Monday, May 26, 2014

DEBT DREAD: PART II: Debt Structure

Some technical details and definitions are necessary to understand the political discussion of the economics of the debt during the past five years.

What is the Amount of the Debt?
The total national debt is now about $17.3 trillion, which is more than the U.S. GDP of $16.8 trillion. This fact especially worries debt-dreaders. They point to the ratio of debt-to-GDP as a sign of eventual economic disaster. Often these facts are mentioned by debt-dreaders in the same breath as the recent economic difficulties of Greece, with the implication that the U.S. economy is on the verge of collapse, like the Greek economy during 2010-2012. Behind all this is the notion that the U.S. is "bankrupt" because the national debt exceeds the GDP, analogous to an individual or a  family whose debts exceed its income.

What is the National Debt?
The national debt is the amount of money owed by federal government as measured by the value of the U.S. Treasury securities issued by the government to pay for deficit spending (deficit spending is spending by the government in excess of its tax revenues, which difference it makes up by borrowing money from the buyers of its bonds). The total debt has two parts. One part is "debt held by the public", individuals and institutions. This includes individual investors, banks, pension funds, U.S. states and cities, the Federal Reserve, and the central banks of foreign governments such as the People's Bank of China, the Bank of England, and the Bank of Japan.  The other part is "intragovernmental debt", debt held by the federal government itself: money that the federal government owes to itself and to the beneficiaries of government programs such as social security. Debt held by the public in December of 2013 was about $12.3 trillion, and intragovernmental debt was at $4.9 trillion. So the "public debt" was 73% of the total and "intragovernmental debt" was 27%. The difference between the two is significant. This brings me to the terms "gross debt" and "net debt".

Gross Debt & Net Debt
I will refer to the total debt as the gross debt, and the portion of the debt held by the public as the net debt. The reason for this will become clear below. The distinction is needed because the internal structure of the debt affects the way the government has to manage its debt payment obligations, and because this key fact is almost never mentioned in discussions of the debt by the news media. To understand the origins and future of the debt it is necessary to understand how the two parts of the debt differ - failure to do so by politicians and the media has contributed to public misunderstanding of the debt.

The distinction between the gross debt and the net debt is debated by economists. The debate is spurious. The significance of the difference rests in the function of the net debt: Which part of the total debt affects interest rates, inflation, economic growth, and unemployment ? Careful analysis (i.e., not sloppy media reporting or politicized "analysis") reveals that the part of the debt that affects the economy is the net debt of $12.3 trillion, and not the gross debt of $17.3 trillion. This is because the intragovernmental debt does not affect the economy in the same way that the debt held by the public does because the intragovernmental debt is a debt that the government owes to itself, but not to private investors, foreign banks, and other non-government actors. As I will discuss later, this means that intragovernmental debt does not affect the economy the way the net debt does. If one were to use the analogy of the government to a family household then you would need to imagine a family that had created a "debt" that it owed to itself, perhaps a commitment to "pay" itself a future amount that it periodically took from its regular earnings (But this is to use "debt" to mean something else than its ordinary meaning - such a misuse of words has become common in recent discussion of the debt and related topics, as I'll show below). Such a payment is usually called "saving". For what? Retirement is the conventional answer.  If so, then you could legitimately compare such a payment to social security and Medicare payments. But I think anyone would agree that such a comparison has not been part of public discussion of this subject since 2009. Why? Because public discussion of the debt has been driven by fear of poorly understood headlines like "the national debt is now bigger than the GDP", and neither our political leaders nor the media have offered competent analytical context. The result has been an unfounded and irrational fear of the debt - debt dread.

Sunday, March 23, 2014


Now there is an erroneous opinion that a statesman, king, householder, and master are the same, and that they differ, not in kind, but only in the number of their subjects. For example, the ruler over a few is called a master; over more, the manager of a household; over a still larger number, a statesman or king, as if there were no difference between a great household and a small state.
                                                                              - Aristotle, Politics, Book I

Is the government of a country like a family? American politicians like to say so.
For several decades we have been told by our political leaders that the federal government should conduct itself as if it were a family household. Specifically, they have a penchant for saying that the government should "live within its means" and not spend more each year than its annual tax revenue. Is that true? Is the federal government analogous to a family household? Does the federal government face the same financial constraints as an individual family? Should the federal government be required to balance its budget?

Americans have been increasingly worried about the national debt recently. There have been proposals to amend the Constitution to require the government to maintain a balanced budget, and there has been an increase in public expressions of concern about the debt during the years since 2008. Talk radio, cable news, movies, print media, blogs, and the "debt clock" in New York have kept discussion of the national debt in the public eye. In the financial media during the years 2009 to 2012, CEOs, economists, investors, and journalists warned constantly that the U.S. faced an "unsustainable" debt path which would certainly bring about an inevitable economic Armageddon. Debt dread became a prominent part of Tea Party rallies during 2009 and 2010, and has featured in the annual budget battles between the Republican Party and President Obama over the debt ceiling vote. This dread of the debt is not the exclusive concern of the right however. Many Democratic Party politicians have recently stated that the national debt is far too large and needs to be slashed. Barack Obama himself has publicly expressed the view that the national debt is a very bad thing, even including the concept of "unsustainability" in his State of the Union addresses. So there seems to be a consensus, left and right, that the national debt is not just bad, but positively scary.

What is the national debt? Why is it growing? What effect does it have on the economy? Why is it bad? And is the national debt really the same as a family's debt? To answer these questions requires historical and conceptual context, context which has been lacking in the political debate about the debt.