Thursday, April 10, 2014

No, the government's debt isn't out of control (and, yes, we should worry about unemployment)

For the last several years (since the fear of an economic meltdown passed, really) it's been almost a truism in America that government debt is out of control. This has been what serious people say and repeat and focus on, despite the fact that the economy has never fully recovered since the crisis. Despite the continued economic malaise, people on the left and right have called for the government to cut spending, and many cuts were indeed made (hence the sequester, debt ceiling stand-offs, etc). Even back in 2009 President Obama made the dumb mistake of saying that, as families were tightening their belts, so too should the federal government. With the economy still far from healthy, you still hear people saying that government outlays are still too great. This, from Utah Rep Ken Ivory, is a great example:

The rest of our conversation is here. For the record, currently the US spends 6% of its budget on interest payments and 19% on the military (see here). Rather than reply and argue this each time it comes up, I thought I'd present three charts here that help us gain a general sense of economic history. The data and figures come from the wonderful FRED database, which can be used by all.

First, I'll present a time series of total federal debt (the red line, right axis) and interest payments on this debt (the blue line, left axis) as a percentage of GDP:

Couple large features. Notice the large increase in debt (red line) during the second world war, and then the notable decrease through the 1950s-1970s. Indeed, the federal debt increased quite rapidly during the crisis of 2008-2010 because of TARP, ARRA, unemployment benefits, food stamps, Medicaid, and other social safety net mechanisms that kicked in during the downturn. For sure, gross federal debt of 60% is high in historical terms, but it was half again as high during WWII and this didn't result in economic catastrophe. Also notice the concavity (ie, the change of the change) of the red line over the last year. This means the deficit has most recently been shrinking, not growing. Another barometer for how dangerous the situation is is how much interest is being paid on the debt. This is true not only because more debt means more debt is being charged interest, but also because the interest rate goes up on the debt as one becomes more of a credit risk. BUT, note how the amount of interest paid by the US (relative to the size of the economy) was twice as high throughout the 1980s and 1990s (blue line) as it is now. If investors were worried about the US defaulting on its debt, they wouldn't be lending it money for a paltry ~2.65% (for 10 years).

Another general claim made by many is that inflation is out of control and that 1) the government is trying to inflate away its debt, 2) that it is thus can't be trusted with any more debt, and 3) that we should thus again tie the dollar to gold. I'll let FRED speak to this. Here's a time series of the inflation rate (sans the volatile food and energy):

Note that inflation is currently at almost a fifty year low, and there are even good arguments that more inflation is needed at present.

Finally, to demonstrate that worries about debt and inflation are not only overblown, but also distracting us from a larger crisis, here is a time series of the median duration of unemployment in the US (ie, half of the unemployed at any given time have unemployed longer than the median duration and half for a shorter time).

So, the median unemployed person has currently been out of work for ~15 weeks, whereas the highest rate previously was around 10 weeks (gray bars are recessions). The gist is that the country hasn't seen an unemployment crisis anything close to our current situation for 50+ years (and likely since the 1930s).

Considering these three charts, why would anyone be worried about the debt or inflation instead of the unemployment crisis?

Note: I chose this measure of unemployment because the simple unemployment rate masks how many people are moving into and out of the labor market at any given time. I would have used the U-6 rate, but the FRED database didn't have it in a long time series.

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