Republicans on the House Ways and Means Committee pounced on a new Treasury Department report purportedly showing that federal debt will top 100 percent of the economy this year. The problem is, they’re using the wrong debt measure.
As we’ve explained before (see here and here), economists use “debt held by the public” — the total amount we’ve borrowed in credit markets to finance our deficits and other cash needs — when measuring what the nation owes. The new Treasury report projects that debt held by the public will reach 71.6 percent of gross domestic product (GDP) in 2011, double its ratio in 2000.
Ways and Means Republicans, however, used a more eye-catching figure from the report, that “gross federal debt” will reach 102.2 percent of GDP in 2011. Gross federal debt consists of debt held by the public plus debt that one part of the federal government owes another part, such as the money the Social Security trust fund and similar trust funds lend to the Treasury.
As the Congressional Budget Office has said, the Treasury securities held by trust funds “represent internal transactions of the government . . . [and thus] have no direct effect on credit markets.” That’s why debt held by the public is the proper measure of government obligations.
Stabilizing the ratio of debt held by the public to GDP is a key test of fiscal sustainability. The simplest way to get there in the next decade would be to let the Bush tax cuts expire as scheduled after 2012 or to pay for the parts that policymakers choose to continue (see graph). That would be a huge accomplishment, buying us time to adopt gradual changes in entitlement programs and figure out the best ways to control health-care costs without jeopardizing coverage.
Instead, Ways and Means Republicans call for “significant spending reductions” soon as part of a bill increasing the debt limit. But if they find today’s debt so objectionable, where did it come from? As my colleague Chad Stone vividly documents, nearly half of our debt results from two policies that bear Republican fingerprints: the Bush tax cuts and the wars in Iraq and Afghanistan. Complaining about the resulting credit-card bill is the sheerest hypocrisy.