So much for “transparency and open government.”
With economic recovery nowhere in sight and its fiscal policies increasingly called into question, the Obama administration yesterday revealed that it would not be releasing its expected mid-year budget review until next month. Although the administration insisted this was a mere bureaucratic formality, critics were quick to note that the delay would help bury some politically unpalatable news about the budget, including its projected rise of the 2009 deficit.
Concern about the administration’s budget has already been stoked by the Congressional Budget Office, whose reports in recent months have read like an unending barrage of bad news. The CBO's latest, “Long-Term Budget Outlook,” is no exception.
The CBO wastes little time getting to the bad news, noting that “Under current law, the federal budget is on an unsustainable path.” A few paragraphs down, we get grim projections about the growth of the national debt. Specifically, the “CBO estimates that in fiscal years 2009 and 2010, the federal government will record its largest budget deficits as a share of GDP since shortly after World War II. As a result of those deficits, federal debt held by the public will soar from 41 percent of GDP at the end of fiscal year 2008 to 60 percent at the end of fiscal year 2010.”
This suggests that at the end of the next fiscal year, the debt of the federal government will be 60 percent of GDP. High as this number is, the actual figure is likely larger still. By some estimates, the debt could be close to 100 percent of GDP.
To see why, we first need to know some basics about our government's debt. Also called “national debt” or “public debt,” it is the cumulative amount of money that the federal government has borrowed over the years in order to finance its budget deficits.
The federal government borrows from two sources. The one that we often hear about is the government bond market. There, government raises money by selling pieces of paper – commonly referred to as treasuries – with a promise to repay the principal plus interest at some point in the future. Purchasers (also called creditors) include foreign central banks, domestic banks, the US Federal Reserve, individual investors, investment houses, etc. The amount of all outstanding US treasuries is referred to as “debt held by the public.”
Confusingly, “debt held by the public” is not the same thing as “public debt.” This is because the federal government also borrows from another source: government agencies that happen to have surplus cash in their accounts. Some time ago it was decided that this money should not be left lying around, but that it should be invested instead. And what could be a better investment than the acquisition of US treasuries?
This seemed like a great idea all around. Everyone would win: The cash-rich agencies would earn interest while the government would get access to ready cash. To make things easy, the US Department of Treasury even issues “special” non-marketable government bonds for this kind of transaction. The process is carried out through a framework of trust funds, the largest among which is the so-called Social Security Trust Fund. The name is something of a misnomer, since the Social Security Administration actually maintains two funds: the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund. From these two accounts the federal government has borrowed some $2.2 trillion, which is about half of the total it owes to various government entities. Other large trust funds include the Federal Employees Retirement Fund ($738 billion), the Employees Life Insurance Fund ($322 billion) and the Exchange Stabilization Fund ($215 billion).
The agencies that administer these funds have in effect become creditors of government, since they hold securities that “represent future obligations that must be repaid.” Because of this, the amount of these outstanding securities is included within the overall national debt. Government accountants use a special name for it – “intragovernmental holdings.”
The public debt of the US federal government thus has two components: debt held by the public and intragovernmental holdings. The CBO chose to project only the growth of the former. Significantly, this is the part of the report that received the most public attention and media scrutiny, because it synthesized in simple terms the largely technical analysis that follows. One strongly suspects that the CBO did this in order to create an impression of lower indebtedness. The CBO's task was made easier by the confusing terminology, which naturally gives rise to the mistaken notion that “debt held by the public” equals “public debt.”
The best place to see the truth is at a website maintained by the US Department of Treasury, the agency responsible for the administration and servicing of America's debt. TreasuryDirect contains a feature called “Debt to the Penny and Who Holds It,” which gives regular updates on the size of the federal debt load. It is presented in the form of a simple graphic where any citizen can plainly see that “Total Public Debt Outstanding” is a sum of two items: “Intragovermental Holdings” and “Debt Held by the Public.” As of last Wednesday, the grand total was 11.525 trillion with intragovermental holdings at $4.344 trillion.
It is deeply disconcerting that the Congressional Budget Office is taking advantage of ill-defined terminology to understate the level of our indebtedness. But that is as nothing compared to the administration’s troubling spending, which so far has failed to jumpstart the economy. This February’s $787 billion stimulus package, sold as a necessary step toward recovery, has not only failed to live up to its billing but by some measures has made it worse. Unemployment remains high, even as the deficit has risen dramatically.
Nor has the administration learned fiscal humility from the serious shortcomings of the stimulus. On the contrary, President Obama has been actively touting his proposed health care reform. Some experts have estimated that the administration’s plan could carry price tag of between $1.5 trillion and $1.7 trillion over the next 10 years. Meanwhile, the Congressional Budget Office has predicted that the administration’s health care plan would add $240 billion a year to the federal deficit, which already stands at a record $1.8 trillion for 2009.
Ironically, in stumping for his latest budget-busting program, President Obama accused his opponents of practicing “the politics of delay.” One could make the same charge about the administration’s plans to delay the release of a budget review, which seems like a desperate attempt to stave off the mounting backlash against the administration’s runway spending. President Obama may have gotten elected on a promise of accountability. But the concept may well lose its allure when taxpayers decide that he is the one they want to hold accountable.