Tuesday, August 17, 2010

Government Debt is Really 91% of GDP, Not 60% of GDP

Stefan Karlsson makes a very important point about the current size of federal debt in the U.S. He writes:
When discussing U.S. federal debt, I have usually focused on gross debt, which is now $13.3 trillion, or 91% of GDP. Others however argue that one should exclude so-called intragovernmental debt, debt held by other government agencies (mainly the Social Security trust fund) which stand at $4.5 trillion. If you exclude that you are left with a debt of $8.8 trillion or roughly 60% of GDP.

The argument for excluding intragovernmental debt may seem convincing at first glance: why should you include debt which is an asset for another government agency, thus being no net liability for the government as a whole?

Assuming that it doesn't represent some external liability for the government agency that holds it, this would indeed be a valid argument for excluding it. But at least in the case of the U.S. government the vast majority of it does in fact represent external liabilities.

[The Social Security trsust fund  assets are supposed to cover future payments of Social Security to senior citizens, it is not valid to subtract the holdings of the Social Security trust fund, or any other intragovernmental holding that represents similar external liabilities, from estimate of government debt.
This is an extremely important point to keep in mind, especially since Social Security is now paying out more in benefits than it is receiving in payroll taxes.


  1. And don't forget, debt is going this way (makes motion up) while GDP is going that way (makes motion down). So Debt-to-GDP is going this way (makes motion up, up, up)!

  2. The issue is really about governmental accounting practices and the misleading terminology they use to instill confidence in the public about the two big pseudo-trust funds. In government, no liability is recorded for the overpayment of trust fund tax amounts from taxpayers. What government records is an increase in cash and an increase in a tax revenue account. When they lend it to another agency, it establishes an inter-fund liability that would be wiped out if you added together all of the governmental entities, thus supporting the lower national debt amount.

    Now for a twist, the government likes to refer to these amounts as trust fund dollars and as any attorney will tell you, amounts held in trust are essentially off limits other then for their intended purpose as defined by the trust. To take this even further, the concept of a trust would imply that the amounts held in it our outside of normal government operations and any amounts borrowed from the trust are essentially borrowed from a non-governmental entity and thus would add to the national debt. With this being the case, the excess amounts paid into any of the government trusts and subsequently lent to other agencies, should be counted in the national debt amount. However, if you look on the government’s books, you will see no such liability.

    Personally I would use the higher number since politicians like to pretend that these amounts are held in a trust fund and to accept that concept, one has to accept the higher national debt amount, which as we all know is still misleadingly low since it ignores unfunded future liabilities.