A rising tide of red ink

We don’t always agree with Ruth Marcus, but she wrote a solid column last week about how the president glossed over the fiscal problem in his State of the Union Address and few people called him on it. The debt: Mission unaccomplished, Washington Post, 1/27/15.

The administration, Congress and the country should be talking about the hard choices necessary to deal with this problem. Instead, we see calculated indifference and political grandstanding, including by a president who ought to know better.

Democrats don’t relish questions about the costs associated with the nonstop expansion of government, while Republicans are tired of endless demands for tax increases. Accordingly, it suits both sides to find other things to talk about. There’s just one problem: the fiscal problem is real and it won’t go away if ignored.

Expect a lively debate after the president’s budget proposal is submitted to Congress (probably today). Some of the key points have already been announced. Thus, the president will reportedly call for an end to sequestration (which Jack Lew, then a White House adviser, proposed in 2011), various new spending programs, and higher taxes for the well to do (after the Bush tax cuts for high earners expired at the end of 2012, Republicans swore there would no more tax increases any time soon).

We’re not big on responding to fragmentary information, so instead of weighing in on what the president is expected to put on the table we decided to run down a conceptual loose end: the unaccountably rapid run-up in debt vis-à-vis the deficits being run. See, e.g., “Checking our bearings and setting a SAFE course,”
1/5/15.

Some readers may have noticed that the total debt rose by $790B in [calendar year] 2014 (versus a budget deficit of $483B for fiscal year 2014, go figure).

Our review quantified and generally explained the debt/deficit disconnect. It also yielded a handy recap of the current administration’s fiscal record versus that during the Clinton and Bush43 eras and prompted a reminder of the procedural path forward.

I. What is debt? – One might think there would be a cut and dried definition of the government’s debt, but two competing definitions are in vogue.

•“Gross Debt” is the total amount of interest bearing borrowings that the government owes – currently some $18.1 trillion (about 104% of GDP). It’s the top left number shown on the US
Debt Clock; it’s also, basically, the definition used for purposes of the debt limit, which Congress periodically raises so the government can continue to operate.

•“Public Debt” subtracts intra-government debt (IGD) from Gross Debt, thereby reducing the current debt level to some $13 trillion (74% of GDP). Government officials (who have a vested interest in minimizing the size of the fiscal problem) tend to consider Public Debt as the real debt. This figure is emphasized in budget reports prepared by the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO), while Gross Debt is either ignored or disclosed in an obscure table near the end.

Here is a recap of the growth of Gross Debt versus Public Debt over time.

Table 1

As for what is in IGD, there are hundreds of accounts involved but here is an approximate current breakdown: Social Security trust funds $2.8T, Retirement funds $1.5T, Medicare trust funds $0.3T, All other $0.4T. Who owns the US National Debt? about.com, January 2015.

SAFE has used Gross Debt as the primary indicator of indebtedness in its fiscal analyses. While IGD does not represent an obligation in the sense of debt held by persons or entities outside the government, as the government cannot very well collect money from itself, ignoring IGD would seem unrealistic.

Note that Public Debt makes no provision for obligations associated with Social Security and Medicare, while Gross Debt includes the trust fund balances created as revenue earmarked for Social Security programs was diverted for other purposes. Granted that there is no money in the trust funds and the government debt they hold is not legally enforceable, said debt represents a moral commitment that would not be lightly repudiated. Moreover, the trust fund debt is dwarfed by the unfunded liabilities of Social Security and Medicare. Plumbing the depth of the fiscal hole,
2/13/12.

As for retirement funds included in Gross Debt, the IGD involved may not be legally enforceable but the liability to government retirees is. And it turns out that the estimated outside liabilities are several times the size of the retirement funds, e.g., totaled $6.5T as of 12/31/13. US Government’s 2013 and 2012 consolidated financial statements, Government Accountability Office (GAO), Balance Sheet,
2/27/14 (download PDF).

Similarly, other IGD issues represent at least a moral commitment to spend earmarked tax revenues on the programs for which they were collected, e.g., the highway trust fund should be spent on roads and bridges (which allegedly are deteriorating). Some deviations from this principle were noted in a recent letter to Congress from 50 organizations (including SAFE). [Americans for Prosperity] leads coalition opposing federal gas tax hike,
1/28/15.

Despite billions in Highway Trust Fund (HTF) shortfalls, Washington continues to spend federal dollars on projects that have nothing to do with roads like bike paths and transit as well as completely unrelated projects like museums and squirrel sanctuaries. Over one-third of HTF spending today is for non- highway purposes.

II. Growth of debt vs. deficits – The following table shows how debt increases have compared to deficits (or where applicable surpluses) during the last three administrations. OMB historical tables, estimated data for fiscal year 2014 updated to final results.

Table 2


Since 1992, Gross Debt increased by $4.0T more than Public Debt due to the growth of IGD. The major components and significance of the latter have already been discussed.

Another $1.2T excess of debt increases over deficits (mostly since 2004) was included in Public Debt. This represents outside borrowing by the government for purposes that aren’t counted as spending, e.g., making government loans, which are accounted for as assets rather than expenditures. As of 12/31/13, the government held $1.0T in Loan Receivables and Mortgage-Backed Securities of which about 80% consisted of direct student loans (a substantial portion of which may never be collected). Financial statements of the US government, GAO, p. 11,
2/27/14 (download PDF).

The indicated attribution of deficits and debt increases to presidents is debatable, for several reasons: (1) events occurred that could not be planned for, such as the terrorist attacks in 2001 and the financial crisis/recession in 2008-09; (2) Congress played a role as well as presidents, e.g., the achievement of budget surpluses in Clinton’s second term was due in part to pressure from Capitol Hill; (3) there are transitional years in the mix, such as fiscal year 2009 (with a $1.4T deficit and even bigger debt increases), which began (first 3 months) under one president and ended under another; and (4) comparisons of dollar amounts in different years are distorted by inflation, e.g., the $255B deficit in 1993 would be equivalent to $418B in 2014 dollars.
Dollar deflator based on the Consumer Price Index.

Still, these numbers suggest – and we believe properly so - that the Clinton administration stayed the course and got the budget balanced, the Bush administration tolerated some fiscal backsliding, and the Obama administration allowed deficit spending to soar (although the game isn’t over yet, there isn’t much time left to leave a more positive fiscal legacy).

The president’s recent claim (SOTU address) of seeing our deficits “cut by two thirds” [from a 2009 starting point] is mathematically accurate but deeply misleading. As SAFE said in 2009, most of that year’s deficit should have been deemed extraordinary and eliminated rapidly. The young and the reckless,
3/2/09.

Is the deficit so huge as to justify taking four years to partially eliminate it? *** We think not! The deficit for FY 2009 is hardly a logical base point for planning future budgets, nor can the administration logically claim no responsibility for this outpouring of red ink.

Here it is, six years later, and the fiscal problem has still not been addressed. Yes, deficits are down, but the improvement was primarily a function of recovering tax collections plus unwise cutbacks in defense spending. The obvious solution is targeted cuts of wasteful government spending, of which there is a great deal. What in the world are this nation’s political leaders waiting for?

III. Less talk, more action – SAFE recently suggested some procedural changes to make the budget process work properly. Here’s a restatement of the points, lest they be overlooked in the excitement of reviewing the president’s proposal and debating policy issues. Postelection review: Deficits & debt, 11/24/14.

(a) Ask the OMB to label its budget document “Budget Proposal of the President,” as the “Budget of the U.S. Government” title should be reserved for the congressionally approved budget.

(b) Shift to a 2-year budgeting system, i.e., have Congress approve a budget for fiscal years 2016-17. In said budget, show three years of historical data plus budget data for the two years. Do not show projected data beyond fiscal year 2017, which would clutter up the budget document without adding much value. Drop the “mandatory” and “discretionary” spending labels, which imply that entitlement programs have priority over the traditional functions of government when the opposite should be true.

(c) Reorient the CBO and also the Joint Committee of Taxation for a mission of helping to balance the budget and keep it that way vs. growing the government. Procedural changes could be helpful, such as using dynamic scoring in evaluating the revenue effects of tax increases and tax cuts, but personnel changes will be needed as well. Rep. Tom Price (R-GA), the new head of the House Budget Committee, is reportedly in favor of dynamic scoring and bringing in someone new to head the CBO. The Price is Right: Budget director should be sent packing, Matt Towery, Townhall.com,
1/30/15.

House and Senate budgets should be proposed by April 1 with the objective of reconciling the differences and adopting a final budget by July 1. Departmental appropriation bills would then be developed, presented and approved by October 1, the first day of fiscal year 2016.

Let’s get it done!
Top

© 2018 Secure America’s Future Economy • All rights reserved • www.S-A-F-E.org