## The National Debt Road Trip – Debt-To-GDP

I’ve gotten a number of people asking some permutation of the following question:

“Why don’t you give the national debt as a percentage of the GDP as a whole? Isn’t that more meaningful/relevant?”

My answer the the latter question is “Yes and no.”

The answer is “Yes”… in the sense that if you made \$50,000 per year and you had \$80,000 in debt, you’re more screwed than if you make \$100,000 per year and you have \$80,000 in debt.

But the answer is “No” for the purposes of making a visualization for the following reasons.

First, I didn’t frame the debt in that way is because it fundamentally hides some really important things that shouldn’t be hidden. I’ll go ahead and give the game away… I’m in the business of communicating numbers clearly. And using the debt-to-GDP ration feels too much like trying to hide the real meaning of the numbers.

It feels like a car salesman who refuses to talk about the raw numbers of the car you’re buying because when he talks about monthly payments, it’s easier to screw you. Because, really, what’s the difference between \$287.87 per month and \$359.60? It’s not that much, is it? And if you’re already spending \$300, you might as well spend \$350, right?

In the same way, talking about the debt in a percentage manner is hiding the true cost. So we increase the debt-to-GDP by 2.2%… big deal, right?

But that 2.2% is the same amount as everyone in the state of Washington makes in a year. Every. Single. Person. Go look at a Google street view of Seattle and try to count how many people live in a high-rise apartment building. Take a stroll down some of the swankier neighborhoods. Look at the obscenely expensive houses that line the bay. Everything every one of those people makes in a year. The more thought you apply to the real meaning of the number, the more you see that, while 2.2% might be an accurate number to describe an increase, it doesn’t even begin to communicate the scope.

That’s the first reason I didn’t use debt-to-GDP… becuase it violates the core principle of what I’m trying to do: give a clear understanding of the scope of the issue. When people use it, it feels like they’re looking around for the best possible way to represent the problem so that it doesn’t feel as big as it is.

Make no mistake, the problem is huge. Huge in a way almost none of us understand because our brains don’t process that kind of huge very well.

There are other problems with framing the issue this way too. One is that comparing the federal debt to the GDP is something of a misnomer because the government doesn’t own the GDP. The GDP is “owned” in part by everyone in the country. And all those people and business have their own debt (mortgages, credit card debt, student loans, business loans).

Quick, off-the-cuff example using very rough numbers: Sam makes \$100,000 per year, but he spending \$150,000 per year. As if that weren’t bad enough, he is \$500,000 in debt already. But he tells himself it’s not a big deal because his kid is in college and that will only last a couple years and, besides, he has a business protecting houses and mowing yards for a living and if you combine everything his clients make in a year, it comes out to be almost  \$750,000 per year.

So if you look at how much he owes compared to how much his clients make, it’s only about 70%. And if his clients make \$1,000,000 next year, he could owe \$666,000 and there would be no change whatsoever in his “how-much-I-owe to how-much-my-clients-make” ratio. No problem!

Except that Sam’s clients are probably a little nervous about Sam comparing the truly absurd scope of his debt to the amount of money they make every year. Shouldn’t he be comparing his debt to the money he makes every year?

I could go on at length, and perhaps I’ll make a visualization about this, but right now I’ve got to work the day job.

1. BCC says:

I really liked your video, but now I’m not buying what you are selling:

1. “I’ll go ahead and give the game away… I’m in the business of communicating numbers clearly”. Cute. But you don’t need to tell us that, just do it.

2. The “debt-to-GDP hides something” argument doesn’t hold water. Your whole video is based on a transformation of an abstract concept (huge national debt, inflation-adjusted) to make it more accessible. It’s your transformation that’s supposed to make things clear. It doesn’t matter if the raw data was kumquats per furlong; the transformation results in units that are accessible and, ultimately, relative.

3. The “Sam the lawn mower” analogy is weak sauce. How about “Same the mutual fund manager”, who earns a fixed percent of his clients’ assets each year? Or “Sam the movie director” who gets a fixed cut of the gross? Or, say, “Sam the tax collector” who derives much of his income as a fixed percent of his clients’ earnings?

In the end, this CPI-vs-GDP-as-normalizer is significant, because it affects the end results so much.

Let’s look at this graph, which is national debt, adjusted for inflation:

My reaction? Holy carp, we are on the road to ruin!

Here’s the same data, but expressed as a percent of GDP:

That kind of tells a different story, no?

If you want to communicate our national debt clearly, I’d do the following:

– Break Obama’s budget into crisis-related (now-2012ish) and steady state (2012-)

– Next, we really need to start talking about the components of the Federal budget- entitlements vs discretionary, defense vs. everything else, etc. That will put your 170mph into context

I really do like your video, but the more I think about it, and the more I think about your reasoning, the less I like it. While arguing that you don’t want to “hide” anything by normalizing by GDP, you are making an implicit argument that government as a pct. of GDP should decline over time (in a healthy economy where growth outpaces inflation). This is a defensible position, but it’s also fairly radical.

2. BCC says:

Here they are:

3. politicalmath says:

Some really good points…

I will absolutely concede the “Sam the lawnmower issue”. I was trying to think of an analogy to what the government does for us (defense and infrastructure maintenance), but I like your mutual fund manager concept better since the analogy fits better in relation to the money.

That doesn’t change any of the numbers, though. We still have someone whose debt is 5 times their income and who is spending like a bat out of hell. (Do bats out of hell spend?) And comparing his debt to the amount of money his clients have is still a little sketchy. Even if his income is related to theirs, it is ultimately his income that is paying the interest in his debt.

So, here is my question: Is there a really compelling reason we should frame the debt in relation to the GDP instead of framing it in relation to federal revenues?

I also wanted to address that last thought, that my implicit argument is:

“The government as a pct. of GDP should decline over time,”

This is not my argument, explicit or implicit. I’m absolutely fine with the government increasing in size in proportion to the GDP. More people to govern, more business to manage, more government to manage it. Makes sense.

But my video is about increases in the debt, not the increases in the government. I wouldn’t mind if the debt “stayed still” and let inflation take its toll (as it did in the 50’s). If the government had a balanced budget, their spending would increase as the GDP increased, but the debt would stay right where it is.

It’s also an issue of mapping units. Debt-per-year maps well to miles-per-hour because debt (distance) is a linear unit that builds upon the previous debt (distance already traveled). The unit we’re measuring is “money over year”… which we can give a velocity.

On the other hand, debt/GDP-per-year is “money over money over year”. Not only does that not map to velocity from a units point of view, it only makes sense if the visualization also gives the viewer a good understanding of exactly how much richer we have gotten over the past 100 years.

This means that, in a single blow, I would need to a) explain the units I’m measuring and how they map to the visualization b) visualize the wealth of the US as a whole c) visualize the debt in regards to the wealth of the US as a whole and d) explain why it is appropriate to judge Sam’s debt against his clients’ wealth.

But if you think that is the only honest way to talk about the debt, I would love to see your visualization of it.

4. BCC says:

I’ll keep this somewhat brief:

Using debt as a pct. of revenue: I didn’t really address this one explicitly- I see the merit of this, but my concern is that you’re making for a noisy denominator. It’s like a P/E metric- very useful, but changes a lot on what you use for “E”- trailing earnings, forecast earnings, etc. The reality is that GDP represents our ultimate ability to pay, and as the gov’t has the Constitutional authority to tax, it’s a relevant quantity.

Units: I understand your point, but I think you are being (what’s a softer word for pedantic?). Also, you’ve buried the CPI adjustment in your comparison. The result of indexing by CPI is not a percentage but an indexed value, but the difference between the two is not that big. The main difference is that GDP, the denominator of debt/GDP, sometimes grows faster than the numerator, while this hasn’t happened very often with debt/CPI (which is precisely my concern with that measure!).

Implicit argument: I typed faster than I thought; my assertion fails with a balanced budget…

I don’t think explaining debt/GDP is that hard a sell; it’s a pretty common way of expressing these things. I agree, however, that in our public discourse numbers do tend to be presented with insufficient explanation of what they are (e.g. is a pct. change year-over-year, or month-over-month? Very rarely explained explicitly in the press).

I prefer my role as critic vs. producer (it’s much more efficient with time), but as there are enough online tools out there that make decent visualizations easy, I may be running out of excuses…

5. politicalmath says:

BCC,

First of all, I’d like to say that I really appreciate your comments. My natural inclination is to react defensively to any criticism, but the rational part of me would much rather have critics like you by the bushel.

I’m working on an interactive visualization that will allow users to look into the numbers a little more deeply and you’ve convinced me to add the debt-to-GDP to that viz.

The benefit of interactivity is that I can make it in such a way that people who want to spend 10-20 minutes looking into the data are free to do so while those who are only interested in the quick sketch can glance at it and be on their way.

I’m hoping that such a solution will satisfy my desire to communicate data clearly and your desire not to gloss over important details.

6. Joshua says:

I’m no mathematician and lot of what y’all said made sense to me but I have to be honest and say that I struggled a bit.

However, none of the math matters because politics are what are really important. In fact, I’ll quote BCC, “The reality is that GDP represents our ultimate ability to pay, and as the gov’t has the Constitutional authority to tax, it’s a relevant quantity.”

That is the most terrible statement that could ever be made if believed in blindly. Our founders NEVER intended our governments, ESPECIALLY the Federal government, to tax us to death.

The real issue here is that they are SPENDING SPENDING SPENDING. The ONLY reasons they should tax us are for protection of our property, lives, and liberty. They should keep our civil contracts honest and ensure our property rights are kept.

We don’t need social security, we don’t need medicare, we don’t need X programs. What we need are solid judicial systems, police, & fire. Other than the free market allows us to take care of ourselves.

The graph, when not viewed by mathematicians, easily shows the SPENDING habits of our federal government. How about we use that Data.gov site & other sources to show ALL of our government spending at every level. Something tells me that many a heart attack will soon follow when added to the Federal debt.

Obama is making things MUCH worse on top of the many presidents who proceeded him. Your MPH depiction is a perfect example of how fast he’s going with it. And that is only the financial aspect of it not to mention our constitutional rights and freedoms he and other presidents have eroded.

7. BCC says:

Sounds promising…

8. BCC says:

Joshua,

Relax. My point wasn’t that the Fed should tax willy-nilly, just that, at the end of the day, it can. That’s why U.S. treasuries are the de-facto savings vehicle for the world; the risk of default is low b/c the U.S. is rich and is very, very likely to be able to make its bond payments.

So, you sound like a small-government libertarian. I personally find libertarian thought to be a great place to start, but not a great place to finish- the sad reality, I think, is that things don’t always play out so hot as libertarians would like. For example, free markets can result in lousy outcomes if there are external costs or information asymmetry. And lots (if not most) markets have big external costs and/or information asymmetry! This isn’t some crazy socialist theory; this is microeconomics, chapter 3 or so.

Also, if free markets work so well, why do we need the government to provide the fire department?

As for Obama, yeah, right now the debt is spiking due to increased spending and reduced revenue. There’s not much he could do about the latter, except push the button on the former (as someone who thinks governments should spend to break recessions, I think it was the right move). The trillion dollar question is what happens after our ship is righted.

Do remember that the U.S. had a public debt of >100% of GDP right after WWII. The U.S. did OK in the following years. It steadily worked its way down to when Reagan took over and took it back up. It came back down under Clinton and has grown since, and is currently spiking. What really matters is where we go after the current crisis/spike subsides. The CBO numbers on Obama’s current budget show some serious revenue/spending gaps, but let’s remember that the budget gets a refresh each year.

I, for one, am still optimistic. Not that Obama will deliver a small government (fat chance), but that he’ll deliver a healthy nation.

9. Joshua says:

I think you meant macroeconomics rather then micro. 😉 As for the fire department, we don’t we have lots of volunteer ones and I’m sure any homeowner wouldn’t mind donating a certain yearly cost to ensure service to them by such department but if all the government had to do was such a thing as I mentioned earlier I think they could manage not screwing it up too much.

Honestly, to put it bluntly, I truly feel that Obama is going to do WAY more damage than we will all realize before its too late. It will take decades before we truly see what he’s done to us with all this.

But I don’t want to get entangled in too many politics with you in terms of who did what or is going to do what.

I only wanted to make the point that though they have the “power” to tax it doesn’t make it right.

10. RF says:

It seems useful to compare this government debt to personal or corporate debt.

Whether or not taking on debt is responsible depends on your earnings potential. GDP seems like the relevant number there, because the amount the government can pull in is related to the size of the economy.

The wisdom of taking on debt also depends on what rate of return you expect from whatever you’ll do with the money. I think that if government acted as a sort of private-equity scavenger for failing companies (buying equity stakes at market value) rather than an ATM, the past and future bailouts could be profitable, or less costly. As is, they’ll make some of the money back; I don’t know how much or if it’s already in the projections.

Finally, deficits tend to go up when the economy sucks, and now it sucks like it hasn’t for decades. It doesn’t change the descriptive picture, but it’s important context.

Still, there are going to be consequences to this someday that aren’t abstract — probably complicating our relationships with China and other debt holders, maybe giving them a bargaining chip. When the economy is less in need of stimulation, it would be best if taxes started to catch up with spending (carbon taxes? reinstate the estate tax? un-cap the payroll tax?), less-useful spending were cut (defense? tuning social programs?), and we implemented policies that would lead to medium-to-long-term GDP growth (funding basic research and education, letting in skilled workers, etc.).

Finally, I can’t begin to figure out how this would work, but we need to treat debt as the foreign-relations issue that it is. Perhaps, at the same time we negotiate on trade and geopolitical issues, we renegotiate when and how our debts can be called in, to take away (or reduce the likelihood of) the “nuclear option” of some large country forcing the U.S. Treasury to devalue the dollar or default. That kind of issue is almost above my pay grade. Almost. 🙂

11. According to my calculations. If 5.8b=1mile, then Obama would be somewhere in the Pacific Ocean. Am I wrong?

12. afrankangle says:

I just saw the video for the first time. Interesting. One question – Didn’t the debt shrink during Clinton years? If so, why forward progress?

Interesting visual!

13. politicalmath says:

afrankangle,

See… the Clinton issue is the reason I did the debt instead of the deficits. 🙂

I knew that we had a surplus in the late 90’s, so I assumed that I would see that surplus show up as a reduction in the debt. But if you look at the numbers, we never saw the debt reduced year-to-year in nominal dollars.

This confused the hell out of me. Where did the surplus money go if it didn’t go to paying off the debt? Why does the debt increase by more than our deficit?

Ultimately, I couldn’t track down those answers (this is just a hobby for me, after all… I do have a real job). But I decided to use the debt exclusively because it is agreed-upon metric.

14. afrankangle says:

Thanks for the thoughtful answer. Trying to follow what the Feds do with dollars can’t be easy!

15. KatSchool says:

You talk about income vs. debt, but basic accounting has been ignored. Assets minus liabilities equals equity (or capital). Where in that equalation is income? You are out of line!
Ture enough if you have \$80K in debt and only make \$50K you are more screwed than if you make \$100K. However, you are ignoring in both cases what assets either of these fictional earners have. Does the guy who makes \$50K also have \$100K in assets? Does the guy who makes \$100K have no assets to show? Perhaps he’s just driving around in a fancy car and spending on consumables.
The national wealth growth has outpaced the national debt over the last fifty years. See: http://www.businessweek.com/the_thread/economicsunbound/archives/2005/07/not_so_scary.html.
Another good resource is “The Truth about the National Debt” by Francis X. Cavanaugh. He’s an economist who worked for the federal government under various administrations. His credentials are more impressive than yours and his arguments make a lot more sense! The first myth he blows out the window is that we are leaving our children and grandchildren with debt–because, as I first stated, we are also leaving them with wealth (assets – liabilities = equity).

16. politicalmath says:

Good points… sort of.

I was sad to see that you completely ignored the entire point of the video. It isn’t to point out that the debt has grown and is growing (duh) and it isn’t to scare you.

It is to compare Bush’s increase in the national debt to Obama’s increase in the national debt in a way that makes sense to everyone.

What you are saying (I believe) is that the national debt wasn’t scary under President George W. Bush and it continues to be not scary under President Barack Obama.

You seem to have found reasons that justify your belief, so if you are satisfied with those reasons, I applaud you.

17. […] this video that really helps us see what kind of trouble we are in.  You can find the blog post here and the video […]

18. Pravin says:

BCC ,
Just because you are lazy to analyze how free market contracts would work doesnt mean that you can throw ‘externalities’ or the bogus public goods argument at it. You need to read walter block who brilliants and in simple to understand words, demolishes all pretensions of public goods.You have been brainwashed too much by your economics profession/professors.
Just because the govt can AND does interfere doesnt mean that the free market cannot provide it better and cheaper.Your understanding of the word market failure also leaves a lot to be desired. Losses caused by information asymmetry are not examples of market failures.Its clear that you imbibe at the Keynesian coolaid joint.

19. BCC says:

Thanks for your arrogant and condescending tone.

As one thing I learned in school was how to think critically, I figured I’d give Block a whirl.

In Public Goods and Externalities, he makes the statement “indeed there is precious little (if anything) that is not an example of an externality.” Block then concludes, essentially, that because everything has externalities, it’s logically inconsistent to try to correct some externalities and not others. It’s a cute argument, but it’s hardly a “demolition” of anything. It must make Block’s head explode that cops don’t pull drivers over for going 1 mph over the limit- it’s inconsistent!

I was actually pretty surprised to see Block concede how pervasive external costs are.

Block’s solution, of course, to correcting externalities is to internalize them. This makes some sense but has some rather severe practical limitations.

First, please drop me a note when the property-rights libertarians take over; I’m going to law school. Oh man, I so want to represent whomever owns the Pacific Ocean- we’re going to sue everyone who’s responsible for changing its pH (i.e. everyone who ever extracted or burned a hydrocarbon; CO2 + H2O => H2C03 => HCO3- + H+; carbonic acid, baby!). And that’s just a start!

I mention the Pacific Ocean because Block mentions it in his 1994 article on pollution trading permits. His objection to privatizing the Pacific Ocean is that it is “may not be politically feasible.” I have some practical concerns, as well!

– It’s classic utopian thinking. Sure, everything looks great on paper!
– You can dance around it, but such a system must rely on a huge, global, kick-ass judicial and law enforcement system. It boggles the mind.

I don’t mean to dismiss all aspects of this line of thinking. As I noted above, it’s a great place to start. And Block has some interesting thoughts. But the strength of his logical arguments generally leaves a lot to be desired- his reasoning on externalities (they’re too widespread to deal with consistently) is weak sauce, indeed.

20. ARDAvis says:

There is one major flaw in the discussion of the debt that’s taking place. President’s don’t pass bills, Congress does. Budgets are primarily the responsibility of the House. Some of you may not be old enough to remember back to Reagan and Bush (the elder). They submitted budgets to Congress, but during that timeframe the term “dead on arrival” took on a political (budget) meaning. Congress would tell them they didn’t care what their budgets were, they were going to pass their own budgets, not the President’s.

So tracking budget results and changes in debt by control of the House gives a much different idea of where the problem has been. In tracking budget reults/ debt you must realize that there is a two year lag from election to first budget. President Clinton was elected in 1992, he submitted his first budget to Congress in 1993 and it applied to fiscal year 1994 (Oct 1993 – Sep 1994).

I’ve tracked budget results by who controlled the House and it is quite revealing. The last time a Democrat controlled House passed a budget that ended in a surplus was in 1969. They’ve had 29 opportunities since then (1970 – 1995 & 2008 – 2010) and will have had 0 surpluses in those years. Republicans controlled the House (1995 – 2006) and had 4 surpluses in their first 6 years. That was pre “911”.

Looking at size of majorities is important too. The average majority for Democrats during those years was ~ 80 seats. The average for Republicans was ~ 25 seats. If you look at the Democrat leadership of the House you find they’ve been in office for most of the run up of our debt. And they have been voting for increased programs, increased spending and all voted against Welfare Reform. They have more than proved they are irresponsible with our Nation’s finances.

Finally, it is intersting to see how the debate has changed in our country. If you look at the budget results by era (Pre 1913, 1913 to 1969, 1970 +) you see some interesting facts. Pre 1913 we had twice as many surpluses as deficits. That’s because we practiced the theory of “limited” Federal government and believed that the Federal government should only incur debt in times of War and economic recession. That’s why we ran successive surpluses and paid off 95% of our debt after the War of 1812 and why we ran successive surpluses and paid off 65% of our debt after the Civil War. Even in the 1913 – 1969 era (dominated by 3 major wars and the Great Derpession) we had 20 surpluses and 36 deficits. After 1969 we had deficits from 1970 – 1997 during a time for relative peace and prosperity. And the Vietnam War was the first war we didn’t go from deficit to surplus in one year when the war ended.

As individuals realize that personal debt is not a healthy thing, shouldn’t we also realize that government debt is even worse. If an individual or corporation goes backrupt it is a tragedy for some. How much more so when a country goes bankrupt!

And if President Clinton was so great on debt, why did his 1996 budget show debt increasing each year, not eventual surpluses? (His solution for debt was a huge tax increase in 1993 that he called a TEMPORARY tax increase on the wealthy. It was going to help offset huge increases in spending (Healthcare Reform) that never materialized. I hope we don’t think raising taxes is the right way to handle our Nation’s finances.

I’ve taken a close look at the last two budgets submitted by President Obama. They are “full of holes”. The high level assumptions (CPI, GDP, Unemployment and Interest rates are so optimisitc that the combination is unrealistic. And interest expense is dramatically understated. (Maximum 10 year treasury rate of 5.3% despite growth and huge increase in debt? Growth and decreased unemployment with extremely low inflation? And on and on.) So let’s be careful about using their numbers. We already saw how far off the 2010 budget was (I.e. 7.9% unemployment for 2010?)