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09.05.12

The U.S. Government Doesn’t Really Owe $16 Trillion in Debt

The U.S. government tipped over $16 trillion in debt on Tuesday. Matthew Zeitlin explains why that number may not be as high as it seems.

On Tuesday, the total debt of the U.S. Federal Government tipped over $16 trillion. That’s 16 followed by twelve zeroes and about the size of the country’s economic output per year. Cue the news stories pegged to the scary number or the blistering anti-Obama ad from the Republican party.

What exactly does being $16 trillion in debt as a country mean? Like any debt, there is one party that owes the debt and another party to whom the debt is owed. Most of the debt is owed by the government to outside investors. But another chunk is simply owed to the government itself. While this may seem like a weird accounting fiction, the difference between the government’s debt owed to others and the debt owed to itself is significant economically.

The $16 trillion number – actually $ 16,015,769,788,215.80 – is the “gross” debt, or what the Government Accountability Office describes “the federal government's outstanding debt issued by the Treasury and other federal government agencies.” (In the accompanying video, Daniel Gross and Megan McArdle discuss the import of the $16 trillion figure.) When the government commits to spending more than it get can get in taxes, it borrows money from the markets to make up the gap. In 2011, this gap – the annual deficit--was $1.3 trillion, about 8.5 percent of GDP.  The public, in this case, includes investors, banks who trade the securities, and foreign governments, central banks and companies who purchase them as a way to spend their dollars. U.S. Treasury securities are the largest and most traded security market in the world and are the backbone of global finance. About 46 percent of this debt is held by investors outside the United States, according to the GAO.

This part of the debt totals to a bit more $11.2 trillion, roughly 72 percent of our total economic output. And when the government publishes financial statements, it is this debt that is recorded as a liability of the federal government. Many economists believe this is the one most worth tracking, including the crew at the Office of Management and Budget, the executive’s branch’s in-house bean counter, who called debt held by the public “the most meaningful measure of the government's current fiscal position” and the Congressional Budget Office acknowledged it to be “the most commonly used measure of the government's debt.”

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But that’s about $4.7 trillion short of the figure that provided copy for journalists and grist for admakers. The rest of the debt, the gross debt minus the debt held by the public, is known in government accounting as “intragovernmental debt.” – or basically debt that taxpayers owe to future taxpayers. Some government programs, like Social Security and portions of Medicare, have a designated funding stream out of total taxes paid – like payroll taxes. But every year, there is a difference between the amount of money taken through those specific taxes and the amount of money legally obligated to be paid out in the program. When Social Security takes in more in taxes than it has out in benefits – as it has done over the last few decades -- it doesn’t hold onto the money or put it in a lockbox. Rather, it uses the funds to purchase special Treasury securities, thus incurring an I.O.U. from the whole of government revenue in order to finance the program down the road, in years when benefits fall below tax receipts.

“The difference between the government’s debt owed to others and the debt to itself is significant economically and provides a clearer picture of why and when having a high debt matters”

Although intragovernmental debt can tell us something about how the government has funded itself and will fund certain programs into the future, it is not generally considered to be a good measure of the government’s overall fiscal health. The CBO has described gross debt as “not a good indicator of the government’s fiscal condition” because it “measures only some of the commitments the government has made for the future, and it includes some amounts that may not represent future obligations at all.”

A good example of this discrepancy between the two figures comes from the O.M.B. About 12 years ago, there was some concern – yes, concern – that because of the persistent surpluses from the 1990s, the government might wind down the debt held by the public to zero and stop issuing new debt. But even if the government was able to run enough surpluses in order to pay off the debt held by the public, the O.M.B. estimated that Social Security’s accounting method would leave a persistent gross federal debt between $5 and $6 trillion.

In journalism and politics, the more mind-numbingly large number is the one you lead with. But the $16 trillion figure is misleading. The U.S. government actually owes its debtors about $11.2 trillion. Which is still a lot.