Wednesday, April 27, 2011

The better way to measure our debt problem

This is the submission to the Sky Hi Daily News and is unedited. The copyrighted edited version is reproduced at

$16 trillion here and $7 trillion there and before long we are talking real money. Raising the debt ceiling and cutting spending reflected in the 2012 budget are the hot topics   and no one seems to have faith in either party, according to the recent NY Times/CBS poll.  Around 57% disapprove of how the President is handling the federal budget deficit and more disapprove of the way Republicans in Congress are.   In 2012, the choices   will be an “as compared to whom” year.
What are perplexing about the choices voters have to make are the complexity and the sophistication that is needed to get our heads around big dollar numbers.  It makes it easy for politicians to demagogue using fear tactics that hype dire pocket book impacts or to exaggerate the problem’s size. There are other ways to frame the problem.
Economists prefer to use a ratio of   the percentage of the dollar amount of the debt to gross domestic product (the size of the economy, a.k.a. GDP) because we get a more realistic perspective. It is similar to a banker looking at the family income and assets to determine creditworthiness.
Historically, US debt has run at about 40% and rarely above 50%. It is about 62% now but if we had continued with the 2009 trend, we could see 82% by 2019. Projections depend upon how much revenue we can expect and how much cost cutting can take place.  Anything above 82% would cause interest rates to rise and decrease productivity and harm economic growth, according to conservative sources.  In short, we have more of a long term problem than immediately impending doom.
 The Simpson-Bowles debt commission recommended around 60% as a target in the next decade and said a combination of tax increases and spending cuts were necessary. The GOP/Ryan plan hopes for 70% without raising taxes, while drastically cutting Medicare.  The Obama plan proposes  a ratio of 3 spending cuts to tax increases of 1 while keeping Medicare in its current form, though he seeks  another $400 billion in cuts to Medicare over ten years on top of his health reform law already passed.  His debt/GDP ratio is unclear, but his plan contains a failsafe clause that would trigger cuts and tax increases by 2014 if the ratio does not stabilize or decline.
The Ryan/GOP plan sounds tempting, but is it reasonable?  It depends heavily upon the revenue the federal government would expect and the Congressional Budget Office calls the Ryan plan optimistic. A possible scenario per the CBO is that revenue could be less and the debt could rise to 92% of the GDP by 2022.
 In addition, the cuts Ryan is proposing to make may be politically impossible .Martin Wolf,  writing in  London 's Financial Times April 12, commented that  the Ryan plan would require the elderly to bear 68% of the costs of insurance by 2030. He asks, “The US has the highest maternal and infant mortality rates among the high-income countries, and among the lowest life expectancies. The result of these cutbacks …would be further deterioration. Is this really politically acceptable?”
 If the New York Times polls are accurate, the answer is probably no.  Three quarters of Americans think the federal government has a responsibility to provide health care for the elderly and 56 believe it has a similar duty to the poor.
Another possibility is to grow the size of the economy.   Both conservatives and liberals will try to turn their economic theories into proposals which they claim will work the best.  In the past decade, neither lowering taxes nor trickle down theories of Republicans have worked well nor have government stimulus programs primed the pump enough to grow the economy as we hoped. Obama prefers investing in infrastructure.
 Knees will jerk one way or the other, but the only constant would be the Obama failsafe proposal to trigger drastic steps in 2014 no matter whose theories are put into practice.

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