How much is a trillion?

A trillion dollars used to be a sum that never naturally came up in normal conversation. Now all of a sudden, it’s the standard unit we seem to be using to talk about our economic problems and what we’re trying to do about them. Fortunately, I think I finally got a handle on what $1 trillion really means.

A trillion dollars is about the total amount collected in income taxes by the U.S. federal government in fiscal year 2006– $1.04 trillion, if you’re curious to use the exact number. That gives me a simple rule of thumb for personalizing these numbers. If I want to know what an additional trillion dollars in government borrowing or spending will mean for me, I just imagine what it would be like to pay twice as much in federal income taxes for one year.

So, for example, with the President’s proposed budget calling for deficits of $1.75 trillion for 2009 and an additional $1.17 trillion for 2010, after 3 years of paying twice as much as I paid in 2006, I’d have about paid off my share of the bill for the first two years of the proposal.

Couldn’t the government get its hands on that $3 trillion from, like, somebody else? Uncle Sam did collect an additional $838 billion from social insurance and retirement receipts in 2006. But pretending that a further raid on Social Security is somehow going to fill the gap is pure fantasy. Then there’s that $354 billion in corporate income tax receipts. No doubt there’s going to be an effort to grab more out of that cookie jar, though I’m afraid that such efforts will prove to be hugely costly economically and not produce nearly as much revenue as some may dream.

Or maybe the Federal Reserve could help out some. The total currency in circulation at the moment is about $900 billion. If the Fed were to create as much money in the next year as it did in total over all the preceding 95 years combined and use it to buy up some of the outstanding Treasury debt, it would doubtless produce an inflation rate in excess of 100%, but at least it would get us most of the way through another of those trillion.

Most of the way.



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67 thoughts on “How much is a trillion?

  1. GK

    James,
    Has Michael Dueker updated his outlook for the recession trough and job market? To my knowledge, he has not, but your last article featuring his forecasts was in December.

  2. Aaron from NJ

    We have had a massive loss of asset prices $25-50 trillion so far & wealth deflation effect that could take 10 years to rebuild asset prices world wide. This would overtake any policy responses we have at a national level as global current accounts fall/prices fall & assets fall it becomes a negative feedback loop.
    The fall in assets across the globe is a very underreported story. My estimates are that US has lost $25 trillion in assets (Homes- $8T, Equities 12T, Corporate debt/plant & stock $5T)
    We have another $10T at risk in the next year in the US. The EU has just started losing on the US scale. BRIC & Japan & rest of G20 is also falling. We could lose $50-75Trillion total during the 2007-11 period. That is massive wealth loss that could take a decade or more to reflate & have strong global GDP growth.
    I think we need to start talking about the plan Z scenario. Where we get G20 central banks, finance min, political leaders & top 100 bank leaders to get a monster $50 Trillion plan ready. This is our insurance policy. When we look at the available capital between Private Equity/Hedge/sovereign wealth funds thats $5-10Trillion. G20 National budgets US/Japan/China/EU could add $5trillion. G20 Central banks could have $10 trillion added to their balance sheets. Global 10000 corporates have $2Trillion+ in working capital/cash. The G20 banks have $20 trillion in deposits
    together we could coordinate the reflation of global balance sheets. If we had Plan Z ready and kicked it into action with a global weekly coordination on Friday & a media communications blitz over a year we would drive confidence and drive demand IS-LM style and get price levels stable.
    If we don’t start discussing this at a global level this could overtake any other policy responses we have.

  3. Stephan

    I think this is really misleading since it assumes you would double all equal tax rates equally and pay for the whole thing in 1 year — which is downright silly.
    The top tax bracket is 35% – it was 92% in 1952.
    A tiny change in the top tax bracket (like 3%… I mean we are talking about adjusted gross income over $357K) would generate $1 trillion in revenue in only a few years. I mean you should know this since that’s how we got rid of our > $1 trillion surplus. Or alter corporte income tax accounting rules to raise a miniscule amount from corporations.

  4. Michael Krause

    You bring up an interesting point – that being if the Fed doubled outstanding currency. I assume you get the 100% inflation rate with the assumption that currency (part of money base) multiplies through the banking system as most other money. What if it doesn’t, considering the insolvency gap?

  5. mark

    A billion dollars is a stack of $1000 dollar bills 358 feet high. A trillion dollars is a stack of $1000 bills 67.9 miles high!

  6. markg

    The answer as to where the public will get the trillion plus dollars to pay taxes or buy the bonds to cover deficit spending is an easy on. From the govt of course. That’s right, when the govt spends money the public gets the money. And since the govt spends every nickel it receives from taxes and bond sales the public never will run out of money to pay taxes or buy the bonds. As a matter of fact, the public has no choice. The money the public receives when the federal govt spends can only (in the aggregate) end up as federal tax revenue or be used to buy federal govt bonds. Its a circular flow.
    The recipient of govt spending can spend it or invest it, but that just transfers the money to someone else. Ultimately the money ALWAYS flows back to the govt in the form of taxes or bond sales.
    What economist should worry about is the govt consumption of REAL resources such has labor, concrete, steel, etc. etc.

  7. JDH

    Stephan: If you believe that somebody other than you and me is going to pay for this, I think perhaps you are the one who has been misled.

    Michael Krause: My reference to a greater than 100% inflation rate comes from the assumption that there would be a flight from money (a drop in real money demand) in response to inflation of this magnitude. In every historical hyperinflation that I am aware of, we observed an inflation rate that is greater than the rate of money creation.

    markq says “The money the public receives when the federal govt spends can only (in the aggregate) end up as federal tax revenue or be used to buy federal govt bonds.” It sounds like you’re assuming a 100% tax rate on the income generated by government spending, or else a multiplier on government spending that by some odd coincidence equals the reciprocal of the average tax rate.

  8. Robert Bell

    From my rudimentary reading of neuroeconomics, we make decisions with the affective (i.e. emotional) rather than cognitive (i.e. thinking) parts of our brains. So even if we do lots of good modeling and econometrics, we still use wetware to decide what to *do* about things. So I think this sort of handy rule of thumb about how big a trillion is can be very helpful.
    Another example is Martin Wolf’s chart showing debt as 350% of GDP (FT, 29 January). That means not merely doubling the income tax in a year, that means our entire gross income (more or less) for three and a half years.
    The downside of handy rules is that sometimes lead to invalid heuristics or other types of shortcut decision making.

  9. vorpal

    Clarification, $1.04 trillion in INDIVIDUAL Income Taxes.
    (I checked because I wasn’t sure what JH meant)

  10. vorpal

    In some way the large deficit could make good economic sense, by crowding out investment in the factors of consumption and directing the money to factors of production. (We were/are going hog wild with strip malls and such).
    Not how I would do it, but….

  11. M1EK

    It is disingenuous not to point out that a large amount of this deficit results from putting the wars on the books rather than hiding them as supplemental spending.

  12. SvN

    That’s a great way to illustrate what a trillion dollars in spending means.
    On the finance side, however, I’m a bit fuzzy on this idea of paying off the debt. Reading Ball, Elmendorf and Mankiw (1998), they argue that the historical record for the US does not feature much of this debt repayment of which you write. Furthermore, when I look at the interest at which the US government can presently borrow long-term and long-run growth estimates, I suspect that the conditions for their “Deficit Gamble” look pretty favourable right now.
    Am I missing something?

  13. markg

    JDH,
    I did not say the spending generates 100% tax revenue. I said the spending equals the money the public uses to pay federal taxes AND/OR buy federal govt bonds. The Treasury ALWAYS balances its books, leaving the public supply of money unchanged. We can argue till the cows come home about how much the govt should spend (and on what) and what and how the govt should tax. But where the money comes from to pay taxes AND buy bonds (in the aggregate) is a no brainer – it comes from govt spending. Give me a scenario where the Treasury does not balance its books (spending=taxes+bond sales) if you disagree.

  14. JDH

    SvN: If the debt is never repaid (which I agree is quite a reasonable working assumption), simply paying the interest on that debt in perpetuity amounts to a commitment of funds whose present value is exactly equal to the value of the debt. Hence another way the point could be made, if you prefer, is that I personally will incur a future tax obligation, which if I wished to pay it off now rather than in installments, the extra charge would be equal to about one year’s worth of my income taxes.

    markg: Yes, there’s an accounting identity here. That in no way alters the fact that my personal share of an extra $1 trillion debt is one year’s worth of paying twice my 2006 tax burden. Perhaps you’re making the same point as SvN about leaving the debt on the books, in which case see my response above.

  15. NumberGuy

    This is from the book Innumeracy by the mathematician John Allen Paulos.
    Without doing the calculation guess how long a million seconds is. Now also guess how long a billion seconds is.
    ..
    ..
    ..
    ..
    A million seconds is only 11.57 days
    A billion seconds is 31.7 years
    Obviously in today’s world we need to add a trillion seconds, which is 317 centuries, or far longer than history.

  16. Finance Nerd

    Another way to look at it is that a business that was started on the day Jesus was born, and lost one million dollars EVERY single day since then, would still not have lost $1 trillion.

  17. DickF

    Professor,
    In the field of horror writing you rank right up there with Stephen King. I want to say thank you for the honesty of this post, but I think I need to go be sick.

  18. Anon

    James,
    Don’t worry about the money. Obama has a plan to get it all out of the Oil Industry. Nasty Big Oil can pay the way for everyone and nobody will shed a tear as the last oil worker leaves the industry and turns off the light…it is a simple plan borrowed from El Presidente Chavez – go for the commanding heights of the economy and control it. In some places it is called expropriation, but here it is done by doubling the taxes at the same time one introduces punitive Carbon cap and trade schemes.
    Of course, this is all much more noble of a cause than a mere Bolivar Revolution, as our leaders intend to harness the wind and save the whole world from CO2 induced “climate catastrophe” no less! And the Priests (sorry I meant Scientists, as that is what they call themselves these days) have blessed it all, after consulting their computer modelling oracles.

  19. David Pearson

    Interesting post in light of recent comments by monetarists Nick Rowe and Scott Sumner. They argue that monetary policy should be a function of desired inflation expectations. You point out that monetary policy could well become a function of deficit financing.
    So much now depends on the perceived credit risk of the U.S. Treasury (counting severe inflation as a partial default). As long as it stays low, Keynesians and monetarists can argue about liquidity traps ad nauseum. These arguments become largely irrelevant in the face of an expanding sovereign risk premium. The only choice then would be high real interest rates (deflation) or high inflation (potentially turning into the hyper variety). This dynamic has been repeated again and again in emerging markets.

  20. BR

    On a second look, there seems to be a mixup of marginal tax rate and effective tax rate in the above link.

  21. Joseph

    Funny how there wasn’t all this hand-wringing when Bush doubled the nominal debt of the previous 200 in just eight years. What about the trillion dollar tax cuts for the wealthy? The trillion dollar war that was kept off the budget? Where was the howling when Dick Cheney announced “Reagan proved that deficits don’t matter.” A change of administration and suddenly the deficit concern trolls pop out of the closet.
    I think I get the picture. Unnecessary wars and tax cuts for the rich are good debt. Money for the unemployed, for health care, for infrastructure is bad debt.

  22. Peter

    In reply to SvN you say “If the debt is never repaid (which I agree is quite a reasonable working assumption), simply paying the interest on that debt in perpetuity amounts to a commitment of funds whose present value is exactly equal to the value of the debt. Hence another way the point could be made, if you prefer, is that I personally will incur a future tax obligation, which if I wished to pay it off now rather than in installments, the extra charge would be equal to about one year’s worth of my income taxes.”

    This is correct but only half the story. The other half is that “I” am also the wealth holder whose portfolio includes these bonds. Now, you could deconstruct this “I” and argue that some taxpayers are net interest payers and others net earners, but that raises a different set of issues. From an aggregate point of view, the meaningful question has to do with the impact of different debt-to-GDP ratios on the fiscal capacity of the state and the portfolio structure of wealth-holders (which is an allocation of capital issue). There may also be an international finance side if foreign purchases of our public debt exceed domestic purchases of theirs, but here too we are in a different thicket. In either a closed economy or balanced capital account framework, there is no aggregate debt position for the collective “I”.

  23. ed

    Joseph, lots of people were concerned about those things, and wrote about them, even on this very blog. What’s your point?

  24. Mike

    CNBC explained what a trillion dollars is in easy to understand terms a few weeks ago. If you had a trillion dollars the day Jesus Christ was born (2009 years ago) and you spent one million dollars a day since His birth, you still would not have spent it all today. Unbelievable…my children’s grandchildren will be paying these debts back.

  25. Rich Berger

    Joseph-
    Bush was in office for 8 years, as you recall. Obamuh hasn’t been in office for two months and he’s made Bush look like a piker. He’s only begun to spend!

  26. DickF

    Rich wrote:
    It’s only a paltry $800BN, but somebody has already illustrated this in an interesting way-
    http://www.youtube.com/watch?v=eZ_Chroi4oc
    Rich,
    The biggest problem is not the pork that is in all these bills. The biggest problem is the theory that leads to this kind of governing. It is the governing itself that is destroying our markets and economy. If we were prosperous we could afford to eat pork now and then.
    By attempting to turn our focus toward fighting the pork the politicians are actually attempting to hide their incompetence in governing. Schumer is a good examply BTW.

  27. Ron

    More Americans Are Saying No to the FED & the National Debt!
    Washington has bailed out the banks, Wall Street & their Washington special interests and much of the cost is added to the national debt to by paid by this and future generations while real estate and investments continue to fall. Find out what a growing repudiate the debt movement could mean for treasuries, the dollar, gold and mining shares.
    The Campaign to Cancel the Washington National Debt By 12/22/2013 Constitutional Amendment is starting now in the U.S. See: http://www.facebook.com/group.php?gid=67594690498&ref=ts

  28. markg

    Thank you Peter.
    Maybe someday JDH could show us a graph of PUBLIC debt to gdp ratio overlayed with gdp growth. Toss in the DJIA for good measure. I say PUBLIC debt and not TOTAL because we want to see how the debt held by the public affects economic performance (intragovernment debt is just an accounting exercise).

  29. G

    We seem to be at the “Gee, isn’t that a big number” level of analysis here. I expect more from an elite macroeconometrician.

  30. Rich Berger

    Stephan-
    I took a look at tax data for 2006 from the IRS. The total AGI for those with AGI of $200K and greater was approximately $2.5 trillion. If you added an additional 3% tax on them (clearly an overstatement), that only raises $75 billion. As others more astute than you have pointed out, there just isn’t enough money there to support Julius Caesar’s grandiose plans.

  31. Fred

    According to the Fed Z.1 report, the average American has assets of $237K, liabilities of $48K, and net worth of $188K. However, because of the stock and housing crashes, the average American has lost or will soon lose perhaps $45K of net worth, for about a 24% reduction. As a consequence of this huge blow to balance sheets, the average American is about to go on a savings spree, to the tune of about $3K/year, roughly equalling that $3/year of extra deficit spending per American due to $1 trillion of stimulus. Add in the reduction in corporate spending, and the leakage of demand through a trade deficit, and if anything, we need much bigger deficits to avoid deflation.
    Remember basic bookkeeping. The government debts are the publics (or the foreigners, in the case of trade deficits) credits. It all sums to zero. When the government runs a surplus, the private sector must show a reduction in net worth (run up losses, dissave). This is not a political statement. Rather it is basic bookkeeping. And it is why a balanced budget can never work, unless we want a never-ending depression.

  32. aaron

    I wrapped my head around it in the fall with the 700 billion bailout, it don’t mean a thing.

  33. Mike

    http://economics.harvard.edu/faculty/mankiw/files/dynamicscoring_05-1212.pdf
    According to a quick reader of the intro on this Mankiw paper, a substantial portion of capital tax cuts (50%) are recovered in the long run (10 years) through taxes on higher output, although his view on labor tax cuts wasn’t so optimistic I’m sure to approach full recovery (feedback) is close to double that.
    So is there nothing to worry about in the long run, no matter how scary the number? Is (deficit spending) then just an arbitrary wealth redistribution ?

  34. Rachel

    My favourite explanation to How Much is A Trillion? is this:
    If you earned 1 dollar for every second you would have:
    $1 million after 2 months
    $1 billion after 32 years
    $1 trillion after 32 000 years. 32 thousand years!
    The difference between the 3 is incredible!

  35. Anonymous

    If I want to know what an additional trillion dollars in government borrowing or spending will mean for me, I just imagine what it would be like to pay twice as much in federal income taxes for one year.

    Good job. Now double your income, too, since all spending is someone’s income, and you’ll find that your tax expenditure as a percent of income has stayed the same.

  36. Anonymous

    Or maybe the Federal Reserve could help out some. The total currency in circulation at the moment is about $900 billion. If the Fed were to create as much money in the next year as it did in total over all the preceding 95 years combined and use it to buy up some of the outstanding Treasury debt, it would doubtless produce an inflation rate in excess of 100%, but at least it would get us most of the way through another of those trillion.

    Do we have your blessing?
    There are two problems we have to deal with. One is appreciation of debt and the other is the resulting destruction of demand which is now its own problem. Fortunately anything that creates demand should also raise price levels, which goes some way to ameliorating the debt problem.
    Increasing the money supply (such as by simply printing $10,000 to send to each household) is one possible solution. Borrowing money for the government to spend to spur employment is another. Another is to simply to raise taxes on those who can afford it so that government can increase spending without having to borrow money. The remaining “solution” is to just live with non-optimal resource employment for a while, however long “a while” is. Take your pick.

  37. Anonymous

    Another way to look at it is that a business that was started on the day Jesus was born, and lost one million dollars EVERY single day since then, would still not have lost $1 trillion.

    On the other hand, if you have a $80 trillion derivatives market, you can easily lose a trillion of that in a year.
    Alternatively, you can spend about three quarters of a trillion dollars in under a decade creating democracy in a far-off land.

  38. Anonymous

    $1 trillion is about $3,000 per person in the US. That’s certainly a significant amount of money (for most people), but it is not an unimaginable sum. And, of course, when the government spends a trillion dollars, GDP increases by at least a trillion dollars (assuming most of the direct spending is in-country).

  39. Bill S

    Here’s an appropriate quote from physicist Richard Feynman: “There are 10^11 stars in the galaxy. That used to be a huge number. But it’s only a hundred billion. It’s less than the national deficit! We used to call them astronomical numbers. Now we should call them economical numbers.”

  40. JDH

    Anonymous at March 4, 4:47: You’re deluding yourself if you think you can divide the $1 trillion by the number of Americans and conclude that your personal bill is only going to come to $3,000. Babies aren’t going to pay any of it, nor are the unemployed, nor should you expect much from the 43 million Americans who filed tax returns in 2006 but ended up paying zero taxes that year. Really the logical thing to expect for you personally is the metric I propose– double the tax each person paid in 2006, and that’s pretty much what you can reasonably expect to pay.

  41. Joseph

    You’re deluding yourself if you think that babies don’t grow up to be tax payers.
    You are also deluding yourself if you think personal income taxes are the only taxes.

  42. Anonymous

    You’re not addressing the fact that every government expenditure is someone’s income. In the aggregate long term, we are not paying the full amount of the loan, we are paying the interest. Thats perhaps a few hundred dollars a year, per person, for someone making the average income.
    I don’t think I’m deluding myself by using math.

  43. Anonymous

    Also, I never said every person would be paying $3,000 in taxes. That’s obviously silly. I was just trying to put the $1 trillion figure in terms that actually made sense for an economy of our size (rather than counting days since Jesus’s birth).
    It’s important to make clear what the real expense is. It’s not the debt, it’s the interest on it, which is obviously quite a bit smaller.

  44. JDH

    Joseph: Yes, babies grow up, but it will be at least 25 years before a newborn makes a significant contribution to tax receipts. Perhaps you are advocating that you and I will only have to pay the interest each year on the debt for the next 25 years, at which point my baby takes over the task. If I only pay the interest on the debt for the next 25 years, and hand my personal debt entirely over to my baby at that time, you can calculate that the present value of what I myself pay on every $1 of debt is

    r[1/(1+r) + 1/(1+r)^2 + 1/(1+r)^3 + … + 1/(1+r)^25] = (1 – 1/(1+r)^26).

    Taking the real interest rate r from the yield on 20-year TIPS gives r = 0.0235, in which case the burden of what I personally pay on each new trillion in debt is about an additional 0.44 times my 2006 federal income tax bill. But do you wish to propose that I should act as if the burden I pass along to my child should be of no significance to me personally? If you count your child’s burdens as important as those you personally shall bear, you will find that the answer I originally suggested is the correct one.

    As for my delusions about the existence of taxes other than personal income taxes, you should be able to locate an explicit discussion of alternatives to using personal income taxes in the text above.

    Anonymous at March 4, 7:05: The present value of the interest payments alone on $1 trillion dollars in debt that is never retired is precisely equal to $1 trillion. Mathematically, if you examine the expression in my response to Joseph and replace 25 with bigger and bigger numbers, you will see that the limit of the expression is precisely 1.

  45. Joseph

    When I was born the debt to GDP ratio was twice as high as it is now. I have to admit I didn’t spend a lot of time in my diapers bemoaning the enormous debt my parents bequeathed to me while saving the world from fascism. To the contrary my generation spent the next 35 years continuously paying down that debt to its lowest level in a half century by 1981. Then Ronald Reagan was elected. Things have been different ever since except for a brief respite under Clinton.
    Maybe our children will be as grateful as we were to our parents if we are able to prevent a repeat of the Great Depression. In any case, they will inherit the bonds and be paying interest to themselves for the most part.

  46. benamery21

    JDH: not to be nasty, but…
    Alternatively, the gov’t could just lay you off to keep the deficit down, eh? The impact on your personal budget would be a great deal bigger, I’m thinking? No nasty tax increase for you, though.

  47. ketzerisch

    Dear Professor,
    thank you for opening this topic that is highly relevant for all of us. (Even though I’m not living in USA)
    But I do not fully agree on your comment “Babies aren’t going to pay any of it, nor are the unemployed, nor should you expect much from the 43 million Americans who filed tax returns in 2006 but ended up paying zero taxes that year.”.
    While you are certainly right that we should not expect relevant payments by said groups in nominal terms, they might well suffer a lot a real terms in case the inflation picks up. Indeed I believe that anyone that can not rely on an income that scales with inflation will – in real terms – be the main contributor of “payback”.
    Inflation is also a kind of tax – especially for the poor.

  48. Kurt

    Here’s a way to think about how a trillion dollars can help to fix this economy: a controlled version of helicopter money.
    The Federal Reserve sets up a mechanism to give every adult in the US who has a valid birth certificate, green card, or passport $5000 in cash or check drawn on the Federal Reserve. If there are 200 million eligible people, then $1 trillion is the increase in net wealth of the household sector, and most of this would find its way into banks, which would be a huge capital infusion. This plan directly addresses the two key problems we have right now that are so difficult to solve: the poor balance sheet positions of both households and banks. Remember, it’s only inflationary if people spend it, and if lending shoots up by too much (which now seems like the lesser of two evils) then OMOs can pull some liquidity back out pretty quickly (again , would it not be nice to have that problem). The Fed’s balance sheet expands but the Federal deficit is unchanged. For all of the “unconventional” steps the government is taking, perhaps it’s all still too conventional.

  49. flubber

    1 trillion dollars is about 1.3 times the amount we’ve spent on the Iraq War.
    1 trillion dollars is enough to give each and every Iraqi citizen, all 27 million of them, $40,000 USD.
    A lot of the Iraqis are children – the average household size is 7 people. So $280,000, per household.
    Give them that to rebuild their country, move to more secure ethnic/tribal enclaves. Compensate the Sunnis for the oil revenues they would be cut out from in a partition. Whatever.
    Or isn’t it important? The neocon/liberal hawks, little Thomas Friedmans all, said invading Iraq was essential to US national security (since a failed state or adversarial Hussein might give the scary WMD stockpiles to Muslim extremists…Cough). So, who is calling for a significant investment in Iraq? Or were they lying when they said it was important – about 700,000 innocent lives ago?

  50. concerned

    its just pocket change too GM and AIG. With the latter 80% Federalized and asking for more.

  51. Roger Kovaciny

    A million dollars is a suitcase full of hundred dollar bills.
    A billion dollars is a semi-trailer filled with neatly-stacked hundred dollar bills.
    A trillion dollars is one thousand semi-trailers filled with neatly-stacked hundred dollar bills. Mounted on standard flatbed railcars, the train carrying all this money would be ten miles long.
    It is important to understand that all this money will be COUNTERFEIT. Inflation is what you get when the government goes into the counterfeiting business, and we will be getting inflation–the money supply is up 271% in just thelast five months according to the Federal Reserve. The result will be an enormous transfer of real wealth–land, houses, factories, cars, stores and their contents–to the people who get to spend all that fiat money, no different from when a criminal fills his gas tank at your station and gives you a counterfeit 50. He’s got a tank of gas, you’ve got a worthless piece of paper. It won’t be QUITE worthless; you’ll still be able to get ten dollars’ worth of food for a hundred. But your salary will be the same as it is today.

  52. ReformerRay

    Fred says: “When the government runs a surplus, the private sector must show a reduction in net worth (run up losses, dissave)”. If the economy is not growing. Keynes said we do not need a surplus when the economy is not growing. If the economy is growing when the government runs a surplus (as Keynes advocated) the surplus will be a small part of the the growth and net result will be more wealth for both sectors.
    What is reasonable as articulated by Keynes is not reasonable to people who vote taxes and pay them.

  53. Mike Laird

    JDH, the debate that you and Joseph had about babies growing up to pay taxes is a symptom of the biggest fallacy in macroeconomics. This debate comes from logic that moves from one equilibrium state (now) to another equilibrium state (baby grown up). Macroeconomics needs to move to thinking only in terms of time varying feedback systems. In this framework, you would see, for example, how many teenagers are about to start paying taxes, followed by gradeschoolers, etc., and what increment in this stream of change accumulates to $1 trillion in the next 10 or so years. It may or may not be a large number, but it is much more realistic than talking about doubling taxes, which comes out of equilibrium state thinking.

  54. nobonobos

    I make $104,000 working for a government agency. When I turn 44 I will get 90% retirement and 100% health and medical benefits for life. I much prefer that your taxes are doubled than to have my retirement reduced by inflation.
    Obama is also right to tax those over $250,000 and not me.

  55. Anonymous

    This is the problem with using irony on the net. Some people are going to actually believe that it might be a good idea to do something as foolish as to run a $1trillion budget deficit that could be paid for by more taxes or simply by turning the USD into a modern day version of the Papiermark.
    We cannot fix the problems caused by the recklessness of the past by pushing actions that are even more reckless. The solution lies with following the path of Harding, not Hoover and FDR. To correct the problem we must allow malinvestments to be liquidated and to allow the markets to clear. This means that there should be no bailouts for the reckless and that government spending should be cut substantially along with tax rates. While there will be short term pain the correction will be deep but short and the real can begin to recover. Sadly, Obama has chosen a plan that will ensure that the pain that is spread over many years and will end only when the currency collapses and government is no longer able to meddle in the economy.
    I hope that readers of this blog have taken the opportunity to acquire some physical gold and silver while the metals are still very cheap. While we could see some sharp contractions in prices eventually they will sell for multiples of current prices and will be asset classes that will provide positive real returns.

  56. HZ

    Professor said:
    “Taking the real interest rate r from the yield on 20-year TIPS gives r = 0.0235, in which case the burden of what I personally pay on each new trillion in debt is about an additional 0.44 times my 2006 federal income tax bill.”
    But that is quite a sneaky way to do the calculation. TIPS is an insignificant amount of treasury issuance. Vast majority is issued in nominal interest rate. At 10 year rate of less than 3% it does not take inflation high (3% is still within what Fed can tolerate) to make the financing zero cost.
    Inflation will impact dollar holders more than tax payers (from earned income) so don’t tell me that is exactly same as doubling one’s tax rate.
    On the flip side let’s have the unemployment rate go to 25% and price fall by 50% and how much tax burden in real term would that create? Our $5T national debt would go to $10T in real terms. You will benefit if you are hoarding dollars but not if you have future income to pay tax on. But of course by then our great state of California will surely be bankrupt and the UC likely closed so that our professor won’t be there espousing nonsense while counting his tax bill.

  57. JDH

    HZ: Using the TIPS yield to calculate a real interest rate is “sneaky”? If you know for a fact that the inflation rate is going to be 3%, your time might be better spent arbitraging the nominal-TIPS spread rather than arguing with me.

  58. HZ

    Professor,
    Even on the rate side you picked the number that favors your argument. The 5 year is 1.46% and the 10 year is 2.02%. But may I pick 03/10/08 rate when the curve is: 5 yr 0.01%, 7 yr 0.55%, 10 yr 0.90%, 20 yr 1.60%?
    But that is not why I called your argument sneaky. It is sneaky since you made it sound quite like a mathematical truth even though you know the world is not static. All kind of power that be will arbitrage this through both the market and the politics and the final burden of allocation will surely be not as simplistic as you suggested, not even close.
    If you want to argue on fundamentals then:
    a) As far as progressive income tax goes no one could be taxed to poverty. If it makes the billionaire not work as hard to earn his next billion, that does not seem as tragic as someone else taking her own self due to financial distress.
    b) Time is the only thing that is unrecoverable. So if you idle someone with productivity that there is some demand for over zero sum financial stuff, that is when you incur real cost.
    c) If anyone needs protection it is borrowers who should have some reasonable expectation of future income and inflation to anchor on, at least in the macro sense.

  59. HZ

    Why choose a 20 year bond with significant term premium when the government finances vast majority of its debt with much shorter term debt? The curve I offered was for one year ago when nobody was talking about deflation. What is the reason to expect real rate much above zero when there is oversupply of savings globally? And since the rates are constantly changing, using one bond rate to assume that is the true cost is stretching.
    The rest of what I was saying was just that finances are zero sum; and if one wants to infer value judgement one has to go beyond the numbers. Apparently that is not where you would like to go (though I assumed there was implicit value judgement in your arguments) I would not belabor on those points again.

  60. Tommy

    There are two things that I think of when I read this article. One is the Simpsons episode, where Mr. Burns, the wealthy man that has made all of his money by exploiting the little people, makes off with the worlds first and only trillion dollar bill. I can see each and every single politition out there in his place. Where did all of that money go?! I also think about what was said about losing a million dollars a day since the birth of Christ and still not losing that kind of money. The other thing that I think about, was said to me by my grandfather, a man that I highly respect. He said, “It’s just paper.” Deep words for something that this country is really falling about over. It’s just paper, but it’s getting almost as important as air to some people. Something to think about. Thank you.

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