Monday, January 17, 2011

Analyzing an Analysis of Debt



How do you pronounce the word "finance?"

Do you say "FI-nance," or "fi-NANCE?"

Not that it makes any difference. Just as there's more than one way to say the word, there's more than one way to evaluate its numbers.

Take, for example, the complex structure of our national debt, and how we finance it. On the one hand, we like to think it's as simple as home economics: when incoming revenue can't keep up with outgoing expenses, then we're in debt.

For government accounting, however, our illustrious politicians and bureaucrats, not to mention our Wall Street gurus, have crafted debt into an art form, in which debts and deficits can exist more in theory than reality. It's all in how you move the money around... and how much money you can make doing it.

Graphing Political Calculations

Recently, both public sentiment and political momentum have increased the urgency to address America's rampant national indebtedness. Almost everyone agrees that the numbers have gotten too big to ignore. Some of the stimulus for this urgency has come from confusion over China's growing role in acquiring and servicing our debt. Other attention has been focused on the drain entitlement programs such as Social Security have been on our national finances.

Last week, the chart you see above started circulating on conservative websites purporting to support two contentions of many right-wing economists. Its primary objective involves proving that people who alarmingly bewail China's purchase of our debt are basically being sensationalistic. Political Calculations (PC), crafters of the chart, also took the time to break out percentages showing that Social Security and civil service retirements are costing us, according to their scenario, about 24% of our national debt.

But how accurate is this interpretation of our indebtedness? Charts and graphs offer easy ways to misrepresent real facts and figures. What are these numbers NOT saying?

New Player in an Old Game

We've been racking up our national debt for decades now, and a number of countries, including Russia, India, Japan, and Columbia, have been buying it. Literally. China has been, too, but within the past several years, they've leapfrogged over Japan to be our primary foreign lienholder. As of September of last year, they owned 7.5% of our national debt.

Crafters of the above graphic would have us think that this comparatively minuscule percentage proves that the fuss over China's holding of our debt is a tempest in a teapot. And in terms of long-range economic implications, that may prove true. But is it the whole picture?

What this graphic doesn't show is the pace at which China has been acquiring our debt.

Indeed, there is no metric on the graphic to show the increase in debt China has secured in a relatively short amount of time, compared with the overall age of our debt. So, although the numbers appear to show China "only" holds 7.5%, the graphic still doesn't tell us the rate at which they've been buying. And since some experts have become alarmed that China has, within the past three years, purchased nearly ten percent of America's debt, this graphic does nothing to allay that concern, does it?

Is their spending spree for our debt going to continue, or has this been a momentary spurt? Might China's debt ownership be declining from even higher historic percentages? We can't tell from the graphic.

Granted, nobody seemed to be as hysterical about foreign participation in our debt market when the Japanese were the leaders, and it's yet to be proven that this foreign participation isn't in actuality a monetary endorsement of the vitality of our national economy.

Conservatives who argue that China can't afford to call due its loans could very well be correct in positing that this financial arrangement serves as economic insurance for us. And them.

But the graphic doesn't prove or disprove any of this. We just have a percentage captured in time. Informative, perhaps, but hardly insightful.

Entitled to Their Viewpoint

But it's not just the worry over China that this chart fails to eradicate. The other little problem we have regards the percentage of debt that has already been spent on entitlement programs such as Social Security and the Civil Service Retirement Fund, which according to this graphic, stands at 23.9%.

Many conservatives have been railing furiously against Social Security, claiming it's an extravagance we can ill afford to pay our lazy, retired workforce. Again, though, the graphic can be deceptive.

For instance, isn't comparing entitlement debt to China's rather like comparing apples and oranges? Isn't what China owns an amalgamation of existing debt instruments? Social Security's debt represents actual expendatures: the difference between what employees have paid into the system and what the government hasn't specifically funded. Just listing Social Security as a massive black hole of debt doesn't intrinsically devalue the program; it simply means that politicians have lacked the political will to either fund it properly or scale it down to more affordable levels.

If you think about it, the graphic could also break out the debt George Bush's two wars have cost the United States, but it doesn't do that. How much these wars have set us back is anybody's guess at this point, but considering our annual Defense Department expenditures, it's not chump change, is it?

In 2009, Social Security swallowed 20% of the Federal budget, while Defense gobbled 23%. Both are staggering percentages, but on PC's graphic, it appears military spending got lumped into the "U.S. Individuals and Institutions" category. Perhaps to dimly highlight Social Security to the benefit of Defense? Hmm...

An even more curious claim comes from "Sherman Says," one of the readers responding to PC's graphic on http://www.ritzholtz.com/. According to Sherman Says, the reason right-wingers have such disdain for Social Security rests in corporate America's inability to figure out how to make money from it, like they have with Medicare.

I'm not going to get into that debate, at least not here. However, the reason I bring this graphic up at all is to show how just as the right gets hot and bothered over fuzzy math by left wingers, they can be guilty of doing the same thing.

Whether or not we're selling ourselves down the river while selling our debt to China, does it help the dialog over the issue by tossing about spurious percentages? And while I don't mean to imply that Social Security is a flawless program, fixing it surely becomes a harder proposition by skewing data and distorting comparisons.

Integrity must be present for trust between factions to be established. And we won't fix any of our pressing national problems without trust from all sides of the debate.

After all, a trillion dollars here, a trillion dollars there, and pretty soon, we're talking about real money.
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