How big is US government debt? If you google this question looking for a number, your first hit is likely to be a site like this, giving a figure (as of June 2016) around $19.5 trillion, or a bit over 100 percent of GDP. That’s the total public debt as reported by the US Treasury.
If you are reading this blog, you probably don’t take that number at face value. You probably know the preferred number is federal debt held by the public. As of June 2016, that’s $14 trillion, or a bit over 70 percent of GDP. That’s the number more likely to be used in academic papers or by official bodies. (Wikipedia seems to mix the two numbers at random.)
Debt held by the public is meant to exclude debt the federal government owes to itself. For the US, that means subtracting the $2.8 trillion in debt held by the Social Security trust fund, the $1.7 trillion held by by federal employee retirement funds, and $1 trillion various other federal trust funds. It leaves in, however, the debt held by the Federal Reserve.
I wonder how many people, the sort of people who read this blog, know that. I wonder how many people know that today, one fifth of the federal debt “held by the public” is actually held by the Fed. I certainly didn’t, until recently.
Here’s a breakdown of federal debt by who owns it. Total public debt is the whole thing. Debt held by the public is the heavy black line. Debt held by the Fed is the blue area just below that line. (Source is various series from the Financial Accounts.)
As you can see, the Fed accounts for quite a bit of federal debt holdings — $2.5 trillion, 16 percent of GDP, or 19 percent of debt “held by the public”.
There’s some other interesting stuff in there. Most obviously, the dramatic fall in the share of debt held by households and nonfinancial businesses (the orange area), and rise of the foreign share (yellow). In the 1950s Abba Lerner could talk with some plausibility about the demand-boosting effects of federal interest payments to households; but it’s silly to suggest — as some modern Lernerians do — that higher rates might boost demand through this channel today. The declining share of the financial sector (red) is also interesting. I’ve suggested that this was a factor in rising liquidity premiums and financial fragility. If, as Zoltan Pozsar argues, we’re seeing a lasting shift from “market liquidity” to “base liquidity” this may include a permanently larger share of federal debt on bank balance sheets.
But what about the Fed share? Should it be counted in debt held by the public, or not? I can’t find the reference at the moment, but I believe there is no consistent rule on this between countries. (As I recall, the UK excludes it.) In any case, the phenomenon of large central bank holdings of government debt is not unique to the US. Here, from the OECD (p. 41), are the shares of government debt held by central banks in various countries:
If you want to say that debt held by the Fed definitely shouldn’t be counted, I won’t object. After all, any interest earnings on the debt are simply returned to the Treasury at the end of the year, so this debt literally represents payments the government is making to itself. But that’s not what I want to say. To be honest, I can see valid arguments on both sides — yes, the Fed is a part of government just as much as the Social Security Administration; but on the other hand, the Fed’s holdings were acquired in market purchases from the private sector, while the holdings of the various trust funds are nonmarketable securities that exist only as bookkeeping devices for future payments to beneficiaries. And if you think the Fed will reduce its holdings in the near future, then it makes sense to count them for any target you might have for holdings by the private sector. But of course, in that case how much you count them will depend on whether, when and how much you think the Fed will unwind its 2009-2013 balance sheet expansions. And this is my point: There is no true level of the federal debt. The “debt” is not an object out in the world. It is a way of talking about some set of the payment commitments by some set of economic units, sets whose boundaries are inherently arbitrary.
Again, debt “held by the public” does not include the notional debt in the Social Security Trust Fund, or in the various retirement funds for federal employees. But what about the debt (currently about 5 percent of GDP) held by state and local governments in similar trust funds? Fundamentally, these represent commitments by the federal government to help with pension payments to retired state and local government employees. But this is the same commitment embodied in the Social Security Trust Fund. And on the other hand, the federal government has a vast number of payment commitments to state and local governments — transfers from the federal government make up more than a quarter of total state government revenue. Why count the commitments that happen to be recorded as debt holding in retirement funds as federal debt but not the rest of them?
For that matter, what about the future claims of Social Security recipients? They certainly represent payment commitments by the federal government. Lawrence Kotlikoff thinks there is no difference between the commitment to make future Social Security payments and the commitment to make payments on the debt, so we should add them up and say debt held by the public is over 200 percent of GDP. Other people want to add in public pensions of all kinds. Why not throw in Medicare, too? True, retirement benefits are not marketable, but checking your expected benefits at https://www.ssa.gov/myaccount is not much harder than checking your bank balance online. And for the MMT-inclined, don’t future Social Security benefits have as good a claim to be “net wealth” for the private sector as federal debt, maybe better?
One takeaway from all this is the point eloquently made by Merijn Knibbe, that one of the big problems in the economics profession today is the complete disconnect between theory and measurement. Most public discussions and economic models — and a lot of empirical work for that matter — treat “debt” as an object that simply exists in the world. (It’s worth noting that the question of how exactly debt is defined, and who it is owed to, does get some attention in undergraduate econ textbooks, but none at all in graduate ones.) It seems to me that the large share of debt held by central banks is a case in point of how we have to make a conscious choice about which commitments we classify as “debt”, and recognize that the best place to draw the line is going to depend on the question we’re asking. We need to treat economic categories like debt not as primitives but as provisional shorthand, and we need to be constantly walking back and forth between our abstractions and the concrete phenomena they are trying to describe. You can’t, it seems to me, do useful scholarship on something like government debt, except on the basis of a deep engagement with the concrete practices and public debates that the term is part of.
More concretely: Whenever you take a functional finance line, someone is going to stand up and start demanding in a prosecutorial tone whether you really think government debt could rise to 10 times or 100 times GDP. How about 1,000 times? a million times? — until you say something noncommittal and move on to the next question (or mute them on Twitter). But of course the answer is, it depends. It depends, first, on the concrete institutional arrangements under which debt is held, which determine both economic impacts and financial constraints, if any. (For example, whether the debt held by central banks should be counted as held by the public depends on when or if those positions will be unwound.) And it depends, second, on how we are counting debt.
Consider a trust fund holding federal debt. What the federal government has actually committed to is a stream of payments in the future which in turn will allow the fund to fulfill its own payment commitments. Converting that flow of future payments to a liability stock in the present depends on the discount rate we assign to them. But we can follow that same procedure for any future spending, whether or not it is officially recognized as someone’s asset. As Dean Baker likes to say, given that we don’t prefund education, the military, etc., pretty much all government spending could be called an unfunded liability for the federal government. How big a liability depends on the discount rate. If the discount rate is less than the nominal growth rate, then the present value of future spending grows without limit as we consider longer periods.
Here’s an exercise. Let’s go full Kotlikoff and call all future government spending a liability of taxpayers today. Say that federal spending is a constant 20 percent of GDP and nominal growth is 5 percent per year. If we use the current 10-year Treasury rate of around 2 percent as our discount rate, then the present value of federal spending over the next 20 years works out to, let’s see, $10 quadrillion, or 55,000 percent of GDP. That’s $30 million per person. Whoa. Can I have a Time magazine cover story now? [No I cannot, because I am bad at math. See below.]
So yeah. 20 percent of debt “held by the public” is actually owed to the Fed. An interesting fact which perhaps you did not know.
UPDATE: As commenter Matt points out below, the math in the next-to-last paragraph is wrong. The calculation as given yields $110 trillion, a measly 600 percent of GDP. On the other hand, if we stretch it out to the next 30 years, we get nearly $200 trillion, which is 1,000 percent of GDP or more than $600,000 per person. I guess that will do.