Mankiw v. Samwick on the Unified Deficit

Greg Mankiw posted an email from the White House on the Federal debt which included a proposition that I’ve been meaning to object to:

gross debt vs. debt held by the public – (this is the hard part) What we care about is how much the US Government owes to the American public and the rest of the world (meaning to those who buy Treasury bonds). This is commonly known as “debt held by the public”. To this amount, the Chairman adds debt that one part of the government owes to another part of the government, to get what budgeters call “gross federal debt”. If you use funds from your savings account to pay down a credit card, you have decreased your “debt held by the public”. For comparison, if you borrow from your savings account and put it into your checking account, and leave in your savings account an IOU from you to you, Chairman Conrad’s metric would say that you have “increased your gross debt.” This is economically meaningless.

This task has been outsourced to Andrew Samwick:

Not so fast. The difference between Total Debt and Debt held by the Public is the bonds held in the Social Security trust fund. Those bonds represent a claim on future tax revenues just like bonds held directly by the public. The taxpayers in 2025 will not care whether the additional income taxes they are paying are to pay off an American citizen who holds a Treasury bond or the Social Security beneficiaries who have presented a bond from the trust fund to the Treasury for redemption so that they can collect benefits. It’s the same to them–it should be the same to us.
The only way the trust fund is equivalent to “using funds from your savings account to pay down a credit card” is if the Social Security surplus is used to repurchase Debt from the Public as an equivalent amount of special issue debt is placed in the trust fund. Debt held by the Public should go down, but Total Debt should stay constant if we are operating the trust fund as it was intended.
In 2025, we get the reverse. As beneficiaries make their claims, bonds come out of the trust fund. Either taxes go up, or new debt must be issued to the public to generate funds to pay off those bonds. Debt held by the Public goes up, but Total Debt stays the same. In both cases, it is Total Debt that is telling you accurately about the size of the liabilities being passed on to future generations. Debt not currently held by the public will eventually be held by the public.
The honest budget policy is to target the on-budget deficit or Total Debt/GDP. Anything else leaves you open to the charge that you are spending the Social Security surplus, raiding the Social Security trust fund, etc. You can ignore the debt held in the trust fund only if you don’t intend to honor its redemption. Let’s not go there.

Very well put!