By Michael Tanner
Wednesday, January 30, 2013
It’s not quite on a par with 9/11 truthers or Obama
birthers, but recently a number of liberal commentators have descended into the
fever swamps of denialism by rejecting the most basic facts about our debt and
deficit. Mind you, they are not arguing about the best policies to reduce the
debt — taxe hikes vs. spending cuts — but actually denying that the problem
exists at all.
Paul Krugman, for example, pronounces the debt problem
“mostly solved.” Matt Yglesias of Slate asks, “What sovereign debt crisis?
There certainly isn’t one in the United States.” Bruce Bartlett, every liberal
economist’s favorite former conservative, adds that “our long-term budget
situation is not nearly as severe as even many budget experts believe.”
Bolstered by a study from the left-wing Center on Budget
and Policy Priorities, the debt deniers claim that a combination of economic
growth, tax hikes, and projected (but not yet realized) spending reductions
have already significantly reduced deficits. They argue that a mere $1.2
trillion in additional tax hikes over the next ten years, and the resulting
savings on interest, would enable us to “stabilize” our debt at a mere 73
percent of GDP by 2022.
Now there’s something to get excited about: stabilizing
our debt at an amount equal to nearly three-quarters of the value of all goods
and services produced in this country each year. Yippee!
But even if you think that’s good news, it’s not really
the truth. The 73 percent figure actually represents only that portion of the
federal government’s debt classified as “debt held by the public,” primarily
those U.S. government securities that are owned by individuals, corporations,
and other entities outside the federal government itself. Debt held by the
public currently totals roughly $11.6 trillion and is expected to rise to
roughly $19.1 trillion by 2022.
Left out of this analysis, however, is roughly $4.9
trillion in “intragovernmental” debt, which consists of the debts that the
federal government owes to itself, through more than 100 government trust
funds, revolving accounts, and special accounts, such as the Social Security
and Medicare Trust Funds (worth $2.7 trillion and $344 billion respectively).
The combination of debt held by the public and intergovernmental debt yields
our current $16.4 trillion in total red ink.
The debt deniers justify ignoring intragovernmental debt
on the grounds that only debt held by the public competes with investment in
the nongovernmental sector. Moreover, while interest on debt held by the public
is paid in cash and creates a burden on current taxpayers,
intragovernmental-debt holdings typically do not require cash payments from the
current budget and don’t present a burden on today’s economy.
Intragovernmental debt can also be considered somewhat
“softer” than debt held by the public, since the government can control when
and whether trust-fund debt is paid through, for example, alterations to the
Social Security benefit formula.
But the federal government, and deficit doves, cannot
simply write off intragovernmental debt as inconsequential. As opponents of
Social Security reform often argue when asserting the program’s solvency, the
securities held by the Social Security Trust Fund are backed “by the full faith
and credit of the U.S. government.” Eventually the securities held by the
various trust funds and other accounts will have to be redeemed, just as if
intragovernmental debt were debt held by the public. No matter how you treat
intragovernmental debt today, repaying it should be included in any projection
of future government spending.
Therefore, a fair accounting of our debt should include
both that held by the public and intragovernmental debt. By that accounting, we
currently owe 102 percent of GDP, and by 2022 our national debt will be 118
percent of GDP.
Moreover, by cutting off the trend line in 2022, the debt
deniers ignore the enormous unfunded liabilities of Social Security and
Medicare, the costs of which will kick in mostly beyond this limited budget
window. According to Social Security’s board of trustees, the discounted
present value (the amount that would have to be set aside today, earning 3
percent interest, in order to pay future shortfalls forever) of that program’s
unfunded liabilities is more than $20.5 trillion. And, according to the most
optimistic estimates by the Obama administration itself, the discounted present
value of Medicare’s unfunded liabilities is more than $42 trillion. And that is
an estimate that assumes Obamacare actually reduces health-care costs.
True, those obligations represent the “softest” form of
debt. But “soft” does not mean debt that can be completely dismissed. According
to generally accepted accounting principles (GAAP), by which private
corporations abide, promises to pay future benefits are generally categorized
as debt. After all, those benefit payments are called for under current law,
and it would take congressional action to change them. Unless and until
Congress reforms Social Security and Medicare, those obligations exist, but
debt deniers are especially vehement in their opposition to precisely such
reform. By their very failure to reform Social Security and Medicare, the
deniers harden the program’s future liabilities.
If we include all this debt — public debt, intragovernmental
debt, and unfunded liabilities — we currently owe at least $79 trillion, 500
percent of GDP, and perhaps as much as $127 trillion, 800 percent of GDP.
That said, these future liabilities will be paid not out
of today’s but out of future economic production, which will inevitably be
larger. Measurements of the discounted present value of future liabilities are
extremely sensitive to assumptions about future interest/discount rates.
Therefore, a better way to calculate the true size of the national debt might
be to measure the share of a country’s future GDP that will be required to
finance that debt. By this measure, the United States faces a debt equal to an
additional 9 percent of its future GDP forever.
However, this may underestimate the tax burden required
to pay the debt, because a country’s tax base is only a fraction of its GDP.
Accordingly, the tax increases required to pay the debt would need to be much
larger as a percentage of the current tax base than as a percentage of GDP. For
example, the payroll-tax base equals slightly less than one-half of GDP,
implying that the 15.3 percent U.S. payroll-tax rate would have to be more than
doubled to pay our debt. Similarly, the income-tax base is roughly 36 percent
of GDP, meaning that revenue from income taxes would have to more than double,
requiring massive rate increases just to pay what we owe.
Taxes at such levels would almost certainly depress both
investment and consumption, substantially slowing economic growth.
Indeed, the debt is likely reducing economic growth
already. The International Monetary Fund looked at the relationship between
debt and economic growth, concluding that, from 1890 to 2000, countries with
high debt levels have consistently experienced slower economic growth than
those with low debt levels. Similarly, economists Carmen Reinhart and Kenneth
Rogoff concluded that countries with debt totaling more than 90 percent of GDP
have median growth rates one percentage point lower than countries with lower
debt levels, and average growth rates nearly four points lower. The slow
economic growth that the United States has seen coming out of the recession is
likely due in part to our high levels of government debt.
Perhaps this was all thought up by President Obama’s
Muslim Kenyan overlords to hide the Mossad’s role in 9/11, but I sort of doubt
it. The debt deniers’ argument is about as unrealistic.
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