The debt of the United States is currently $29.6 trillion and is rising fast: the 2020 federal deficit (i.e., the one-year addition to the debt) was $2.8 trillion; and in 2021 was $2.14 trillion. Numbers this large tend to boggle the mind. Such numbers lower our nation's sense of financial security, increase anxiety and, for younger/future taxpayers especially, foster insecurity.
But, why? What if that level of borrowing did not occur? The United States borrowed more in 2020 than ever before in order to save businesses and household solvency during the pandemic, now they are bouncing back. In earlier years, more common lower levels of borrowing financed national defense, repaired the nation's infrastructure, improved math and science education, and fought recession and joblessness. Should anxiety over America's debt prevent us from modernizing the country? It is essential to think about these numbers in a rational way.
As a second example of misleading reporting, recent spikes in the price of gasoline "at the pump" have caused a great deal of angst because newscasters and politicos have stated that the gas price has never been higher in history! This is simply not true: this misleading notion comes from the failure to adjust for inflation, one of the simplest arithmetic calculations in all of economics. As President Joe Biden might say: "C'mon man. Do the MATH!"
To help voters understand the debt capacity of their government, just as for a corporation or an individual, they should be shown the relative earning power from which that debt will be repaid. This logic can be applied to the infrastructure bill passed last November, whose projected spending is $1 trillion over 10 years, and to the soft infrastructure bill often dubbed “Build Back Better”, whose projected cost over 10 years is $3.5 trillion. To determine the true affordability of these investments, simple arithmetic is required. First, in each case, the spending is to take place over 10 years. So, to compare the actual size and proportion of the expenditure to the nation’s ability to pay, the huge figure must be divided by the number of spending years to calculate the annual cost. This result must be further divided by the annual national income to determine its relative percentage.
HARD INFRASTRUCTURE BILL (Infrastructure Investment and Jobs Act of November 2021)
Total new Cost Estimated = $1 Trillion
Projected Spending Period = 10 Years
Cost per year = $100 Billion
Percent of Annual National Income = 0.44% (less than ½ of 1%!)
SOFT INFRASTRUCTURE BILL (Ten Year Budget Framework aka "Build Back Better.")
Total new Cost Estimate = $3.5 Trillion
Projected Spending Period = 10 Years
Cost per year = $350 Billion
Percent of Annual National Income = 1.54%
This arithmetic, which is obviously not ideological but simply factual, shows that when huge numbers are compared in proportion to the ability to pay they provide a much more rational way of deciding whether the nation should make such expenditures. Failure to make these two adjustments to the relative costs and benefits of public investments is not only misleading, but it prevents rational decision-making.
GASOLINE PRICE ADJUSTED FOR INFLATION
A second example of how arithmetic must be applied to avoid misleading the public is in comparing economic data from different time periods. Recently it was announced that the spike in gasoline prices had driven the average "price at the pump" above the previous all-time high. This was reported in major newspapers, on television, and screamed on Fox News in an attempt to make the Biden Administration look bad. Apart from the fact that no president has much impact on the price of any individual commodity, it is a common but serious error to compare prices from different years without adjusting for inflation. Fortunately, the correction is simple.
First, the data. In the table below are listed two important years, 2008 which had very high gasoline prices, and the current year, 2022. Also shown are the dollar prices from those two years. Without adjusting for inflation, the 2022 price is higher.
Consumer Price Index (CPI)
The table also shows the consumer price index for the two years. Using this index, we can adjust for inflation in two ways. First, the 2022 price of $4.33 can be expressed in 2008 dollars, by multiplying it by the CPI from 2008 divided by the CPI from 2022:
THE 2022 "PRICE AT THE PUMP" IN 2008 DOLLARS:
$4.33 x 212/284 = $3.23
Result: contrary to news reports, this means that in a direct comparison with the 2008 price today's price is only 79% of the 2008 price.
The second way to adjust for inflation is to convert the 2008 price to today's dollars by taking the 2008 price and multiplying it by the ratio of the consumer price indices for those two years:
THE 2008 PRICE IN 2022 DOLLARS:
$4.10 x 284/212 = $5.49
In this scenario, the 2008 price adjusted for inflation is $5.49, actually 26% higher than today’s price.
Correcting Mis- and Dis-information
In national budget discussions, projecting large, scary expenditures such as the $29.6 trillion debt figure should not be introduced without explaining them in relation to the economy's projected ability to cover their cost,, or National Income. Omitting this second factor introduces false and possibly misleading information, and presents a deceptive picture.
Because most of the general public has only a limited understanding of such large numbers, reporters, politicians, pundits, editors, and professors should follow these basic rules of arithmetic.
Rule No. 1: Never use large debt numbers without stating the time period over which they are to be incurred and their corresponding percentage relative to the ability to pay, or National Income.
Rule No. 2: Never compare dollar figures from different years without adjusting to a common year using the consumer price index, readily available online at FRED (Federal Reserve Economic Database: fred.stlouisfed.org).
Rule No. 3: When a violation of Rule No. 1 or Rule No. 2 leads to a false conclusion, a correction should be published or broadcast with the same degree of audience reach as the original misleading statement, including a complete reference to the original misinformation.
William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.