Last week the Congressional Budget Office released its long-term budget outlook, claiming that federal debt is 74 percent of the U.S. economy (as measured by Gross Domestic Product, or GDP). Actually, federal debt is about 105 percent of GDP. That “tipping point” could be a problem because many economists believe that once government debt approaches 100 percent of GDP, economic growth tends to stagnate, um, much like the U.S. economy has under President Obama.
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The CBO claims that debt won’t hit 100 percent of GDP for 25 more years, in 2039. But just look at the numbers. The World Bank puts the U.S. economy in 2013 at $16.8 trillion, and the U.S. Treasury says total federal debt stands at $17.6 trillion—that’s nearly 105 percent of the economy.
So what’s the CBO missing, a good calculator? The answer is what the government has borrowed from itself.
The government breaks down its debt into publicly held debt and intergovernmental holdings. Publicly held debt is the debt owed to individuals, companies, the Federal Reserve Bank and other governments. Intergovernmental holdings, by contrast, refers to government assets that are borrowed and then spent by the government, such as the money in the Social Security Trust Fund.
Workers and their employers pay a combined 12.4 percent Social Security payroll tax, which the government uses to pay current Social Security beneficiaries. If
Social Security receives more money than it pays out—which was the case until a few years ago—the surplus goes into the Social Security Trust Fund. That surplus currently stands at about $7 trillion. However, the federal government has borrowed all of that money and spent it, leaving a string of non-negotiable IOUs in its wake.
Defenders of the current system, almost all of them liberals, tell us not to worry; the government owes that money to itself. Not exactly.
If you take a dollar out of your left pocket and put it in your right pocket, leaving an IOU in its place, you are no worse off because you can put that dollar back if the left pocket needs it. But if you spend that dollar out of your right pocket, you will have to find another dollar somewhere if the left pocket needs its dollar back. You no longer just owe that dollar to yourself because you don’t have it anymore.
If the federal government needs to pay back the IOUs in the Social Security Trust Fund, as it has been doing lately, the government must come up with the money from somewhere—by taxing, borrowing or printing it. Thus, the only difference between publicly held federal debt and intergovernmental holdings is a middleman—e.g., a government trust fund.
By excluding intergovernmental loans from its standard debt statements, the CBO is ignoring more than a quarter of total federal debt, allowing lawmakers to hide behind a debt burden that is much worse than it seems.