Andy Stone: A Stone’s Throw
November 1, 2011
I know Halloween is over, but I still want to offer some really scary stuff: numbers.
Here in this great mathematically challenged nation of ours, everyone’s eager to critique national and international economic policies – Greek default! Gold standard! Federal Reserve! Arrrgh! – even if they still can’t balance their own checkbooks.
So, just for fun, I thought I’d wade through three popular economic myths.
1. We’ve borrowed so much money from China that they own this country.
America is certainly deeply in debt, no question there.
As I write this, the U.S. Debt Clock website shows that we’re racing toward a total national debt of $15 trillion. (I told you this was going to get scary.)
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But have we really borrowed it from the Chinese?
First off, just to be clear, the country “borrows” money by selling Treasury bills, notes and bonds. (And to oversimplify, those are all versions of the same thing: You give the government money; the government gives you a piece of paper that promises to pay back all your money, plus interest.)
So, who holds most of that $15 trillion?
Hint: It’s not China.
Yes, China does own a lot of that debt – about 8 percent, say $1.2 trillion. That’s a lot of money, to be sure. Maybe you think it’s too much. Maybe you don’t. Maybe, like most of us (me included), you have no idea. But it’s still just 8 percent of the national debt.
In fact, the great majority of the debt is owned by … us. Yes, us – U.S. citizens, banks, mutual funds, retirement funds and, of course, the government itself, in the social security trust fund, government pension funds and the Federal Reserve.
All in all, about two-thirds of our national debt is owned within this country.
We owe us a lot of money. China is not going to foreclose on us: Relax.
2. “I can’t afford that raise. It’ll put me in a higher tax bracket. I’ll actually lose money.”
The higher tax bracket myth is a popular one. You hear versions of it all the time. But, really, have you ever heard anyone actually refuse a raise? Of course not – because the myth is, well, a myth.
Tax brackets work on “marginal rates.”
That means, when you move into a higher bracket, the higher rate only applies to the money you earn that is above the dividing line between brackets.
To be specific: Let’s say you earn $85,000. (Hey, this is Aspen. Even dishwashers earn at least $85K, right?)
At $85,000 you’re in the 25 percent tax bracket. (And, again, I’m not going to get into a discussion of whether that’s too much, too little or just enough.)
But then you get a $1,000 raise – which kicks you up into the 28 percent bracket, because the dividing line between the brackets is $85,650.
But that does not – repeat, NOT – mean you pay 28 percent on your entire $86,000.
You only pay that rate on the $350 that is above the threshold.
That’s an extra tax bite of $98. Plus the 25 percent tax on the $650 between $85,000 and $85,650, which is … um, carry the 2 … $162.50.
So the total income tax on your $1,000 raise is $260.50.
(Yes, plus FICA. And, of course, the tax is only on your taxable income – duh! – which is a lot less than your gross income. But, hey, we’re trying to keep things simple here.)
3. The damn Democrats keep running up the national debt, and that Obama guy is the worst one yet.
I love this myth.
Let’s look at the numbers. (These numbers come from the whitehouse.gov website. I’m using the numbers for debt at the end of each presidential election year. I know one can quibble about that choice.)
When Ronald Reagan (remember him? A Republican) took office, the national debt was under $1 trillion. About $909 billion. Kind of makes you nostalgic for “Morning in America” and a cute little national debt in billions of dollars.
By the time Ronaldus Magnus left office at the end of 1988, the national debt was $2.6 trillion.
So the debt increased by $1.7 trillion under President Reagan.
And then, Mr. Reagan’s vice president, George H.W. Bush, took the stage for four years and bumped the debt up to $4 trillion. An increase of $1.4 trillion.
So, under Reagan-Bush (Republicans), the debt went from just less than $1 trillion to $4 trillion. In other words, it quadrupled.
Then, in 1992, that hound dog Democrat Bill Clinton slimed into the White House and, let’s be honest, the debt continued to grow.
In Clinton’s first term, the debt went up by $1.2 trillion.
When we look at that, we have to remember that one of the main things driving the debt is the continuing interest payments on all the previous debt. So Clinton’s numbers include paying interest on the $4 trillion debt that he was handed by the Reagan-Bush administrations. Still, $1.2 trillion is substantial.
In Clinton’s second term, the debt went up by a mere (“mere”? Ha!) $440 billion. Not bad. Still, all in all, we’re up to $5.6 trillion. A $1.6 trillion increase.
Then we get to George W. Bush.
In Bush II’s first term, the national debt went up by $1.8 trillion, to $7.4 trillion.
Then, in George W’s second term, the debt went up by $2.6 trillion, which left us all gasping at a national dent (I mean, debt) of $10 trillion.
So, eight years under George W. (Republican) bumped the debt from $5.6 trillion to $10 trillion, an 80 percent increase. Not quite up to Reagan standards, but still, a pretty impressive jump.
And now, finally, we can look at how Barack O. is doing.
In his not quite three years, the debt has gone up by a painful $5 trillion.
Pretty grim. And by the end of 2012, it’s expected to slide on past $16 trillion.
That’s a 60 percent increase.
Which, let’s be fair, is more than George W. Bush. But it’s well behind that crazy budget-busting Ronnie Reagan, who oversaw a first-term debt increase of just about 80 percent.
Like I said, right at the start, those are some scary numbers.