Let’s Focus on the Right Debt Measure

In recent congressional testimony on the country’s fiscal state of affairs, former U.S. Comptroller General David Walker rightly noted the long-term budget challenges facing U.S. policymakers.  But he unnecessarily muddied this critical issue with a misguided focus on a seriously flawed measure of the nation’s debt and inappropriately alarmist comparisons between the United States and other countries, including Greece, with economic and budgetary situations quite different from ours.

Walker began by discussing the debt measure that policymakers should be looking at — federal debt held by the public (basically the sum of all past budget deficits minus surpluses), measured as a share of the economy.  But his account started to go off the rails when he said:

Today’s public debt is about 65 percent of GDP and growing rapidly.  In addition, if you add the debt owed to Social Security and Medicare, which I believe you should, federal debt is close to 95 percent of GDP and growing rapidly.

Actually, the growth in the public debt would slow dramatically over the next decade if we let President Bush’s tax cuts expire, though it would accelerate in later decades as more and more baby boomers retire.

More importantly, while using a debt measure that includes money owed to Social Security and Medicare makes debt growth look worse, such a measure is seriously flawed.  Called “gross debt,” it includes money the federal government owes to itself — such as the money the Social Security trust fund has lent to the Treasury in years when Social Security’s earmarked revenues exceeded expenditures.

The Congressional Budget Office said recently that gross debt “is not a good indicator of the government’s future obligations” and the Treasury securities held by trust funds “represent internal transactions of the government and thus have no direct effect on credit markets.”

Consider the following.  Budget analysts agree that reducing scheduled Social Security benefits or increasing Social Security taxes would improve the long-term fiscal outlook.  But these steps — which Walker himself has called for— would not reduce the projected gross debt.  Debt held by the public would decline because total deficits would be lower, but the benefit reductions or tax increases would expand the Social Security trust fund, which in turn would lend that increase in its surplus to the Treasury.  The increase in intragovernmental debt would fully offset the drop in debt held by the public, so gross debt would remain unchanged.

Walker’s claim that the United States looks more like Greece than like most other developed countries is more alarmist than accurate.  As Howard Gleckman has argued, we’re not like Greece:  our economy is much larger, the sources of Greece’s budgetary problems are very different from ours (public employee pay is a large budget item for them but a trivial one for us, for example), and we have the advantages that come from having our own currency so that others are not dictating how we need to address our fiscal challenges.  These differences vastly outweigh any similarities between the two countries’ levels of deficits and debt.

To be sure, the United States faces serious long-term fiscal challenges, and failure to address them would pose real economic risks.  But as we address that challenge, we should focus on the right measure of the debt and not act like the United States is on the verge of being the next Greece.