Readers may be puzzled by seemingly inconsistent statistics that are now flooding the media with respect to the size of the U.S. federal debt problem. Today, I draw on a useful clarificatory column published in The Wall Street Journal by John Steele Gordon to focus attention on the nature of the apparent inconsistency.
1. The total national debt of the United States is the sum of all federal bills, notes and bonds that have been issued by the Treasury and not yet redeemed.
2. The publicly held debt is the sum of the Treasury securities held by individuals, financial institutions, and foreign governments.
3. The intra-governmental debt is the sum of Treasury bonds held by agencies of the federal government, principally by the Social Security Trust Fund. These liabilities equal the future pensions, health care, Social Security payments, etc. that are promised under current legislation. These are liabilities only as long as current law remains unchanged. So, if legislation was signed into law eliminating all Social Security, health care and other commitments of the federal government – and there is no constitutional protection against such legislation – intra-governmental debt would disappear immediately.
The question thus arises, should intra-governmental debt be included when counting the size of the national debt? As long as one believes that the commitments will not be reneged upon, the answer must be positive. For, as the Social Security surplus disappears, given that the Trust Fund monies have been expended elsewhere, all that remains are Treasury notes. As these notes mature, Congress will have but three options: cut spending elsewhere, raise taxes, or borrow the money in the bond market, thus converting intra-government debt into publicly-held debt. The third option is the most likely. So intra-government debt must be counted in.
On August 11, 2011, the total public debt was $9,924 trillion, and the intra-government debt was $4,666 trillion, making a grand total of $14,587 trillion. As such, public debt equalled 66.1 per cent, and intra-government debt equalled 31.1 per cent of gross domestic product. Thus, total debt is now 97.2 per cent of GDP and rising rapidly. That is the ratio relevant to the U.S. federal debt debate.
It is important to note that what matters is the rate of growth of the debt relative to GDP. And this is where the United States is currently very vulnerable. The ratio itself has been higher – for example in 1946 it stood at 129.98 per cent. But conservative fiscal policies roughly balanced the federal budget, allowing the ratio to decline as GDP grew. By 1960, the ratio of total federal debt to GDP had declined to 58 per cent. The debt to GDP ratio can also be reduced by inflation, as occurred infamously through the 1970’s, lowering the ratio to 34.5 per cent by 1980.
The fundamental problem confronting the United States at this time is that no attempt is being made to balance the budget, economic growth is all but non-existent, and the total debt to GDP ratio will soon pass 100 per cent and well beyond as far as the eye can see. That is why Treasury notes were downgraded by S & P and why the two other major ratings agencies should be castigated for not following suit. That is why fundamental budgetary reforms are essential – reforms that target all the entitlement programs while reforming the tax structure to raise revenues while regenerating GDP -growth.
Wise voters will evaluate all candidates for the 2012 elections – presidential, senatorial and representative alike – in terms of how they propose to resolve the federal budget crisis as defined in terms of the total federal debt to GDP ratio.
Hat Tip: John Steele Gordon, ‘A Short Primer on the National Debt’, The Wall Street Journal, August 29, 2011
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