As Congress begins to deal with President Biden’s proposed $1.9 trillion covid-19 reliefpackage, we’ll be in for a debate about how much that legislation andother Biden initiativeswill add to our national debt and how much interest that additional debt will cost taxpayers.
You can be sure that many Republicans who supported former president Donald Trump in cutting taxes andjacking up our debt by $7.8 trillion will attack Biden’s spending programs for adding to our debt. And that Democrats who opposed Trump’s costly 2017 tax cut will be talking about how affordable Biden’s proposals are.
As that show kicks into high gear and numbers start flying around, I’d like to give you a primer on how to measure the debt and the interest on it.
Why do I feel the need to do this? Because there are two different ways to measure the debt and two different ways to measure the interest. In addition, there’s a third way to measure the interest being proposed by Larry Summers and Jason Furman, two influential economists who have served in Democratic administrations.
Are you ready for some fun with numbers? And examples of how Washington math can conflict with common sense? Okay, here we go.
If you look at Treasury’s wonderfully named Debt to the Penny daily report, you’ll see that as of last Friday,the total national debt was about $27.76 trillion. Of this, $21.64 trillion was “public debt” and the other $6.12 trillion was “intragovernmental holdings,” which we’ll call “trust fund debt” to keep things simple.
Just so you’ll know, the $4.7 trillion of Treasury securities that the Federal Reserve owns is part of the public debt.
Much of Washington says that only the public debt matters. After all, the argument goes, the $6 trillion-plus of Treasury debt held by the trust funds is money that the government owes itself. Therefore, it’s not really debt any more than an IOU that you write to yourself would be considered debt.
However, I look at things differently. Take Social Security. When I look at the Social Security Trust Fund’s $3 trillion of Treasury securities, I see money that the government owes or will owe to current and future generations of Social Security recipients. Not money that the federal government owes to itself. That’s why I think trust fund holdings should be part of the national debt.
These days, with Social Security running large cash deficits, the Treasury has to borrow money from investors to raise the cash that it needs to redeem Treasury securities held by the Social Security Trust Fund. So what was “intragovernmental debt” yesterday is indirectly becoming public debt today.
Now, let’s look at the two ways of calculating the interest that taxpayers pay on the national debt. There’s a big difference — $178 billion — between them.
Last year, “net interest” — interest on the investor debt — was about $345 billion, while the total interest on investor and trust fund debt was about $523 billion.
For budget purposes, the $178 billion of trust fund interest doesn’t count. That’s because the Treasury’s $18 billion interest cost is offset by the trust funds’ $178 billion of interest income.
But in economic terms, that $178 billion really matters if, like me, you assume that sooner or later the trust funds will ask the Treasury to cash out some or all of their securities.
That’s why I consider the interest on the trust funds’ Treasury securities to be a real expense. Even though that interest is paid in Treasury securities, not in cash.
I don’t care how you account for that $178 billion in the federal budget, but it’s clearly a real economic cost to taxpayers. And we should count it as an interest expense.
And now, to Summers (a treasury secretary under President Bill Clinton) and Furman (head of the National Economic Council under President Barack Obama). And to something known as “Fed remittances.”
The Federal Reserve is an immensely profitable operation. That’s because it creates credit balances out of thin air, at no cost to itself, and uses those balances to buy Treasury securities and other interest-paying assets.
Every dollar that the Fed earns above its expenses — I’ll spare you the details of how those are calculated — gets remitted to the Treasury.
So let’s say that the Fed decides this week to buy $100 billion of one-year Treasury IOUs yielding 0.10 percent. The $100 million of annual interest flows from the Treasury to the Fed. Then, because that $100 million is pure profit for the Fed, it remits that $100 million to the Treasury.
Last year, the Fed sent $88.5 billion to the Treasury, up from $54.5 billion in 2019. That’s some serious jack. And Summers and Furman say those remittances should be subtracted from the net interest cost of the debt. That would have reduced last year’s $235 billion net interest cost (the interest metric they and many other experts prefer) to less than $150 billion.
It would also make the numbers around Biden’s existing and future proposals look a lot better. But it seems to me that obscuring the true cost of the interest on our debt isn’t in our national interest. (You can groan now.)
With a pandemic raging, small businesses being destroyed right and left and millions of people who are unemployed, it makes sense to spend a lot of money to prop up the economy. And I also think it makes sense for the government to engage in big-time public works projects that can produce economic returns greater than the 1.9 percent annual cost to the government if it funds the projects with 30-year bonds at current interest rates.
But I think we ought to measure properly the cost of these borrowing-funded programs. Using numbers of convenience to make things look much better than they actually are will make some politicians and their followers feel better. But they won’t change the underlying reality. They’ll just hide it. And I think that’s bad policy, even though it sure is expedient.
The Congressional Budget Office has asked me to tell you that although the CBO report that Cezary Podkul and I discussed in our Jan. 14 article, “Trump’s most enduring legacy could be the historic rise in the national debt,” had been sought by Republicans, the CBO sent it to both Democrats and Republicans.