Two front page articles in today’s WaPo caught my attention (yes, I still read the “broadsheets”).
The first was a cliff update but it is the accompanying graphic upon which I wanted to comment (saw “My Fair Lady” last night so I’m minding my elocution). It is conventional wisdom in this town, especially by the anti-tax crusaders, that our fiscal problems are wholly on the spending side. In this regard, that $46.5 trillion in federal spending under current policy, 2013-2022, is surely the stuff of ammunition for that crowd.
But as I’ve stressed before, big numbers like that really need a context—they should be considered as a share of GDP. According to the CBO, outlays at that level would comprise 23.1% of GDP. Now, the historical average for outlays since the late 1970s is 21.2%, so we are talking another 2% of GDP, which ain’t nothing.
But a) demographics in the form of aging boomers means outlays will have to go up some over the next decade, and b) these figures don’t include trillions of savings now being considered in plans from all sides. For example, if the Congress were to accept the President’s cliff-resolution offer (the one from earlier this month with the $400K cutoff and the chained-CPI), the outlay share would fall from 23.1% to 21.7%.
Either way, whether we’re talking roughly 23% or 22% of GDP. Those numbers are in the historical ballpark and more informative than the big trillions folks like to throw around.
Second, there’s this debt ceiling story—can you stand all this fun reading!—with lots of good info but the Post misses a chance to explain that while we’re about to bump up against the $16.4 trillion debt limit, the economically relevant debt number is considerably lower than that…$11.6 trillion (about 74% of GDP).
What’s the difference? The larger figure—which is the correct one in terms of bumping up against the debt ceiling—includes debt held by the public along with intra-governmental debt, funds that government borrows from and lends to itself, of which the Social Security trust funds are the largest and best known.
The public debt is what the USG borrows through credit markets—selling Treasury bills—from people, institutions, and other countries to finance that part of our spending and interest payments not covered by our revenue collections. Economists almost uniformly agree that since that’s the part of Treasury’s operations that affect interest rates and the broader economy, it’s the part of the debt that we want to consider when we’re worrying about the path of the debt/GDP ratio.
All of that’s largely accounting stuff, but for some really interesting substance, read what Ezra’s written here—in fact, some of what’s in there is so resonant with me that I don’t want to just tack my thoughts to the end of this post. It deserves its own entry, coming soon. Here I’ll just say this: you may be thinking, “Jeez, Jared—what’s the difference whether it’s $16 or $11 trillion—that’s still too much debt.”
To which I say, “no, it isn’t.” We needed to kick that number up to support Keynesian measures to offset the Great Recession, and once the recovery gains some steam, the key is to get the debt/GDP ratio on a downward path. The level, in this case, is less relevant than its trend. And again, there are numerous plans afoot to achieve this path. And again, they’re all gridlocked.