The debate this summer over raising the debt limit promises to be intense, and perhaps divisive, but it also provides an opportunity for meaningful fiscal reform. The unprecedented public attention focused on this relatively arcane economic tool can help return the country to a sustainable, rational path; foster a renewed sense of freedom; and create a new era of prosperity by making government smaller, less intrusive, and less burdensome.
The debt limit is an instrument established by Congress to limit the Treasury Department’s ability to borrow, but it has increasingly lost its effectiveness. It has been waived ten times in the last decade. And a vote to increase the debt limit has often been, ironically, tied to “must pass” spending increases. In one sense, then, the fact that the debate is now focused on how much to cut government spending suggests that the tide has finally turned.
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Conservatives are rightly interested in the magnitude of the change and not merely its direction. Many members of Congress have declared that they will support a debt-limit increase only if it is accompanied by something “really big” — a balanced-budget amendment, entitlement reform, more discretionary cuts, budget-process reform, or all of the above.
Despite this progress, we believe something is still missing. While we applaud the recognition that spending cuts are necessary, the debate still lacks a clear focus on the trigger itself — the debt limit.
Quite simply, the debt limit as currently constructed is practically meaningless. The debt it caps includes both the massive borrowing that our federal government has undertaken, and trillions of dollars of intragovernmental debt — the latter of which accrues when a federal program borrows from another federal program’s surpluses. By commingling these obligations under one limit, the government has created confusion and clutter, not clarity or transparency.
To better illustrate this point, imagine that you have a checking account, a savings account, and a mortgage. The money in the savings account is for retirement, but sometimes you have an extra expense and need to dip into those savings temporarily. Every time you transfer funds from your savings to your checking account, you write an IOU to yourself to remember to replenish the savings as soon as you can. If you were to total your debt by adding all these IOUs to your mortgage, this would be comparable to the way the U.S. government currently measures its debt for the purposes of the debt limit. Over 30 percent of the U.S. government’s debt is made up of IOUs between various government accounts.
Intragovernmental debt is not a measure of the federal government’s obligation to bondholders. Rather, it reflects the left hand of government borrowing from the right hand. Put differently, if the balanced-budget amendment were put into effect tomorrow, and our spending instantly matched our revenue dollar for dollar, we would still need to raise the debt limit eventually because of borrowing across various federal trust funds.
We propose the following reforms to distinguish between the two components of the debt limit, which, when mixed together, cause it to become meaningless.
First, the debt subject to the debt limit should be redefined to include only the total of all debt instruments held by the public. That’s what the Framers had in mind when they gave Congress the power to borrow money on the credit of the United States. Currently, debt held by the public is $9.6 trillion, or roughly two-thirds the size of the U.S. economy. If publicly held debt as a share of the overall economy continues to rise to out-of-control levels, it will pose a genuine risk to the sustainability of our economy.
Second, Congress should develop uniform standards for regular, plain-English disclosure to the public of all unfunded governmental obligations, separate and distinct from the publicly held debt. The Medicare and Social Security Trustees recently issued their annual report, which again reiterated the massive imbalance facing our major entitlement programs, but these reports are densely written and not widely read. One option for improved transparency would be for the Social Security Administration, in the annual account statements it sends to every worker, to disclose the magnitude of the unfunded liability and its effect, if left unaddressed, on every future retiree. By making the magnitude of the problem clearer to voters, this disclosure would make it more difficult for Congress to avoid or delay action. Denying or ignoring the risks posed by runaway entitlement spending will only force more draconian cuts down the road.
Our spending problems won’t solve themselves. In fact, they will only get worse if they are not addressed. The current debt-limit debate can serve as an opportunity to force action. But it would be short-sighted of legislators to fail to take the opportunity to reform this tool so as to keep themselves and their successors focused on the right fiscal metric: ensuring that our government’s public debt is held to a sustainable level.
— Alex Brill is a research fellow at the American Enterprise Institute. Colin Hanna is president of Let Freedom Ring.
What happens to the money borrowed from other government accounts? It's spent. How will the money borrowed be repaid? By revenues or borrowing.
Ignoring this borrow and spend would create the appearance of free money. The fund from which the money was borrowed wouldn't be reduced.
Also, the debt cap is not a good means to make needed cuts. The public is persuaded that default is a catastrophe, so Democrats can gain if Republicans carry through their threat.
The best Republicans can do is minor cuts while Democrats portray themselves as responsible adults responding to irrationality. Republicans should make the 2012 budget their vehicle. There's a reason Democrats don't want to produce a budget.
I'm with Anton, we really should include the intragovernmental debt because it must be paid unless current entitlement laws change.
The authors propose an analogy between a intragovernment debt and borrowing from your savings account to cover your checking account.
The better analogy is borrowing from your Mortgage Escrow account to cover your checking balance. That Escrow account exists so that you will have funds to pay future debts that must be paid (taxes, insurance, etc). These are payments that are predictable and inescapable much like, under current law, the federal govt must cover Social Security, Medicare, and Medicaid.
Here is my crude take on this. The income tax system is responsible for covering public debt _plus_ intragovernmental debt. This is why these two obligations are combined. The Social Security and Medicare program tax systems are responsible for their unfunded entitlement obligations _minus_ intragovernmental debt. This is because the intragovernmental debt for the most part represents the money that the income tax system owes to the Social Security and Medicare tax systems. The government as a whole is responsible for public debt plus unfunded entitlement obligations. This is the sum of the obligations of all the tax systems, and is clearly independent of intragovernmental debt. So whether or not you think intragovernmental debt is important depends on what you are looking at.
After all is said and done, the nominal debt would still be an actuarial and accounting fiction unless the present value of unfunded entitlement liabilities, carried forward and calculated based on the current demographic mix, with a reasonable implicit long term economic growth rate (according to Mr. Williamson, around 2% would be a defensible number) and an equally conservative and defensible long term discounting interest rate assumption (in the order of 2-4% if history is any guide) is built into the budgeting and forecasting process.
The key planning and forecasting appeal of the Ryan Plan is that it eventually caps entitlement spending at a known percentage of GDP, leaving any spending beyond that point 100% based on individual free market choice.
By establishing firm targets for all entitlement (and personal as well as government to government transfer payments) spending as percentages of real GDP, using concrete, simple and commonly accepted underlying assumptions for growth and interest rates, the shell game of intragovernmental borrowing (and the potentially even more pernicious Federal Reserve policy of burying the effects of past problems within its totally non-transparent books) would be minimized or eliminated as a fudge factor in trying to figure out where we really stand at any point in time.
Forecasts and budgets always carry implicit assumptions. Defining them explicitly (even statutorially) would allow the state of the nations finances to be clearly defined, put the Federal Reserve back into the box of only managing the money supply, and eliminate the temptation to use its power to bail out (and usually compound the damage) of both the government and the private sector for it's past irrationally exuberant assumptions about the wondrous efficacy of it's initiatives. It would force the CBO and OMB to clearly justify the use of any assumptions outside the accepted target range when "scoring" the impact of any legislation - whether it be for entitlement as well as discretionary spending (which, as evidenced by the supposedly temporary stimulus bill looming so large in the recent political charade over phantom real budget cuts, somehow always morphs into a de facto permanent entitlement for the government employee and transfer payment recipient classes.)
People will have to get used to the fact that their entitlements and transfer payments would float within a (hopefully) narrow range and perhaps reconnect to the basic fact that they are only as good as the underlying economy that funds them anyways.
There will always be the claim that the government cannot be denied to ability to take extraordinary counter cyclical measures in times of need. But such measures would be debated on a playing field in which their sustainability will always be as relevant a factor as their purported efficacy.
