Senior Advisor for Federal Fiscal Policy
In an earlier post I explained that when it comes to the nation’s long-term debt problem, what matters is the size of the debt held by the public, not the gross debt, and warned that the President’s deficit commission would go seriously off track if it focused on the wrong measure. The Center issued a new report today that explores this issue in greater depth. Here’s the executive summary:
A call by several members of the President’s Commission on Fiscal Responsibility and Reform for the commission to focus on the federal government’s gross debt, rather than debt held by the public, is misguided and could inhibit efforts to address the nation’s long-term fiscal challenges.
Debt held by the public consists of promises to repay individuals and institutions, at home and abroad, who have loaned the federal government money to finance deficits. Gross debt (as the term is used in the United States) includes, along with debt held by the public, intragovernmental debt — money that one part of the federal government owes to another — such as the money the Social Security Trust Funds have lent to the Treasury in years when their earmarked revenues exceeded their expenditures for benefits and other costs.
The interest of some commissioners in gross debt stems at least partly from an analysis of 44 countries that, they believe, suggests that high levels of gross debt inhibit economic growth. In a widely cited article, University of Maryland professor Carmen M. Reinhart — who testified to the commission on May 26 — and Harvard professor Kenneth Rogoff concluded that debt-to-GDP ratios of 90 percent or more are associated with significantly slower economic growth. Since they use gross debt as the measure of debt for the United States, and since our gross debt now equals 90 percent of GDP, the nation appears close to that “tipping point.”
But claims that gross debt (as the term is used in the United States) is an economically meaningful measure of national debt and that the United States is approaching an economic danger zone are extremely dubious for several key reasons:
This leads to two conclusions.
Finally, while the authors argue that debt-to-GDP ratios over 90 percent are correlated with lower economic growth, they do not argue that the former causes the latter. In fact, other experts argue that lower economic growth may cause higher debt-to-GDP ratios, rather than the other way around.
To be sure, the specter of rising debt for decades to come presents a very serious economic challenge for our nation. But, in addressing this issue, the commission should focus on the right fiscal target — debt held by the public — rather than on a measure or target that will cause confusion and misunderstanding and does not make sound economic sense.