July 26, 2011
Economists say U.S. debt maybe not as high as you think
By James Rosen | McClatchy Newspapers
WASHINGTON — Economists dismayed by the debt-ceiling pyrotechnics on Capitol Hill and at the White House say that political leaders' failure to deal with the short-term crisis bodes poorly for their ability to confront another looming fiscal disaster.
And the problem is compounded, many economists say, by how the United States calculates its debt.
In trying to understand the debt ceiling — a subject many people had never considered before this summer — it helps to know a few things about the layers that make up the United States' $14.34 trillion mountain of debt.
The U.S. blends two kinds of debt, and some economists say that makes little sense. Moreover, we don't even have a good way of paying back one of those types of debt. More on that later.
The first type of debt is what the government owes to outside bondholders: individuals, pension funds, other groups and foreign governments. The second type is a sizable amount of intra-governmental debt, or obligations of the Treasury Department to various trust funds — basically what we owe ourselves.
Alex Brill, an economist with the American Enterprise Institute, a conservative research center in Washington, said that counting external and internal debt together didn't make economic sense and blurred the real fiscal situation the U.S. faces.
"Not all of the debt is the same, and it doesn't all matter the same," Brill said. "What really matters is debt held by the public."
Those are the outside bondholders, and they take up about two-thirds of the total U.S. debt. As of Monday, the most recent date for which the Treasury Department provided figures, the U.S. owed $9.75 trillion to them.
Almost one-third of the U.S. debt — $4.59 trillion — is in the form of IOUs dedicated to programs such as Social Security, Medicare and the pension plans for federal workers and military personnel. That's what the United States owes its citizens.
As an analogy, Brill suggests thinking of a family that's facing medical bills now and college bills in the future. Say the family has set aside $3,000 for college costs, encounters a $13,000 medical bill, pays $10,000 of it with a credit card and uses the college savings to pay the rest.
That family's real debt is $10,000, but the Treasury Department's method of calculation would place it at $13,000.
While the family does need to replenish the college savings, the movement of money within its personal accounts doesn't affect its credit score.
"When you blend this real debt with the kind of accounting debt where the left hand borrows from the right hand, you end up with something that's completely meaningless in economic terms," Brill said.
This practice enables some lawmakers to exaggerate the severity of the problem that underlies the debt-limit impasse.
For example, Sen. Jeff Sessions, an Alabama Republican, told Fox News earlier this month: "The debt as it exists today — 95 percent of GDP — is so high, economists tell us it's dragging down (economic) growth at least 1 percent."
But considering only the $9.75 trillion that's owed to bondholders, the U.S. debt is 65 percent of the GDP; still worrisome, but nowhere near the 140 percent level that's fueling the Greek debt crisis or the 100 percent-plus levels of other troubled European governments.
This kind of distinction, though, provides little solace in the face of the coming entitlement crisis just a few years down the road.
President Barack Obama and lawmakers are struggling to agree on a debt-ceiling hike before next Tuesday, which would allow the government to borrow more money in order to fund a more than $1 trillion budget deficit.
As they wrangle, they're only tenuously offering solutions to entitlement obligations that are many orders of magnitudes more. Those obligations eventually will total at least $60 trillion.
"This huge debt burden won't bankrupt the country on Aug. 3, but it does demonstrate that there is an enormous and growing problem that gets much harder to deal with the longer it is left unaddressed," said Christopher Frenze, a former staff director of the American Action Forum, a conservative policy institute in Washington.
That coming threat stems from another issue, the IOUs to ourselves.
For years, increased spending has forced the government to raid federal trust funds. It takes payroll tax revenues earmarked for Social Security or Medicare, for instance, and uses them to cover unrelated expenses. But it doesn't have a way to pay back the money.
It would be as if a family kept a budget on paper that put aside set sums each month for defined needs, but it spent all that money and more in its daily activities.
Kenneth Rogoff, a Harvard economist who's advised U.S. government leaders, views the debt-limit crisis as concealing a deeper dilemma: Americans expect federal benefits they're not willing to pay for.
"We're on a completely unsustainable path," Rogoff said. "People are just convinced the government doesn't need any money. They're mad at all the borrowing, but they get even madder when taxes go up or they don't get the programs they like."
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