Scene: Jordan and Sandy, a former business colleague, are having coffee.  The discussion begins Entry #121,.  This segment is a continuation of Jordan’s description to Sandy of a conversation with the Speaker of the House and the Senate Majority Leader, which begins Entry #123.

Jordan:  “Feel better, John Boy?”

John Boy:  “Much.  Now, now back to the debt to income discussion.”

Mackey:  “OK, so we agree Bill Gates can take on a lot more debt than any one of us because his income is much higher.  What does that mean for the Federal debt?”

Jordan:  “John Boy, you want to explain this to Mackey or you want me to?”

John Boy:  “Let me try.  The simple answer is we should link the amount of Federal debt to Federal income.  The more income the country has, the more debt it can have.”

Mackey:  “Alright, I understand the concept but what makes up Federal income?”

Jordan:  “Two approaches.  One measure is revenue collected through taxes.  The other measure is gross domestic product, or GDP.  Most measures of debt are against GDP because that represents the income of the country rather than just taxes collected.”

Mackey:  “John Boy, you think GDP is a fair measure.  You can’t trust these liberals to tell you the truth.”

John Boy:  “Relax, both measures have their plusses and minuses but yes, I think debt as percent of GDP is fair.  From what I’ve read, the ratio is used by a wide range of economists, including some of our own.  Let’s stick with debt as a percent of GDP.”

Jordan:  “Here’s a question for both of you.  Did debt as a percent of GDP increase more during Bush 43 or Obama?”

Mackey:  “That’s a stupid question.  Obama, of course.  Hands down.”

Jordan:  “John Boy, what do you think – Bush or Obama?”

John Boy:  “I’m afraid to answer because it seems like a trick question.”

Jordan:  “OK, here’s another.  Did the Federal deficit as a percent of GDP increase more under FDR – up until WWII – or under Ronald Reagan?”

Mackey:  “I’d like to say another stupid question but now I’m not so sure.”

Jordan:  “We seem to be making progress.”

Mackey:  “You know, Republicans hold up Ronald Reagan as the paragon for fiscal conservatism.  What’s wrong with that assumption?”

Jordan:  “Lots wrong.  One final question for now.  When’s the last time debt as a percent of GDP declined?”

Mackey:  “Under a Republican, of course.”

John Boy:  “Mackey, I think we are in for a rude awakening.”

Jordan:  “Look at my iPad.  Here’s a chart to get us started.  It’s from the BLS (Bureau of Labor Statistics).”

John Boy:  “Another liberal organization – should be named BS, not BLS.  Just kidding.  I know BLS has been a credible source of data for decades.”

Jordan:  “Look at this chart.  Federal debt as a percent of GDP beginning in 1800.”

Mackey:  “Now we’re talking.  That’s when the US was really a great country – no debt and lots of growth.”

John Boy:  “Mackey, you need to take a close look at this chart.”

Mackey:  “Whoa.  That can’t be right.”

(To be continued)

Scene: Jordan and Sandy, a former business colleague, are having coffee.  The discussion begins Entry #121,.  This segment is a continuation of Jordan’s description to Sandy of a conversation with the Speaker of the House and the Senate Majority Leader, which begins Entry #123.

Jordan:  “Waiter, we’d like another round, please.”

Waiter:  “And whose tab should I put this on?”

Jordan:  “Mine, unfortunately.”

John Boy:  “Jordan, you have no idea how good this drink tastes since you’re paying for it.”

Mackey:  “You’re not going to charge this to taxpayers, are you?”

Jordan:  “No, Mackey.  Not to worry.  My own money.”

Mackey:  “Now, explain all this accounting stuff.  What does it really mean?”

Jordan:  “Let me ask you.  When you were first married did you buy a house?

Mackey:  “Of course…and proud of it.”

Jordan:  “And did you pay cash for the house?”

Mackey:  “Are you kidding?  I borrowed all the money I could.”

Jordan:  “What if you were forced to pay cash for the house rather than borrowing?”

Mackey:  “Never could have afforded it.  In fact, we’d probably still be renting.”

John Boy:  “I think I see where you’re headed with this.”

Mackey:  “I don’t see.  Where is this headed?”

John Boy:  “Since the government uses ‘piggy bank’ accounting, it appears there is a big deficit when some of the funds are used to buy an asset…something that lasts a long time, like a new house.”

Mackey:  “I still don’t understand what you guys are talking about.”

John Boy:  “Why did the bank lend you money?”

Mackey:  “Because I had a steady income.”

John Boy:  “Did the house you bought cost more than your annual income?”

Mackey:  “Of course…4-5 times more than my income.  What’s wrong with that?”

Jordan:  “Nothing wrong.  What if you had to make as much money every year as the house cost?”

Mackey:  “Already told you.  I couldn’t afford the house and probably still be renting.”

John Boy:  “Well, Mackey, old buddy, I can see we have a problem.”

Mackey:  “The problem is the federal budget deficit.”

John Boy:  “It’s not the deficit.  It’s the way we calculate it.  If your personal household used the same accounting method as the government, you would be in a big hole when you bought the house, or even a new car.  If there were a Constitutional Amendment forcing a balanced budget, you never would have bought your house, or even that new car.”

Jordan:  “And most businesses would never have gotten started.”

Mackey:  “I think I’m getting this.  And boy, am I glad we are off camera.  We are off camera, aren’t we Jordan?”

Jordan:  “No recording, no notes, no record, just an informal chat.”

Mackey:  “Quite honestly, I just never appreciated…really never understood…the difference in accounting methods.  By the way, what’s the other accounting method called?”

Jordan:  “For the record, accrual accounting.  And ‘piggy bank’ accounting is really called ‘cash’ accounting but piggy bank is easier to understand.”

John Boy:  “Jordan, at some point you have to pay off your debts.  We paid off the loans on our house.”

Jordan:  “Are you completely out of debt?  I mean debt other than credit cards.”

John Boy:  “No, not really.”

Mackey:  “And neither am I.”

Jordan:  “You’re not alone.  Most people, even those who’ve paid off their house, are in the same boat.  So, some debt seems OK?”

John Boy and Mackey (in unison):  “Of course.”

Jordan:  “What about the amount of debt?  Does that matter?”

Mackey:  “All depends on income.”

Jordan:  “So you think Bill Gates could take on more debt than say I could.”

Mackey:  “That seems like another stupid question.  Of course Gates could handle more debt than you.  What’s your point?”

John Boy:  “His point, if I understand correctly, is the amount of debt should be measured against income or wealth, not just the amount of debt per se.”

Mackey:  “So $100 million of debt for you Jordan, might seem like a lot…”

Jordan:  “Excuse me Mackey?  Me with $100 million debt?  That’s a dream.  A debt of $1.0 million or even less would seem like a big deal.”

Mackey:  “As I was saying, $100 million debt might seem like a lot of debt to Jordan but not to Bill Gates.  Is that your point?”

Jordan:  “Exactly my point.  The measurement should be the amount of debt relative to income or wealth, not just the amount of debt.”

John Boy:  “Jordan, the way this discussion is headed you might make meaning less the argument that the federal debt is too high.”

Jordan:  “I wouldn’t say ‘meaningless’ but certainly citing the amount of debt as a scare tactic becomes a lot less impactful or rational…if people understand.”

John Boy:  “Mackey, why did we agree to talk to this guy?  He’s starting to ruin my day…even more than my golf game.  But, I really want to learn more about the relationship of debt to income…after a break.  Be right back.”

(To be continued.)