Wednesday, November 28, 2012

Simulacron: Growth and the Federal Debt

Had some trouble with Federal debt numbers. Didn't trust my results. Thought it might be a confusion of quarterly data and annual-versus-quarterly rates of change. Downloaded the numbers from FRED again, this time annual numbers.

 Graph #1:Developing the Trend Calcs
Blue is RGDP early (1947-1979). Red is RGDP late (1980-2007). Exponential trend equations are provided by Excel.

 Graph #2: RGDP Fitted to the Trend Lines
The red trend line is the actual RGDP trend, before 1980. The green trend line is the actual RGDP trend since 1980 (and before the financial crisis). RGDP (blue) hugs the trend lines.

 Graph #3:RGDP Since 1980 boosted to the Early Trend. Compare Graph #2.
For the years since 1980, I took the RGDP numbers, divided by the green-trend number and multiplied by the red-trend number to simulate continuation of the Early Trend in RGDP growth. This boosts RGDP and pushes the blue line up.

 Graph #4: A Difference since 1980, due to faster the GDP growth of Graph #3. Thats DEBT, Gross Federal DEBT, not REBT thank you very much.
I used the "boosted" RGDP numbers to calculate high-performance NGDP numbers. The blue line shows Gross Federal Debt relative to actual NGDP. The red is lower since 1980 because the high performance NGDP values are bigger.

NOTE: The difference shown on Graph #4 is due to the difference in Early-Trend and Actual NGDP numbers. All of the change is in the denominator. In Graph #5, I change the debt.

 Graph #5: A Faster Growing Economy Generates More Tax Revenue
GDP is income. When GDP grows faster, income goes up. When income goes up, tax revenue goes up. Faster GDP growth since 1980 produces more tax revenue. I take this extra tax revenue and apply it to debt and deficits. Doing this brings the Gross Federal Debt down from the red line to the blue line -- from 15000 billion dollars to less than 6000 billion.

Next, Graph #6 combines the high-performance NGDP denominator of Graph #4 with the high-performance reduced-debt numerator of Graph #5.

 Graph #6: Better Growth Reduces Debt
The red line is the Gross Federal Debt as a percent of nominal GDP, the debt graph everybody shows. The blue line is Gross Federal Debt reduced by the extra tax revenue generated by the faster-growing economy, divided by nominal GDP that is larger because of the faster growth.

The blue line here assumes everything is as it was since 1980, except that RGDP growth continued at its pre-1980 rate.