendly federal laws and policies. 

Think what would happen if we capped the federal tax “take rate” at, say, 18% of GDP: Then, only when the take rate dipped below that level would our politicians have the option of increasing tax rates to increase tax receipt dollars.  Otherwise (i.e., most of the time), their only option for “increasing taxes” would be to successfully implement growth-friendly laws and policies that increase the tax base instead of the tax rate.  If the "take rate" drifted above 18% GDP, they’d be forced to reduce tax rates, and that’s growth-friendly.  [...correction... that's "growth-friendly” in the opinion of most people, including me, but there are a few contrarians who, believe it or not, think that tax rate hikes are “growth-friendly.”  I kid you not.]  Growing the tax base requires productivity growth (GDP per worker), and population growth—or, more specifically, workforce growth.  I'll have more to say about that in future articles. 

By the way, I decided to get an early read on what the next generations will think of my plan for taxing them—don't forget, we'll need our grandkids to come up with forty-two trillion bucks fifty years from now, give or take a few trillion.  So, I took a small, preliminary poll [...sample size=1: my granddaughter].  Click on the following thumbnail to see her reaction to my plan after I ran it past her. 


I take that as a good sign.  I think my plan has legs. 

So: Let's force our leaders to change the subject
A three-pronged fiscal strategy of capping the feds’ tax take-rate, capping the debt-to-GDP ratio [explained in other articles at this website], and controlling inflation would force the national debate onto the subject of real economic growth. 

Wouldn’t it be unexpectedly strange—and invigorating—to see the fiscal debate shift towards how to raise everybody’s pay by fostering the creation of new, better jobs in new, better companies and industries, and by leveraging an ever-growing stock of intellectual capital?  It would be a long-overdue change-of-subject, in my opinion. 

Yes.  It would change the subject from fear to hope, from pessimism to optimism, from "how to avoid deficits" to "how to make better investments in our future."  Anyone who has ever bought a home or grown a business knows that borrowing money to help fund good investments is perfectly sound financial practice.  So why can't our leaders get behind that simple concept?   Wouldn't it be refreshing if they stopped talking about deficits, and started talking about how they'll work towards growth-friendly laws and policies—i.e., "good investments"? 

I bet they would if we'd start demanding it.