CQ WEEKLY
July 2, 2011 – 12:07 p.m.
Political Economy: Adding It Up
By John Cranford, CQ Columnist
Washington and Wall Street alike remain fixated on whether the Republicans and Democrats can reach an accommodation to raise the limit on federal government borrowing before a default sends financial markets into a tailspin. But one question isn’t really being addressed: Just how big is the federal debt, anyway?
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This question isn’t as easy to answer as one might think. Yes, the Treasury Department publishes a plethora of figures about the size, maturity and interest rates of the securities it, and other agencies, sells. And, after the close of every business day, Treasury reports a bottom line number for total borrowing down to the penny. As of June 30, the government’s total debt was $14,343,087,640,008.40. (Not every dime is capped by the debt ceiling, by the way.)
That total isn’t necessarily the only number that official Washington, investors and other governments watch, however. Some economists even say that the tally of total debt is misleading because it includes intra-governmental debt — money borrowed from surpluses held by the trust funds that finance Social Security benefits, Medicare hospitalization costs, federal worker pensions, unemployment insurance claims and the like. That borrowing is not technically an immediate obligation to government creditors and, when it is excluded, the government’s real debt is a good deal smaller than the $14.3 trillion figure that’s so prominent in the news. (Interactive Graphics: Raising the Debt Limit, 1980-2011 | Who Holds the Debt)
The amount of this intra-governmental debt is substantial. On June 30, it was just a bit in excess of $4.6 trillion — more than 32 percent of the total debt. That means almost a third of the accumulated amount that the Treasury has borrowed since the mid-1830s, when Washington was last functionally debt-free, is owed by one part of the government to another.
In essence, this internal borrowing is a measure of tax receipts that have been diverted from one use to another — an IOU of sorts that eventually will need to be honored — unless Congress decides to radically change the structure of Social Security and Medicare to deny benefits that Americans think they have earned, which is highly unlikely. Someday that money will be needed for its originally intended purpose, but not today.
So, the amount known as “debt held by the public” is regarded as a more accurate measure of the demand that the government imposes on financial markets, and the immediate claim that investors have on taxpayers. While it is quite a substantial sum — roughly $9.74 trillion on June 30 — it is a somewhat less daunting figure than the total debt.
For example, total U.S. debt is expected to soon be larger than the annual output of the economy. Last year, gross domestic product was $14.7 trillion. This year, GDP is likely to be a bit less than $15.5 trillion. Assuming the debt ceiling is increased, total borrowing might rise to that level by year’s end. U.S. debt held by the public, however, will remain close to two-thirds of the size of GDP.
This narrower definition of debt also puts borrowing by the United States government more or less in line with that owed by other industrialized countries. Statistics compiled by the Economist Intelligence Unit show that at the end of 2011, government borrowing by Canada, France, Germany, Ireland, Italy, Japan and the United Kingdom is likely to be larger as a share of GDP than U.S. debt held by the public.
So, maybe we aren’t in such a deep hole after all. At least not right at the moment.
About the Rest
But, as with any good economic issue, not every expert sees it that way. Some economists fret about the growing intra-governmental debt — and what it conceals.
In fact, they argue, the trillions of dollars borrowed from the Social Security and Medicare trust funds will be needed in just a few years to pay benefits to the retiring baby boomers for whom it was intended. That money can also be viewed as a meager down payment on the huge unfunded liabilities of those two programs and other entitlements. In that sense — and because most analysts see the cost of health care amounting to many tens of trillions of dollars over the next half century — the size of the federal debt can also be seen as many times larger than official statistics show.
Political Economy: Adding It Up
This “fiscal gap” is what most troubles those lawmakers, bureaucrats and economists who are looking for ways to preserve the country’s solvency into the middle and latter part of this century. And it’s also the undercurrent that is carrying along the current budget debate — even if few people are explicitly acknowledging this fact.
Congress has yet to fully engage on how to manage this longer-term liability. Instead, almost all of the conversation — on both sides of the aisle — is about how to save a few hundred billion dollars here and a few hundred billion more over there.
Where is the focus on the tens of trillions? Maybe the issue is just much too big for most people to grasp.