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Keep large debt numbers in context

The debt of the United States is currently $14 trillion and is rising fast. Congressional Budget Office projections show it climbing to roughly $70 trillion in the next 75 years. • Numbers this large tend to boggle the mind. Such numbers lower our nation's sense of financial security, increase anxiety and, especially for future taxpayers, foster insecurity. • At a time when the United States is borrowing ever more money to repair our nation's infrastructure, buy oil, improve math and science education, and fight joblessness, should anxiety over America's debt prevent us from additional borrowing to modernize the country? Before answering that question, it is important to realize that such numbers — while accurate — are only part of the story. Such numbers play well in a sound bite, but the sound bite is missing some critically important contextual information.

Relative ability to repay

The debt capacity of a government, just as for a corporation or an individual, requires reference to the earning power from which that debt will be repaid. For example, when potential home buyers evaluate the affordability of a new home, they determine the size of the debt they can incur by comparing estimates of their monthly income to the mortgage payment. Because a mortgage is repaid in monthly installments, potential home buyers are able to obtain a loan that is some multiple of their annual income.

For instance, a couple whose combined income is $150,000 can buy a $300,000 house even though they could not possibly pay that purchase price in one lump sum. Simple arithmetic is used to calculate their relative ability to pay. If they conservatively assume that their incomes will not grow, the $300,000 is 6.7 percent of their total income over those 30 years. If, instead, they assume 2 percent annual income growth, that home costs 4.9 percent of their 30-year income; and, at a 3 percent growth rate, this figure falls to 4.1 percent.

Proportionality and the national debt

The projected $70 trillion debt referenced above is accumulated over the next 75 years.

But how does it compare to the nation's ability to pay? That is, what proportion is $70 trillion to the 75-year national income?

Just like the prospective homeowners, we don't know how fast America's national income will grow, but we can estimate high, low and "best guess" numbers.

At a "pessimistic" economic growth rate of zero percent, the gross domestic product will total $1.05 quadrillion over the next 75 years; at an "average" 2 percent rate, the GDP will total $2.46 quadrillion; and, at an "optimistic" 3 percent rate, the GDP will total $3.95 quadrillion.

Comparing $70 trillion to these three numbers, we see that debt as a percent of the GDP varies from 7 percent at zero economic growth to 2.84 percent at 2 percent growth and to slightly more than 1.77 percent at 3 percent growth. Such computation demonstrates that while the projected $70 trillion debt figure represents an important problem, it is also a problem that is quite manageable. Sure, let's get better control over the national budget, but there is no need to panic or take sudden actions with Social Security, or continue the neglect of our roads and rail networks.

Omitting information is misleading

In national budget discussions, projecting large, scary numbers such as $70 trillion should not be introduced without placing them in proportion to the economy's projected ability to pay. Omitting this second factor is to introduce false and possibly misleading information, to present a deceptive picture.

During the recent debates over the extension of the Bush-era tax rates, and the current debate over raising the debt ceiling, the urgent economic challenge of stabilizing the economy at reduced unemployment rates seems lost in the din over the 75-year projection of the national debt. Three debt-reduction commission reports made alarming assertions without using basic arithmetic to properly portray a sense of proportion.

Because much of the general public has only a tenuous understanding of such large numbers, we propose the following rules for the commentariat — reporters, politicians, pundits and professors.

Rule No. 1: Never use large debt numbers without stating the time period in which they are incurred and the corresponding proportion to ability to pay.

Rule No. 2: Never repeat statements made by others that fail to adhere to Rule No. 1, unless it is to include the missing information.

Rule No. 3: Report all failures to adhere to Rule No. 1 as a failure of professional ethics.

Charles O. Kroncke is associate dean in the University of South Florida College of Business. William L. Holahan chairs the department of economics at the University of Wisconsin-Milwaukee.

Keep large debt numbers in context 01/23/11 [Last modified: Sunday, January 23, 2011 3:30am]
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