Worrying about China

Ian Talley at the Wall Street Journal's Real Time Economics blog draws our attention to new numbers on just how much US debt China actually owns. A recent revision takes into account China's practice of routing its purchases of US securities through other countries, especially the UK. China's holdings were revised upwards by $268.5 billion, while the UK's holdings were revised downward by $269.2 billion.

The revised numbers for the largest holders of US debt can be found here. China owns $1,160.1 billion, even after the recent revision. The "Grand Total" of foreign holdings of US securities is $4,439.6 billion, near the bottom of the table. Total US federal debt is about $14,193 billion.

Compare that total to China's mere $1,160.1 billion. China's portion might sound like a lot, but it's only 8.17% of the total. I often hear complaints that China owns the US, but this could hardly be further from the truth. If you owed $100 to a bunch of different people, would you be very concerned with the one guy you owed $8.17 to?

To put it another way, US GDP in 2010 was $14,657.8 billion, meaning total federal debt is about 97% of the country's total income in 2010. If you started on January 1st, and took every dollar of income in the country to pay back the debt, starting with China, you would have paid back China by January 29th. But you'd still be paying off the rest of the debt until December 20th! Still think we need to worry about China?

Not Nearly Enough

No matter how you look at it, the GOP's budget proposals just don't cut it. Before being elected, they promised $100 billion in cuts. Now that they're in office, that number has fallen to $74 billion. But that's $74 billion in cuts from the planned 2011 level of spending. When compared to 2010 (you know, back when they were running for office and promising to cut $100 billion), the new cuts are just $35 billion less than we spent last year.

Even so, that's $35 billion with a B. That has to be a significant cut, right? Not so fast. The federal deficit in 2010 was $1,555.6 billion (with a B). The GOP's $35 billion cut lowers the deficit by 2.25%. Let's put that in perspective.

In the graph to the left, the blue bar is the 2010 deficit. The red bar is the 2011 deficit with the GOP's cuts enacted. Huge difference, right?

To put this another way, think of yourself cruising along the debt highway at 65 mph, when you see there's a roadblock up ahead. If you're a normal person, you'd stop the car completely (in other words, eliminate the deficit). But if you're the GOP, you'll slam on the brakes and slow down to... 63.5 mph. Were these really the best people to put in the driver's seat?

You might also have noticed the rather smaller green bar in the graph to the left. That bar represent's Rand Paul's cuts, about $500 billion. In order to reach that level, Rand Paul had to propose dozens of cuts, including eliminating the departments of Energy, Housing and Urban Development, and Education (except for Pell grants), a three-fourths cut to the Department of the Interior, a one-third cut to the Judicial Branch, and a one-fifth cut to the Legislative Branch, along with others. It's a bold plan, but even with all these cuts, the green bar on the graph is still above one trillion dollars. Even if Rand Paul's cuts are all enacted, we will still face a deficit this year greater than $1,000,000,000,000. Remember the roadblock on the debt highway? Rand Paul would slow the car down to 44 mph. He's a lot better than the rest of the GOP, but it's still not nearly enough.

To be fair, Rand Paul says his plan is just the beginning, and he's willing to make much deeper cuts to eliminate the deficit. That would be comforting, if I thought for a moment that his current plan had any chance of success. Unfortunately, the GOP leadership isn't even aiming for the green bar; they're aiming for the red bar, the $35 billion cut, and that's before the inevitable process of compromise with the Democrats begins. Once it's over, we may end up with a bigger deficit in 2011 than we had in 2010-- and the politicians will still say how successful they were in cutting the budget.