Misleading numbers--$150,000 versus $1.7 million

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.

Three assumptions:
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.

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Reader Comments

Jack Krupansky

June 27, 2005 11:50 AM

Maybe somebody should write a book entitled "Freakoutonomics", which gives all sorts of bizarre calculations designed not for any useful purpose, but merely to freak people out.

A saw a joke line this morning: "There is a fine line between a hobby and mental illness." Maybe we should substitute "economics" for "hobby".

As they say, it's a sign of the times.

-- Jack Krupansky

Mr. Econotarian

June 27, 2005 03:01 PM

I would suggest that the $150,000 is not related in any way to the $1.7 million. It clearly is not an "investment" by any means.

Infact, the $1.7 million might be much higher if spending was lowered, tax rates were lowered, and deadweight losses of taxes and mal-investment by government was eliminated.

TDM

June 27, 2005 05:12 PM

Also, almost all of the debt burden will fall on the richest children, who will be significantly richer than the rich today. The bottom 50% of children can expect to inherit about 4% of the debt burden. If that number looks scary to you then you can expect to inherit a tiny percentage of that number.

Addylu

June 27, 2005 06:00 PM

What I love the most about Economists are their assumptions.

James

June 28, 2005 08:37 PM

How exactly does he come up with this number? Federal debt per capita is only about $25,000. A considerable number, but only 1/6 his claim. It could be worse, in Japan the national debt is an astounding 164% of GDP, around 2 1/2 times ours.

Thank you for your interest. This blog is no longer active.

 

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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.

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