Bush's deficits and the coming crunch.

[KrazyHorse]

Anyhow, I don't need to run a spreadsheet to tell you what the solution in that case is steadily approaching:

Debt level of 0.035/0.0525 = 0.667 of GDP
Deficit - debt service of 0.035 - 0.044*0.667 = 0.002 of GDP

As opposed to today, when debt level is ~0.42(?) of GDP
Deficit - debt service = 0.035 - 0.044*0.42 = 0.0165 of GDP

[The Mad Viking]

I get the debt service cost asymptotically approaching 88% of the deficit...

But what about my other questions?

Grwoth of government revenues are not directly tied to GDP, are they? How much revenue is earned on government expenditures? Do you earn the same % revenue on investment as you do on consumption expenditures? Don't you earn more revenue on imports (which are not part of GDP) than on exports?

To whit, why did government revenues drop in 2003 despite growth in the GDP?

I am not at all convinced that growth in the GDP is a very good indicator of growth in government revenue.

[Vanguard]

Some of you seem to believe that the mere fact that we can continue to borrow at some level means that we have no debt problem. This is not true.

Being able to finance your debt is not the same thing as paying it off. In one case you no longer have to make payments on the debt; in the other..... YOU DO!

It is not a negligable difference.

This is the same boneheaded mistake that Republicans made when they said we could easily finance private Social Security accounts----- provided that we all conveniently forget that we still have to pay the benefits of all current and many future retirees.

In the case of the deficit, Republicans seem to think that simply because we are able to finance our current debt, it somehow doesn't exist. Or at least that it doesn't exist at a burdensome level.

But this is not true, is it? We do have a debt. Eight trillion dollars worth of debt, in fact. That's real money. And we owe it. Being able, as Dan S. suggests, to pass this level of debt burden on to the future is no solution. It will still be the same percentage of GDP then as it is now and it will still be a debt we owe, won't it?

Yes, it will. Let's do a little thought experiment, shall we? Let's imagine what would happen if the US paid off its entire debt in one year. The US has a GDP of 13 trillion dollars and a debt of 8 trillion. So debt is equivalent to 60% of GDP. Thus, in order to pay off US debt in one year, the average income of everyone in the US would have to reduced by 60% for one year.

What would the effect of this be? Well, it would be bad. While the top tiers of the economy could take a 60% hit to income and survive, the bottom tiers could not. All those people living at, or slightly above, the poverty line would no longer have enough income to buy food or pay rent. They would all starve or freeze to death. Something like 20% of the entire population of the United States would die of starvation. A equal percentage would suffer severe privation and poverty.

Does that sound like a burdensome debt to you now? Yes, yes it does, doesn't it? Fourty percent of the US population either starved to death or reduced to total poverty would, I think, be something of a burden to the country.

Passing this amount of debt burden on to the future does not solve the problem. It will still be the same amount of debt burden (the same percentage of GDP) then as it is now. And so twenty percent of the US population of ten years from now will die instead of twenty percent dying now. That's no improvement, except, perhaps, for people who do not intend to be alive in ten years and those who have the money to avoid the consequences of the debt disaster.

The only way to avoid starving a signifigant percentage of the US population to death is to pay down our debt over a longer period of time than one year. A much longer period of time. But in order to do that, we actually have to.... well..... start doing it at some point.

[Patroklos]

If I paid off all my debt right now I would. Obvioulsy if you close the time of payment to a ridiculoulsy short time frame the debt becomes a burden.

I happen to beloeve it is a burden, but that was a very poor way to try and show it.

[DanS]

TMV: What are your questions that KH has not yet answered? By the way, you're the most moronic moron that I have encountered today.

Economic growth runs about 3 to 3.5% real, 5 to 5.5% nominal per annum on average. Both inflation and real growth are higher than the average this year, such that the nominal growth rate will be something like 6.5%. Maybe higher.

[The Mad Viking]

Dan

The assumption that government revenue grows in direct correlation to GDP seems specious.

GDP calculations, as I understand it, INCLUDE government spending. Which typically does not generate direct revenue!

I suppose you are suggesting that tax policy will catch up and that the economy can support the same real tax rate.

But, for example, in 2003 tax revenue fell despite the growth in the GDP.

BTW, your 6.5% projection fro this year is the highest I have seen, and I'm curious where it comes from.



"You call him a moron, and he just sits there, grinning moronally!" --Homer Simpson

[The Mad Viking]

Originally posted by Vanguard
Some of you seem to believe that the mere fact that we can continue to borrow at some level means that we have no debt problem. This is not true.

Being able to finance your debt is not the same thing as paying it off. In one case you no longer have to make payments on the debt; in the other..... YOU DO!

It is not a negligable difference.

This is the same boneheaded mistake that Republicans made when they said we could easily finance private Social Security accounts----- provided that we all conveniently forget that we still have to pay the benefits of all current and many future retirees.

In the case of the deficit, Republicans seem to think that simply because we are able to finance our current debt, it somehow doesn't exist. Or at least that it doesn't exist at a burdensome level.

But this is not true, is it? We do have a debt. Eight trillion dollars worth of debt, in fact. That's real money. And we owe it. Being able, as Dan S. suggests, to pass this level of debt burden on to the future is no solution. It will still be the same percentage of GDP then as it is now and it will still be a debt we owe, won't it?

Yes, it will. Let's do a little thought experiment, shall we? Let's imagine what would happen if the US paid off its entire debt in one year. The US has a GDP of 13 trillion dollars and a debt of 8 trillion. So debt is equivalent to 60% of GDP. Thus, in order to pay off US debt in one year, the average income of everyone in the US would have to reduced by 60% for one year.

What would the effect of this be? Well, it would be bad. While the top tiers of the economy could take a 60% hit to income and survive, the bottom tiers could not. All those people living at, or slightly above, the poverty line would no longer have enough income to buy food or pay rent. They would all starve or freeze to death. Something like 20% of the entire population of the United States would die of starvation. A equal percentage would suffer severe privation and poverty.

Does that sound like a burdensome debt to you now? Yes, yes it does, doesn't it? Fourty percent of the US population either starved to death or reduced to total poverty would, I think, be something of a burden to the country.

Passing this amount of debt burden on to the future does not solve the problem. It will still be the same amount of debt burden (the same percentage of GDP) then as it is now. And so twenty percent of the US population of ten years from now will die instead of twenty percent dying now. That's no improvement, except, perhaps, for people who do not intend to be alive in ten years and those who have the money to avoid the consequences of the debt disaster.

The only way to avoid starving a signifigant percentage of the US population to death is to pay down our debt over a longer period of time than one year. A much longer period of time. But in order to do that, we actually have to.... well..... start doing it at some point.

Actually, if you simply stop adding to the debt, and never spend a cent reducing the principal, it will become neglible in 100 years, because of the annual growth in the GDP.

[DanS]

GDP calculations, as I understand it, INCLUDE government spending. Which typically does not generate direct revenue!

Government services are a component of GDP and comprise about 19% of the total in the US. Meanwhile, government spending is about 32.5% of GDP.

Tax collections in the US rise as the economy grows. It's not a direct effect. For instance, business profits aren't always fat, even in a growing economy. Also, you can lower or raise the tax rates, if you choose (in the US, the tax rate rises as the economy grows).

[Vanguard]

Actually, if you simply stop adding to the debt, and never spend a cent reducing the principal, it will become neglible in 100 years, because of the annual growth in the GDP.

No. We pay interest on our debt.

If we simply stop adding to the debt then in 100 years our debt will be, oh, I don't know, let's say five times our GDP? Something like that.

That's assuming a rate of growth of more or less 2.5%--- about the long-term historical growth rate of the United States.

Very high rates of growth are not realistic. We have only had relatively high rates of growth in the US recently because we have been adding to the debt. If we stop "adding" to the debt (adding to the principle) then our growth rate will fall to historical levels (hopefully at least).

Seriously, what you suggest is that people are willing to loan us money at a loss. Why would they do this?

It is true that people are willing to accept a slightly lower rate of return on government bonds because of their low risk. But unfortunately they are only willing to do this because there is risk in the rest of the economy. That risk, in the long term, will nominalize. And when it does, the rest of the economy will crash and our debt will become unsustainable. That will be bad.

Even if the risk doesn't nominalize, the economy will still lose value due to the inefficient allocation of capital inherent in people overestimating risk. That might work to our advantage in the short term, but in the long term it will misallocate capital away from its most productive use and into, say, US weapons programs. So it's still bad.

[Vesayen]

We need a constitutional amendment that if the national debt grows over a certain % during a presidents adminstration and there was not war where we were attacked(directly) first, the president is executed at the end of his term, and we decimate congress(i.e. line up everyone in congress and execute every 10'th man).

Sound good?

[Vanguard]

Of course the real fallacy here is in predicting that US population growth will continue at the same rate for the next fifty years and that GDP per capita will increase at the same rate it has been.

But that means that in fifty years the US will have a population of 500 million and that their average per capita real income will be four times what it is now. This is possible I suppose. Thus the economy will grow eightfold in fifty years. This would certainly reduce the debt burden some, but what makes anyone think it will happen?

Increasing the population of the US does not mean that our per capita growth rate will automatically rise at the same rate as it has been. There are some limits to resources. Arable land, for instance, isn't overly abundant now.

[DanS]

Of course the real fallacy here is in predicting that US population growth will continue at the same rate for the next fifty years and that GDP per capita will increase at the same rate it has been.

This is a valid criticism, but it has happened in most other periods of US history (not all). Maybe people will stop coming. Maybe we'll start to shoot illegals on sight. But I wouldn't bet on it.

[Dinner]

One of the few Bush policies I can support is making it easier for illegals to gain legal status. It simply isn't good for the nation to have 10-13 million people who exist off the legal books.

[Lawrence of Arabia]

Arable land, for instance, isn't overly abundant now.

import. developing countries would benefit greatly with no farm subsidies on cash crops and increasing populations in the first world.

[The Mad Viking]

Originally posted by Vanguard


No. We pay interest on our debt.

If we simply stop adding to the debt then in 100 years our debt will be, oh, I don't know, let's say five times our GDP? Something like that.

That is simply not true.

You pay interest on the debt every year. This is part of the annual budget.

The debt only grows by the amount of the annual deficit.

If you eliminate the deficit, your budget still includes paying the interest on your debt.

Then, after 100 years averaging, say, just 2.5% growth, a debt that was 40% of your GDP becomes just 3.3% of the GDP.

If you grow at 4%, (still conservative) the debt falls from 40% to less than 0.8% in 100 years.