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Another Debt Documentary: Ten Trillion and Counting

March 24th, 2009 . by economistmom

I had been interviewed for this Frontline documentary months ago (by Forrest Sawyer no less–it was a thrill!), but a change in producers has deprived me of my 15 seconds of fame…alas. Still, I kept in touch with the production crew while they continued working on it, I’m glad they completed the project, and I’ll be watching this evening, for sure (and will be DVR-ing it).

From a NYTimes review of it (I’m happy to see some of my friends who did make the program):

The makers of “Ten Trillion and Counting,” Tuesday’s “Frontline” on PBS, want to make really, really, really sure that you know that George W. Bush, not Barack Obama, put the country in the economic mess it’s in now. More than half the program is devoted to cataloging the Bush administration’s economic policies, which, as portrayed here, come across as appallingly reckless, a burden that will grind us down for generations to come.

Though it may be accurate, it’s an emphasis that is unfortunate for two reasons. One is that it leaves the smart-sounding commentators assembled here not much time to talk about what matters now: how we get out of the mire. The other is that it could cause anyone who still has any regard for Mr. Bush to tune out the program as just another exercise in Bush-bashing. This is a program everyone needs to watch if the search for solutions is ever going to get beyond the simplistic, accusatory catchphrases that sometimes seem to pass for economic-policy debate in Washington…

There is a succinct history lesson on how the Republican “starve the beast” economic philosophy — if you keep taxes low, government spending will automatically be kept low for lack of money — ran off the rails. And then, the program says, Mr. Bush took things a step further by cutting taxes while starting a war.

“We borrowed money from China to give tax cuts to the best-off people in our society and leave our kids paying the bill for a war that we chose to fight,” says Matt Miller, a senior fellow at the Center for American Progress, a liberal-leaning research group. “That was really unprecedented.”..

Now it is Mr. Obama who will have to make the case for sacrifice, though the Iraq war is winding down, and the one in Afghanistan is somewhat murky in the public mind. Good luck.

“It’s hard to sell a message of pain to Americans,” says David Wessel of The Wall Street Journal. “It’s hard to tell them that we have lived beyond our means and we’re going to have to spend less money on benefits that you enjoy, and we’re going to have to collect more taxes from you than we do now because we overpromised in the past. That’s a very hard message to deliver when unemployment is low and everybody’s feeling good. It’s an impossible message to deliver when people are frightened that they’re going to lose their houses, lose their jobs and their kids are going to be out of work.”…

So I hope you’ll tune in tonight (or “hit record”), as I will!

32 Responses to “Another Debt Documentary: Ten Trillion and Counting”

  1. comment number 1 by: Brooks

    Very good to see.

    That said, I think they should have addressed the validity/invalidity of Orszag’s implication that we can adequately reduce projected spending on Medicare and Medicaid to adequately reduce our long-term fiscal imbalance without reducing benefits (eligibility; quality of care; quantity, and timing/availability of care; healthcare outcomes; etc.) and without major, broad-based tax increases. That question is perhaps the central focus of debate at least among budget wonks, with some on the left (e.g., Dean Baker) contending that we really can avoid sacrifices in the future if we just “invest” in greater healthcare efficiency now (including providing universal coverage as a supposedly essential ingredient in this solution), and others doubting such claims (e.g., http://www.concordcoalition.org/files/uploaded-pdfs/ff-1220-demographics.pdf ).

    I also think they should have used figures for debt held by the public rather than gross debt, but that’s not as critical for the purposes of the documentary.

  2. comment number 2 by: Brooks

    Also, as fiscally irresponsible and harmful as the Bush Administration and Republican Congresses surely were, the documentary manages to go even further, getting into territory I’d consider unfair, when it emphatically places blame for Medicare Part D on Bush and the Republican Congress. The reality is that Bush and the Republicans were pushed by Democrats to add that benefit and if anything, the benefit was smaller than Democrats would have liked. It’s certainly arguable, as the documentary indicates via statements on the House floor by Democratic Congressman, that Republicans added significant extra cost by preventing/limiting competition that could have lowered the prices Medicare pays for drugs (albeit perhaps with some adverse effects such as reducing incentive for pharmaceutical R&D), but overall, to place blame for Medicare Part D on Bush and the Republicans is unfair and may reveal an ideological/partisan bias/agenda on the part of the makers of the documentary.

    And this unfairness is not only inappropriate in its own right, but also adds unnecessarily to the “turn off” effect to which the NYT refers.

  3. comment number 3 by: B Davis

    I had been interviewed for this Frontline documentary months ago (by Forrest Sawyer no less–it was a thrill!), but a change in producers has deprived me of my 15 seconds of fame…alas. Still, I kept in touch with the production crew while they continued working on it, I’m glad they completed the project, and I’ll be watching this evening, for sure (and will be DVR-ing it).

    I’m sorry to hear that you were deprived of your 15 seconds of fame! Still, I thought that it was a very good show. I was especially struck by the following statement by David Walker about 40 minutes into the program:

    President Obama has to assure the American people that he will do what it takes to turn the economy around but he also needs to tell the American people the truth and let them understand that, while we’ll get through the current recession, it’s not the big one - the big one would be a meltdown in the federal government’s finances and we need to start taking steps to defuse the ticking time bomb that threatens our future.

    That tied in well with about 4 minutes into the movie where the narrator asks “But for the President and the country, there is one unavoidable question. Where are we going to get the money to pay for all this?”. They then show the “room at an undisclosed location not far from the Capitol steps” where the government borrows the money through Treasury auctions.

    I’ve wondered about the same question looking at the foreign holders of treasuries in the two graphs at this link. Japan used to be the largest holder of treasuries but they seem to have reached their fill in mid-2004. China and some other countries have picked up the slack over the past year but the deficit is projected to skyrocket in the next couple of years, if not longer. Is there really that much untapped demand for treasuries out there? Even if there is, there would seem to be a high risk that interest rates will rise sharply. And the alternative of monetizing the debt poses serious risks to the value of the dollar. I believe that this is the meltdown that Walker speaks of for which we need to start taking steps to defuse.

  4. comment number 4 by: B Davis

    I also think they should have used figures for debt held by the public rather than gross debt, but that’s not as critical for the purposes of the documentary.

    I generally agree with your comment (and that of the NY Times review) that they might have done well to downplay Bush’s role a bit so as not to distract from the same message. However, I disagree that the public debt is a better measure of our fiscal situation. I posted a discussion of this topic at this link of which this was the final paragraph:

    As far as which of these measures of debt is the “real debt”, it seems to me that they all provide some information about our financial state. The smallest one, the debt held by the public, gives a very narrow but concrete view of the effect of the current debt on the credit markets and the largest one, the $53 trillion figure, gives an indication of the future debts we face if we continue to follow current law. Each successive debt from the smallest to the largest generally gives a less concrete but a more inclusive view of the debt. Hence, it seems that we have to consider them all. We need to deal with our current debt at the same time that we lay the framework, as much as possible, to deal with our other rapidly approaching debts.

    If I had to pick one debt to look at, however, I would pick the gross federal debt. As mentioned above, the public debt is the smallest measure and may give a good view of the effect of the current debt on the credit market. The $53 trillion figure, on the other hand, is the largest and may be the best measure of all liabilities under current law. The gross federal debt, however, is the public debt plus all debt currently owed to the trust funds, chiefly Social Security. Every projection I’ve seen suggests that the monies owed to Social Security will be required within the next several decades. I don’t see how we can ignore this when considering our financial condition. In any event, the gross debt will likely all become public debt in the end. Hence, it you look at long-run projections of the debt, such as in the graph at this link, it doesn’t matter which of the two you look at. But the current gross federal debt gives a better indication of this future level of the public debt.

  5. comment number 5 by: Jim Glass

    If I had to pick one debt to look at, however, I would pick the gross federal debt.

    The way I see it…

    [] The debt held by the public, $6.7 trillion, is the debt that always really matters, because it determines the credit rating of the United States, upon which all else rests. And its payment to the penny is guaranteed by Constitution, so there is no getting out of it.

    [] The total liabilities of $53 trillion are what matter next, because they will be rolled into the debt held by the public as time passes, as the law stands. Thus, it sets expectations about future credit rating of the US, which matter a lot, especially to investors in long T-bonds.

    This $53 trillion can be changed by policy, such as by modifying spending programs like Medicare and Social Security, and the pct of GDP collected via taxes, so it is (or should be) the policy-driving number. (If it’s not affecting policy then it should be the flashing warning light number).

    [] I don’t see much independent value to the gross federal debt figure of $11 trillion. It’s neither fish nor fowl, being the debt held by the public plus a small subset of the additional liabilities that exist in the form intra-governmental debt, $4.3 trillion. Thus it exaggerates by two-thirds the amount of Constitutionally guaranteed debt the US “can’t get out of”, but understates by near 90% the additional liabilities the US has promised to pay.

    The nature of the intra-governmental debt is identical to that of the rest of the $53 trillion, it just reflects an amount Congress has promised to pay, but the promise is not binding, Congress can delay the payment or get out of it entirely by changing the terms of Medicare, Social Security, and its other programs that use these bonds as a tally counter. Since the nature of this debt is indistinguishable from the rest of the $53 trillion (in excess of the debt held by the public) what’s the benefit of distinguishing it?

    If redemption of these bonds actually extinguished a liability of the US, as redemption of bonds held by the public does, then they would have an independent meaning. But for that to be true, we would all have to believe Medicare and Social Security benefits will be slashed as of the day the bonds in the Medicare and Social Security trust funds run out, because the trust bonds ran out. But does anybody believe that? How many people are talking today about the coming slashing of Medicare benefits in 2018?

    What’s the logic of counting a small portion of the liability for Medicare and Social Security in a federal debt figure, but not the rest of the liability, when the two portions of the liability are identical in nature? That is, counting the liability for Medicare until 2018, but not for 2019 and after? I don’t see it.

    So it’s $6.7 trillion and $53 trillion for me.

  6. comment number 6 by: B Davis

    The debt held by the public, $6.7 trillion, is the debt that always really matters, because it determines the credit rating of the United States, upon which all else rests. And its payment to the penny is guaranteed by Constitution, so there is no getting out of it.

    According to the Social Security Administration, “the investments held by the trust funds are backed by the full faith and credit of the U. S. Government”. In any case, do you really think that the government is going to renege on its debt to the most powerful voting block in the country?

    The total liabilities of $53 trillion are what matter next, because they will be rolled into the debt held by the public as time passes, as the law stands. Thus, it sets expectations about future credit rating of the US, which matter a lot, especially to investors in long T-bonds.

    The fact is, just as each of these measures have their strengths, they also have their weaknesses. Focusing on the debt held by the public prompts the government to play accounting games by which they use the same dollar to shore up the Social Security trust fund AND to mask the deficit. This keeps them from considering certain reforms such as allowing Social Security to invest all or part of the trust fund in private markets. If Social Security (or any other trust fund) were to do this, the debt held by the public would increase as the government could no longer hide it in “intragovernmental debt”. Hence, this reform is never considered. When Bush suggested that some of the trust fund go into private accounts, I seem to recall that there was some accounting change recommended so that the debt held by the public did not increase. In any case, all of this slight of hand will become meaningless in a few decades when Social Security cashes in it bonds. As I said, it will all become publicly held debt in the end.

    The problem with the $53 trillion dollar, as I see it, is that it is very difficult for most people to wrap their minds around. I wrote the June 16th and 23rd posts on my blog largely to help me familiarize myself with the Financial Report of the United States Government, from which that figure comes. The problem is not just the immensity of the $53 trillion dollar figure but also the concept that it is the “present value” of all current debts and liabilities.

    Of course, both of these measures have their strengths. The strength of the gross federal debt, I think, is that it is a concrete number that people can easily understand. It is debt held by the public plus debt held by the trust funds. Focusing on this figure keeps the government from monkeying around with moving things on and off budget but is concrete enough for most people to understand.

    In any case, Frontline itself responded to this question at this link. Following are the last couple of paragraphs:

    But if the publicly held debt represents the impact of government borrowing on the current economy, then intra-governmental debt represents the future promises we have made. Due to the retirement of the baby boomers and rising health care costs, under some projections Medicare and Social Security will run out of money. If this happens, the trust funds for those programs will have to start cashing in those I.O.U.s, and to pay them the government will need to borrow more from the public. Or it could raise taxes to cover the shortfall, or it could make cuts to the programs to make them less expensive. If our future economy grows more robustly than expected, it will be easier to pay for these commitments, but the intragovernmental debt is not simply going to evaporate.

    Viewers are entitled to know that the country faces both an immediate and a long-term debt challenge. If we were not as clear as we should have been about this distinction in our broadcast, we nonetheless stand by our decision to highlight what we consider to be the true dimensions of the problem by using the gross debt figure of $10 trillion — now more than $11 trillion — and counting.

  7. comment number 7 by: Brooks

    B Davis,

    Jim Glass is right. Here’s what you are misunderstanding: Even if the Social Security “trust fund” (”SSTF”) bonds are honored, as I assume they will be (i.e., we will not default on those bonds), that roughly $2 trillion SSTF balance is far below what we would spend anyway on Social Security (”SS”) over the next few decades (and fund primarily via SS FICA taxation and secondarily via repayment of those SSTF bonds [plus intererest], plus, to the extent that spending exceeds those revenues — as it is projected to — non-SS taxes), so that intragovernmental “debt” is essentially meaningless with regard to our fiscal imbalance rather than representing a real liability for practical purposes. Yes, it means that we have to carve out of non-SS tax revenues at least that amount (cumulatively, eventually, over time in the future) and spend it on SS (like an earmark), but again, that is essentially meaningless. We will spend far more than that amount on SS anyway, regardless of how much of it is funded via SS FICA vs. via non-SS tax revenue used to “pay back” the intragovernmental “debt” of SSTF bonds.

    The above is most obvious in the case of SS being less than fully “solvent” based on projections for the next several decades (as is the case per official projections), since in such a case non-SS tax revenue even greater than the amount of the SSTF balance will be used to fund SS benefits. But it is also true even if we were to assume (contrary to official projections per current SS policy) that SS is projected to be fully “solvent” forever. The only way that the SSTF balance would have any practical significance would be if it were plausible that we would want to spend less over the next few decades (or over the infinite horizon) than that balance amount. In that case, it would indeed represent a liability because over some time period we would be forced to either spend that amount on SS and fund it via non-SS taxes OR default on those SSTF bonds. But no one considers that scenario plausible. $2 trillion is just a couple/few years worth of SS spending per current SS benefits policy, and no one seriously expects we’ll spend anywhere near that little over the next few decades. Put differently, if the SSTF balance were zero, there’s still no way we would spend less than $2 trillion on SS over the next few decades. And if the level SS spending we want exceeds the amount of SS FICA revenues we want to collect, will will fill the gap via revenues from non-SS taxes anyway.

    An illustration:
    Joe has a child to whom he is committed (emotionally, as a matter of love, values, etc.) to providing support (food, healthcare, clothing, etc.) for the next ten years. Joe projects that he’ll spend $100,000 on such support. It is inconceivable that he’ll spend anywhere near as little as $5,000 over that time period on such support. Joe has $10,000 in credit card debt. And Joe borrowed from his child $5,000 (let’s say, from some inheritance the child received) and spent it. Is Joe’s debt, for practical purposes, $10,000 or $15,000? The answer is $10,000. His debt to his child is meaningless, because it is far less than he plans to spend on his child anyway. It does not matter matters if $5,000 of the $100,000 Joe spends on his child consists, for bookkeeping purposes, of “repayment” of that debt, and that $5,000 does not force Joe to spend $105,000 instead of $100,000. And it is only the credit card debt of $10,000 (plus any further borrowing on the credit card) that affects his ability to borrow, the interest rate he must pay to do so, the amount of money he must pay in interest expense, and the amount of money he will have left for other spending, all of which are what we are concerned with in our discussion of the federal government’s debt.

    So the key figure is the debt held by the public, not the gross debt.

  8. comment number 8 by: Jim Glass

    The SS Trust fund bonds are a small sideshow in the great fiscal circus that somehow gain far more attention than they deserve. But as the subject has come up again….

    According to the Social Security Administration, “the investments held by the trust funds are backed by the full faith and credit of the U. S. Government”.

    As a lawyer who deals with financial matters I urge my clients not to be mesmerized by boilerplate language, but to understand its real-world meaning, if any.

    What does the “full faith and credit clause” mean in practice? This…

    If you own a 15-year T bond, then at its maturity the gov’t must redeem the bond and pay you its face value. If it fails to do so it goes into default and you can sue it to collect. The “full faith and credit clause” deprives the govt of any defense to the suit, if it has any resources it must pay them to you before any other creditor — so it must pay.

    But the SS Trust Fund has been buying 15-year T-bonds since 1983, for 26 years now, and it hasn’t redeemed any of them, hasn’t paid a penny of cash on them, yet. And it isn’t planning to for years to come — yet there has been no default! Why??

    Because the SS Trust Fund bonds have two special terms not found on any bond you can buy — (1) on maturity they roll over automatically, and (2) they are redeemable on the date the bond owner presents them for redemption, regardless of their maturity date.

    Let’s see you or the Chinese try to buy some T-bonds like that!

    And, of course, the bond owner is the government itself.

    Now, I am sure you will agree with me that a “guarantee” that guarantees against something that can’t possibly happen is meaningless and has a value of $0.

    So now I invite you to present any imaginable scenario under which the gov’t will “default” on the SS trust fund bonds, such as the “full faith and credit” guarantee has any effect at all.

    For instance… The gov’t issues a 15-year bond in 1984 that isn’t cashed yet by 2015. Default? No. Congress reduces Social Security benefits so that same bond isn’t needed to be cashed by 2099. Default? No. Congress passes a law so that the govt, as owner of the bond, will never present it to itself for redemption. Default? No.

    Unless you can provide here a possible scenario in which the gov’t does default on the trust fund bonds, so the clause can be invoked against the gov’t, you will have to admit that the “full faith and credit” clause, in relation to the trust fund bonds, is totally meaningless and has a value to Social Security participants of exactly zero, $0.

    In that case you will also admit that the only real-world function of the “full faith and credit clause” in relation to Social Security is to mesmerize people in debate and political discussions about SS into misunderstanding. But now you can correct them about that. ;-)

    This also explains why, on the Consolidated Balance Sheet of the United States, the $6.7 trillion of debt owed to the public is reported as a liability of the U.S. in the amount of $6.7 trillion, while all the intra-governmental debt combined — the Social Security and Medicare trust fund bonds, etc. — is reported as a liability of $0.

    In any case, do you really think that the government is going to renege on its debt to the most powerful voting block in the country?

    Yes, I certainly do, and here’s when, how and why. (Though there will be no legal default, of course.) In fact, senior citizens will insist! And who will want to argue with them?

  9. comment number 9 by: Jim Glass

    In response to Mr Davis, my point about measures of the debt as clearly as possible:

    [] Debt held to the public: ~ $7 trillion.
    [] Promises made by law and represented by intra-governmental debt: ~ $4 trillion.
    [] Promises made by law but not represented by intra-government debt: ~$42 trillion.

    Of the $53 trillion total:
    [] Since payment of the $7t debt held by the public is constitutionally guaranteed, while the remaining $46t is only a political “promise to pay” that can be changed by Congress at any time, the two amounts are clearly distinguishable, both in terms of legal liability and political practicality.

    Thus, in financial reports they are properly stated separately. However….

    [] The $4t of spending promises represented by intra-governmental debt and $42t of other spending promises are all identically subject to change at the will of Congress — thus, both as a matter of legal liability and as a matter of political practicality, they are indistinguishable, and there is no justification for reporting them separately.

    Thus, reporting only the $4t in any figure of “federal debt” understates the liability of this nature by more than 90%(!) and is grossly misleading. So the figure for “gross federal debt” of $11 trillion — which includes 10% of unfinanced spending promises but only 10% of them — is a gross and unjustified understatement.

    (Unless one can come up with a justification for including projected Medicare liabilities through 2018 in a number for federal debt, but not Medicare liabilities for 2019 and later. Is there one?)

    This has the toxic result of enabling the misled public’s willingness to tolerate the politicians’ constant running of deficits that continually increase this grossly understated “national debt” amount.
    ~~

    The problem with the $53 trillion dollar, as I see it, is that it is very difficult for most people to wrap their minds around … The strength of the gross federal debt, I think, is that it is a concrete number that people can easily understand.

    I don’t understand this logic.

    Take the case of a public corporation. Say its top execs said “Our real debts are so huge they would be hard for investors to comprehend, so instead we’ll report a debt number only 10% as large that they can grasp (and will accept, so they’ll keep us in our jobs, keep re-electing our board, and keep investing in us)”. Would that be the right thing to do?

    The issue isn’t whether voters can “wrap their minds around” the big number, the issue is whether the big number is the correct number. If it is, budget hawks should be informing voters of this fact and teaching them how to comprehend it.

    And if the entire $46t of unfinanced spending promises is substantially indistinguishable in nature, how can it possibly be correct to report only 10% of them in a debt number and not the rest?
    ~~~
    Frontline itself responded to this question at this link.

    It did not! To quote Frontline:

    “Gavin is disputing FRONTLINE’s use of the statistic gross national debt, as opposed to the share of the debt held by the public”

    How can you confuse that with what I’m saying? Gavin objects that Frontline used a number for national debt that is too large — I’m saying it used one that is far too small.

    Frontline’s response defending the number it used…

    “But if the publicly held debt represents the impact of government borrowing on the current economy, then intra-governmental debt represents the future promises we have made…” [my emphasis]

    Well, if Frontline wants to give a debt number that “represents the future promises we have made” then why does it give one that understates their amount by >90%, by counting only those represented by intra-governmental debt?

    Are Medicare benefits post 2018 — for people like me — a promise that has been made? What is Frontline’s justification for including the cost of Medicare benefits through 2018 in “promise debt”, but not their cost in 2019 and later?

    Has Congress promised Medicare benefits to me or not? Is the answer “no” because there are no bonds in the Medicare trust to secure them?? I need to know!

    “…we nonetheless stand by our decision to highlight what we consider to be the true dimensions of the problem.”

    But why have they excluded the cost of Medicare benefits for me, due just 10 years from now, from “the true dimension of the problem”? What’s their justification for that?

    The toxicity of the “gross federal debt” number is demonstrated by this very Frontline show. In the very act of trying to run an expose revealing the hidden debt cost of “the future promises we have made”, it is misled by the “gross debt” and “intra-government debt” numbers into understating that debt cost by >90%!
    ~~~

    Brooks wrote:
    Jim Glass is right….

    I appreciate those words, thanks. That phrase has great scarcity value in my life.

    …So the key figure is the debt held by the public, not the gross debt.

    But Jim Glass thinks the two key figures are, at the top of this comment, the $7t figure and the $53t total (with the $11t “gross debt” being dismissed as highly misleading for reasons that I hope I’ve explained by now — because if I haven’t yet, I can’t).

  10. comment number 10 by: Brooks

    Jim,

    Yes, the “$53 trillion” (actually higher now) is important, too, for the reason you mentioned (”they will be rolled into the debt held by the public as time passes, as the law stands.”). I was just pointing out that of the two figures, gross debt vs. debt held by the public, the latter is the key figure. And of course, it is most meaningful when expressed as a % of GDP (today and over time). And also per your explanation, the $7 trillion is a more firm obligation than is the “$53 trillion”, since the former is actual existing debt the repayment of which can only be reduced/avoided by defaulting on U.S. debt (or, in real terms, by inflating it away via monetization of the debt), whereas the latter can be reduced via policy changes (changing law re: entitlements; finding other ways to reduce the excess cost growth of Medicare; etc.), albeit only with the political will to do so.

  11. comment number 11 by: B Davis

    But Jim Glass thinks the two key figures are, at the top of this comment, the $7t figure and the $53t total (with the $11t “gross debt” being dismissed as highly misleading for reasons that I hope I’ve explained by now — because if I haven’t yet, I can’t).

    In fact, I think that any of these figures can be misleading if improperly presented. The problem that I have with the unified deficit and the public debt is that they are often presented as a full measure of our financial health. Remember all of the self-congratulation when we ran a unified surplus from 1998 through 2001? As the second graph at this link shows, it was only by borrowing from the trust funds (chiefly Social Security) that we achieved those surpluses. This is a little like a person who borrows against their 401K and/or pension to achieve continued balanced budgets and then retires with no (or seriously underfunded) savings. Yes, the balanced budgets are real. But if they are presented as a complete measure of that person’s financial health, they are highly misleading.

    Now I think that the public debt can provide a more complete measure if one looks at its long-run projections (shown in the first graph at this link). Of course, the projections are likely to be less and less precise the further out you go. In addition, they assume current law and what is judged to be reasonable economic assumptions. But they do provide some indication of financial problems not visible in the current public debt.

    I have heard much less discussion of the $53 trillion figure so I can’t say that I’ve heard it presented in a misleading way. I suspect that some may interpret it to pretty much mean “game over” since it’s hard to imagine paying the interest on such a debt, much less the principle. As you point out, however, this is largely promises implied by current law. Hence, its real meaning is not “game over” but just that current law must change.

    Of course, the gross federal debt does not give a full measure of our financial condition either. Some will argue that the current debt owed to Social Security can suffice if minor changes are made to the program. But nobody argues that the current debt owed to Medicare will suffice. Hence, none of these three numbers give a full picture of our financial health. What I don’t understand, however, is why you seem to believe that the two extremes in measuring our debt are valid but any measure in between (or at least the gross federal debt) is 100 percent bogus.

    Look at it from a pragmatic point of view. What would you have suggested that the documentary be called… “7 Trillion Public Debt and $46 Trillion of Liabilities and Counting”? If you’re going to ban the gross federal debt from discussion, you really need to give a full discussion of both of these measures. I think it was better to give it the title that it has and give some discussion to all three measures of the debt.

  12. comment number 12 by: B Davis

    So the key figure is the debt held by the public, not the gross debt.

    I did notice that Frontline posted an e-mail from the OMB that began as follows:

    Most economists and budget analysts use debt held by the public — and not gross debt — as the most meaningful measure of the government’s current fiscal position. This is a point of wide agreement among analysts, across political parties.

    Frontline recognized the usefulness of the publicly held debt but not it superiority as “the most meaningful measure of the government’s current fiscal position”, stating the following:

    Most economists look at the publicly held debt as the figure that has the most immediate impact on the economy. If the government issues too much public debt relative to the size of the economy as a whole, it can drive up interest rates for other types of borrowing. At some point, creditors may worry about the government’s ability to pay back all its debt.

    A major portion of the intergovernmental debt which is the difference between the publicly held and gross federal debt is the Social Security surplus. This surplus was created by setting FICA taxes higher than the level required to pay benefits. Now suppose that the current system was changed such that these excess FICA taxes were diverted to private accounts and all of those accounts invested in government Treasuries. This would be essentially identical to the current situation, at least in how much was invested into each possible investment. However, the publicly held debt would now rise as this previously intergovernmental debt would now be publicly held debt. This mere naming change would now supposedly drive up interest rates for other types of borrowing and possibly hurt our credit.

    Hence, I have serious questions with OMB’s contention but even some with Frontline’s response. Since they both refer to “most economists” (of which I am not one), perhaps EconomistMom can comment on this. Why does the same investment supposedly behave differently when it is “intergovernmental debt” than when it is “publicly held debt”? The only possibilities that I can think of is that there is some real difference caused by the characteristics of the private Treasuries and the special-issued Treasuries and/or that the idea that intergovernmental debt has no effect on interest rates and credit is flawed.

  13. comment number 13 by: Jim Glass

    … suppose that the current system was changed such that these excess FICA taxes were diverted to private accounts and all of those accounts invested in government Treasuries. This would be essentially identical to the current situation, at least in how much was invested into each possible investment. However, the publicly held debt would now rise as this previously intergovernmental debt would now be publicly held debt. This mere naming change would now supposedly drive up interest rates for other types of borrowing and possibly hurt our credit….

    Why does the same investment supposedly behave differently when it is “intergovernmental debt” than when it is “publicly held debt”?

    The “debt held by the public” is like debt put on your credit card. It is a legally binding liability on your personal balance sheet, you have to pay cash interest on it now, you can’t change its amount, and its amount relative to your income affects your credit rating.

    The “intragovernmental debt” is like an expenditure you think you’ll put on your credit card in the future, but you can always change your mind and might decide not to do so. It is not a liability on your balance sheet, nor legally binding in any way, you don’t have to pay any cash interest on it now (or ever if you change your mind), you can change it any time at your whim … so you can see why a mere intention to probably spend doesn’t affect your credit rating.

    If you look at the Consolidated Balance Sheet of the United States (page 39)…
    http://www.fms.treas.gov/fr/08frusg/08stmt.pdf
    … you will see that the “debt held by the public” is reported as a liability of the U.S. in its full face value amount ($5.8 trillion for 2008) while all the intragovernmental debt is reported as a liability of $0 (as explained in the notes).

    So converting, say, $200b of “intragovernmental debt” reflecting a government liability of $0, to $200b of “debt held by the public” that is a liability increase of $200b on the Balance Sheet of the U.S., is a lot more than a “mere naming change” — it increases the government’s fixed liabilities by $200 billion, causes the gov’t to go into the credit markets to borrow that much (”crowding” the markets), and to raise taxes to service the interest on that much, etc.

    Just like going from “maybe I’ll put another $1,000 on my credit card” to actually putting another $1,000 on your credit card is a lot more than a mere naming change for your total personal liabilities.

  14. comment number 14 by: B Davis

    The “intragovernmental debt” is like an expenditure you think you’ll put on your credit card in the future, but you can always change your mind and might decide not to do so. It is not a liability on your balance sheet, nor legally binding in any way, you don’t have to pay any cash interest on it now (or ever if you change your mind), you can change it any time at your whim … so you can see why a mere intention to probably spend doesn’t affect your credit rating.

    So if the Social Security trust fund were allowed to buy government bonds on the open market, same as any individual, it would hold a legally binding debt. Under the current system, however, it owns a debt about which the government has a mere intention of probably repaying but may change it’s mind at any time on its whim. Sounds like the Trustees of the Social Security trust fund aren’t doing their jobs! Anyhow, I suggest that we just agree to disagree on this.

  15. comment number 15 by: Brooks

    B Davis,

    Suppose today a law were enacted that mandated that we must spend on Defense at least $1 trillion in real terms (or in present value terms; doesn’t matter for our discussion) over the next 50 years, and let’s say a Defense Trust Fund (DTF) is established and Special Treasury bonds are put in its account, representing a claim against future tax revenues.

    Per your view of our debt (i.e., combining intragovernmental debt with debt held by the public), even if it is inconceivable (politically) that we would spend less than that amount on Defense over that time period anyway (i.e., without the obligation that those bonds represent), our debt has just gone up by $1 trillion and thus our fiscal outlook has worsened.

    I would disagree (and I presume so would Jim). All that law would do (and all the Special Treasuries held by the DTF would do) is mandate spending that would have occurred anyway. It would have no practical significance. It wouldn’t increase the amount we need to borrow and/or tax now, nor or in the future. Do you agree?

    As I’ve explained, all that $2 trillion balance in the SSTF (and the related “Special Treasury” bonds and interest they “earn”) represent is a requirement that we eventually spend (cumulatively) at least $2 trillion on SS. To explain further, it really means that we must eventually spend $2 trillion on SS above whatever SS FICA revenues are collected, but we can lower SS FICA taxation as much as we want, even eliminating it completely (and if we wanted to keep projected deficits unchanged, we would just increase other taxes to provide revenue neutrality), so our obligation is really just to spend only that $2 trillion on SS. But it is inconceivable that we will spend that little on SS, so, as with my Defense illustration above (and my illustration of Joe the father — ouch, sorry if that brings back memories of Joe the Plumber), the “debt” “owed” by the general fund to the SSTF has no practical significance. It doesn’t affect the amount we need to borrow now, nor in the future, so it doesn’t have all the adverse consequences that would be associated with increasing the projected levels of debt held by the public.

    Do you see the equivalence between my Defense illustration above and those bonds in the SSTF?

  16. comment number 16 by: Jim Glass

    Sounds like the Trustees of the Social Security trust fund aren’t doing their jobs!

    How so? They are doing exactly what Congress has instructed them to do.

    You asked: Why do the intragovernmental debt and debt held by the public “behave differently” when the former is converted to the latter.

    The answer is that the …

    . debt held by the public is a liability of the United States.
    . intragovernmental debt is not a liability of the United States.

    … as shown on the Consolidated Balance Sheet of the U.S. at the link I provided.

    That’s a big difference. Ask yourself, if the intragovernmental debt is not a liability of the U.S., what does that mean?
    ~~~

    As an aside, regarding the “job of the Trustees”, you are aware that the members of the Greenspan Commission and Congress who created today’s Trust Fund in the 1983 law changes themselves never, even for a moment, considered the trust fund to be any kind of savings device that would prefund future benefits? The idea never even occurred to them.

    So managing and investing such savings for future retirees certainly was not any part of the job that they imagined for the Trustees.

    The Commission and Congress in ‘83 were focused solely on setting the new tax rate high enough so they wouldn’t have to go through the political pain of raising taxes again in the next few years, on their watch. The idea of creating a “surplus”, and what to do about it, never entered their heads.

    Here’s the executive director of the Greenspan Commission, Robert Myers, in his oral history at SSA.gov:

    Q.: … some people rationalize the [trust fund] financing basis by saying that it’s a way of partially having the baby boomers pay for their own retirement in advance. You’re telling me now this was not the rationale. Nobody made that argument or adopted that rationale?

    Myers: That’s correct. The statement you made is widely quoted, it is widely used, but it just isn’t true.

    It didn’t happen that way … The main thing that was talked about was how do we fix up the short-range problem. Are you sure we aren’t going to have another crisis in 2 or 4 years?… The whole air of crisis in early ‘83 was let’s fix this system up for the next decade…”

    Since the Trust Fund was never meant by its creators to hold real assets — in the form of a true liability of the U.S (or in any other form) — to prefund or guarantee in any way the payment of any future benefits, it’s not surprising that it doesn’t do so.

    Here’s a Congressional Research Service report (.pdf). detailing the history of the Commission and 1983 law changes. From the introduction….

    Various misperceptions of their intent have developed over the years,
    among them being that Congress wanted to create surpluses to “advance fund” the benefits of post World War II baby boomers.

    “Misperception”? That’s understating things!

    That “misperception” has become the greatest urban legend/myth of politics and public finance of our time.

  17. comment number 17 by: Jim Glass

    … I would disagree (and I presume so would Jim).

    Brooks, I half agree with you. Yes, putting intragovernmental bonds of $X in your new “Defense Trust Fund” as you describe would have no effect on the national debt.

    If the amount of bonds was less then than we planned to spend, then this would be self-evident. E.g., if the govt put $500 billion of bonds in the DTF to “cover” a period of years in which it was planning to spend $1 trillion anyhow, leaving the original spending plans unchanged, that surely would not increase the national debt by $500b. Resulting future tax changes = $0, spending changes =$0, thus the newly issued intragovermental bonds have a practical effect of exactly $0.00.

    So why would they be considered new debt in any sense that matters to the world? You are right. They wouldn’t be — just like all existing intragovernmental bonds are a $0.00 liability on the balance sheet of the US.

    Our difference arises when you say the bonds’ only effect would be to guarantee spending of at least $500b, which is less than we plan to spend (and that’s why they don’t add to the debt).

    That’s not true, the DTF bonds wouldn’t require spending even that much. They wouldn’t require any defense spending. In terms of your reference to Social Security…

    As I’ve explained, all that $2 trillion balance in the SSTF (and the related “Special Treasury” bonds and interest they “earn”) represent is a requirement that we eventually spend (cumulatively) at least $2 trillion on SS. To explain further, it really means that we must eventually spend $2 trillion on SS above whatever SS FICA revenues are collected.

    Not at all. Congress clearly, unquestionably, unambiguously, can reduce Social Security benefits any way it wishes, as much as it wishes, at any time. The Supreme Court even has ruled on this. (Flemming v Nestor) Say Congress decides to reduce future benefits so the bonds won’t ever be needed. (Such as by means-testing “the rich” out of benefits so the taxes that would be needed to service the bonds can instead be applied to Medicare — an entirely possible scenario). Then SS spending will be reduced. Period. Simple as that.

    So the SS Trust Fund bonds guarantee nothing as to the level of future benefit spending.

    End of that story.

    There are two ways an item can become a liability on the Balance Sheet of the US: as a debt liability or a contract liability. Intragovernmental bonds are neither — that’s why they are counted at $0 on the balance sheet.

    Specifically, the Social Security trust fund intragovernmental bonds,

    [] Are not a debt liability of the US for the fundamental accounting reason that they are issued by the govt to itself. A bond is a liability of the issuer and an asset of the holder — but the federal govt is both for these bonds, so their asset-liability value offsets to $0.00. The notes to the Consolidated Balance Sheet of the US clearly explain this.

    (Hey, try issuing a legally binding note for say, $100,000 to yourself. Have you made yourself richer? Poorer? Have you committed yourself to pay at least $100,000 in the future, so you will be subject to a lawsuit if you refuse to pay?)

    The practical, real-world illustration of the $0.00 asset/liability value of the bonds is this: The govt currently promises that in the year 2030 it will pay SS benefits in excess of payroll tax collected in the amount of, say, $300 billion…

    * Without the SS bonds, in 2030 the govt would have to collect $300b of general revenue to pay the benefits.

    * With the SS bonds, in 2030 the govt will have to collect $300b of general revenue to pay the benefits (via redeeming SS bonds).

    The difference between the two scenarios is $0.00. So how would the existence of bonds that make a $0.00 difference to the finances of the US add to the liabilities of the US? (Or to the assets of the US). They don’t. That’s why they are counted at $0.00 on the US’s balance sheet.

    The key is that the intragovernmental debt is issued by the govt to itself, and a liability that one issues to oneself is financially meaningless. This not a personal opinion or a political argument, it is Accounting 101 (Lesson 1, paragraph A.).

    [] Are not a contract liability of the US because no citizen has any contract right to receive any benefit from Social Security — any more than anyone has a contract right to receive agricultural subsidies, welfare benefits, or any other government spending program payments. (Flemming v Nestor, again).

    And that’s why the intragovernmental debt is in no way equivalent to the debt owed to the public. It’s not a debt liability to anyone (as the govt owes it to itself, not anyone else) and it is not a contract liability. It’s not a liability at all!

    The only real effect of the SS bonds, and of all the other intragovernmental debt, is political, as a tally counter of politically made spending promises, that may be changed by politics.

    The same thing would be true of your “DTF” intragovernmental bonds — even if Obama, to appease the right, issued enough of them to cover 100% of his budgeted defense spending for eight years.

    Say that after doing that and then getting safely re-elected four years from now, he and the Dems decided to slash defense spending in half anyhow (”Fooled you!”).

    The Republicans could play the political card of pointing to those bonds and saying: “These bonds are public evidence of your solemn promise to maintain defense spending, which you are now breaking, you two-faced lying hack Chicago machine politician.”

    If the Democratic Congress replied, “Too bad” and voted to cut the spending in half anyhow, what would happen? Spending would be cut in half. What would stop it? Nothing.

  18. comment number 18 by: Brooks

    Jim,

    First of all, just so it’s clear to all, your disagreement with my previous comment places your view even farther from B Davis’ view, not somewhere between my view and B Davis’. Correct?

    Unless you’re saying that we can just roll over those $2 trillion of Special Treasury bonds held by the SSTF forever, it seems to me that the only options are either (1) for that $2 trillion to eventually be shifted from the general fund to the SSTF, or (2) default on those bonds.

    Is your point #2, which means defaulting on Treasury bonds (albeit “Special Treasury bonds”) that are (at least ostensibly) backed by the full faith and credit of the USA? Sure, we could default on those bonds just as we could on the debt held by the public, but I assume there would hurt our nation’s credit rating, so to speak, because I assume financial markets would not completely dismiss default on those Special Treasury bonds as merely tossing aside political promises that were packaged as bogus, falsely-named “Treasury bonds” with all that is implied by that label (albeit with the word “Special”). Is your point that you disagree with that assumption, and that defaulting on those bonds would be merely the equivalent of breaking a political promise from the perspective of the bond market?

    I also think that such a default, combined with never spending (cumulatively) the amount of those bonds (plus interest) on SS would be much more unethical (and politically even harder and even more unlikely) than just spending a lot less than projected on SS (even cutting it in half or more) by reducing eligibility and/or benefit levels (the formula).

    If you are assuming, as I am, that we will not default on those bonds, do you agree, then, that unless we somehow roll over those bonds forever, #1 must occur — i.e., that $2 trillion must eventually be transferred from the general fund (which is to say, from tax revenues other than those that go into “trust funds” or any other dedicated tax revenues) to the SSTF?

    If so, the next question is, given that at least $2 trillion will be flowing into the SSTF, what would have to happen for the SSTF to never spend that much (cumulatively) on SS benefits.

    If we assume that #1 (the SSTF will get $2 trillion over time), let’s assume (just to take a simple, pure scenario) that we eliminate SS altogether (other than maintaining the bank account, so to speak — the SSTF with the $2 trillion flowing into it over time), and thus we decide never to spend another dime on SS. I assume we’d also eliminate SS FICA taxes. So the only funds available for SS spending would be the “repayment” from the general fund of those Special Treasuries to the SSTF. In that case, what would it mean for us to keep that $2 trillion in the SSTF forever with no intention of ever spending it on SS? Would that be viewed as default or something akin to default by the bond market? I would guess not, but I don’t know. Would it mean entering an entirely different category and severity of unethical governmental/political behavior (beyond simply breaking political promises in the normal sense, and beyond the bait & switch that will be pulled by collecting excess SS FICA revenues under the pretext that the SS surpluses would provide incremental SS spending vs. what we would have spent anyway, which may not occur completely or even at all)?

    Again, in the ultimate sense, we don’t have to do anything. We could even default on the debt held by the public. So the questions are, what does it mean to do (or not do) X or Y, what would the practical consequences be, what is the political plausibility, and what would it mean ethically? That’s why I’m asking (and really asking, not asking rhetorically) the questions above.

  19. comment number 19 by: Brooks

    Oh, and I should add the question of what is legally possible. I’ll check out Flemming v Nestor and perhaps there would be no legal obstruction to defaulting on those Special Treasuries, keeping funds in the SSTF indefinitely with no intention to ever use the funds for SS benefits (or transferring the funds back to the general fund), or some other means of spending less than that $2 trillion on SS, but I don’t know yet if such is the case.

    Yes, Flemming establishes that an individual has no right to Social Security benefits, but that’s a different question from whether or not the U.S. can default on the bonds held by the SSTF and whether or not funds in the SSTF can be transferred out or used for any purpose other than SS spending or deliberately allowed to stay there unused forever. I haven’t read up thoroughly on Flemming yet, but I wanted to point out that distinction.

  20. comment number 20 by: Brooks

    Note: When I say (in my 3/31 11:27pm comment) “whether or not funds in the SSTF can be transferred out or used for any purpose other than SS spending”, I am, of course, aware that the SS surpluses that flowed into the SSTF were indeed then used to cover other (on-budget) expenses, but that was in exchange for those special issue Treasury bonds, not simply a transfer of funds from one account to another (as one would do between, say, one’s own checking and savings accounts) without providing those bonds in exchange, which is what I mean by “transferred out” in that 3/31 11:27pm comment.

  21. comment number 21 by: Jim Glass

    Brooks:

    I’ve tried to respond to all your questions, but don’t want to consume all of our host’s bandwidth in what looks like it is getting to be a private conversation, so if you are interested my reply is here, consuming my own bandwidth.

    – JG

  22. comment number 22 by: Brooks

    Jim,

    I’m ok with moving our discussion over there, but (1) do you mean literally that continuing here would significantly reduce available bandwidth and place some significant functional limitation on the site, or (2) just that you don’t want us to take up a lot of space on this thread?

    Although I’m not a techie, I’d be surprised if #1 is true (but let me know if it is and I’ll have learned something new). And #2 wouldn’t make much sense to me as a reason to move our conversation elsewhere.

  23. comment number 23 by: Jim Glass

    No, no, I just don’t want to clutter our host’s site with comments that are off-topic to her original post and probably of interest only to you and me.

    If you want to continue here — and she doesn’t say “move on!” — I’m willing, though I think I’ve pretty much said all that I have to say without repeating myself too much (even by my own slack standards).

  24. comment number 24 by: Brooks

    Jim,

    My sense is that it is sufficiently relevant to the post, and perhaps more importantly, to the mission of this site in general, that it would be best to continue here. Although I’ve already posted my reply to your comment at the link you provided, if you don’t mind doing so, I’d prefer you copy & paste your comment here and I’ll do the same with my reply (and we’ll proceed from there), so we can keep it all in one place and in case it’s of interest to other EconomistMom readers. ok?

  25. comment number 25 by: Jim Glass

    Brooks, since our host hasn’t said “No”, OK, here are my points about “default” on the intragovernmental debt (hereinafter “ig-debt” — the rest of the govt’s debt to me is the “ugh-debt”).

    Keep in mind the obvious, that the ig-debt is “intra”, it is owed to by the govt to itself . As obvious as that is, 95% of the confusion and political argument about the ig-debt comes from people forgetting that fact, to believe and act as if it is not true, the debt is owed to “someone else” (like *them*).

    Before discussing “default”, it’s necessary to know some basic true facts about the ig-debt:
    .
    1) The ig-debt has no asset or liability value to the US. This is seen on the Consolidated Balance Sheet of the US, which reports the full $4 trillion of ig-debt at a value of $0 — because, as it is owed by the govt to itself, its asset and liability value offset to a net of $0.00.

    Thus, the ig-debt is not an asset that can be used to pay any obligation of the US (such as SS benefits) it has a value of $0 for that purpose.

    This is seen perfectly clearly with the SSTF bonds. In 2030 SS benefits are projected to exceed payroll tax receipts by $400 billion. Thus to pay all promised benefits: (a) without the bonds, the govt would have to use $400b of general (income tax) revenue; while (b) with the bonds, the govt will have to use $400b of general (income tax) revenue (to redeem $400b of bonds while paying benefits). As the difference between $400b and $400b is zero, $0, the existence or non-existence of the bonds has no financial meaning for Social Security at all.

    On the other side, the ig-debt is not a liability of the US that must be paid off either, because it is not a liability(!) — remember that $0 on the balance sheet — since, very simply, it is not owed to anyone.

    2) The ig-debt bonds roll over automatically forever. They are redeemed when presented by the holder to be cashed in, regardless of their maturity date. (Let’s see anybody either here or in China try to buy US bonds with those terms!) .

    3) The ig-debt bonds are owned by the US and payable to itself — and the various “trusts” they are held in are owned by the US and payable to itself too. No US citizen has any legal right to any bond proceeds or the assets in any trust. Congress can change the use of the bonds at any time, as it wishes. E.g., in the future it can transfer all the bonds to the Medicare trust, or your new Defense Spending Trust, or to the Treasury’s general fund. No participant in Social Security can legally object.

    The above are all facts (not “opinion” or “political argument”) detailed in the federal documentation of the ig-debt, such as the Analytical Perspectives on the Budget, the notes to Consolidated Balance Sheet, etc. There is nothing to argue about regarding them. Knowing these facts we can say, definitively …

    4) Default on the Social Security trust fund bonds is impossible — just as ‘pigs can’t fly. Hey, let’s try to default on them, do our evil worst, and see if we can find a way to do it!

    Say that it’s the 2020s, and as the nation’s finances enter the big crunch Congress decides to duck the 15% income tax increase needed to pay off the SSTF bonds by means-testing enough of the “rich out” of benefits. After it cuts benefits the bonds are unneeded, and not a penny is ever paid on them. Suppose that then…

    [] A forward-looking Democratic Congress says it will “save the bonds for a future time when the nation may need them”, and lets them keep rolling over forever, just as they have from 1984 to the 2020s … until the year 3,000. Is there a default on the bonds?

    No! By their terms they roll over forever. What effect would this have on the finances of the US? None! Because the bonds have $0 value as an asset, liability, and funding mechanism.

    [] An evil, spiteful Republican Congress decides to outright repudiate the bonds and have a bond-burning party. Is that a default???

    Well, “default on a bond” has a very clear legal meaning. The requirements are:

    (1) on a bond’s maturity date, (2) the issuer fails to pay the bond holder — a separate person — the bond’s face amount, (3) so the holder suffers a financial loss, (4) giving the holder a right to a judicial action that a court will hear, seeking compensation for the loss.

    The ig-debt bonds are 0 for 4 on this — they have no maturity date (but roll over forever) … the issuer and the holder are the same person (is the govt going to sue itself for not paying itself?) … there is zero loss to the govt if the bonds are not paid off (do you have a loss if you don’t pay something to yourself?) … and nobody has a right to bring a judicial action to enforce payment on them (is Congress going to go to court to sue itself for not paying itself?)

    Legally “default” on the ig-debt is just as impossible pigs flying and camels striding through needle-eyes. So go ahead, enjoy the bond-burning party, cook some s’mores over the flames, there’d be no “default”.

    And as to the credit rating of the US, the credit markets and the Chinese wouldn’t care a whit — except that they’d probably be happy to the extent that the bond-burning represented elimination of unsustainable domestic social spending, which would improve the credit rating of the U.S.

    Ig-debt is meaningless financially as an asset-liability-funding mechanism, and also legally as any kind of guarantee of payment or legal constraint on Congress.

    Since the ig-debt is meaningless in those terms, and default on it is flat impossible, all such talk of “default” on the SSTF bonds — that it is a “risk”, it would “damage the nation’s credit”, but is protected against by the “full faith and credit clause” — is naught but bogus misunderstanding and confusion, driven by politics, largely for political purposes, distracting from and obscuring the real problems that must be addressed.

  26. comment number 26 by: Brooks

    Jim,

    I was expecting and hoping that you were going to copy & paste here your earlier comment (http://www.scrivener.net/xp/answer-for-Brooks.htm ) per my request, and then I would paste the comments I made in response (http://www.haloscan.com/comments/jimglass/37376574034466853/ ), and then you’d reply.

    I see that much of your comment above contains elements from your comment over there, so I’m just going to go ahead and copy & past my reply there here in my next comment in a moment.

  27. comment number 27 by: Brooks

    The bonds do roll over forever. That’s why we have 15-year bonds issued starting in 1984 that aren’t going to begin to have anything paid on them until 2018 or so, with no problem.

    I assume they have been rolled over, and will continue to be rolled over until 2018, because the cash from redemption has not been needed (SS FICA revenues have exceeded SS spending) and will not be needed until 2018. Correct?

    Moreover, the bonds are redeemable upon presentation at any time, regardless of maturity date — if not redeemed, they keep rolling over.

    Is your point that the maturity date is, for all practical, contractual, or any other purposes, meaningless (because they can be redeemed by the holder before that date and because they don’t have to be repaid by that date)?

    The bonds also can be transferred by Congress to any other purpose, such as by being moved to the Medicare trust fund or into the Treasury’s general holdings account.

    Really? Are you sure? Also, does the same apply to cash in the SSTF – in other words, if the bonds were all redeemed this year and $2.5 cash were transferred from the general fund to the SSTF, the courts would allow the government to then transfer that cash right back into the general fund? Can you point me to your sources for your answers to these two questions?

    So say Congress decided to reduce SS benefits post-2020 by means-testing “the rich” out, so the SS TF bonds aren’t needed. It can then let the bonds roll over until the year 3,000, or put them in the Medicare trust, or drop them in the Treasury and use them at will to “pay for” defense or agricultural subsidies or whatever. No “default” would ever occur.

    That’s a different scenario from the one to which I referred, which was never spending (and Congress making changes in SS law that represent an intention to never spend) a cumulative amount of at least $2.5 trillion on SS benefits. In your scenario, SS FICA taxes can still be set to fund that level of spending or more. So the simplest scenario for the purposes of our discussion (and most useful to start with for me to better understand your answer to this question) is to assume that SS FICA taxation is eliminated altogether, permanently, starting today. The questions now are what it would mean – in terms of what actions, what those actions would be called, what, if any, legal restrictions there would be, what the practical consequences would be (particularly if there would be any adverse response in the bond markets – i.e., upward pressure on interest rates on Treasury debt), what the political plausibility is, and what the ethical implications are – of Congress making the aforementioned change. Does this scenario change any of your answers vs. your answers for the scenario in which SS FICA revenues are still being collected and funding SS spending, or does it make no difference?

    Congress can do absolutely whatever it wants with the bonds with no legal or “default” constraint. They are just tally markers representing spending promises that can be changed — the Treasury’s explanation of the bonds, such as in the Analytical Perspectives on the Budget, themselves say all this, you will see if you look.

    [skip]

    “Default” requires that (1) on a bond’s maturity date, (2) the issuer fails to pay the bond holder the bond’s face amount, (3) so that the holder suffers a financial loss, (4) giving the holder a right to a judicial action that a court will hear. Intragovernmental bonds are 0 for 4 on this — they have no maturity date (but roll over forever) … the issuer and the holder are the same person (is Congress going to make a claim on itself and refuse to pay it???) … there is zero loss to the govt if the bonds are not paid off (do you have a loss if you don’t pay something to yourself?) … and since the govt owes the bonds to itself, nobody has a right to bring a judicial action to enforce payment on them (other than Congress and the fed govt, which is unlikely to sue itself for deciding not to pay itself.)

    So, just to check and get confirmation, you are implying that, if SS FICA taxation were permanently, completely eliminated…
    - We could cease all SS spending and never transfer funds from the general fund to the SSTF without the courts dictating otherwise, without it being correctly labeled (technically) as “default”, AND without the bond markets reacting negatively (i.e., without the bond markets considering it some sort of default or other indication of weakness in “the full faith and credit of the U.S. government” that should affect the credit rating for other Treasury debt).
    - Similarly, we could transfer that $2.5 trillion from the general fund to the SSTF and then just immediately transfer that cash back to the general fund without the courts dictating otherwise.

    I’m guessing the support for your contention is in Section 22 of this document http://www.whitehouse.gov/omb/budget/fy2009/pdf/apers/dimensions.pdf to which I navigated from http://www.whitehouse.gov/omb/budget/fy2009/apers.html . If it’s not too much trouble, if you know which is the most relevant text, can you please point me to it or copy and paste the relevant quote here?

    I am constantly perplexed by how people who see a relationship as obvious when it involves individuals and businesses become totally oblivious to it when it involves the govt.

    As you can probably tell from the illustrations I offered on that thread on EconomistMom (my Joe the Father illustration http://economistmom.com/2009/03/another-debt-documentary-ten-trillion-and-counting/#comment-2688 and my Defense Trust Fund illustration http://economistmom.com/2009/03/another-debt-documentary-ten-trillion-and-counting/#comment-2704 ), not to mention my many comments on other threads and blogs on this subject, I have a similar frustration with people with regard to their erroneous, nonsensical assumptions about the supposed relevance and implication of the SSTF and of SS “solvency” for our fiscal health and for our policy choice of whether or not to reduce projected SS spending. But as you can see, I’m just now sorting out, via this discussion with you, the above questions with regard to spending less than the amount of the SSTF balance on SS between now and eternity.

    One potential difference between the example you give – a person or a business writing a note to himself/itself – and my Joe the Father illustration (father borrowing from daughter), is that in my Joe illustration, as with (I think) the SSTF, even though that “debt” may be meaningless from an aggregate family perspective (national perspective in the case of the SSTF), the debt does represent an obligation from one person to another, not from one person to himself.

    Say a nation over-commits to spending programs it can’t afford, which hurts its credit rating, So it cuts back the spending programs. Will its credit rating then go up or down?

    The key differences whose relevance, if any, I am trying to sort out in our conversation, are the existence of Treasury bonds and the existence of the SSTF and the balance thereof.

    Say that nation is the US, and that Congress to show its iron commitment to Medicare, etc., issues another $40 trillion of intragovernmental bonds to fully back up its $53 trillion of unfinanced spending promises that are already on the books. Then, as S&P and Moody’s predict, the credit rating of the US starts falling in 2017 heading towards junk by 2027. In the crisis that ensues, an new Congress slashes promised spending and outright repudiates say $20 trillion of intragovernmental debt — “default” if ever there was! Does the massive “default” on the intragovernmental debt collapse the US’s credit rating — and drive the Chinese to hysteria? Or does it improve the US credit rating and leave the Chinese smiling?

    Good question at the end, but even if the answer to that last question is that it would probably “leave [Treasury bondholders] smiling” in your scenario, it could be that these bondholders are happy on balance – that there is a negative impact on their view of the risk of U.S. Treasury debt due to “default” (or the appearance thereof, whether or not technically default), but that this negative factor is more than offset by the positive factor of lower projected spending. If so, I think that’s an important distinction to make (it may be that the positive factor would necessarily outweigh the negative factor, but that would be the next question).

  28. comment number 28 by: Jim Glass

    Brooks, ^h^h^h … while I was leaving a comment you left one that made mine unresponsive, tried to delete it, but apparently not possible, so I’m submitting this note that I’ll have to come back.

  29. comment number 29 by: Brooks

    [deleted -- same thing happened to me (wrote comment while you were submitting yours)]

  30. comment number 30 by: Jim Glass

    The bonds do roll over forever …

    I assume they have been rolled over [because] not be needed until 2018. Correct?

    Right. And if not needed until 2050 or 20xx they’ll roll over until then.

    Is your point that the maturity date is, for all practical, contractual, or any other purposes, meaningless..

    There are two basic kinds of debt notes: term notes with a specific maturity date and demand notes payable whenever the holder demand it. (Although there are infinite variations.) The conditions of the SS bonds effectively make them demand notes, though nominally they are 15-year term notes, that term being used to set their interest rate when issued.

    The point is, these bonds have no maturity date upon which they will default if not paid down.

    The bonds also can be transferred by Congress to any other purpose…

    Really? Are you sure? Also, does the same apply to cash in the SSTF…

    Yes, yes, and yes. The trust and the bonds are 100% the property of the govt, payable only to the govt. This is where voters get confused, they think the trust is payable to them as SS beneficiaries. It’s not. The trust is the govt’s property, and legally it can treat the trust just like all its other property, it’s trucks, real estate, etc. The citizenry has no legal claim to any of them.

    Can you point me to your sources …

    Among other places, you can read about this in the Analytical Perspectives, section, “Trust Funds and Federal Funds”. You’ll find statements like: “the meaning of the term trust in the Federal Government budget differs significantly from the private sector usage…”

    So while the politicians are saying: “Your SS taxes are being saved safely for you in the SS trust fund!”, the Treasury is explaining, “but the trust fund is not a trust fund”.

    This always reminds me of The Simpsons episode where Krusty the Clown runs a TV ad in which he shouts out of the screen “I personally guarantee it!” with a disclaimer running underneath “Not a guarantee”.

    So say Congress decided to reduce SS benefits post-2020 by means-testing “the rich” out, so the SS TF bonds aren’t needed. It can then let the bonds roll over until the year 3,000 … No “default” would ever occur.

    That’s a different scenario from the one to which I referred, which was never spending … a cumulative amount of at least $2.5 trillion on SS benefits…

    Legally, the govt doesn’t have to spend a penny on SS, it can reduce benefits to zero (Flemming v Nestor). Then it can use the bonds for something else, repudiate them, burn them, whatever. (They have $0 asset, liability, and funding value, so it makes no difference what is done with them.) SS legally is a govt spending program like any other, pure and simple. How much Congress will spend on it will be determined by politics.

    ["Default issues..."] I’ve explained all this before. No point in repeating it all. See my earlier comment. Short recap: “default” on these bonds is like a square circle, it can’t happen by *definition.*

    Imagine you wrote a legally binding $10,000 note debt obligation, secured by your own property. Then you issued it yourself.

    Could you default on it? The same answer applies to the US govt.

    “…[posssible to] then just immediately transfer that [SS trust fund] cash back to the general fund without the courts dictating otherwise.”

    How would “the courts” ever get involved?

    You take that same $10,000 note you issued to your self above, and put it in a shoebox labeled “for my retirement only!”. Later you take it out and put in a shoebox labeled “for my vacation”. *Then* you go to court to sue yourself about misappropriating your own IOU to yourself!

    Remember, the $10,000 note pays exactly nothing, $0, towards either your retirement or your vacation. Nothing.

    Are you going to get any judge to listen to your case?? Only if you can find one who likes to laugh out loud at crazy people!

    Whenever you talk about “the courts” doing something you have to ask yourself: who is going to file the suit asking the court to do it? As we lawyers say, who has “standing”?

    The trust funds and everything in them are Congress’s sole property to do with as it wishes. No person has standing to sue the govt over them. Nobody.

    That leaves only Congress to sue itself, asking the courts to stop it from doing what it’s doing. Do you expect Congress to do that? And … supposing Congress could find a judge who enjoys laughing out loud at crazy Congressmen … being that the trust funds and the bonds are entirely Congress’s own property to do with as it wishes, what would the judge say? “It’s your own damn property — for all the $0 value it has! — so make up you own damn mind! Nobody has standing to sue himself, especially over nothing. I’m outta here, but you guys are sure funny. Now, maybe I’ll move to another country.”

    What if the Congress wanted to declared all the special issue Treasury bonds held by the SSTF null and void … Would that be technically default? (I assume your answer is “no”)”

    C’mon, I explained all this in full in my prior comment — remember cooking the s’mores at the bond-burning party?

    But again, in brief: Not only would it not be “technical” default, it wouldn’t be REAL default.

    Write a $10,000 debt note to yourself, then don’t pay yourself. Forget “technical” rules. Have you REALLY defaulted?

    If it is a REAL default, then it will cause you a real financial loss. What is the dollar amount of your financial loss when you fail to pay money to yourself. Calculate it. Your answer is ….

    If the answer is $0, then you have described an exercise in … nothing.

  31. comment number 31 by: Brooks

    Thanks. I appreciate your answers, and just so you know, my questions to you are not rhetorical; just trying to cover the bases and run out the ground balls so that, if there aren’t any limitations/omissions/imperfections/etc. in what you’re saying, I will have a very good sense that you’re completely correct and nothing significant has been overlooked.

    How would “the courts” ever get involved?

    As they did in Flemming. I realize (or think) that your point is that Flemming clearly established that the courts cannot restrict Congress (or the Treasury or whatever entity/entities would be involved) at all in what it does or doesn’t do with the funds, bonds, or balance in the SSTF, and you may be right (I’ve only read a bit of the court’s decision and related commentary), but I don’t know if it has indeed clearly so established, to the point that there’s no chance of any court imposing a restriction or requirement of any sort. One thing I wonder about, as I think I mentioned, is whether or not what Flemming says about Congress’ discretion with regard to an individual claim (and individual seeking SS benefits) applies on an aggregate level.

    As for “technically” and “really” defaulting, a key question — probably the most important question — is what the perception and reaction of the bond market would be. Apparently you think that if the government just announced today that the special issue Treasuries held by the SSTF are now null and void, and then burned them, the bond markets would not see that action as in any way increasing the risk of Treasury debt. That’s what you are saying, right? (sorry if it seems — and to some extent I am — repeating some questions in slightly different ways, but I just want to be sure my understanding of what you are saying is accurate and precise)

    I remember that Simpsons line. Good one. I think my favorite exchange related to fiscal irresponsibility and much/most of the public’s irrational, immature thinking that enables politicians to get away with fiscal irresponsibility is the following, which I’m paraphrasing from memory:
    Bart: Dad, listen, I used your credit card to buy something for $500…
    Homer: What!!??
    Bart: …but I tricked Mr. Burns into giving me $500, look! [holding out cash in his hand]
    Homer: [taking the cash from Bar] Woo Hoo! New bowling ball !!!
    Bart: But dad…
    Homer: Woo hoo !!!

  32. comment number 32 by: janx87

    For those of you having difficulties watching the documentary (like me outside the US), this video can also be watched in the same quality at http://www.documentary-log.com/watch-online-d/288/ten-trillion-and-counting/