Choosing the Right Debt Measure
http://www.offthechartsblog.org/choosing-the-right-debt-measure/
Posted by: James Horney
Posted in: Deficits and Projections, Federal Budget
In an earlier post I explained that when it comes to the nation’s long-term debt problem, what matters is the size of the debt held by the public, not the gross debt, and warned that the President’s deficit commission would go seriously off track if it focused on the wrong measure. The Center issued a new report today that explores this issue in greater depth. Here’s the executive summary:
A call by several members of the President’s Commission on Fiscal Responsibility and Reform for the commission to focus on the federal government’s gross debt, rather than debt held by the public, is misguided and could inhibit efforts to address the nation’s long-term fiscal challenges.
Debt held by the public consists of promises to repay individuals and institutions, at home and abroad, who have loaned the federal government money to finance deficits. Gross debt (as the term is used in the United States) includes, along with debt held by the public, intragovernmental debt — money that one part of the federal government owes to another — such as the money the Social Security Trust Funds have lent to the Treasury in years when their earmarked revenues exceeded their expenditures for benefits and other costs.
The interest of some commissioners in gross debt stems at least partly from an analysis of 44 countries that, they believe, suggests that high levels of gross debt inhibit economic growth. In a widely cited article, University of Maryland professor Carmen M. Reinhart — who testified to the commission on May 26 — and Harvard professor Kenneth Rogoff concluded that debt-to-GDP ratios of 90 percent or more are associated with significantly slower economic growth. Since they use gross debt as the measure of debt for the United States, and since our gross debt now equals 90 percent of GDP, the nation appears close to that “tipping point.”
But claims that gross debt (as the term is used in the United States) is an economically meaningful measure of national debt and that the United States is approaching an economic danger zone are extremely dubious for several key reasons:
- Most economists agree that debt held by the public — rather than gross debt — is the proper measure on which to focus because that’s what really affects the economy.
- Reinhart and Rogoff used a measure of debt that, for most of the countries they researched, is consistent with the standard measure of national debt that the International Monetary Fund and the Organisation for Economic Cooperation and Development use. Although those institutions call that measure “gross debt,” it is very different from what is called gross debt in the United States because it excludes most intragovernmental debt. The Reinhart-Rogoff data for the United States and Canada, however, differ significantly from the IMF and OECD measures because these Reinhart-Rogoff data reflect gross debt as that term is commonly used here — and thus include large amounts of intragovernmental debt, such as the money that the Social Security Trust Funds have lent to the Treasury.
This leads to two conclusions.
- First, since the gross debt measure that Reinhart and Rogoff use for countries other than the United States and Canada does not include significant amounts of intragovernmental debt, the Reinhart-Rogoff data do not allow them to reach valid conclusions about the effects of intragovernmental debt on economic growth.
- Second — and of particular note — the authors’ gross debt measure for countries other than the United States and Canada is roughly equivalent to what, in the United States, is called debt held by the public. In both cases, the measures essentially exclude intragovernmental debt. And by this measure, the U.S. debt-to-GDP ratio equaled 53 percent at the end of fiscal 2009 and, under current policies, will not reach 90 percent until around 2020.
Finally, while the authors argue that debt-to-GDP ratios over 90 percent are correlated with lower economic growth, they do not argue that the former causes the latter. In fact, other experts argue that lower economic growth may cause higher debt-to-GDP ratios, rather than the other way around.
To be sure, the specter of rising debt for decades to come presents a very serious economic challenge for our nation. But, in addressing this issue, the commission should focus on the right fiscal target — debt held by the public — rather than on a measure or target that will cause confusion and misunderstanding and does not make sound economic sense.
More About James Horney
Jim Horney is the Vice President for Federal Fiscal Policy at the Center on Budget and Policy Priorities, where he specializes in federal budget issues.
Full bio | Blog Archive | Research archive at CBPP.org
The most profound failing in the Reinhart and Rogoff paper is embodied in their “smoking gun” graphic, Figure 3:
http://www.asymptosis.com/wp-content/uploads/2010/03/Screen-shot-2010-03-02-at-9.19.03-AM.png
But note the footnote to this table: they have only 5 samples (years) out of 216 in which debt/GDP was greater than 90%.
It’s not hard to figure out what years those were:
U.S. Federal Debt as a Percentage of GDP
1944 91.45
1945 116.00
1946 121.25
1947 105.81
1948 93.75
1949 94.60
Source: http://www.usgovernmentspending.com/downchart_gs.php?year=1930_2015&view=1&expand=&units=p&fy=fy11&chart=H0-fed&bar=0&stack=1&size=l&title=&state=US&color=c&local=s
I find six years to their five, but in any case.
This was a period of profound economic turbulence–the years when our economy was struggling to recover from the massive back-and-forth swings of unprecedented economic forces in the preceding 10-15 years. Things didn’t smooth out until the fifties.
If these years constitute Reinhart and Rogoff’s “proof,” well…there’s just not a lot of there there.
Damned disappointing, given the quality of their book.
I find this brief statement of the problem/issue lacking in a couple of major respects/ways: First, this executive summary (and so I assume the larger report) fails to address HOW government debt, at whichever level and however measured, potentially slows economic growth. One might assume that would be through the (negative) effects of higher taxes on economic activity. Based on that assumption, and the fact that higher taxes will be necessary to pay the piper for the government’s wanton misuse of social security funds to pay for our wars in the past and currently, the distinction between gross debt and debt held by the public is a distinction without a difference – unless, of course, the report authors advocate not paying those baby boomer social security and medicare benefits in the future (which I doubt they advocate)! One would hope that addressing such key issues would not be lacking in the executive summaries of future reports!
Second, the executive summary notes in closing that correlation doesn’t equal or imply causation, which of course is true. But, since causation necessarily implies that the cause precedes the effect in time, examination of historical data (assuming, of course, that such exist for multiple countries involved) should readily answer the question of which comes first, slow economic growth or high government debts/deficits. And if the goal is to educate the public, given the large amount of attention currently focused on this topic in the media, one would hope that the executive summary would shed light on this, rather than leaving it up in the air in the last couple of paragraphs.
The conservative led debt commission is saying that our Social Security and Medicare are going to bankrupt the country. What they are NOT saying is that the Social Security Trust Fund, which we have all paid into to fund future retirees, has been raided to fund the Bush tax cuts and the wars in Iraq and Afghanistan. If we end these wars and the Bush era tax cuts, and increase the marginal rate on the highest income Americans we can balance our budget and still keep Social Security and Medicare intact, provided we put the Social Security Trust Fund in a “lock box” so that it cannot be touched to finance anything other than Social Security. It may seem counter-intuitive, but increasing the marginal tax rate on the wealthiest Americans will actually act to improve our economy. If their marginal tax rate is high enough, these wealthy people will re-invest in their companies rather than taking the money out in personal income. This will act to create new jobs. It worked quite well for 50 years after the Great Depression, but Reagan’s and Bush’s tax cuts for the wealthiest Americans destroyed this well-oiled machine. It is a little off target for this particular article, but the repeal of the Glass-Steagal Act also did a great deal to help bring about our current devastating recession, and the new banking “reform” act does not bring back Glass-Steagall, which separated commercial banks from investment banks, something that we will have to do if we want to prevent another severe recession or even depression!
I understand your explanation and agree that US gross debt is not an appropriate measure of the effects of fiscal or public policy measures on the economy but to say that gross debt’s significance becomes a mere budgetary problem at some point in the future avoids the basic cash accounting problem. The governmental accounts series will have to be paid to the public in cash at some point unless the public can be conned into accepting less than the employees and employers are owed. So in a very real sense, the “trust fund” securities are debt held by the public because if the debt is not paid when due it will not be the bureaucrats at SSA coming down Pennsylvania Avenue with pitchforks in their hands. I suggest that you urge the Fiscal Commission to take the conservative (note the small c)accounting approach and treat the intra departmental debt as debt held by the public even though it does not meet the definitional requirements. Also I suggest that auditors of non-governmental entities would treat amounts paid into the “trust fund” & the accrued interest as liabilities of the fund. The fact that the trustees invested in possibly worthless securities would not change that classification. No one on earth knows what the government’s cash flow or borrowing capacity will be when the “trust fund” goes cash flow negative. I would extend your organization greater credibility if you had included a projected cash flow requirements chart in your analysis.
Wow this really shines some new light on the debate. The variation in how Debt/GDP (a VERY key metric) is calculated reminds me of the disparity in measurement of unemployment across economies.
There now appears to be a bit more wiggle room for some government stimulus to jump-start the US economy out of a liquidity trap, if we are at a mere (roughly) 65% Debt to GDP (forecasting based on your figure for end of 2009).
It would be interesting to see a chart comparing Gross Debt and Debt Held By Public for the US and European nations, and to calculate each into GDP levels.