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Monday, October 06, 2008
The Fiscal Balance of the American Federal Government
I, for one am a little bit tired of hearing about how “the United States is bankrupt” from people with a minute level of knowledge of international finance. In truth – despite recent setbacks – the U.S. Federal Government is probably in the best shape of any major world government when one measures total debt, assets, and ability to borrow.
Let’s begin with one fallacy – the size of the Federal Debt. Down below, Mike cites a debt-to-GDP ratio of 70% for the United States. This is an officially accurate number – but it’s an extremely misleading one. That’s because a large portion of the U.S. Public Debt ($4.3 Trillion of $10.1) is held by (wait for it)… the Federal Government. It may sound strange, but it’s true – the Federal Government owes about 42% of the American national debt to the Federal Government.
Bizarre? Sure. But it’s the truth. What happens each year, as a result of a Social Security reform law, is that the Federal Government notionally “borrows” the Social Security surplus from itself. In reality, given that the debt is incurred and owned by the same borrower and could easily be papered over by an Act of Congress, it shouldn’t be counted when comparing the American public debt to that of other major industrial nations.
In other words, if you ignore the money that the Federal Government owes to itself, the real debt to GDP ratio of the US Government is something like 41% - better than most developed nations (indeed, Canada’s is still just under 70%).
Even this, I should add, understates things even further – because the Federal Government owns, as of 2007, a little over 42 Million acres of land, much of it filled with unexploited resources. If that property interest were to be liquidated in an orderly fashion over a period of time (say twenty years), it could generate the revenues to retire an appreciable portion of the nation’s debt.
The present balance of the U.S. Government is strong. If you want to argue over the future – and in particular how that $4.3 Trillion that the Government notionally owes to itself is just a downpayment on future pension bills – well, then we have another story altogether.
But, on that count, let me point something out to you – that’s a problem that everyone has. Indeed, because it continues to experience robust population growth and has a higher-than-replacement birthrate, the United States is the Western country with the best chance of successfully navigating the pending pension crisis.
Does this mean that everything is great? No, far from it – but it does mean that the sky isn’t falling over America. Indeed, the United States has – and God willing will be able to keep – one great advantage over every other major country: it doesn’t have a national health care system. Medicare and Medicaid, one could argue, are bad enough – but I don’t think that’s the case. Because they aren’t universal entitlements, it will be much easier to target them for destruction when the fiscal crisis comes. In Canada and other places, on the other hand, I think that we will continue to embrace the futile delusion that socialized medicine is economically feasible until the day that our governments literally hit the wall.
Indeed, that’s the one silver lining of the present credit crisis – it makes any sort of socialized health care system in the United States impossible to afford. And it won’t be getting any more affordable as the years go by.
Dealing with the coming pension and health crisis is going to be dangerous game. As we saw when President Bush tried it in 2005, there’s probably too much vested in those programs right now to fight them and win. The key is timing. Time is on our side. It’s true that the Baby Boomers are aging and going to start retiring – but that also means that they’re going to start dying as well. And it’s worth remembering that, under the status quo, Baby Boomers are likely to vote for these programs for two reasons – that they expect to benefit from them and that they want their parents to continue to do the same (they being of the Greatest Generation and all). As time marches on and Generation X’ers and Echo-Boomers come to make up the largest voting cohort, it’s worth pondering if they will have the same regard for the most selfish generation that threw away so much of what their parents fought for and who ran up most of the debts that we now have to contend with. I, for one, am of the attitude that my own Baby Boomer parents have sufficient wealth to see them through the rest of their lives and that the rest of the wretched generation to which they lamentably belong can go beg in the streets (but, ideally, not my streets) before they can get a cent of my money. That’s a minority attitude for now – but give it time.
Posted by Adam T. Yoshida on October 6, 2008 in International Affairs | Permalink
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Comments
The Fiscal Balance of the American Federal Government....hahahahahaha...yeah right.
Fiscal balance...hahaha, good one!
Posted by: JC | 2008-10-06 7:35:32 PM
I don't know how Wikipedia is calculating that figure... but...
"Canada’s total government net debt-to-GDP (gross domestic product) ratio, which has been the lowest in the G7 since 2004, is estimated at 27.6 per cent for 2006.[1] The OECD expects Canada’s debt burden to continue to decline in future years."
http://www.budget.gc.ca/2007/images/bpa2_5e.gif
The OECD ranks Canada has having the lowest debt-to-GDP ratio of all member countries.
Posted by: Mike Brock | 2008-10-06 7:51:33 PM
Since Canada's GDP came in at $1.4 trillion this year... I don't understand how $420 billion of debt calculates to 71% debt-to-GDP.
Posted by: Mike Brock | 2008-10-06 7:52:33 PM
Since Canada's GDP came in at $1.4 trillion this year... I don't understand how $420 billion of debt calculates to 71% debt-to-GDP.
Posted by: Mike Brock | 6-Oct-08 7:52:33 PM
Canada's total public debt, which includes provincial and municipal debt, was 68.5 in 2007. The US number is 61%.
It may sound strange, but it’s true – the Federal Government owes about 42% of the American national debt to the Federal Government.
Posted by Adam T. Yoshida on October 6, 2008
Debt is debt no matter who you borrow it from. That money will at some point have to be repaid which means borrowing more money from someone else.
Posted by: The Stig | 2008-10-06 8:14:03 PM
"In reality, given that the debt is incurred and owned by the same borrower and could easily be papered over by an Act of Congress, it shouldn’t be counted when comparing the American public debt to that of other major industrial nations."
"Papered over." What the hell does that mean? If they have to pay out social security benefits they'll have to find the money somewhere.
Posted by: Craig | 2008-10-06 8:35:14 PM
And China is a creditor. So are many of the Gulf States.
Posted by: epsilon | 2008-10-06 11:09:54 PM
"Now, in case you missed it, the White House "shelved" a Treasury Department commissioned study that showed the net liabilities of our FedGov to be $44.2 trillion. By comparison, our current official debt stands at about $6.4 trillion. Other comparisons: $44.2 trillion is roughly equivalent to four years of US economic output or more than 94% of all US household assets. Truly, voters have voted themselves largesse from the public treasury."
http://www.gold-eagle.com/editorials_03/haynes060203.html
Posted by: Snowrunner | 2008-10-06 11:46:18 PM
Your numbers are right but they overlook certain facts. One, social security(bankrupt in 2042) and medicare(bankrupt in 2017) costs are rising much faster than inflation. The U.S.'s relatively high birthrate(more babies leads to larger young labor force) of 2.1 kids per woman limits but doesn't resolve these problems. After the stock market debacle, the left will use this incident to counter any efforts at privatization of services. Also, Americans have a ridiculously high level of personal debt. Obama will make this worse by $1 trillion in new government spending and tax increases. The answers are twofold. One, taxes have to be kept low(in fact the corporate and capital gains should be cut further). The other is that there has to be massive government spending cuts. This is the problem because Americans have done a horrible job on the cutting side. In 1995, the Republicans tried to cut government and were countered with ads about senior citizens and school children being victimized. In Schwarnegger's first term, he tried to push 4 ballot initatives that would have reduced government spending in education(by making teachers work 5 yrs instead of 2 before getting tenure) and healthcare. All 4 initiatives were attacked by the unions and defeated. After that, the "Governator" refused to challenge the Democrats on spending. The end result is that California has a $15 billion budget deficit. Will Americans wake up or become California, part 2?
Posted by: Edward | 2008-10-06 11:48:39 PM
The article talks about Americans owing money to themselves and that this cannot be counted as debt.
But what the article doesn't say is that this debt still commands an interest payment and that money is either taxed away from citizens or added to the debt drawing even more interest. The result is that taxes go up and the market has less ability to efficiently allocate resources because the gov't has crowded it out.
Epsi
Posted by: epsilon | 2008-10-07 8:35:35 AM
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