Measures of Debt

Comments on the CBO Baseline Projections

By Alan R. Davis

The Congressional Budget Office (CBO) has released their 2014 projections in a 182 page document.  Comments in this “blog” related to the topic of the Nation’s Debt covered in that document.

The CBO lists four measures of Debt:

-          Gross Debt: All debt of the Federal Government

-          Debt Subject to Limit: Basically the same as the Gross Debt but relating to the authorized limit passed by Congress.

-          Debt Held by the Public: Excludes Debt Held by Government Accounts (Trust Funds) but does include that amount held by the Federal Reserve Board.

-          Debt Held by the Public less Financial Assets: A technical definition that is difficult to calculate because of the difficulty in measuring value of the Financial Assets

The CBO explains the rationale for concentrating on the “Debt Held by the Public” as follows:

“(Debt held by the trust funds)...does not directly affect the economy and has no net effect on the budget.”

So because of that position, it’s hard to find figures for Gross Debt in their report and they repeatedly use Public Debt figures in their analysis.  But let’s look at that statement to see if stands up to scrutiny.

“…has no net effect on the budget.”:  What they are telling us is since the government is the issuer and the borrower, those two transactions cancel themselves out.    Also since the government is paying the interest and receiving the interest those also cancel themselves out.   On a strict accounting basis, that may be true for any given year.  But it’s not true from the perspective that the government has more debt that it must pay back at some point in time. 

According to the trustees of the Social Security and Medicare trust Funds, that point is coming relatively soon.  In fact the 2013 Trustee Report shows that occurs beginning in 2021.  At that point, not only will the Federal Government have to borrow funds to support the General Fund’s deficit, but also to start paying back the trust funds.

 “…does not directly affect the economy”:  Economists in Washington tell us that borrowing funds from the trust funds doesn’t impact the economy in the same way as borrowing directly from the public.  They justify this theory by saying the funds are sitting idly in the trust funds, while those borrowed from the public are no longer available for use by the private sector economy. 

How do the funds make it into the trust funds?  They are accumulated through payroll taxes which take money out of the economy.  And when it’s time for the IOU’s to be paid off, the General Fund will have to increase its borrowings taking more funds out of the economy than otherwise would be required.  So over time borrowing the surpluses from the trust funds to support deficit spending not only puts the viability of the trust funds at risk, but it increases the long term borrowing needs of the General Fund.

Let’s put that in real terms from my life.  My parents stressed that I should go to college.  Coming from a large family with moderate income, they told me I needed to make a sincere effort to pay for as much of my college education as I could.  So beginning in my junior year of high school I stopped running track and cross country and got a job.  I saved as much as I could and put it in a "college fund".  When I got my drivers’ license I had to share a family car rather than have one of my own.  Had I used the Government’s logic, I could have used the funds I had saved for my college education to purchase a car since they were sitting idly.  I could have just issued my college fund IOU’s for the amount I used.  However, when I finally went to college those funds wouldn’t have been available, would they.  How would I have paid for college?  I would have had to borrow the money.

 

Ignoring the government account debt is just a way to justify deficit spending and to keep from having to recognize that our Debt to GDP ratio is now over 100%.