Wednesday, November 17, 2010

A Look at the Debt Problem (2)


Took the debt numbers used for my November 15th graphs. Got rid of the oldest, mismatched stuff. Then figured "Change From Previous Year" calculations for public and private debt. Made a graph of that. But CFPY numbers vary a lot. Showing public and private on the same graph made a messy picture. I ended up with two graphs:



Does Size Matter?

The first thing I see in these graphs is that the ups and downs of public debt -- Graph #2 -- are much bigger than those of private debt. It is not immediately clear to me why.

The two screen clips above show some of my numbers. The left-hand clip shows the values I started with. The right-hand clip shows "percent change" figures for today's graphs.

(The source numbers -- the left-hand clip -- are shown in Graph #2 of November 15th. I used them to figure the public and private "portions of total debt" shown in Graph #1 of November 15th. The right-hand clip is what's new here: It shows change-from-previous-year values for those "portions" of total debt. Today's graphs show annual changes in the "indebtedness balance" of the public and private sectors.)


In that right-hand clip you can see the "Pub/Tot" numbers in column B vary from a low of -7.4% in 1973, to -5.3% in 1974, to a high of 8.2% in 1975. On today's Graph #2 (repeated at right) you can see that big jump, from the 1973 low to the 1975 peak, with the shading of the 1974 recession behind it.

I accidentally exaggerated this jump  by going with newer data, switching from the 1956-1995 data series to the 1975-2009 series at 1975 (as I did for the graphs in the previous post). But the exaggeration is slight. If I had only used the 1956-1995 series, the 1975 peak value would have been 8.0% rather than 8.2%. Almost the same number. Whatever. Anyway, that's what I did.

It turns out that the CFPY jumps are bigger for Public than for Private debt because Public debt is smaller, so a given jump stands out more in comparison to Public debt.

For example, between 1974 and 1975, public debt increased from 24.3% of total debt, to 26.3%. At the same time private debt fell from 75.7% of total debt to 73.7%. In both cases the change is two percentage points of total debt. But for private debt, the change was 2 out of 75.7 percentage points. That's less than a 3% change. For public debt it was a change of 2 out of 24.3 -- an increase of 8.2%. So the change looks bigger for public debt than private, because public debt is so much smaller.

The "When" of it

The next thing I notice on the public graph is that the big changes in Public CFPY do not begin until the 1974 recession. The change from 1974 to 1975 is the first big one.

On the 15th I linked to a graph by Ross Perot (from his 1992 book) that showed the number of "generations required for U.S. living standards to double." Before 1973, less than two generations were required. After 1973, 12 generations are required. Perot's graph shows a significant slowdown in economic growth in the years after 1973.

That slowdown makes an appearance on my Graph #2 as a dramatic increase in the size of the Public CFPY changes since 1974.

The change in Public CFPY is clearly associated with the economic slowdown. So, either the economy slowed immediately in response to suddenly increased government deficits, or the economic slowdown came first and increased deficits were the response. The latter is what happened, of course. But it is worth noting that Public CFPY changes continue to be large, meaning that the 1974 slowdown has not yet abated.

Below Zero!

The next thing I see on the Public CFPY graph is that, before the 1974 recession, all of the changes take place below the zero-line. (Most of the changes before 1974 are between zero and 5 below.) What this means is that all of the Public CFPY changes between 1957 and 1973 were decreases. In plain language, the public share of total debt was decreasing until the 1974 recession.

The Private Eye

The Public CFPY graph shows small changes until the 1974 recession, and large changes after. On the same graph, the entire trend-line is below zero until the 1974 recession. After that recession the trend-line is more or less centered on the zero, and crosses the zero easily. It is as though there are two different graphs here, or at least two different sets of circumstances shown on the graph: before 1974, and since.

Having noticed this "1974 shift" on the Public CFPY graph, the eye expects to see something similar on the Private CFPY. Here, there is no clear shift in the size of the changes. But it is easy to see that the red trend-line of this graph is entirely above zero until the 1974 recession. Those are the same years that Public CFPY was entirely below zero. And it is easy to see that since 1974, the red trend-line, like the black one, looks to be centered on the zero.


The big jumps in Public CFPY only start in 1975. Everything on the Public graph is below zero until the 1974 recession. And everything on the Private graph is above zero until the 1974 recession.

Changes in Public debt were small until the 1974 recession, but larger since that time. Until the '74 recession, the tendency of public debt was to decrease. Until that same recession, the tendency of private debt was to increase. Since the economic slowdown of 1974, the end of our so-called golden age, the tendency of government debt to decrease has dissipated.

These changes suggest it was the economic slowdown -- the change noted by Perot and others -- that caused the trends of debt to change. These changes also suggest that government debt grows more when the economy is slow than when it is healthy -- but that since 1974, the growth of public debt has not restored economic vigor.

Increased public debt has not restored economic vigor since 1974. But neither was it an increasing public debt before 1974 that undermined economic vigor. In the years before 1974 it was private sector debt that was increasing.

These observations suggest that the solution to the federal debt problem is to make the economy vigorous again by reducing debt in the private sector.

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