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Jewish World Review March 1, 2011 25 Adar I, 5771 Mike Huckabee is on to something here, but jumped the gun By Glenn Kessler
An important sign of a country's economic health is how its overall debt load compares to the size of its economy, also known as the gross domestic product (GDP). When the debt level equals the size of the economy, that's a rather big warning light. Once and possible future GOP presidential candidate Mike Huckabee says that the moment of truth has arrived--the size of the U.S. economy is now smaller than the size of the national debt. Is he right? The Facts Only three years in the history of the United States--1945, 1946, 1947--has the national debt exceeded the size of the economy, and the ratio quickly fell in the booming economy after World War II. The ratio of debt had more than doubled during the war--it was 45.4 percent in 1941, when the United States entered the war--but defeating the Germans and Japanese was a national imperative. The ratio of debt to the economy has also soared during the recent recession--from 69 percent in 2008 to 93 percent in 2010--in part because the economy shrank but largely because of increased government spending designed to combat the recession. But it will probably be much harder for the United States to bring down the ratio this time because of the population is aging and the available pool of workers to retirees is shrinking. Also, social welfare programs such as Medicare have been introduced since World War II. So Huckabee is raising a serious and economically profound issue. But he's gotten ahead of the facts. As of Feb. 23, according to the Treasury Department debt meter, the national debt was nearly $14.13 trillion. But the gross domestic product, at of the end of 2010, was $14.86 trillion, according to the Commerce Department. That's a ratio of 95 percent, which is about as high as the ratio in 1949. (The ratio was 94 percent on Dec. 31, which is actually an apples-to-apples usage of the GDP figure.) Still, President Obama's 2012 budget predicts that at some point this year, the boundary will be crossed and by the end of the fiscal year, Sept. 30, gross federal debt will be 102.6 percent of the GDP. The budget further predicts that the ratio will remain above 105 percent for at least five years after that. The ratio could be even worse if outside experts are correct and the economic forecasts in the budget are too rosy. We used figures for gross federal debt for these calculations. Gross federal debt includes both bonds held by the public and bonds held by other federal accounts, such as the Social Security Administration. The ratio would drop to about 75 percent if bonds held by government accounts were not included. But that would be an incomplete figure. Some politicians claim the securities held by federal programs such as Social Security and Medicare are "worthless IOUs" but they are wrong. An IOU is just another way of saying bond. These bonds are backed by the full faith and credit of the U.S. government. No president or Congress would risk defaulting on these bonds because it would ruin the nation's financial standing. The bonds are a real asset to Social Security and Medicare, but they also represent an obligation by the rest of the government. Like any entity that issues debt, such as a corporation, the government will have to make good on its obligations, generally by taking the money out of revenue, reducing expenses or issuing new debt. The action taken really depends on the resources available at the time, but one can't wave a wand and pretend that these obligations will disappear. So that's why it makes sense to include them in calculations about the nation's indebtedness. The Pinocchio Test The national debt figures are scary enough without needing to hype them. Huckabee clearly is an error when he says the United States has already passed the critical threshold of when the national debt exceeds the size of the economy. His figure for the current national debt was also off by nearly $1 trillion. Still, we are kind of sorry to give him a Pinocchio because if he repeats the comment a few months from now, he may very well be right. Then he would have earned a rare Geppetto checkmark. One Pinocchio
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