Tuesday, March 20, 2012

A Simple Test

Back on 2 January, Nick Rowe considered The 30 years non-war over the debt burden. "There are 4 possible positions to take on the debt," he wrote.

This is one of them:

3. Robert Barro/Ricardian Equivalence. 'The national debt is not a burden on future taxpayers (except for the deadweight costs of distortionary taxation) but only because ordinary people take steps to fully offset the burden on future generations by increasing private saving to offset government dissaving and increasing bequests to their heirs to offset the debt burden.'

Right away, or anyway by mid-March, I realized I could go to FRED and look at government dissaving and increases in private saving.

But I'm not sure what data series to use. GPSAVE, which FRED calls "Gross Private Saving" is nowhere close. I had to look at the annual changes in it to get anything close to Federal deficit numbers. Since the numbers are close, I went with that.

For the graph I corrected both the saving numbers and the deficit numbers for inflation, because there was an obvious hump during the Great Inflation and I thought it might distort the image of what was occurring.

For the Federal deficits I used FYFSD with a negative sign to make increasing deficits go up, and divided by 1000 to convert millions to billions.

I stopped the years at 2008 so that the gigantic deficit spike didn't shrink everything else down and hide the information.

Graph #1: Annual Change in Gross Private Saving (blue) and Federal Deficits (Inverted)
Both adjusted for inflation

Looks like the two time series traveled roughly together until about 1980. Dunno how the Barro hypothesis would stand up during that early period. Correlation aside, the two do seem to run flat together before 1967 and then climb together from 1967 to 1980. Even with the inflation removed.

But the similarity doesn't appear to stand up at all after 1980. Deficits were particularly high until about 1992, then fell dramatically during the budget balancing years, and then spiked up sharply again. None of this is reflected in the blue line that shows saving.

So, during the years that Ricardian Equivalence has been helping to guide policy, it seems *not* to be true that "ordinary people take steps to fully offset the burden on future generations by increasing private saving to offset government dissaving".

If this is the right measure of saving.

Now I don't know. I put Gross Private Saving (GPSAVE) in blue on Graph #2 below. And Personal Saving (PSAVE) in red. And the annual changes in Gross Private Saving, in green. The green one is the same shown on Graph #1 above in blue, which matched fairly well for a while.

Graph #2: Gross Private Saving (blue), Personal Saving (red), Changes in Gross Private Saving (green)

What Graph #2 shows is that both GPSAVE and PSAVE are much larger than Federal deficits. And Graph #1 shows that the changes in GPSAVE have not been near in size to Federal deficits since we elected Reagan.

And just to give a bit of context to Gross Private Saving...

Graph #3: Gross Private Saving (blue) and all the spending money we have (red)

... since around 1972, with very few exceptions, Gross Private Saving has been more each year than all the money we have for spending.

For what it's worth.

No comments: