It’s No Wonder People Don’t Understand the "Public" Debt
A friend of mine posted this on Facebook:
I started to explain it, but realized that the standard usage is wildly screwy and confusing for any normal human, and decided to explain it here instead.
The problem is that even in standard economists’ usage, “public” is used in two different ways:
1. “Public” debt: debt owed by the government. In this usage, “public” means “government.” It’s sort of metaphorical: the government r us. As in “the public [versus the private] sector.” “Public debt” is often called “gross public debt.” That includes money “owed” to Social Security, etc.
Note that these debts to trust funds don’t in any way represent the liabilities of those programs; they’re pretty much arbitrary numbers, accidents of the moment, bookkeeping artifacts of a political/ideological construct, that are best ignored if true understanding is the goal. “Gross public debt” a.k.a. “public debt” — the $14.3 trillion shown in this graphic — is not an even vaguely useful figure in understanding the fiscal position of the country or the federal government.
2. “Debt held by the public” (not the public as described in this graphic): in this usage, the public is exactly not the government. It refers to debt held by non government — including other governments, and private holders in other countries. This is often called “net public debt.”
Watch: two (contradictory) usages of the same word, in one equation!
Net public [government] debt = debt held by the public [non government]
You can see this if you search for “public debt” on Fred. Or, read this wikipedia graph caption:
Red lines indicate the debt held by the public (net public debt) and black lines indicate the total public debt outstanding (gross public debt), the difference being that the gross debt includes that held by the federal government itself.
It’s no wonder people are confused.
This graphic makes it even more confusing, because “the public” here is the domestic private sector plus state and local governments. And it excludes foreign-held debt, which is included in the normal definition of “debt held by the public.”
This is the fault of the New York Times, which uses the term in the infographic from which this graphic is prepared. Not only they start with the gross figure rather than the more useful net figure, but they use “the public” in a completely idiosyncratic way.
A further complication: in standard usage, “debt held by the public” includes Fed holdings, even though the Fed is part of the government. The interest it is paid (by the Treasury) on government bonds is paid right back to the Treasury. (The presumption is that those bonds will eventually be sold back to the private sector.) This is not usually such a big deal, but these days the Fed is holding 17% of the Debt Held By The Public.
I suggest the word “public” should be eradicated from all these usages, in favor of more descriptive and precise terms. “Public” does nothing but confuse if you don’t know exactly what it means. Instead, say things like:
Net federal debt.
Net federal debt minus Fed holdings.
Federal debt held by the domestic private sector.
Government debt [including state and local]
And etc. The bookkeeping at this high level is not actually very complicated, so hopefully careful usage will help people better understand and discuss fiscal issues.
Cross-posted at Asymptosis.
good proposal. However not quite there yet. Fed is an abbreviation for Federal but here there is federal debt to the Fed. I think in this context Fed should be written out as federal reserve system to underline the distinction.
Federal is a problem anyway since it combines the Treasury and the trust funds. I definitely agree with the conventional usage which treats debt owned by the Federal Reserve Board as debt held by the public.
Oh I got it. there could be total net Federal government liabilities — Federal Debt held by the Fed is included because Fed liabilities minus the balances of loans the Fed made to private sector entities are included.
A number which is not reported is total Federal Government liabilities to other entities. This is current debt held by public plus the money corresponding to to Fed loans to private entities. For decades up to 2008, they were insignificant. Now they aren’t. There is no good reason to net out loans from the Fed to private entities but not net out TARP loans.
Thanks Steve, for the beginning post (I hope) in explaining the language that is treated so glibly by media, and of course for those who know better but choose to ignore a careful look in public.
Where does the debt held by private individuals go? By this I mean, what do you call the indebtedness of ordinary people for things like school loans, credit cards, mortgages and the like? Does it count any where? NancyO
In addition, if that wasn’t confusing enough, keep in mind that all debt is, in the end, a promise of action or work. Really, truly. But it’s hard to keep in mind.
In that sense, now, look at Medicare and Social Security “debt.” They are essentially promises that someone, whether doctors, farmers, carpenters, drug researchers etc, will work on behalf of the people to whom that debt is owed. Each slice of work is fragmentary, and the seniors will almost certainly never meet most of the people repaying that debt, but that is what is owed, nothing else. And in the case of SS, that debt was prepaid, purchased, by the efforts of the recipients back during their working lives.
So what happens if that debt is reneged upon? Setting aside whether the seniors realize they have been scammed or not, what actually happens is that the effort promised via SS will still be delivered, mostly, but will be delivered at a much higher cost and with much lower effectiveness. Instead of seniors living in their own homes, their poverty will put them into hospitals, shelters or their children’s spare bedrooms. The prepaid effort promised during their working lives will be shifted onto local governments, charities, families, hospitals and prisons.
This pushing downwards of obligations I term “pancaking,” and like pancaking of buildings and bridges during earthquakes, it is never a good thing. Like a building forced to carry heavier and heavier loads, eventually collapse occurs.
not so fast.
your suggestions, while undoubtedly well founded, would not unconfuse the public.
it’s not the words, but the facts they point to that need to be understood. and no words will do that automatically.
meanwhile, i think even you got a little confused:
you said, “Note that these debts to trust funds don’t in any way represent the liabilities of those programs; they’re pretty much arbitrary numbers, accidents of the moment, ..”
debts TO trust funds would not in any case represent liabilities OF those programs.
worse, from my perspective, you seem to share the idea that money owed TO Social Security is money the government owes itself.
“Social Security” is a legally distinct entity from “The United States of America.” The government owes the money it borrowed from the SS Trust Fund TO the Trust Fund. quite legally.
Good point dale.
@Robert: “Fed should be written out as federal reserve system”
“A number which is not reported is total Federal Government liabilities to other entities.”
Where does that live in the Z1? When I’ve looked for it I got all confused with Maiden Lane and suchlike “special purpose vehicles” or whatever they’re called.
Total Credit Market Debt Outstanding =
Government debt held by the private sector
+ Corporate debt outstanding (finanancial and nonfinancial corps)
+ Household/Nonprofit debt outstanding
It’s often useful to look at private debt minus financial corp debt, cause financial corp debt is different in complicated ways that I don’t fully understand.
Here’s household debt outstanding (I’m not sure if “household” here includes nonprofits — it often does — but they’re relatively small change in any case. Household mortgages alone utterly swamp their debts):
Here are some useful graphs:
@Noni: “Medicare and Social Security “debt.” They are essentially promises”
Yes but key to understand is that those promises are not represented by the treasury debt to the trust funds. Again, that measure is basically arbitrary and an accident of timing.
“Pancaking” is good!
I knew I’d see you here. I think you know that I I totally get and agree with where you’re coming from. But I think your crusade is quixotic. People almost universally call SS contributions “payroll taxes,” not “contributions.” That ain’t gonna change. Benefits might/will, and not in any kind of steel-rod relationship to trust-fund levels or revenues. And the country’s fiscal stance and future depends on the unified budget — what gets prioritized out of the whole revenue pie. The trust-fund balances and flows are only significant politically and rhetorically. (Which is, I know, why you grind this axe so hard, and for noble purpose.)
But: Insisting on the trust fund construct actually provides political/rhetorical cover for raising our already horribly regressive payroll taxes like Reagan did (or resisting cuts thereof, as you have done quite vehemently, along with the ‘Pubs), instead of far more efficient, progressive, and equitable taxes on income, wealth, etc.
Who is that person that put up the cartoons explaining the debt, fed, SS etc on youtube. I could not find them, but maybe it is time to link them here again.
Just to add, to Coberly:
I”m a *very reluctant* advocate of “Scrap the Cap,” extending payroll taxes all the way up the income spectrum. This will add a bit of progressivity to an overall (fed, state, local) tax system that is not even progressive about about $75K in income. But I only advocate it because the rhetorical construct of the trust funds makes it politically feasible. That’s the conflicted position that raging liberals like I are put into by that construct. It’s a liberal own-goal.
as you perhaps know i regard the “regressive tax” meme with regard to Social Security to be nonsense.
Social Security is worker paid for a very good reason. Trying to turn it into a progressive tax would turn it into welfare as we knew it.
This is particularly infuriating when some progressive person says “you can’t take away their SS, they paid for it themselves.” and then in the next breath say “we can save it by making the rich pay for it.
As for Quixotic crusades, well, me and Don Q go way back. But let me recommend “Flight to Arras” in which Antoinne de St Exupery explains why a nation of forty million farmers bother to fight when invaded by a nation of eighty million industrial workers.
I do not understand your sentence with the steel rod relationship. I do understand that the Trust Fund is not vital to Social Security, which can go on forever as it has for seventy plus years being paid for by the workers who will get the benefits. Total theft of the Trust Fund would not really hurt anybody. By simply raising the payroll “tax” about one percent… some years earlier than would otherwise be necessary… the boomers would get the retirement they paid for. and the people paying the increased tax will get their money back with interest when they retire in their turn.
as for the “unified budget” it’s a way congress has of keeping two sets of books right under your nose. the future of America does not depend on dishonest bookkeeping… or it might, but not in the way you think.
“…as for the unified budget…”
Coberly is being too kind here. There is no legal basis for the term unified budget. LBJ used it as a political convenience. Read the legislation. Unified budget is bullshit. And, as Dale so succinctly points out, there is good reason for Social Security to be recognized as distinct from the concept of progressive taxation. FICA deductions are the funding mechanism for our government administered retirement income program. Initially intended to supplement worker retirement plans of the past, Social Security has become the basis for too many workers’ entire retirement income.
All the more important that it not be brought part and parcel into a budget negotiation. It isn’t part of the problem. Don’t fix what isn’t broken. If the general budget needs increased funding in order to pay its bills and reduce the size of the net federal debt then raise taxes on all those who can afford to pay increased taxes. Or, maybe we should disregard the debt held by “The Public”. Aren’t those debts just so many IOUs? I wonder how Peterson et al might feel if their personal holdings in T Bills were simply canceled tomorrow. It’s only a matter of legislation.
for those who don’t know, some people who have had too much education call SS a “regressive tax” because, essentially, the rich don’t pay it. and the poor pay the same “rate” as the less poor.
what these educated people don’t think far enough to realize is that this “tax” structure (it’s really an insurance payment or “forced savings”) is what it takes to support the most progressive anti poverty program in America. the poor get a much higher return on their “investment” than the less poor. and the rich get no return whatsoever on the money they didn’t pay into the system.
a “tax” is generally something the government extracts to pay for it’s own expenses. the payroll tax is something the government extracts to make sure you will have enough to live on when you get old… and not become a burden to society. It’s your money,you get it back, with interest. but the poor are heavily subsidized by the “rich” in a way too clever for the educated to understand… insurance. and even the rich get all of their money back plus interest, just not as much interest as the poor.
i do not know what the educated read to get their understanding of Social Security, but there are precious few of them who actually understand anything about it. these people are blinded by words. they read to fast to ever have to think about what the words are pointing at.
But they can say “regressive tax” with the same deep understanding as the “right” can say “socialist.”