Rogoff: 'Adding a Trillion Dollars in Debt Is Quite Manageable'

Said another way: Another $1,000,000,000,000.00 in public US debt is manageable. Can you believe that? I do now, because Professor Kenneth Rogoff said so and so do the numbers.

I stumbled upon this fascinating interview with Rogoff, economics professor at Harvard (his Alma Maters were MIT and Yale). The entire interview is here on the Minnesota Fed's website.

The attention grabber was Ken's statement, "Fortunately, adding a trillion dollars in debt is quite manageable for the United States." And on what basis? "...the United States grew decently until recently, so that our debt/GDP burden is still modest by European or Japanese standards."

Really? Let's have a look at that. The CIA fact book has the total listing here. And translated onto a map, the ratios are distributed like this (thanks to wikipedia):

click to enlarge

Looking closely at the CIA fact book, indeed Japan's debt/GDP burden is 170%. Italy is at 104%. Germany, Canada, France? All around 64%. And the US? A measly 61%.

So now that we know we are more qualified to take on more debt than Japan, or Canada, or France, historically how are we doing? How has our GDP compared to our debt load over time?

As you can see even though our debt has increased over time, our ability to pay the debt (our GDP) has kept pace (or outpaced) our debt load. And the ratio of debt to income is nowhere close to where it was in the mid-40s.

So what does the chart tell us? The proper way to measure the impact of national borrowing is by calculating the total debt as a percentage of income... just like qualifying for a home loan. This is exactly the same exercise that banks use to determine if you are fit to buy that huge house. Just because your debt may increase, your absolute debt number says nothing about whether the debt is too high for you. Only by also looking at your income can the bank determine whether or not you can afford your mortgage combined with your other obligations. And what is the worst that can happen once you move into that house and start working that new mortgage book? Your bonuses get cut. Or you lose your job. So then what? Do you default? Maybe.

Maybe not.

You are smart, productive and innovative. Perhaps a new and better job comes along. Or you get funding for that venture that you always wanted to start... and before you know it you are making more money, are more productive, and ready for a bigger house and bigger mortgage. It's the American dream, a message of increased productivity and innovation in the face of adversity. A message of hope and good news.

So the new Congress and President-elect talk of a $700-$800 billion stimulus plan. Bring it on.

Professor Rogoff continues, "bailing out the financial system is [was] not a fun way to spend money... we'd rather spend it on health, education, infrastructure or the environment."

Let's go for it.

Comments

[Vienna:]

Rogoff, economics professor at Harvard (his Alma Maters were MIT and Yale)

I am not questioning the article itself. Acceptance and perspective is good.

Please stop quoting all the TOP CV analysts. What happened to the MIT (i think it was) experiment with the monkey buying stocks.

Jan 07 09:10 AM

[sieraromero:]

What is wrong with this picture? Don't worry about borrowing money to make us feel good and comfy now. Our future generations can pay it back later. Our attitude of I want the best for me and mine now,and I will worry about the ramifications of such actions later-much later, is exactly how we got in the predictment we are in now. We still haven't learned anything or even acknowledged the problem. The problem is ours that we created and we need to accept the responsibilities and the ramifications of such irresponsible behavior and not pass it on to our children and granchildren!

Jan 07 09:27 AM

[Jan Baker:]

1. Unfortunately, one cannot draw any conclusions from this post without finding another source for the first graph from wikipedia, or without knowing the source of the second graph. Because they can be modified at large and are often modified, and so extremely skillfully as to be undetectable, the data on wiki is just not reliable at all. One might expect the most manipulation for data that is important, and this data is important.

2. That said, one has to agree with sieraromero. This article would have to analyze the economic prospects of all the countries cited, and rank them, for our scores relative to theirs to be reassuring. After all, what difference is it if some people die from poison in the water at a concentration of ten percent, and others die at a concentration of twenty three percent, when point zero zero one percent could kill you? The fact that we have a certain percent of debt retio compared to others is meaningless without more analysis.

3. Also, there's this: we've never been in a demographic like this. Listen--the middle class anywhere is not reproducing. It only takes one generation to die. Can't you realize what that means to supply and demand? Do you know why Europe and China have tumbled? Because their demand went away. That was us, the US, because we are just about the only ones barely reproducing, and thus growing in consumer demand. And we quit buying anyway, because owners just won't pony up the required wages to keep demand growing even without a growth in population. Which was the way all previous markets eventually pulled themselves out. It was the magical fix: the numbers grew and bought houses and cars in spite of the wage stalemate between the owners and the workers.

And because we quit buying, Europe and Asia went down. Their debt to production ratio is meaningless without buyers.

And it won't get better here. We keep pushing lifestyles that are not reproductive, we keep making movies that convince women that motherhood sucks, we keep trivializing women, we keep trivializing men, we keep aborting. We've aborted fifty million car buyers in forty years--since Roe v Wade introduced the Red Death. That's economics 101. Bad move.

It won't get better here until we change some fundamental things. That's all. Trillions, billions, it won't matter. So let the gay agenda keep driving our politics, see what transpires. Our civilization was very fragile, that's what they'll say. Who knew? (You did, but you shut up.)

Jan 07 11:50 AM

[lorddarley:]

<<calculating the total debt as a percentage of income>>

This is simplistic and dangerously misleading. Any good lender would also analyze the quality of income, and its sustainability.

The US "income" is 70% based on consumption. A good portion (and much more, as we retire in large numbers) is based on recycling government entitlements.

LordDarley

Jan 07 06:16 PM