## Wednesday, July 20, 2011

### The Federal Relative and "relative to GDP"

This is the Federal Relative; we looked at it recently:

 Graph #1: The Federal Relative

Since (as you can see) the Federal Relative is so low, I woke up today wondering what is it that drives people crazy about the Federal debt. Maybe it bothers people that the debt is so big, relative to GDP:

 Graph #2: The Federal Relative and Federal debt relative to GDP

The red line here shows the Federal debt, relative to GDP. It's the "size" of the Federal debt. It's big. Since the mid-1960s it has been bigger than the Federal Relative. And though they show similar patterns since that time, the red line has been pulling away, rising higher and higher. And maybe that's what bothers people.

Still... to drive the red line down, we must reduce the Federal debt relative to GDP. But if we want to reduce the Federal debt, we must also push the blue line down. In order to push the red line down, we must push the blue line down. And this is a problem, for the blue line is already just about as low as it can go.

When we take Graph #2 and add to it (in green, below) the trend line of Non-Federal debt, relative to GDP, we start to see what a high level of debt really is:

 Graph #3: also comparing Non-Federal debt to GDP

If you get the feeling it is the Non-Federal debt that's pulling everything else up, I think you're right.

Add the Non-Federal Relative to the graph, and it stands out above all:

 Graph #4: with the Non-Federal Relative added in
Once again, the Non-Federal component of debt is by far the biggest part of the debt problem. Everything else pales beside it. (And this graph shows the understated version of the Non-Federal Relative.)

On Graph #4 here, in the red and blue lines, the Federal trends, you can see slight increase through the 1980s and into the 1990s.

In the Non-Federal trends, you can see a flattening in the green line, mid-1980s to mid-90s. And in the orange line you can see that flattening translated into a brief but significant decline, 1989-1994. That came just before the vigorous uptrend that accompanied our best recent years.

Again: It was the fall of the orange line, Non-Federal debt, that allowed our economy to perform well, however briefly.

What we need to do is bring the Non-Federal Relative down to perhaps half where it has been for 30 years or more.

The best way to do that? Reduce private-sector debt, the green line. Not the red and blue.

And yes, very often I get up at two in the morning, because my restless mind put two notions together and I want to see what the graph looks like.

Jazzbumpa said...

Finally!

Debt/GDP is a meaningful ratio, because GDP is a measure of the wealth of a nation, and, hence, it's ability to carry the debt burden.

The orange line is still a crock.

D = A + B

A/D and B/D, as percentages of the whole, can give you information that might be useful.

A/B and B/A are just artificial ways of magnifying a trend over time. It's involuted nonsense.

A/B = A/(D-A)
A = (A/(D-A))/(D-A)

This makes A a function of itself - if you don't bother to cancel, and a tautology if you do. Doesn't that annoy the mathematician in you, at least in some small way?

Again: It was the fall of the orange line, Non-Federal debt, that allowed our economy to perform well, however briefly.

Correlation is not causation. You need a rational, coherent theoretical narrative to support this view, not just an assertion.

The best way to do that? Reduce private-sector debt, the green line.

How about grow GDP - the denominator?!? Why isn't that a just a whole hell of a lot better?

Cheers!
JzB

The Arthurian said...

Jazz
If you reject every little piece of what I'm doing, you will never see how the pieces fit together. I'm not saying you have to swallow every nibble as I spit it out. (Forgive the imagery.) But it would be nice if you postpone judgment until you have a chance to see how a few pieces fit together.

Debt/GDP is a meaningful ratio, because GDP is a measure of the wealth of a nation, and, hence, it's ability to carry the debt burden.

No, not wealth. GDP is a measure of the *income* of a nation. (Income is the golden egg. Wealth is the goose that lays it.)

Anyway, you have to be careful with Debt/GDP. You are saying the same thing here that economists and policymakers were saying right up to the moment of the financial crisis: "GDP is a measure of the ... ability to carry the debt burden." I say it is not a good measure. (I have a post on that somewhere.) (Nibble.)

You might say the increase in Debt/GDP was an indicator that we should have listened to. I say, they don't know how to read the indicator. As long as the burden of debt doesn't collapse the economy, they keep piling more debt on top of what we already have. (I have a post on Mandelbrot about this.) (Nibble.)

(I have written this before too, somewhere, that) comparing debt to income is the micro-economic approach. The macro-economic approach is to compare debt to the quantity of money. (But that is not pertinent to this discussion.) (But it *is* original stuff.)

Krugman has argued that a high level of Debt/GDP is not [necessarily] a problem. Well, he's right: It didn't cause any financial crisis for 30 years after World War II. But it does now. (Why? For a hint, look at the breakdown of debt into Federal and Non-Federal. And that is what my debt-relatives are all about!) (Nibble.)

D = A + B

A/D and B/D, as percentages of the whole, can give you information that might be useful.

A/B and B/A are just ... ways of magnifying a trend over time.

A/B and B/A are indeed ways of magnifying changes in the trend. That is absolutely correct. Making it easier to see how the trend of the graph corresponds to the trend of the economy, as I have tried to show, and you have tried to deny.

The A/B relation examines the relation between the two sectors.

A/B = A/(D-A)
A = (A/(D-A))/(D-A)

This makes A a function of itself - if you don't bother to cancel, and a tautology if you do. Doesn't that annoy the mathematician in you, at least in some small way?

No. It makes A a function of itself AND OF D, where D is total debt. But as you have pointed out, D = A + B. So then A is a function of itself and B. Which is pretty much my point. We have to keep an eye on BOTH the Federal debt and the Non-Federal debt.

I suggest that there is a relation between the two that has long been ignored. It is being ignored right now, in the debt-ceiling talks.

Correlation is not causation. You need a rational, coherent theoretical narrative to support this view, not just an assertion.

Yes. For causation you might review the "Rise and Fall of the Non-Federal Relative" post. What I said before, about not rejecting every nibble.

I don't mean to suggest that the recommended post is complete. But it is a place to start.

How about grow GDP - the denominator?!? Why isn't that a just a whole hell of a lot better?

Well yeah, Jazz, that *is* the objective. But it isn't magic. You don't just command it to happen. You have to find out what is hindering growth. And regarding that, I happen to be the guy who is on to something... IMHO.

Jazzbumpa said...

I'm not rejecting (except for the ratio thing I prattled on about, which I reject in its entirely for the reasons mantioned.)

I'm challenging you.

I don't know how to find posts on your blog. You don't have a search function.

Gotta run.

Cheers!
JzB