‘Headline’ Surplus/Deficit and ‘Headline’ Debt

by Bruce Webb

In the course of a post called the The Vanishing Surplus-Revealed there arose a semantic dispute about what ‘surplus’ means. Well I maintain that the answer to that question is not in authorial intent but instead on audience reception. If you are writing for a popular audience you have an obligation to write in a way that is in accord with their normal understanding. In the course of that discussion I was directed to the following paper by Michael Boskin. But I took away from it totally the opposite message from that of the commenter. (Bolding mine). Sense and Nonsense About Federal Deficits
and Debt

“To make sense of these issues, economists employ several related measures in addition to the traditional nominal cash budget balance (see Table 1).”

Table 1
Alternative Budget Surplus/Deficit Concepts

1. Unified nominal surplus/deficit = nominal revenues – nominal outlays; “headline” numbers
2. Operating surplus/deficit = unified deficit – net investment (public capital investment – depreciation of public capital)
3. Primary surplus/deficit = unified deficit – interest outlays on inherited debt
4. Cyclically adjusted surplus/deficit: unified deficit adjusted to “high employment,” i.e., removes effect (+ and – ) of business cycle on revenues and outlays; i.e., removes effect of “automatic stabilizers”
5. Standardized surplus/deficit: adjusts unified deficit for business cycle and some other transitory items, e.g., the inflation component of interest, receipts from allies for Desert Storm, deposit insurance outlays for failed S&Ls, that are unlikely to affect real income

I would agree with Boskin that when people hear the word ‘surplus’ unqualified they will understand it in the ‘traditional’ ‘headline’ sense, which is to say as a product of the Unified Budget surplus/deficit.

I say this not to just refight the stale battle (though comments are welcome) but instead to take the ‘headline’ characterization from Boskin and apply it to debt. What then would ‘headline debt’ be? Discussion below the fold

I suggest that when people hear the term ‘federal debt’ they normally understand that to be total Public Debt as portrayed on such things as the U.S. National Debt Clock whose most famous version is seen in Times Square. This version summarizes the debt situation as follows

The Outstanding Public Debt as of 15 Apr 2009 at 05:13:40 PM GMT is: $11,176,896,295,826.53
The estimated population of the United States is 306,006,590
so each citizen’s share of this debt is $36,525.02.
The National Debt has continued to increase an average of $3.84 billion per day since September 28, 2007!
Concerned? Then tell Congress and the White House

A search on ‘Obama $11 trillion debt’ returns 108,000 hits and many quite literally using this in their headline. For example a CBS online piece from March 17th is quite explicit. National Debt Hits Record $11 Trillion and reports it as follows:

The Federal Government’s flood of red ink hit another high-water mark as the Treasury Department quietly reported today that the National Debt hit $11-trillion for the first time ever.
To be exact, the Debt now stands at $11,033,157,578,669.78. Divide it by the U.S. population and it comes up to over $36,000 in debt for every man, woman and child among us.

And the government is running up mountains of debt with increasing speed. It took just over 5 ½ months for Uncle Sam to go another trillion dollars deeper in debt since hitting $10-trillion last September 30th. It’s the fastest jump in U.S. history.
The hundreds of billions of dollars being spent as part of the federal bailout of the financial markets is a leading factor in the rapid increase. Over $400-billion in debt has been accrued in the 57 days since President Obama took office.

And the federal budget he unveiled last month projects even faster increases in the National Debt. It’ll hit $12.7-trillion by the end of the fiscal year on September 30th. The Administration’s four year estimate shows that by the end of September 2012, the Debt will have soared to $16.2-trillion – which amounts to nearly 100% of the projected Gross Domestic Product that year.

I don’t even think that there is any dispute that in popular discussion that ‘debt’ is heard to mean what is more technically known as total Public Debt.

On the other hand if you go to the Treasury’s Debt to the Penny you will get a more complex view. At the close of business April 13th, total Public Debt stood at $11,169,978,555,115.48. But this breaks down to two components, Debt held by the Public at $6.893 trillion and Intragovernmental Holdings at $4.276 trillion. This in turn breaks down as follows. (chart from Wiki)

First thing of note, the OAS, DI, HI, SMI Trust Funds all are treated separately. Second note interest on those Trust Funds ARE counted as Public Debt, the $2.203 trillion shown as OAS debt in the chart above equating exactly to the year end balance and assets respectively in the following two balance sheet from the Dec. 2008 Montly Trust Fund Report.

(Note too that the second balance sheet showed $0 in “Interest receivable” while the second showed that of $52.95 billion in interest earned year-to-date fully $52.85 billion was credited in December leaving only $100 million credited in Oct and Nov. Meaning you can’t just pick any month of the year and draw conclusions, in total context only June and Dec are meaningful.)

So ‘Public Debt’ as reported on the Debt Clock includes total Trust Fund balances including interest earned as of Dec 2008. The Trust Funds’ interest are thus included in what I am calling ‘Headline debt’. And those totals assume that we are accounting on Boskin’s definition 1 of surplus/deficit, which in turn makes ‘headline surplus/deficit’ equate to Unified Budget surplus/deficit.

Now you can argue that this is not the right way for policy makers to think about debt. For example OMB Director Orszag argues as follows:

How much does the federal government owe? It might seem like a simple question to ask those of us wearing the green eyeshades, but there are lots of different concepts used to answer it. For example, at the end of fiscal year 2008:
Debt held by the public net of financial assets— the measure I find to be most meaningful — stood at $5.3 trillion (37 percent of GDP).
Debt held by the public was equal to about $5.8 trillion (41 percent of GDP).
Gross debt equaled $10.0 trillion (70 percent of GDP).
What do each of these concepts represent?

Let me proceed in reverse order, and begin with gross debt. Gross debt has two components: debt held by the public—which I will discuss more in a moment— and intragovernmental debt. Intragovernmental debt is, essentially, debt that the government owes to itself—as of the end of last year, it totaled $4.2 trillion. The majority of this debt is issued to the Social Security Trust Fund, and most of the remainder is issued to other trust funds, such as the Civil Service Retirement and Medicare Trust Funds. These trust funds are required to invest their surpluses in government bonds. While the federal government will certainly make good on the IOUs issued to these trust funds, they should not be counted when assessing the financial state of the federal government as a whole.

. Yet most commenters do use Gross debt as the proper measure. Orszag again (bolding mine)

One branch of the government issuing debt to another branch may make one branch poorer relative to the other branch—but it does not affect the overall financial state of the government. For example, when I tell my daughter and son that I owe them each $10 for their allowances, I am poorer, and they are richer—as a family, though, there is no change in our overall finances. That’s why the Congressional Budget Office, the Office of Management and Budget (including under the prior administration), and the Government Accountability Office all agree that gross debt is not a meaningful metric for assessing the government’s current fiscal position. Yet, the world being what it is, this number is quoted often.

Those who argue that interest earned on the Trust Fund should not be considered in deciding Social Security policy (in effect abrogating the Trust Fund) cannot use total Public Debt when criticizing Obama budgets, not at least without being intellectually inconsistent. Because by 2019 about $2.5 trillion in total outstanding Public Debt will be the product of Social Security TF interest and interest on that interest

Which makes the CBO’s March 2009 OASDI Baseline cut both ways.

If you want to argue that the key for policy making is really ‘Primary Surplus’ and not Unified Budget ‘Surplus’ then you need to subtract out TF interest from your Obama budget forecasted additions to Public Debt. Which is to say to move in Orszag’s direction. Of course many people will try to have it both ways as is convenient instead of using an honest oranges to oranges approach.