Wednesday, April 15, 2009

Draft for AB

by Bruce Webb
(For some reason I am having problems getting this saved over at AB so I will just try to publish it here. The piece is incomplete as is, the parts that are not quite ready have been placed in italics)

In the course of a post called the The Vanishing Surplus-Revealed I made some claims that the promoters of this claim were using a novel sense of 'surplus'. Well it turned out that this sense was not really novel, it had indeed been used for certain technical purposes. Still I maintain there was an intent to deceive. And to explain why I propose to revisit the concepts of 'surplus' 'deficit' and 'debt' as normally used in reporting intended for the public. I fully expect this discussion to result in a flame war, those who find such things distasteful are urged to just move on. On the other hand I believe there is some value added by clarifying the issue. So you can with Dante at the Gates of Hell accept the consequences of 'Abandon All Hope Ye Who Enter Here' and follow me below the fold. Or take the more prudent advice of 'Move Along Folks, Nothing to See'. Your choice.

What does it mean when we say that a current year deficit adds to the Federal debt as in 'CBO projects Obama budgets will add $3 trillion more in debt by 2019 than the Adminstration projected in February"? Or what are they talking about when Congress periodically talk about raising the debt limit? Well it turns out to not that simple. The simplest measure of national debt is that given us by the U.S. National Debt Clock whose most famous version is seen in Times Square. This version summarizes the debt situation as follows
The Outstanding Public Debt as of 15 Apr 2009 at 05:13:40 PM GMT is:
The estimated population of the United States is 306,006,590
so each citizen's share of this debt is $36,525.02.
The National Debt has continued to increase an average of $3.84 billion per day since September 28, 2007!
Concerned? Then tell Congress and the White House
This is what I am calling 'Headline' Debt, it is this measure that you will see in the headlines and in coverage of the Tea Baggers. On the other hand if you go to the Treasury's Debt to the Penny you will a more complex view. At the close of business April 13th, total Public Debt stood at $11,169,978,555,115.48. But this breaks down to two components, Debt held by the Public at $6.893 trillion and Intragovernmental Holdings at $4.276 trillion. This in turn breaks down as follows. (chart from Wiki)

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

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

So 'Public Debt' as reported on the Debt Clock includes total Trust Fund balances including interest earned as of Dec 2008. The Trust Funds are thus included in what I am calling 'Headline debt'. How does that relate to 'Headline surplus/deficit'?

Well Movie Guy directs us to this from Michael Boskin . Sense and Nonsense About Federal Deficits
and Debt
and quotes it as follows (bolding mine)
"To make sense of these issues, economists employ several related measures in addition to the traditional nominal cash budget balance (see Table 1)."

Table 1
Alternative Budget Surplus/Deficit Concepts

1. Unified nominal surplus/deficit = nominal revenues – nominal outlays; “headline” numbers
2. Operating surplus/deficit = unified deficit – net investment (public capital investment - depreciation of public capital)
3. Primary surplus/deficit = unified deficit – interest outlays on inherited debt
4. Cyclically adjusted surplus/deficit: unified deficit adjusted to “high employment,” i.e., removes effect (+ and – ) of business cycle on revenues and outlays; i.e., removes effect of “automatic stabilizers”
5. Standardized surplus/deficit: adjusts unified deficit for business cycle and some other transitory items, e.g., the inflation component of interest, receipts from allies for Desert Storm, deposit insurance outlays for failed S&Ls, that are unlikely to affect real income
Meaning that the 'traditional' 'headline' surplus/deficit is the Unified Surplus/Deficit which includes 'net interest' and NOT the Primary Surplus/Deficit which excludes it and seems limited to technical discussions as opposed to those aimed at the pubilic.

When CBO released its March 2009 Preliminary Analysis of the Presidents Budget it was explicitly explained as an increase in the 'deficit' of an extra $2.3 trillion dollars over the $6.9 trillion predicted by OMB for 2009 to 2019. And not a single AB critic discounted that increase for the amount actually due to a DECREASE in projected interest on the Trust Funds. First the tables:
CBO March


This is where it gets hard. For Unified Budget purposes Social Security surpluses including interest show up as Revenue in the current year and so to that degree offset somewhat General Fund deficits. On the other hand they also show up as Public Debt

What do we have so far? Well I have shown that Trust Fund interest shows up in Public Debt which is also what most people think of as 'Federal Debt' (as in Debt Clock). It is thus part of 'Headline Debt'.also shows up in

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

Let me proceed in reverse order, and begin with gross debt. Gross debt has two components: debt held by the public—which I will discuss more in a moment— and intragovernmental debt. Intragovernmental debt is, essentially, debt that the government owes to itself—as of the end of last year, it totaled $4.2 trillion. The majority of this debt is issued to the Social Security Trust Fund, and most of the remainder is issued to other trust funds, such as the Civil Service Retirement and Medicare Trust Funds. These trust funds are required to invest their surpluses in government bonds. While the federal government will certainly make good on the IOUs issued to these trust funds, they should not be counted when assessing the financial state of the federal government as a whole.
. Yet most commenters do use Gross debt as the proper measure. Orszag again (bolding mine)
One branch of the government issuing debt to another branch may make one branch poorer relative to the other branch—but it does not affect the overall financial state of the government. For example, when I tell my daughter and son that I owe them each $10 for their allowances, I am poorer, and they are richer—as a family, though, there is no change in our overall finances. That’s why the Congressional Budget Office, the Office of Management and Budget (including under the prior administration), and the Government Accountability Office all agree that gross debt is not a meaningful metric for assessing the government’s current fiscal position. Yet, the world being what it is, this number is quoted often.
Now it is just a fact that both Unified Budget surplus/deficit and Gross debt each include interest on the Trust Funds

Now there is an argument that it SHOULD be the one so used for example we have this from Orszag at OMB

They are not wrong in doing so because when OMB and CBO scores the effect of those spending proposals they explicitly confine themselves to that measure. For example here is Table S-1 from the Presidents Feb Budget proposal.

Which we could compare to CBO's March 2009 OASDI Baseline

In each case when they use the term 'deficit' they take that by subtracting 'Outlays' from from 'Receipts' "headline" number.
To which we could compare CBO's August 2008 The Budget and Economic Outlook: Fiscal Years 2008 to 2018

In this Table CBO breaks it down a little differently, instead of taking total receipts and subtracting total out lays they take On Budget deficit/surplus and add it to Off-Budget deficit/surplus to produce overall 'deficit/surplus'.


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