Much Ado About the National Debt
With today’s news that the United States’ national debt has topped $17 trillion, there is and certainly will continue to be much pontificating, finger pointing, and armchair policy advising over the issue. I’m all for some good policy discourse, but the the trouble is that, much like almost any political squabble that reaches the masses, the loudest voices are also missing some crucial details and facts. This is not meant to be an indictment–I have a fancy piece of paper that cost me a lot of time and money that says I’m supposed to be an expert about things like this, and even I can’t keep track of all of the pertinent facts and details about how exactly the national debt works. But what I DO know is that it doesn’t quite work how the pundits (or even the straight news folks) say it does.
The following is meant to be a primer on what makes up the national debt, who holds the debt, and how things that should be internal budgeting issues wind up having global ramifications. Whole sections of libraries are taken up with various treatments and analyses of the national debt. That said, that is clearly more detail and depth than I am capable of going into in a blog post, so a lot of things here will be oversimplified and a lot of details will be left out. The good news is that, unless you have a background in public policy, economics, or political science, you probably won’t notice or care. To my professional colleagues: I apologize for some of the liberties I’m about to take. To anyone who wants a slightly more complete (though still totally understandable) treatment of things, Just Facts has a pretty nice national debt overview, complete with charts.
A tale of two debts
So let’s take a quick overview of what makes up the national debt. The ownership of the debt can be divided into two categories: debt owed to federal entities and debt owed to non-federal entities (also known as “public debt”). Debt owed to non-federal entities works about how you’d expect: the federal government has financial liabilities to the “public,” which includes foreign entities, state and local governments, various investors, private firms, etc. These entities loan the government money by purchasing marketable securities such as Treasury notes, bills and bonds, which the government has to pay it back, with interest. This is why debt held by the Federal Reserve is included in the calculation of public debt, even though it’s a federal entity–because it holds some of those marketable securities.
Debt owed to federal entities is a little trickier, because while federal debt is included in the calculation and reporting of the total national debt, it’s simply money (plus interest) that the federal government owes itself. The best example of how this works is with Social Security. Legally speaking, the funds that run the Social Security program are kept separately from the rest of the federal government in a “trust fund.” (This legal separation applies to the funding for a number of other social support and entitlement programs, as well.) When Social Security spends less than what they’ve been allocated by the federal government, they lend the surplus to the federal government. The federal government is then legally obligated to pay back this loaned money, plus interest, which contributes to the liabilities included when calculating the national debt. Confused yet?
As of 2010, 32 percent of the national debt was federal debt, that is to say, money the federal government owes to itself. While federal law makes no distinction between federal and public debt in how it must be repaid, many entities exclude this portion of the debt in economic analyses, as, according to the Office of Management and Budget, “issuing debt to Government accounts does not have any of the credit market effects of borrowing from the public.” To put it a different way, if you were to borrow money from your savings account to make up for a personal budget shortfall, the fact that you borrowed it and whether or not you paid it back to yourself would not impact your credit score, but you might still count it in your own personal accounting of money you owe. However if you used a credit card or took out a loan from the bank to make up for that shortfall, the action itself and whether or not you paid it back properly and on-time WOULD impact your credit score. This example is a fairly accurate illustration of the difference between federal and public debt and its impact on the economy.
That Social Security show
With this distinction in mind, it’s important to note that the portion of the national debt “caused” by social programs and entitlements (Social Security, Medicare, disability and retirement funds for federal workers, etc.) falls entirely under the category of federal debt–money the government owes itself. The trouble with federal debt comes, however, when other areas of the government that have borrowed from (for example) surpluses of the Social Security Trust Fund continue to run a deficit and can’t pay back the intragovernmental loan. If this continues long enough, the government will essentially trade out one type of debt for another by paying back the intragovernmental loan by issuing marketable securities to public entities. This is where a lot of talking points about social programs running up the deficit come from.
It is true that Social Security and other social programs are currently paying out at unsustainable levels from the amount they’re taking in. This problem is primarily twofold from the perspective of this article (and, as with a lot of things, I’m keeping this very simple for the purpose of greater understanding):
- The amount being paid into the Social Security Trust Fund through payroll taxes is less than what is being paid out. There are several reasons for this, not limited to the fact that the number of people collecting Social Security benefits has exploded in recent years, with the (continuing) wave of Baby Boomer retirees who are living long enough to collect more in benefits than they ever paid into the system during their careers. Further exacerbating the problem is the fact that the revenue from payroll taxes that is funding the benefits currently being paid out has dropped significantly due to a combination of unemployment, low wages relative to inflation, and generally decreasing effective tax rates over the last decade.
- The budget for the Social Security Trust Fund accounts for expected repayments of intragovernmental debts (including interest). But as other parts of the government continue to borrow from Social Security and other legally separated funds, the repayments of these intragovernmental loans are not keeping up with the twofold drain on the accounts without budgeting more to the programs in the first place.
But if the government entities that borrowed from these trusts can’t manage to budget themselves out of a deficit, or, more accurately in the present case, Congress won’t pass a budget at all, the government still has to raise revenues somehow to pay back the money it owes to its legally separated trusts. Generally, the only two ways to do that are to issue marketable securities or to raise taxes. And you may have noticed that any attempt to raise revenues through increasing taxes lately is probably a less worthwhile venture than teaching poetry to fish. So securities it is. And thus the publicly-held debt (which includes debt held by foreign entities) increases, and what was once an internal budget issue is now one with global economic ramifications. This is also why the current budgetary squabbles in Congress have had such an impact on financial markets and international confidence in the marketable securities issued by the government. (See my post about national credit ratings for more details about this. It’s a complicated topic all its own.)
The most obvious takeaway here is that if you’re about my age (or younger), don’t hold your breath about getting back that Social Security money you’ve been paying in. All (serious) joking aside, though, the biggest conclusion that can be made here is that any serious approach to managing the national debt (on both the federal and public sides) MUST involve the passage of an actual federal budget instead of the continuing resolutions that have been keeping the government running since before President Obama ever took office. Most federal entities can’t make any serious moves toward reducing any existing budget deficits without one, and thus the continuing cycle of swapping federal debt for public debt will continue until appropriate and effective changes can be made.
Oh, and one more important thing: it is the responsibility of CONGRESS to create and pass a budget. The president can present a budget to Congress as a suggestion, but it is ultimately Congress’ responsibility to formulate and pass the budget bill for the president to sign. Technically, the budget still in effect was the one passed in 2007 (that was during the Bush Administration, for those still playing at home), as Congress has not been able to get its collective dung together for nearly seven years to do much more than agree to keep doing what we’ve been doing with a patch here and a plug there. Take that how you will, but it does explain a few things about how the national debt has managed to explode in the way it has.