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All posts by Dan Whalen,
Providence, RI (resume)

Friday, July 27, 2012

Misinformed by Infographic

The “Infographic” that’s been bugging me

Maybe you’ve seen this graphic floating around lately?  On someone’s facebook page or a message board someplace? 

Kinda sorta true...accurate numbers, but inaccurate commentary

Ok so… I have a bone to pick with this.

While I definitely appreciate the graphics attempt to put some daunting concepts into a workable perspective, the perspective it puts them in is a little warped. 

Let me be clear: the figures are correct.  The math is correct.  In the last four or five years, the US has collected somewhere to the tune of $2 – $2.5 trillion in revenues (taxes), and been spending just under of $4 trillion.  Our national debt is a little over $15 trillion.

BUT! The context the graphic reframes the numbers in is not right.  NAMELY: the national debt and a credit card debt ARE NOT at all comparable!


So what's wrong with the credit card corollary?

Here’s my objection to comparing the US’s national debt to a household's credit card debt:

1)      Nations can print money in a pinch.  Families can’t. 

The US is $15 trillion in the hole.  So what’s to stop us from just printing up 15 trillion dollar bills and paying it off?  Nothing, really. 

Of course, that doesn’t mean that we should!  Printing off more and more currency in the absence of any corresponding economic growth causes a whole other economic problem - inflation (please read Inflation (part 1) and Inflation (part 2) for details on inflation’s mechanics). 

Inflation is bad for your economy…but so is defaulting on your debts.  For evidence of how scary default can be, consider Greece or Spain.  They haven’t even started defaulting on debt en masse yet, but just the threat of it is causing some goddam pandemonium.  So sometimes, if a nation is willing to take some inflation pain to make it easier to service their debt…they might find printing cash and the inflation it brings to be the lesser evil.

Printing money is a recourse nations have for managing their debts in an emergency.  Of course, the hypothetical household in the graphic doesn’t have a Plan B like that, so their debts are considerably more constricting.  By comparing it to credit card debt, the graphic implies that the national debt is more binding then it actually is.

2)    That $15 trillion the US "owes," is mostly money the federal government owes individual Americans.  It's not all owed to someone outside "the household" - ie foreign entities.

One of the most backwards economic urban legends out there is this idea that somehow when the US borrows money, it gets it all from foreign entities.  This is not true.

The federal government collects taxes from the American people.  It rarely collects enough to cover its costs.  This creates a “budget gap.”  To make up that gap, the government borrows money – and borrows the overwhelming majority of this money from the American people.

For example, the US owes only $1.2 trillion to Chinese institutions, governments and citizens.  That’s about 8% of our nation's total debts.

Of the $15 trillion total we owe right now, $5 trillion is owed abroad.  The rest is owed to individual Americans (or companies, local governments, etc.) that have lent money to the national government.  

Meaning the other $10 trillion of our national debt will be paid off by shuffling money around internally - you paying taxes so the government has money to pay your neighbor, that sort of thing.  Not "you paying taxes so the government can pay back China, or Japan or UK or someone 'outside the household'" as the infographic implies.

More on that last point

Imagine a family where:
·         Baby Sister owes Big Brother $3,333, and
·         Big Brother owes Dad $3,333, and
·         Dad owes Mom $3,333, and
·         The family has a group credit card with $5,000 outstanding owed

For those of you keeping score: the family as a whole is only $5,000 in debt to outside entities – namely the credit card company.  And they’re $10,000 in debt to each other (ok it’s $9,999, I’m rounding).

In the hypothetical situation I sketched out above, I guess you could say that “the household is $15,000 in debt.”  (The infographic would.)
   3,333 (Baby Sister’s debt)
   3,333 (Big Brother’s debt)
   3,333 (Dad’s debt)
+ 5,000 (Family’s debt)
   15,000 <= total “owed” by the family

But do note that if I gave the family $8,333 (5,000+3,333=8,333), they could completely pay off their “$15,000” debt.  Sister passes it to Brother, Brother passes it to Dad, Dad passes it to Mom, the whole family gives what's leftover to the credit card company.  Now everybody’s even.

So is it correct to say that the household is “$15,000 in debt to the credit card company”?  No.  The graphic says yes.  It's simply wrong.

Last word: On viral “infographics”

I’ve been seeing a lot of these political/economic infographics lately.  And I’m sure I’ll see more and more of them as we near the election.

Just a heads up – viral infographics like you see on facebook are NOT legitimate sources of information.  Most of them contain incomplete - or at the very least misleading - information.  Often, they’re total hoaxes.  (Politifact is doing a whole series on fact checking these viral facebook posts/graphics.)

Next time you see one, click on it and check who was the original poster.  It’s usually a PAC or lobby group.  They whip up these infographics, post them online, and sit back and wait for people to spread the image around for them. 

And spread them we do!  When we see these graphics, containing “facts” that confirm and validate our beliefs, we enthusiastically hit the “Share” button and hold it up for all the world to see.  But it’s all just ploy for getting “free advertising,” and the progenitor of the graphics are relying on their ability to play you for a fool for it to work.

I think the infographic trend bugs me so much because they often contain economic “facts” and assertions.  Partisans love to hijack, distort and spin economic data because it can be used to give objective salience to otherwise subjective positions

Liberals don’t just come out and say “the military offends my values, so I want to punish it.”  They say “the nation can’t afford to spend so much on the military, and I can demonstrate why!”  Then they launch into some economic chicanery (that probably involves an infographic on facebook) to “prove” the claim.

Conservatives don’t just come out and say “welfare programs offend my values, so I want to punish them.”  They say “the nation can’t afford to spend so much on welfare, and I can demonstrate why!”  Then they launch into some economic chicanery (that probably involves an infographic on facebook) to “prove” the claim.

BUT YOU’RE TOO SMART FOR THAT!!  Do the world a favor, don’t get sucked in!  Maintain your dignity - and don’t repost dubious "infographics"!

4 comments:

  1. OK, I know that most of the debt is owed to other Americans (people, companies, etc) and even much of it is owed to the Social Security Trust Fund, I'm not sure your analogy is any better than the credit card one though.

    I'd think it would be closer to each of the 3 family members owes mom the $3,333.

    ReplyDelete
  2. Also, worth noting that in your example the family only needs 5000 dollars to pay off all its debt, since the sink of the debt chain can then use the money received to pay off external debt. Which is probably why I agree with sailor-tech that the analogy more appropriately has multiple sources and one sink (so more than the external debt must be paid in order to satisfy all obligations).

    I think there's more to the deception than you mention though. I did an analysis on similar lines as this post little while back:
    http://roryrant.blogspot.com/2012/02/debunking-us-budget-is-like-family.html

    ReplyDelete
  3. So let's just print the $5 Trillion owed abroad and do it over a 5 year plan. $1 Trillion per year in not new debt, but paying that debt off. Sounds good to me. Temporarily increase interest rates just a little to hedge off inflation. Once way or another, we need to get rid of the Federal Reserve Bank. Sell our $224 Billion of Gold to pay some of it off. Raise taxes on the rich back to when Reagan first took office, just for 10 or so years. We can do this. We just have to VOTE DEMOCRATIC or it will never happen. Clinton worked to take surplusses and pay down the debt. And he raised taxes on the Rich to help that story. When Reagan took office the top tax bracket for the rich was 72%. He knocked it down to 50%. Then Bush Sr. knocked it down to 28% and left office with it at 31%. The national debt skyrocketed over those 12 years. Clinton raised the top tax to 39.6%. We had surpluses and paid down the national debt. Bush Jr. takes office and knocks it down to 35%, capital gains from 28% to 15%, and ended the estate tax. All for the rich. More than 50% of all capital gains taxes come from .001% of our population. Go figure.

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