The ‘Off-Budget’ Budget Problem

Robert Samuelson elegantly summarizes the case for fretting about the legal obligations of the federal government we tend not to hear about — apart from (1) Treasury debt held by the public and (2) Gross federal debt, we have the following:

(3) Federal loans and loan guarantees: $2.9 trillion in 2011, 19 percent of GDP. The government makes or guarantees loans to college students, farmers, veterans, small businesses and others. The face value of most of these loans don’t show up in the budget, but the government is on the hook if borrowers default. Adding this debt (19 percent of GDP) to gross federal debt produces a total debt ratio of 122 percent of GDP.

(4) Fannie and Freddie: $5.1 trillion, 33 percent of GDP. The government wasn’t legally required to cover the debts of these “government sponsored enterprises” — the major lenders to the housing market — but almost everyone assumed it would if they got in trouble. That happened in September 2008. With Fannie and Freddie, the total debt ratio rises to 155 percent of GDP.

(5) The Federal Deposit Insurance Corporation: $7.3 trillion, 47 percent of GDP. That’s the insurance protection on bank accounts up to $250,000. Including the FDIC brings the total debt ratio to 202 percent of GDP.

Assuming everything goes exactly right, this won’t be too much of a problem. But if loans go sour or there is another housing bust or financial crisis, the cost to the federal government could be staggering. And this ultimately is the reason to pursue medium-term, responsible, deliberate fiscal consolidation: it helps to have some fiscal leeway to deal with unanticipated calamities. 

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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