The "True" National Debt

Robert Samuelson claims that he did not write this article to sensationalize the US debt problem.  Of course, that is exactly what he has done.  He has been writing about deficit reduction and our debt problems on a regular basis.  His articles are frequently posted on red state blogs.  Most economists pay little attention to them.  I would like to use his article, however, to make a couple of important points.

He correctly points out that our treasury debt to the public is the most frequently used measure of the national debt.  He took the trouble to indicate that it has increased by over $5 trillion since the recession began in 2007.  Most of his readers will jump on this point as an indication of out of control spending in the Obama administration.  The jump in our national debt is primarily the result of other factors.  Mandatory spending on numerous social welfare programs increase during recessions.  We have also been spending trillions on two "wars" in the Mid-East.  Non-defense discretionary spending as a percent of GDP has not grown faster than trend during the Obama administration.  The other thing that happens during a recession is that income tax revenue declines.  The large budget deficits during the Obama administration are primarily due to a large drop in tax revenues, and increases in mandatory spending due to the recession, and our wars in the Mid-East.

Samuelson then moves to a second category of debt that includes money that the treasury borrows from other government agencies.  That includes several trillion dollars that the treasury borrows from Social Security.  It is able to borrow this money from Social Security because the payroll taxes collected by the federal government have exceeded the amount paid out in benefits for the last 30 years.  Social Security has been operating with a surplus because the government increased payroll taxes during the Reagan administration so that it could meet its obligations when the baby boom generation reached retirement age.  Now that the baby boom generation is reaching retirement age, payroll taxes will no longer provide a surplus from which the treasury can borrow.  Even worse, the treasury will be forced to pay back the money that it has been borrowing from Social Security for over 30 years.  That is what most of the scare tactics about Social Security's solvency are about.  The government has been able to cut income taxes, and borrow money from Social Security for over 30 years, and now government must deal with the impact that this will have on future budgets. The government can raise taxes, cut benefits, or borrow money to meet its obligations to Social Security.  Conservatives don't want to raise taxes, and they don't want to borrow money to pay for Social Security.  They have been working on ways to cut benefits for the last 10 years.

Samuelson claims that government can simply decide not to honor its debt to the Social Security Trust.  He argues that this is unlikely, but that this is an option that government can take.  He is correct. The government can decide to default on any of its obligations to creditors.  It can't default on its public debt, however, and still expect to be creditworthy, but the bonds held by the Social Security Trust are no different from the bonds held by the public.  The government cannot default on its obligations to Social Security and still claim to be creditworthy.

I have ignored the other categories of debt that Samuelson included in his article because they are not really debt.  They are simply guarantees that the government has made on debt held by others.  The notional value of the guarantees are much higher than any potential claims that the government faces. He includes these guarantees because it serves his purpose of sensationalizing the debt issues that he claims that he does not want to sensationalize. This is Robert Samuelson at his best.