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Posted by: Michael Mandel on June 27
I hate it when journalists (and economists!) give misleading and silly economic numbers without an appropriate comparison. In the Sunday NYT, Nicholas Kristof wrote that because of the national debt, “every American child” will face a “‘birth tax’ of about $150,000.”
That’s right: every American child arrives owing that much, partly to babies in China and Japan. No wonder babies cry.
This number is misleading in so many different ways, it’s almost hard to believe. First, guess what? Most of that national debt is owed to ourselves, so those same babies have a share of both the debt and also of Treasury bonds.
Second, and more important, those same babies also own a share of the future output of the U.S. economy, which is much larger than that so-called “birth tax”. A simple calculation (explained below) shows that each baby’s share of future output is roughly about $1.7 million.
Average baby’s share of future output=$1.7 million
Average “birth tax” (according to Kristof)= $150,000
Doesn’t look quite so scary, does it?
See Details of calculation below
Per capita disposable income in 2004 =29416 (disposable income is equal to personal income after various kinds of taxes are subtracted)
Average growth rate of real per capita disposable income over past ten years= 2.3% per year.
a) That growth rate will continue into the future.
b) The real rate of interest (after inflation) is 3%.
c) 70 year average life expectancy
Using those three assumptions, the discounted present value of future disposable income per capita, in 2004 dollars, is about $1.661 million, rounded up to $1.7 million.
Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.