Bad Economic Analysis

I can’t help myself…I saw this on Facebook and had to comment.  But instead of bombing my friend’s comment section, I decided something that was becoming a 300 word blog post should just be a proper blog post.  Read the picture below; I’ve provided commentary underneath.

Not a very good analysis of Federal debt.

There are a few problems with the above analysis.  The most obvious is the fact that they confused the Fiscal Cliff with the Debt Ceiling.  This should cause readers to be wary of this pamphlet from the get-go.  The second is the spurious comparison between the Federal and household budget.  The Feds can issue bonds and print currency (which also happens to the be global reserve currency), which makes Federal debt a very different animal than household debt.  The third is the assumption that budget cuts affect debt load; cuts are forward looking, debt is fixed repayment.  Even if we completely eliminated the entire Federal budget we’d still have to make payments on our debt (albeit at dramatically higher interest rates with weaker currency since we’d be getting rid of the thing that gets us a really good interest rate on our debt…the Federal government as reliable issuer of currency).

The sewage reference is problematic because the sewage is coming in, without the ability of the United States to stop it.  The person who designed this flyer clearly has mistaken the United States for some poor country that has debt forced upon it (e.g. structural adjustment programs).  If that was the case, then yes, the sewage example makes sense.  But since we’re the United States, it doesn’t; a better analogy would be that we have a bunch of sewage we sequestered in a swimming pool out back and everyone wants it, so we exchange it with them for their cash and then pay them back at a really low interest rate.  We’re not a forced recipient of debt, we’re a seller of bonds and this is a good thing.

Indeed, I think something that is damaging the economic debate is the problematic (and often wrong) assumptions people make about how the Federal economy works.  A little more knowledge of the technical mechanisms and functions of debt and currency would lead to a much healthier public debate, which would keep our representatives in Washington honest about what types of problems we have and how to solve them.

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