Government Debt in the United States
Debt Held by Government Accounts (Intragovernmental Debt) in the Federal Budget Process
Meaning of Debt Held by Government Accounts in the congressional and executive budget processes (GAO source): Federal debt owed by the federal government to itself. Most of this debt is held by trust funds, such as Social Security and Medicare. The Office of Management and Budget (OMB) contrasts it to debt held by the public by noting that it is not a current transaction of the government with the public; it is not financed by private saving and thus does not compete with the private sector for available funds in the credit market; and it does not represent an obligation to make payments to the public.
Ceilings on Government Debt, Taxes, and Government Spending
In a little over a week the federal government will reach its debt ceiling of almost $17 trillion unless Congress raises the ceiling. I am 99% confident that the ceiling will be raised in time to avoid a crisis. It is difficult to see any useful purpose served by these ceilings. Indeed, I will show why a focus on debt ceilings may even be harmful.
Federal debt is rising toward the present ceiling because the government has been running a deficit between its spending and tax revenue. The government has run a deficit practically every year for many decades, so that Congress has been forced to raise the ceiling over 90 times during the past 70 years, and 15 times since 1993 alone.
The financial burden of the federal debt depends not only on the size of the debt, but also on the interest paid on the debt. The product of the level of the debt and the interest rate essentially determines the government revenue needed to service the debt. The low interest rates on federal debt (and other debt) during the past decade have made it easier to service even a growing debt. The burden of the debt to the economy also depends on the size of the debt relative to GDP. Federal debt held by the public, including debt held overseas but excluding debt held by other government agencies, is about 70% of American GDP.
This debt ratio grew rapidly during the past five years partly because federal spending increased greatly for most of this period, and also partly because GDP has been growing slowly because of the lingering recession. Still, a 70% debt to GDP ratio is much lower than the ratio in some other developed countries. In Japan, this ratio is over 150%, and the ratio is also higher in some European countries.
Many conservatives have liked having a debt ceiling, even though it has been raised many times, because they believe a ceiling helps limit federal deficits. This is why conservative members of Congress in 2011 were able to abolish the “Gephardt Rule”. This rule stipulated that when the House adopted a budget, a separate debt-limit vote was not necessary since the ceiling automatically increased by enough to accommodate the spending implied by the budget. Yet since deficits have been common even before the Gephardt Rule was adopted in 1979, it is not apparent that having a separate vote on the ceiling reduced the size of the deficits.
Conservatives who have supported a debt ceiling to reduce deficits are really usually mainly concerned about the size of government. However, government size depends not on deficits, but rather fundamentally on the level of government spending. Since deficits can be reduced either by cutting spending or raising taxes, both liberals and conservatives can agree on the value of reducing deficits while strongly disagreeing on how to reduce them. Liberals want to raise taxes to cut deficits, while conservatives want to limit many kinds of government spending in order to reduce the size of the government.
To the extent that debt ceilings mainly induce tax increases to slow the growth in debt, a focus on debt ceilings and deficits does not help rein in the size of government. Moreover, the substantial growth in federal spending during the past 50 years under both Democratic and Republican control of Congress and the presidency strongly suggests that the many debt ceilings during this period did little to reduce the size of government. The numerous deficits over this period even suggest that the ceiling has accomplished little, if anything, in reducing deficits.
For those worried about the growth of government, there is no substitute for a focus on the scale of government spending. Having debt ceilings may not be completely innocuous because they may detract from that focus.
Author: Becker, defunct
The Debt Ceiling
Both Democrats and Republicans are concerned with the growth of the federal debt relative to the growth in GDP. Consider an analogy to real estate. If one owns a house worth $100,000, borrowing $50,000 from a mortgage lender is unlikely to jeopardize one’s solvency. And if the value of the house increases to $200,000, borrowing another $50,000 would not be imprudent either. But suppose the value of the house remains unchanged, and still the borrower increases his borrowing from $50,000 to $100,000; his debt burden will have increased greatly. And likewise if a government increases its borrowing at a rate substantially in excess of the increase in government revenues as a consequence of economic growth or higher tax rates. It is burden, not amount, that is, or should be, the concern. And thus if interest rates are falling, the debt burden may not be increasing even if the amount of debt is increasing. But most federal debt is fairly short term nowadays, and thus the currently low interest rates are not locked in for long. If interest rates increase as the amount of debt increases (and those rates may increase for a separate reason—the greater the debt, which includes interest on the debt, relative to the borrower’s ability to repay, the greater the risk of default and so the higher the interest rate demanded by the lender), the overall debt burden will increase by more than the amount of borrowing increases.
The debt ceiling is not actually a ceiling on borrowing by the federal government. Rather, it is a limit on the amount of money that the Treasury can pay to meet its obligations, and thus to repay, or pay interest on, its borrowings. If the ceiling is low enough to prevent the Treasury from paying what it owes its creditors, the government is in default and interest rates on government debt are likely to soar.
The difference between our political parties is not that the Democrats want to “grow” the federal deficit faster than the economy is growing and that the Republicans want to shrink it. The Democrats want to reduce the deficit—everyone fears the impact of growing entitlement spending on the nation’s fiscal health—but mainly wants to do it, it seems, by increasing federal tax rates, while the Republicans want (or rather say they want) to reduce the deficit by reducing government spending. As Becker points out, if the method used to reduce the deficit is higher taxes, the debt ceiling has no effect. And as for reducing spending, that probably is politically infeasible, because the Republicans, though they say they want to reduce spending, don’t wish to touch entitlements (or at least social security and Medicare) or military or law enforcement expenditures; and there doesn’t seem to be much room as a practical and political matter for further economizing on other federal expenditures, which have already been reduced. Attractive reforms such as eliminating agricultural subsidies (importantly including the ethanol subsidy) do not seem to be politically feasible.
So a debt ceiling is unlikely to reduce the size of government. But it is pernicious, in inviting political
tactics that could well be thought to violate the Constitution, or at least the spirit of the Constitution. Republicans want to destroy, or in the short run greatly weaken, Obama’s health care law (“Obamacare”), even though it resembles a health care reform proposed by President Nixon and successfully championed by Mitt Romney when he was governor of Massachusetts. The Republican preoccupation with Obamacare is thus rather surprising, but may reflect a fear that when once Obamacare is debugged and up and running it will prove popular, which will boost the Democrats. Yet the Republicans are not in a position to repeal or even amend the law by constitutionally authorized means, because repeal or amendment would require a majority vote in both houses of Congress (actually a two-thirds vote in both houses, for given a lesser majority Obama could veto a repeal or amendment without fear of being overridden). The intention, which is contrary to the structure of the federal legislative process ordained by the Constitution, is to coerce Congress to repeal (or by amendments to defang) Obamacare by threatening to precipitate an economic crisis by refusing to vote for an increase in the debt ceiling. If the tactic succeeded, it would mean that a minority in Congress had succeeded in amending a federal statute.
Author: Posner
Resources
See Also
- Federal Appropriations
- Entries about the United States Budget Process in the Encyclopedia (including Debt Held by Government Accounts)
- Public Debt
Further Reading
- Legislatures and the budget process: the myth of fiscal control(J Wehner, 2010)
- Reconcilable Differences?: Congress, the Budget Process, and the Deficit (JB Gilmour, 1990)
- Fiscal institutions and fiscal performance(JM Poterba, J von Hagen, 2008)
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