Tuesday, September 23, 2014

Just right

I'm always on the lookout for something said "just right" that will help me understand a concept or help me convey an idea. Funny thing, though, sometimes the thing that's just right is the perfect expression of a wrong idea. I think it happens most often when somebody takes an idea that was wrong to begin with, and dumbs it down to make it clear.

We tend to accept as true the things we've been taught. Not all of it of course, but the bigger part. It's natural. We're spoon-fed practically from birth, and much of what we know is so terribly familiar to us that we never doubt the truth of it.

Anyway, while looking up "inflation adjusting debt" the other day, I came across U.S. Public Debt Since 1940 - Adjusted for Inflation, an old (2008) post by John Buck at Economic Perspectives:
Here is the U.S. public debt since 1940 adjusted for inflation:

Adjusting the public debt for inflation provides a good account of federal government borrowing. The public debt increased in the 1940s to finance World War II. The public debt remained fairly constant from the late 1940s through 1981.

"Adjusting the public debt for inflation," Buck says, "provides a good account of federal government borrowing."

No it doesn't. If you want to see borrowing you should look at borrowing, not debt:

Graph #2: We were borrowing more by the mid-1970s than we were during World War Two
Federal deficits increased all through the 1950s and 1960s and 1970s.

Graph #3: But the 1970s don't look so bad when deficits are adjusted for inflation

Inflation adjustment makes it look like "public debt remained fairly constant from the late 1940s through 1981". Inflation adjustment hides the fact that the public debt was less constant than it appears on Buck's graph.

Graph #4: Gross Federal Debt  1940-1981


netbacker said...

Why does the federal goverent borrow in its own currency? What the need for it to borrow? Or does it really borrow?

The Arthurian said...

The post is about what to look at and how to look at it when you want to say that something is "more than" or "less than" or "the same as" something else.

I don't understand your questions.

Why do we do what we do? What is the need for us to do it? And, are we really doing it? I don't know.

You caught me before my coffee!

jim said...

The reason the Federal govt borrows instead of just spending is to keep the accounts of the banking system in balance.

The constitution gives the govt power to coin money and regulate the value thereof; so it is technically and legally possible for the govt to simply spend without offsetting each dollar spent into the system by taxing or borrowing another dollar out of the system. However to regulate the value of money you need an established payment system and an accounting system that works. The current accepted system of accounting, balances liabilities against assets. If the govt spent without the counter balancing un-spending the banking system would be flooded with liabilities (i.e. deposits) that have no counter balancing assets.

This is not to say it can or can't be done. I'm saying it can't be done absent a complete overhaul of the current payment and accounting system.