A battle between interest rates and growth rates
The U.S. federal debt has been rising steadily since the Great Recession and is currently 103 percent of GDP. So let’s enlist FRED to help us study the sustainability of this debt by looking at how much it costs to service it.
Neil Mehrotra recently described the cost of servicing public debt as dependent on the gap between the real interest rate on debt and the growth rate of real GDP: This gap captures the difference between the interest the government must pay to its lenders, in real terms, and the pace at which U.S. income increases. If U.S. income increases more rapidly, then interest payments on U.S. debt shouldn’t be a major burden.
The graph plots this measure of the cost of servicing the debt. (Here, the growth rate of real GDP is the sum of real GPD per capita growth and population growth, and the real interest rate is the difference between the interest rate on a 10-year Treasury bond and the CPI inflation rate.) The graph presents an interesting picture. In the years since the Great Recession, the cost of servicing public debt has been negative, which means that the burden of U.S. public debt is low. Since 1960, negative debt servicing costs have occurred nearly 63 percent of the time; and the average cost of servicing debt is -0.67%. In fact, since the 1960s, the only time period in which the real interest rate was consistently greater than the growth rate of real GDP was from 1981 to 1995.
Interest rates have been low since the previous recession, but they have been on an upward trajectory lately, which may increase the cost of servicing the federal debt.
How this graph was created: Search for and select the series “Constant GDP per capita for the United States.” From the “Edit Graph” panel, set the frequency to “Annual.” Then add three more series in this order to the same line: “Population Growth for the United States,” “10-Year Treasury Constant Maturity Rate,” and “Consumer Price Index for All Urban Consumers” (all at anual frequencies). Set the units for constant GDP per capita to “Percent Change from Year Ago” and the units for CPI inflation to be “Percent Change.” Then, in the Formula bar, enter the formula c-d-a-b.
Suggested by Asha Bharadwaj and Maximiliano Dvorkin.
View on FRED, series used in this post:
Recent GDP data for Italy have rekindled concerns about how well some countries are moving out of the global financial crisis. Professor Justin Wolfers plotted a comparison between real GDP in Italy and the United States that shows the dismal Italian “recovery” and hints at the possibility of a triple-dip recession. (FRED lets you plot this graph pretty quickly.) Several Italian commentators have also made comparisons between Italy and Japan. But these FRED graphs show that the path of Japan’s GDP is more similar to that of U.S. GDP. And, as Professor Wolfers points out, U.S. GDP hasn’t been all that bad in an international context.
Italy’s GDP appears even more dismal if you consider real GDP per capita, which smooths out differences in population growth:
In terms of real GDP per worker (a ratio also used as a measure of labor productivity), Japan’s trend has diverged from the U.S. trend only since the global financial crisis. Because there is a tighter relationship between employment and GDP in the United States than in Japan, real GDP per worker in the United States hardly reveals a recession at all: As GDP was falling in 2008-09, the number of employed workers was also dropping. In Japan, however, workers were not being laid off in such large numbers, so the ratio declined more. Chalk that up to stark differences in the labor markets of these two countries.
Yet, the divergence of Japan from the United States is dwarfed by that of Italian real GDP per worker, showing a dismal protracted reduction since the global financial crisis.
How these graphs were created: The first and second graphs simply use data on real GDP and real GDP per capita, rebasing them to 100 in 2001 using the options under the “EDIT DATA SERIES” tab: Select “Index (Scale value to 100 for chosen period)” and choose the 2001 option. Note that this is a default option for rebasing the series, but one can also choose different dates. Construct the third graph as follows: Create the ratio of the original series (real GDP = a and civilian employees = b; a/b) and then apply the transformation “Index (Scale value to 100 for chosen period)” and again choose 2001. Finally, remove the legend axis on this last graph, which reduces the clutter.
Suggested by Silvio Contessi
View on FRED, series used in this post:
The best investment advice is to diversify your asset portfolio because it reduces the volatility and risk of the portfolio. The same applies to the economic performance of countries. The better diversified they are in terms of sectors, the less they suffer from large economic fluctuations. (This concept applies when all other factors are equal, of course; we have recently seen that emerging economies suffer from large fluctuations.) So, how to illustrate the benefit of diversification? One way is to contrast a large country such as the U.S., which covers virtually every imaginable sector, with smaller countries whose size limits the number of industries they can have. The graph shows per-capital real GDP growth for the U.S. (thick black line) and for three countries whose combined population amounts to about 3.5% of the U.S. population. It is quite easy to see that U.S. GDP growth fluctuates less.
How this graph was created: Search for “Constant GDP per capita” for the various countries and add those series to the graph. Transform each series to “Percentage change” and emphasize the line for the U.S. so it stands out (in this case, it is thicker and black).
Suggested by Christian Zimmermann