Written by Jim Bacon
Now that budget and deficits are the No. 1 topic in Washington, D.C., politicians should make a point of downloading a recent Congressional Budget Office (CBO) study, “Federal Debt and Interest Costs,” so they can learn what the heck they are talking about. The study is an excellent primer for neophytes who want to bone up on the national debt.
The CBO report provides the clearest explanation that I have yet seen explaining the differences between two numbers that are often bandied about and just as often confused: “Gross Debt” and “Debt Held by the Public.” Gross debt is the larger number, and the one that gets the most attention — stories reporting the total debt of the U.S. surpassed $14 trillion have generated more than a few headlines in the past few days.
It turns out that the federal debt is a complex, multi-faceted thing, and journalists are rarely clear about the disinctions between different definitions of the debt. Broadly speaking, the gross debt falls into two big buckets: “debt held by the public” and “intra-governmental holdings.” But there is a profusion of sub-categories, from bills, notes and bonds (which vary by the length of the debt maturity) to non-marketable savings bonds, a special series for state and local governments, and the Medicare and Social Security trust funds.
If your goal is to scare the bejeebers out of people, then you should emphasize the gross debt, or total debt. That’s
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the number I use, with ample justification, I believe. The Social Security trust fund for retirees and the disabled amounts to $2.6 trillion. Additionally, there are trust funds for federal civilian and military employees ($1.6 trillion), Medicare ($350 billion), unemployment insurance ($19 billion) and other programs. By the end of 2020, the CBO projects, the total balance of all those funds will increase to more than $6 trillion, which is real money, even in Washington, D.C. The trust funds may not consist of publicly traded securities like T-bills, but they do represent a meaningful obligation of U.S. taxpayers, and there will be political hell to pay if the government breaks its promise.
If your goal is to minimize the looming fiscal crisis, then you should highlight the Debt Held by the Public, a significantly smaller number. Although huge and growing, the number is somewhat less alarming than total debt. While the measure is useful for analyzing the impact of the federal debt upon financial markets, or vice versa, in my humble opinion, it is severely lacking as an indicator of the total debt burden faced by the country because it leaves too much out.
The CBO is a fan of a third definition of the debt, “Debt Held by the Public Net of Financial Assets.” This measure, which is not widely reported, takes into account the value of financial assets held by the government, such as mortgage-backed securities purchased from Fannie Mae and Freddie Mac, Federal Housing Administration loan guarantees, student loans and preferred stock of financial institutions acquired under the Troubled Asset Relief Program (TARP), which may be higher or lower than what the government paid for them. The CBO makes a decent case for using this definition, but don’t feel like you’re missing much. The bottom-line adjustments are relatively small, and they don’t affect the main trend lines.
Finally, there is the Debt Subject to Limit, an amount determined by Congress for the purpose of capping the amount of money the federal government can borrow. It is nearly identical to Gross Debt, except that it excludes the relatively trivial borrowing of entities like the Tennessee Value Authority and the Federal Financing Bank. As an analytical tool, this measure is meaningless. As a political club with which to beat your partisan foes when it comes time to raise the debt ceiling, it’s priceless.
Whichever measure you prefer, the national debt is climbing faster than the economy, and interest rates are rising even faster.
A life-long journalist and writer, James A. Bacon is former Publisher & Editor-in-Chief of Virginia Business magazine, former editor of the Generational Advisor newsletter, and founder of the Bacon's Rebellion public policy newsletter and blog. Visit his blog and buy his book, or you could lose your golden years and your 401K.