The Debt Deniers’ Fantasy
Prominent liberals are now insisting that we face no debt problem at all.


Michael Tanner

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.


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