Thursday, July 22, 2010

Measuring the country’s debt. Why Gross Debt is the WRONG measure.

Republicans have been busy for some time scaring Americans to death about the amount of debt citing studies such as the one by University of Maryland professor Carmen M. Reinhart and and Harvard professor Kenneth Rogoff that Gross Debt over 90% of GDP, close to where we are now, is disasterous for the country.  Turns out Gross Debt maybe the wrong measure and the country may be in much better shape debt-wise than Repubs would like you to believe.  This from a study by the Center on Budget and Policy Priorities:

[C]laims that gross debt (as the term is used in the United States) is an economically meaningful measure of national debt and that the United States is approaching an economic danger zone are extremely dubious for several key reasons:
  • Most economists agree that debt held by the public — rather than gross debt — is the proper measure on which to focus because that’s what really affects the economy.
  • Reinhart and Rogoff used a measure of debt that, for most of the countries they researched, is consistent with the standard measure of national debt that the International Monetary Fund and the Organisation for Economic Cooperation and Development use. Although those institutions call that measure “gross debt,” it is very different from what is called gross debt in the United States because it excludes most intragovernmental debt. The Reinhart-Rogoff data for the United States and Canada, however, differ significantly from the IMF and OECD measures because these Reinhart-Rogoff data reflect gross debt as that term is commonly used here — and thus include large amounts of intragovernmental debt, such as the money that the Social Security Trust Funds have lent to the Treasury.

That leads to two conclusions:
  • First, since the gross debt measure that Reinhart and Rogoff use for countries other than the United States and Canada does not include significant amounts of intragovernmental debt, the Reinhart-Rogoff data do not allow them to reach valid conclusions about the effects of intragovernmental debt on economic growth.
  • Second — and of particular note — the authors’gross debt measure for countries other than the United States and Canada isroughly equivalent to what, in the United States, is called debt held by the public. In both cases, the measures essentially exclude intragovernmental debt. And by this measure, the U.S. debt-to-GDP ratio equaled 53 percent at the end of fiscal 2009 and, under current policies, will not reach 90 percent until around 2020.

So, relax a litte.  Sure, we need to get debt under control long term but don’t believe the “sky is falling” predictions from the Repubs.  It just ain’t so.

You can read the fully analysis here:

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