“The share of publicly held debt we have now relative to GDP has only happened once before in U.S. history. What our debt levels are — we often talk about this number, $19 trillion of debt. That’s not the real number because all of your entitlement spending is kept off book on a different ledger. The real number is more like 70 to 75 trillion dollars — and so when you set that up against U.S. GDP, the only time we ever had a debt-to-GDP ratio like this was on the eve of the Great Depression.”
— Sen. Ben Sasse (R-Neb.), town hall meeting in Elkhorn, Neb., March 17, 2017
We’ve been asking readers to send us fishy-sounding claims from town halls being held by lawmakers. A reader questioned the assertion made by Sen. Ben Sasse that the national debt is really more like $70 trillion to $75 trillion, rather than the more commonly used figure of $19 trillion. Here’s the key moment in the discussion, which you can see was somewhat rowdy, though Sasse handled himself well. He was attempting to answer a question about proposed cuts in arts funding.
Let’s dig into this. In addition to Sasse’s comments on the “real number” being $70 trillion to $75 trillion, we’ll look into his remarks on the debt-to-GDP ratio.
The Treasury Department has a website that provides the national debt up to the penny. It lists three figures — debt held by the public (about $14.35 trillion on April 13, 2017), intragovernmental holdings ($5.49 trillion) and total public debt outstanding ($19.85 trillion). Intragovernmental holdings include items such as the Social Security Trust Funds, which hold U.S. Treasury securities that can be redeemed at some point to pay benefits. (For more, see our guide to understanding Social Security.)
The Social Security and Medicare trust funds accumulated these bonds because the government at the time collected more money than it needed to pay Social Security benefits and so borrowed the money to pay other bills. Thus intragovernmental holdings are debt that taxpayers owe to future taxpayers. Generally, economists and bond traders pay much more attention to the public debt number.
“Gross debt is not a good indicator of the government’s fiscal condition,” the Congressional Budget Office says. “The value of Treasury securities held by trust funds and other government accounts measures only some of the commitments the government has made for the future, and it includes some amounts that may not represent future obligations at all.”
In other words, public-traded debt amounts to a little over $14 trillion. So how does Sasse get to $70 trillion to $75 trillion?
That’s a number that adds in implicit liabilities that are not easily captured in official reports about the public debt. It also looks over a very long time period — 75 years.
James Wegmann, a spokesman for Sasse, said he was drawing on several sources to come up with a ballpark figure. The Treasury Department, in a 2016 report, said that the projected expenditures for scheduled benefits for social insurance programs would exceed projected revenue by $46.7 trillion. Adding to it the gross debt of $19 trillion yields a figure of $66 trillion. Over an infinite horizon, Treasury said, total resources for Social Security and Medicare amounted to $90.5 trillion in present value terms. Wegmann said Sasse was taking a number between those values to make a broader point.
“At the town hall, Sasse was seeking to drive home the point that unfunded obligations, not arts funding, are driving the debt without wading into a debate on scoring windows,” Wegmann said. “His 70 to 75 trillion-dollar number ballparks the two scores.”
Now it’s important to remember that these large numbers should be measured against equally large numbers regarding revenue and national resources. Treasury said that the $46.7 trillion figure represented about 3.8 percent of the present value of GDP over 75 years, which helps put the number in perspective. The present value of GDP over an infinite horizon is $1.3 quadrillion.
In 2014, James D. Hamilton, an economist at the University of California at San Diego, published an article that calculated that as of 2012, the U.S. government had about $70 trillion in off-balance-sheet commitments and public debt. Social Security and Medicare accounted for about 77 percent of that figure, but it also includes housing-related commitments, student loans, federal deposit insurance and other government trust funds.
Some of these obligations, such as FDIC guarantees, do not pose significant risks to taxpayers, Hamilton said. “Other programs, such as the federal government’s big role in lending for housing and education, have less clear benefits and have been associated with more tangible costs,” he said. “The biggest off-balance-sheet liabilities come from recognition of the fiscal stress that will come in the form of an aging population and rising medical expenditures.”
Hamilton noted that at times, such as during the savings and loan crisis in the 1980s, off-balance-sheet obligations ended up costing Americans real money. The United States had to honor $124 billion in off-balance-sheet commitments when the savings and loan industry collapsed. The situation has been even more dramatic in other countries. Ireland had a very strong financial position, on paper, before the Great Recession. But the Irish then had to inject the equivalent of 45 percent of their GDP to rescue the banking system, sending the country’s debt from 25 percent of GDP to over 100 percent.
So Sasse is correct to highlight implicit liabilities that are larger than the official debt. He gets into a bit of trouble by suggesting $70 trillion is “the real number,” as these figures do not represent actual debt instruments. These are potential obligations, but as Sasse well knows, Congress is able to change future Social Security and Medicare benefits, as it has in the past. Indeed, Sasse himself has proposed to gradually index the age of eligibility and means-testing benefits, which would reduce future obligations.
Finally, Sasse referred to the GDP-to-debt ratio. When we first watched the video, we thought he was referring to the GDP-to-debt ratio under the $70 trillion figure, which would be Pinocchio-worthy because it is rather misleading to compare liabilities over the infinite future to one year of GDP.
But Wegmann said that Sasse’s reference to $70 trillion to $75 trillion was parenthetical. “Sasse starts with a conversation of debt to GDP, interrupts to make a point about the off-books debt we’ve discussed, and then comes back to debt to GDP,” he said, noting that Sasse misspoke when he made a reference to the highest level being on the eve of the Great Depression. “He probably should have said World War II.”
The gross debt-to-GDP ratio did peak right after World War II, to nearly 120 percent, and then declined steadily to about 30 percent until the Ronald Reagan administration. The debt ratio soared until a brief period of balanced budgets under Bill Clinton. Then the Great Recession sent the debt-to-GDP ratio skyrocketing. As the charts below show, the ratio more or less has plateaued around 100 percent in the last few years of the Obama administration but still has not been reduced from its post-recession high — unlike the period immediately following World War II.
The first chart goes back more than a century, showing from 1900 to 2015. The second chart shows more detailed quarterly movements from 1966 to 2016. The ratio would be lower — but still relatively high — if you only counted public-traded debt, not intragovernmental holdings.
The Pinocchio Test
Sasse was speaking off the cuff in a noisy public forum, so we can understand it might have been difficult to get this exactly right.
The senator was correct to note that arts funding is not a major factor in the debt, compared to entitlement programs such as Social Security and Medicare, which have long-term obligations that could total $70 trillion to $75 trillion. But he was a bit misleading when he called those obligations “the real number,” when in fact those obligations can be reduced if Congress takes action. So it’s not really the same as the Treasury securities now traded on Wall Street, or even the bonds in the Social Security and Medicare trust funds.
Sasse should have spoken more clearly and explained he was talking about anticipated costs over a 75-year or infinite period, not debt held by bondholders. That would have allowed him to speak more clearly about the unusually high debt-to-GDP ratio for the United States. It’s an important point to raise, and will be solved either by a booming economy or tough choices about reducing federal spending or boosting federal revenue.
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