Debt Scores

Inevitable Uncertainty
“Significant Risks”
Curious Assumptions
The Future of Energy
Dallas and Emergency Landings

Identifying problems is great. Identifying solutions is even better, especially when the politicians who are supposed to be solving our big problems don’t even try.

In last week’s Debt Catharsis letter, I offered some ideas to start fixing the federal debt problem. To be clear, those ideas won’t balance the budget and in many ways are woefully inadequate. But even this feeble effort drew positive feedback from far and wide. That was gratifying and I hope encourages the leaders who can actually do something to, well, do something.

Today I want to go deeper in explaining the scale of this problem and why it will get far worse, absent serious changes that are not presently on the radar.

Inevitable Uncertainty

Discussing the debt problem is difficult in part because we have to see incomprehensibly large numbers. Quantities in millions, billions, trillions, and (soon) quadrillions just don’t occur in everyday life. Our brains revolt against processing them. Moreover, inflation and economic growth change the significance of these numbers over time. A billion dollars of debt in, say, 1970, was a bigger deal back then than it is now.

One way around this is to express the debt as a percentage of real gross domestic product. This adjusts both for inflation (i.e., the purchasing power of each dollar) and the debt’s amount relative to the economy. This method has its own challenges, though, one of which is that GDP misses quite a few things. It’s not a great way to measure economic growth. It is the best yardstick we have, though.

But forecasting the future debt as a percentage of GDP means we are estimating both sides of the equation. We have to make assumptions not only about how much debt the government will have at a specific future date, but also what GDP will be on that same date. Saying the debt will be X% of GDP in 2035 is a forecast divided by another forecast.

That’s error-prone, but most of the error potential is on the debt side. GDP growth varies but over long periods is a fairly smooth line. Here it is from 1947 to the present.

FRED graph