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). 

Comments

[Dave]

Couldn't agree more. If only we could get them talking about the 14 trillion at least a LITTLE more.

In case your question is too hard for them, here's another: after borrowing money to put an addition on my house, my mortgage debt has gone up, but the value of my house has gone up MORE. Am I going bankrupt?

[Stephen Reed]

Well, the latest treasury statement was just released, it looks like government spending surged this month. Spending was 29.7% higher this August compared to last August while receipts were up 8.2%. Perhaps some of the expenditures in September were pushed into August, we'll see next month.

[Jason]

With interest rates so low across the Treasury yield curve, doesn't it make even more sense to run up the National Debt versus raising taxes?

[Chris]

Somebody please educate me:

If we left the debt alone, without racking up any more, but without paying it off, it would increase at somewhere around 4% because of interest payments.

To my knowledge, we are actually still adding money to the debt -- not only are we not paying off the interest, we are borrowing more. As a result, the debt has to be growing at more than 4%.

In 2006, GDP grew at about 3.6%.

Since, it appears that debt is growing faster than GDP, why is the debt clock ratio going down?

[Steve]

Stephen:
Spending only appears to have gone out of whack; in August there was a near-doubling of the monthly outlay for social security administration, and that has to be an outlier worth disregarding. Could have been some kind of timing issue, in which case it should come back to trend next month.

Chris:
Accountants usually think of interest as being paid out of tax receipts instead of borrowing. Today it takes about 9% of tax receipts to pay the interest; ten years ago, it was in the 15% range, so that has improved, too.

Also, GDP is now growing at a faster rate than debt is growing; that's why the ratio is ticking backwards.

[DrToast]

"In 2006, GDP grew at about 3.6%.
Since, it appears that debt is growing faster than GDP, why is the debt clock ratio going down?"

You're looking at real GDP. Nominal GDP, which is what matters in this case, is much higher.

[Bob]

I have my curmudgeon hat on today. It seemed to fit for some reason.

Take a look at the political zoo we are in. Not only is there not one pundit who would ask the question, I suggest none of the contenders would
dare to go there.

Really, if these people running are the best we can do.................

[PseudoNoise]

Hm, I think I can smell the second one coming -- something about liabilities perhaps?

I agree the picture is looking quite rosy right now.

By my calcs, social security surplus is worth $6000/sec (using 2006 receipts).

http://www.ssa.gov/OACT/STATS/table4a3.html

[Kevin]

By gosh, wouldn't it be interesting if one of the candidates stepped up and said:

"The debt's no big deal, hell, nominal GDP's growing faster than the public debt. Oh, and by the way we'll NEVER pay off the debt, neither us nor our grandkids, and it would be extremely counterproductive and stupid to try to."

I'm going to hold my breath til i hear that.

[Jason]

Kevin,

Only readers of this blog and a tiny minority of voters would appreciate hearing that. Everyone else would consider it a huge gaffe on par with Ford's "Poland isn't under communist control" line. "NEVER pay off the debt" would probably be replayed constantly as a joke. Hardly anyone can visualize debt that is never paid off. People will think of an IO mortgage and we know the current impression of those.

[DrToast]

It's kind of weird that you never hear people freak out about how corporations don't plan to "pay off their debt."

Why is it acceptable for corporations to have a capital structure that includes perpetual debt, but not a country?

[Boghie]

Has anyone thought of what will occur as a result of the Iraq drawdown.

Bush is requesting a $50 Billion supplimental - not a $100 Billion.

He has been close lipped on this. Is it an additional $50 Billion, or is it the FY2008 supplimental? My guess is the latter.

If that guess is correct, than the 'structural' deficit for FY2008 has just shrunk by $50 Billion, the economy is still growing, and political deadlock will keep spending down.

My guess is surplus for FY2008!

[Steve]

Jason:
You're right, and this is an excellent example of the contrast between objective reality versus emotion-based bias.

For two years, I've been trying to think of a different word to call it besides "debt" (which scares everybody the instant they hear it, which makes them stop listening to anything that comes after that word); but no success yet. "Our savings bonds" is the best I've come up with so far, and that's a loser because (a) it won't fit on a bumpersticker or a political poster, and (b) most people have never seen a savings bond in real life. I'm also trying to work the asset side of the balance sheet into some kind of simple message, such as "rich people don't have to pay down their debt, and neither do rich countries" -- but as you can see, it's still in the conceptual, brainstorming stage (...and that stage is in its thirteenth year).

Maybe I should open up a contest for best "debt doesn't matter if you're rich enough" slogan.

[Andy]

Yeah, something that doesn't sound so "evil corporation"y, exclusive to the upper class, or like too much accounting hocus-pocus.

[A Tanatar]

OK, so the question to the author: let us say that for whatever reason (housing collapse, oil prices, BRIC competition etc.) economy actually goes down. What will happen to debt? I'm not convinced that at current levels it will reduce. It can actually go up, at worse term and spur a debt spiral Canada went through.

[Bay]

Gee, Dave, your mortgage debt has gone up, but so has the value of your house....anything sound funny about that, circa September 2007? What's that sound I hear? It must be falling house prices... And the other sound? Crashing GNP numbers, perhaps a recession. It's the Republican pied pipers, leading the nation off the cliff again.... No problem, just make sure you hold a lot of Euros and foreign stocks. The clever US-orgin multinationals are way ahead of you, much of their reserves and markets are in other currencies and countries. As always, the common folk will be left holding the bag. What a reckless, hapless government!!

[Counter Revolutionary]

A. Tanatar, for your scenario to happen, the US economy needs to tank AND Fed spending needs to go up higher than revenues, AND it needs to continue for a period longer than a couple of years. Perhaps significantly for all three.

Bay, you need to hang around a better quality of economics blogs/sources. Recessions happen. it's called the BUSINESS CYCLE. Nothing to be afraid of except for extended and deep cycles. Looking at history, they have usually been shallower and shorter than the previous. We recovered from the Clinton bubble. IF, I repeat, IF we have a Bush bubble it already appears to be a slow down in growth, not even a recession. We'll just have to wait and see.

But, my point Bay, is you are spouting the traditional "fear mongering" BDS inspired rhetoric of the majority outside of Kevin's,
"Only readers of this blog and a tiny minority of voters."

You need to review and learn a little more than you have, before espousing these inanities.

[A Tanatar]

Counter Revolutionary, the third option is for inflation/interest rates to go up without a significant improvement in economy. If interest rates go higher, especially long-term interest rates, this can trigger the process. With emerging markets inflation hovering around 5-10%, tons of assets in US with values tied directly to risk-free rates (housing to start with), a depreciating dollar and increasingly pricy commodities this is not a wild cry.

[Counter Revolutionary]

Tanatar, your first scenario was a reach. The second is even more so, but I am not really sure what you are trying to prove. Earlier you asked " what will happen to debt" and then asked about the Canadian "debt spiral." Which is it?

[A Tanatar]

Counter Revolutionary, I just want to point out that the statement "the debt goes up 5.7k a second, the economy grows at 20.3k a second" is slightly misleading. It can be interpreted in a few ways. One is "our economy goes up at a rate 20.3k a second because debt goes up 5.7k a second". It can be interpreted as "it's OK that the debt grows at a rate 5.7k a second as long as economy grows at a rate 20.3k a second". Or at can be viewed as "Even though our economy grows at 20.3k a second, the debt still grows at 5.7k a second".

The nature of a problem, I think, is whether the growth of economy at a rate of 20.3k a second is better than the debt growth of 5.7k in second even from a debt burden standpoint. I tend to think that a large part of a burden is described in terms of an interest rate. I think that debt-driven economic expansion has not been fully tested in an environment where interest rates rise, therefore I am afraid that we can come to a situation when an absolute amount of debt or the rate of debt creation can undermine economic performance more than a relative increase of debt in relation to economy. Therefore I'm not sure that it's correct to judge the impact of debt burden by the ratio of debt and growth.

In my opinion, there are two problems: either the country will not be able to cut the rate of debt creation once the economy cools or the credit conditions worsen enough so that refinancing of existing debt will become a burden. I tend to think that Canada, to a certain degree, experienced both problems.

[Counter Revolutionary]

Tanatar, I guess I can not relate. I am not as concerned as you are about the economy, that may be because of our ages - I am already retired. I have seen many business cycles and the current versions have been very mild. Because of my experience, I can not see happening what you are conjecturing.

[Nobody of Importance]

A. Tanatar,

For an analogy to work, we have to agree that all the important aspects of the things being compared are alike. I cannot see a meaningful way to defend the assertion that the Canadian and US economies are similar in ways that would validate my consideration of your conjecture. What you seem to suggest is that the US economy could be caught in another bought of stagflation but that assumes an awful lot about where we are currently vis-a-vis where we were in the mid-1970s.

[A Tanatar]

Nobody of Importance, I imply that if we consider stagflation scenario then the fact that the government still make debt now that economy is expanding can have consequences substantially different from a simple GDP/Debt ratio. Canada comes into picture as a country that had a) hard times cutting spendings and b) with a substantial reliance on foreign financing. I tend to think that US has both of these features at the moment. And, similarly, I tend to think that US might need to borrow and invest in order to avoid shrinking, not to finance expansion. I also tend to think that both stagflation and increased demand for investment under contracting economy tend to be thrown out of the window as they "can never happen" too easily.

[Andrew]

Steve:

Regarding slogans, as I understand it, the debt doesn't matter as long as we can cover interest payments because the government basically never 'retires.' By retire I mean stop taking in taxes. This is analogous to a worker with a mortgage. An interest only mortgage would be great if you knew that you would live and work forever (and hence have infinite paychecks). The only reason to pay down the principle is to prepare for the day when you don't have enough income to pay interest. So maybe you could get slogans out of that somehow.

Also, maybe you could substitute credit for debt. Credit isn't quite as scary, and explanations built on the idea that America has lots of credit might be easier for the voter who only understands economics at a personal finance level.

[Andrew]

Of course, I had a guy clean my carpets the other day that refused to take a credit card. He then launched into this big diatribe on how credit cards are evil and abuse you and how he has never had a credit card in his life. I said that was nice, but I'd rather have my money go directly from my bank to the business, rather than carry it around on me. Wonder if he ever heard of a grace period.