After I wrote yesterday's post and showed the "national debt (adjusted for inflation) since George Washington" graph, bluemexico's graph, I went and made my own graph right away.
|Graph #1: Federal Debt (blue) and Its Inflation Adjustments, Right (red) and Wrong (green)|
|Graph #2: The Last Part of Yesterday's Graph|
But the two are close enough I can tell that bluemexico adjusted the debt for inflation using a calculation like the one that is used to adjust GDP for inflation. His graph shows the same pattern as my green line: It shows a peak in 1945. Then it falls a bit. Then it runs flat for the rest of the '50s, the '60s, and into the '70s. On mine, into the '80s.
Compare the green line to the red in the years before the mid-1980s, or the green to the blue, and it is easy to see that the green is the flattest of the three. That flatness is the result of the way inflation is taken out of the debt numbers.
What's wrong with the green line? Debt accumulates over many years. The effect of inflation on debt depends on what year the money was borrowed. But the calculation for the green line pretends that the whole accumulation was borrowed in a single year: in 1970 for all the debt accumulated up to 1970, in 1980 for all the debt accumulated up to 1980, and like that.
I know, I know. I hope I don't still have debt left over from 1970 or 1980. Still, the graph does show the debt of those years. And if the graph shows it wrong, people get wrong ideas about debt and the economy. That leads to flawed analysis and bad policy.
Here is a post on how to adjust debt for inflation.