Last week the Office of Management and Budget released its updated fiscal outlook for the next ten years. Called the Mid-Session Review (MSR), the report was eagerly awaited in light of the growing alarm at the seemingly unrestrained spending of the current administration. This alarm is growing so widespread and intense that it threatens to sink much of the president's program. Whether it comes to healthcare, cap-and-trade or various economic stimuli, their projected multi-trillion dollar costs are the number one concern on the minds of most voters.
Knowing that more bad fiscal news would effectually doom his agenda, the president and his team increasingly resort to deception. There is an an egregious instance of this in the MSR when they take advantage of confusing terminology to conceal the true size of the national debt.
Traditionally, the most scrutinized and reported on portion of budget documents is the section containing summary tables. This is because they present data, trends and projections – which are often complex and confusing – in relatively easy-to-grasp graphical form. The exhibits are normally arranged in order of importance with the big picture presented first.
The leading table in Obama's Mid-Session Review is labelled S-1 and called Budget Totals. As would be expected, it seemingly features the three main indicators of a country's fiscal health: GDP, deficit, and “debt held by the public.” The table's penultimate line appears to present that all-important gauge: the country's indebtedness expressed as a percentage of GDP. The administration forecasts rapid growth of this variable. It will jump from 40.8 in 2008 – the last year of Bush – to 55.7 percent in 2009. It will then grow to 70.0 percent in 2011 and finally it will reach 76.5 percent of GDP in 2019, the last year for which projections are made.
Looking at the chart most people will naturally get the impression that these figures express the country's public debt as a percentage of its annual economic output. This, however, is not so. In reality America's public debt will be much higher. This is because “debt held by the public” – which is what the administration tracks in its first exhibit – is not the same thing as “public debt.”
As we pointed out some time ago, the public debt of the federal government has two components: the “debt held by the public” and the “intragovernmental holdings.” The former is in the form of various government notes, bills and bonds which the United States Department of Treasury sells in public auctions and which are afterwards freely traded on the market. The intragovernmental holdings, on the other hand, is the debt the Treasury incurs by borrowing from government agencies that happen to have surplus cash in their accounts such as the Social Security Administration.
There are those who say that the intragovernmental holdings are not true debt, since it is money that the government owes to itself. Nothing could be further from the truth. The financial obligations associated with the intragovernmental holdings are as real as those imposed by the debt held by the public. The securities held by the two Social Security Trust Funds will have to be redeemed with actual money when the time comes. The matter cannot be simply disposed of by some accounting double entry. Therefore, the debt held by the public and the intragovernmental holdings together constitute what is properly referred to America's public debt.
You can get clear confirmation of this on the website of the US Treasury, the agency that administers and services our public debt. Its size is regularly updated for all to see via the Treasury's online facility called “The Debt to the Penny and Who Holds it.” The information is conveyed in the form of a simple graphic where “Total Debt Outstanding” is the sum of two parts: “Debt Held by the Public”and “Intragovernmental Holdings.” As of last Thursday, the breakdown was as follows:
Debt Held by the Public: $7,393 trillion
Intragovernmental Holdings: $4,331 trillion
The Total Outstanding Debt : $11,725 trillion
In what they knew would be the most closely studied and widely reported chart of the Mid-Session Report, President Obama and his team misleadingly presented only one component of the national debt – the debt held by the public. They took advantage of the confusing terminology to create a false impression of lower indebtedness. That they meant to deceive cannot be doubted, since the table is supposed to give the big picture. As such the viewer will automatically assume that the trends projected are stated in the full extent of their magnitude.
The ruse has worked. Below is how three major media outlets reported on the administration's debt projections when analyzing the Mid-Session Review:
Yahoo News: "The figures show the public debt doubling by 2019 and reaching three-quarters the size of the entire national economy."
The Washington Post: "Deficits of that magnitude would require dramatically more government borrowing from China and other creditors, driving the accumulated national debt to nearly $23 trillion in 2019 – or 76.5 percent of yearly gross domestic product, the highest proportion since 1950."
Fox News: "The White House report showed the public debt doubling by 2019 and reaching three-quarters the size of the entire national economy."
The figures used for these reports were obviously taken from the penultimate line of the first table. Notice that the authors speak of “public debt” whereas Obama's graphic only tracks “debt held by the public.” They really should know better than to fall for this. We will leave it up to the reader to decide whether the error is the result of ignorance or whether these journalists knowingly propagate the administration's lie. At any rate, any journalist interested in finding out the truth only needs to visit the Treasury's “The Debt to the Penny and Who Holds It” to see the facts presented in a format that is easy to grasp.
Be that as it may, let us now do something that journalists in the mainstream media are either unwilling or unable to do. Let us search the MSR for the place which indicates the full size of our public debt. Admittedly, this is not an easy task. To locate it, we must comb through the document until we come to the very last page of the whole report. There we will find Table S-15 titled “Federal Government Financing and Debt.”
The table's fourth line is called Total, Gross Federal Debt. It also happens to be the item we are looking for – America's public debt proper. Just as on the Treasury website, it is broken down into two parts: Debt held by the public and Debt Held by Government Accounts (the same as “intragovernmental holdings”).
In Table S-15, the Obama administration gives the following projections for fiscal 2009:
Debt Held by the Public: $7.856 trillion
Debt Held by Government Accounts: $4.356 trillion
Together they add up to $12.212 trillion of Total, Gross Federal Debt. If we now take Obama's GDP projection for 2009 from the first table and express the former as a percentage of the latter, we will get a figure of 85.8 percent.
Yes, you are reading correctly: At the end of fiscal 2009, our national debt will be 85.8 percent of GDP.
This is an alarmingly high figure. It also gives a completely different picture from that painted by the misleading S-1 table, the one which was taken up by journalists as the basis for their reporting. But the 2009 debt level is not the worst of it; the situation will grow more dire in the years that follow.
By taking Obama's projected GDP from Table S-1 and Total, Gross Federal Debt from Table S-15, we can now express public debt as a percentage of GDP for the ten year period (you can see the resulting chart by clicking here). Below is the Debt/GDP ratio for selected years:
Extrapolating from Obama's own figures we arrive at some truly incredible results. But the most astonishing aspect of this is that our public discourse is completely devoid of any discussion of the fact that the public debt will exceed 100 percent of GDP in some twenty-four months. One can only imagine what would happen if this became public knowledge. The ensuing outrage would almost certainly sink any hope President Obama may have of implementing his massive and costly programs (the cost of these programs is not factored into the MRS's grim projections). But Obama would not be the only one to bear the brunt of voter anger. The outrage would probably sweep away the whole political class – democrats and republicans alike – for allowing this to happen without sounding the alarm.
In any case, we are now in the position to correct those erroneous media reports on the Mid-Session Review. They should read something like this:
The numbers released by the Office of Management and Budget show that the unprecedented deficit spending of the Obama administration will push our national debt to 97.5 percent of GDP by the end of the next fiscal year. The national debt will exceed the 100 percent mark in the year after that. By 2019, it will reach 107 percent of GDP. This level of indebtedness will put us on the same level as Sudan.
Public debts exceeding 100 GDP are very difficult to manage. They often lead to default or massive inflation. Certainly no country with such a high debt load can hope to keep its AAA bond rating. Losing this rating will deal a devastating blow to America's financial system and send shock-waves across the globe. Needless to say, this will be a far more serious event than the credit crunch of 2008.
Barack Obama campaigned on the promise of openness, transparency and honesty. Yet in his latest report he cynically tries to conceal the dire fiscal truth from the American people. So much so that he buries the most damming item on the very last page of the document.
This is certainly not the change we were hoping for.