Debt isn’t as bad as it sounds
We heard a lot of frightening talk about our national debt during the presidential campaign and in a recent House and Senate debate over raising the debt limit by hundreds of billions of dollars.
The numbers may sound scary, but many wild claims are being made about our total federal debt that exaggerate its size and misstate its impact on the U.S. economy. In fact, the real debt we owe lenders is a great deal smaller than it’s touted to be, and the numbers have little to do with our economy’s year-to-year performance.
We have had robust, record-breaking economic growth during periods of rising federal debt and equally strong economic performances when the government’s debt was falling.
What is called the statutory debt limit, which Congress must raise every now and then (and did in November) to permit additional borrowing, is a cap on the total debt the federal government can run up at any given time. We have hit that limit now, nearly $7.4 trillion, which is the number we usually hear to describe the total amount the feds owe.
Lawmakers beat their breasts in feigned outrage over the national debt, even though most if not all of them have contributed to such debt by voting for higher spending. We’ve been regularly raising the debt limit since 1940. JEC economists say that in the last 64 years “Congress has raised or extended the debt limit nearly 80 times.”
The problem with the $7.4 trillion national debt number is it is not a true description of what the government actually owes to its creditors. The real figure is a lot smaller because, as a JEC report points out, “not all debt is equal.”
As a fledgling Washington reporter in the 1970s, I would call up the U.S. Treasury every so often to get the total debt owed. The officials in charge of keeping that number would always ask me, “Do you want to gross nightmare number or do you want the real number?”
This is because there are two kinds of debts. There is publicly held debt, which is sold to the public in the form of Treasury bills, notes and bonds, which totals $4.3 trillion, or about 60 percent of our total debt. This is the true debt held by banks, retirees who want a safe, secure investment for their money, along with other financial institutions and even foreign governments.
Then there is something called government-held debt, which totals $3.1 trillion, or about 40 percent of the gross national debt. This is the amount of money loaned from one program to another within the government. It is essentially debt that the government owes itself.
For example, Social Security’s surplus revenues are routinely spent by the government to pay other bills in exchange for a Treasury IOU that the retirement fund can redeem when it does not have enough funds to pay all of its benefits (which will happen in about 15 years or so).
The Congressional Budget Office explains that these transfers of debt are only “reallocating costs from one part of the budget to another. They do not change the deficit or the government’s borrowing needs.” Thus, they “have no effect on the economy.”
In other words, our real $4 trillion debt is a lot less of a burden than the gross number suggests. It’s even less when measured as a percentage of our Gross Domestic Product (GDP) which is the sum total of our national income.
The lesson, then, is to not get over-excited about a $4 trillion public debt in a government that is spending $2.4 trillion a year in an $11 trillion a year economy. Instead, we need to focus on accelerating economic expansion through lower tax rates, while gently applying the brakes on spending, which the most recent budget bill did quite nicely, thank you.
Donald Lambro is a syndicated columnist.