Sunday, January 25, 2009

Crisis Graphs

I last mentioned the Entitlement Crisis in December and the mortgage-liquidity crisis a few days ago. It is finally time to put these two together.

A nice graph about the Entitlement Crisis is here, from the Citizen's Guide to the 2007 Financial Report of the U.S. Government (.pdf file).

Two graphs that show the unprecedented level of government spending are here, from a blog named East Coast Economics.

We can combine the themes of these graphs.

Note from the first graph that the historic high for the national debt was 109% of the GDP, which happened during World War II and in 2007 was expected to happen again shortly before 2040.

The current U.S. GDP is 14.4 trillion. The national debt is now 10.6 trillion, or 74% of the GDP. This means the mortgage-liquidity crisis caused us to leap ahead to about 2030 on that first graph's timeline. We are not yet at a record high for the national debt. But we did lose 20 years of preparation for fixing the Entitlement Crisis.

To summarize, people panicking about how much debt our children and grandchildren will have are missing the big picture. That debt is important but our country has previously overcome that problem on an even bigger scale. More important is that our society is currently structured around many kinds of "entitlement programs" (from welfare to social security to pension plans for government employees) that simply cannot continue and we just lost 20 years towards developing a solution.

(Nitpick for other math folks: I realize a one-time expenditure is additive not multiplicative growth. But I expect that the government, having realized it can actually borrow two orders of magnitude more than it previously believed, will not forget that lesson.)

UPDATE: A whole collection of related charts here at the Financial Times.

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