How Big is $9 Trillion? – Willful Omissions From Paul Krugman

You may have seen the Paul Krugman post “How Big is $9 Trillion” in which he attempts to defend the Obama administration’s recent announcement that they expect that their policies will increase the national debt by $9 trillion. His tack is to “explain” that $9 trillion isn’t really all that much when you understand it in context.

it’s being treated as an inconceivable sum, far beyond anything that could possibly be handled. And it isn’t.

What you have to bear in mind is that the economy — and hence the federal tax base — is enormous, too. Right now GDP is around $14 trillion. If economic growth averages 2.5% a year, which has been the norm, and inflation is 2% a year, which is the target (and which the bond market seems to believe), GDP will be around $22 trillion a decade from now. So we’re talking about adding debt that’s equal to around 40% of GDP.

Right now, federal debt is about 50% of GDP. So even if we do run these deficits, federal debt as a share of GDP will be substantially less than it was at the end of World War II.

I defer to Paul Krugman on a lot of things because he is transparently smarter than I am. But it is precisely because of this fact that I know he is conscious of the obvious reasons his analysis is hogwash.

First of all, the national debt in WWII was initiated by an existential threat to the very continuation of our country. Mr. Krugman does not make even attempt to make the case that we have a similar crisis that justifies this kind of debt.

Second, implicit in his observation is the concept that since we did fine after WWII, we’ll do fine now. But the years after WWII saw drastic reductions in the inflation-adjusted debt driven by drastic reductions in spending. Mr. Krugman points to no similar possibility in the post-Obama world.

Third, we have something now that we didn’t have in the 1940’s. Back in the 1945, at the height of the spending that saw our national debt rise so dramatically, entitlement spending and interest on the national debt made up a meager 5% of our total budget.

By the end of President Obama’s term (if he runs two terms) we’ll be looking at a federal budget that is 70% mandatory spending. (I assume for the purposes of consistency that mandatory spending includes interest on the national debt because we don’t really have a choice in not paying it.)

Here’s a quick visual of the difference in the budgets in 1945 and 2016. (Ugly, because I did it fast… I’m on vacation.)

1945 vs 2016

If you look at the 1945 budget with the single question “How are we going to reduce our debt?” you can identify the major problem. It’s the defense budget, which is almost 90% of the budget. Interestingly, reducing the defense budget is exactly what we did in order to reduce the debt, cutting it over 80% in 3 years (it helped that we won the war).

As a contrast, President Obama’s solution to reducing overall spending is… well, I don’t think he really has a plan. His projected budget in 2016 has reduced the defense budget as a percentage of the overall budget from 20% to 14%, but military spending isn’t what is killing us. The president has no plans to reduce mandatory spending whatsoever. In fact, his only change to entitlement spending is to increase it.

My problem with Mr. Krugman’s “How big is $9 trillion?” is that he is aware of all the problems I pointed out. He didn’t explain how much $9 trillion is; he obfuscated it. By comparing the debt load in the heart of a world-shaking war to a debt load that was accumulated in (relative) peacetime, he has misled his readers to the real significance of the data.

(By the way… if you would like to blame the debt load on the Iraq war, you should know that those costs have raised our debt by 5% of the GDP. Comparing this to WWII, which raised our debt by 70% of the GDP, is a pretty weak argument.)

57 comments

  1. D Rumsfeld says:

    Krugman does not make sense. The $9trl is additional debt, it is added on. The current debt is $11.8trl plus $9trl takes you to $20.8trl. $20.8trl of a projected GDP of $22trl is 94.5% NOT 40%! This is banana land country.

    Have I missed something!

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  4. Chris Tune says:

    I like to think of each trillion as 1,000 billion. I then think of the consolidated balance sheet I used to prepare for then valid bank – Glendale Federal Bank. The “bottom line” or footing (the total of all assets, which would equal the total liabilities and equity) was 23 billion. That way, I can think of each trillion as 43 Glenfeds. That is 43 big, big thrift banks. Present day “money center” banks are larger….quite larger, but I prefer to think of something I’ve pored over in detail. I do that just to have something to “put my hands on”.

    So, each of these 9, or 13 or whatever is equivalent to 43 of these large institutions. So, now we are talking about roughly 400 or so of these things. This is clearly an enormous amount of financial matter. Simply managing the details of daily operations on the titanic 13 trillion national debt must be an enormous undertaking. Perhaps we could ferret out how many persons are involved in managing the payments, getting ready for Open Market Operations, making sure the activity is audited, and that everything flows smoothly. I’d bet that the work force is in the thousands.

  5. Gault Falcon says:

    The thing to remember is that we’re all screwed. I’m not a doomsayer but the numbers just don’t lie.

    $230,000,000,000.00 in interest this year will be paid by US tax payers to our debt holders. That money won’t fill one pot hole, pay one teacher, buy one hot meal for a homeless person or contribute to our economy in any directly meaningful way.

    In the budget proposed by the current administration their own numbers show our annual interest nut rising from where it is today to over $600,000,000,000.00. And that is a conservative estimate! Recently, when pressed on this enormous annual interest amount, Tim Geitner actually admitted to the staggering amount and even admitted that it was unsustainable.

    http://www.youtube.com/watch?v=WdcQGJF_jmY&feature=player_embedded

    Regardless of weather the administration submitted this budget as a political satchel bomb or not, the fact that they actually did shows how little they care about fixing the run away spending problems of this country.

    My simple advice is to invest in commodities. With fools like the ones we have had in charge for the past two administrations commodities will be in shortest supply and most valuable in the coming decades.

  6. Gault Falcon says:

    I used the wrong form of the word “weather” in my post above. I should have used “whether”. Sorry about that.