D. Dowd Muska


Journeying Down the Unknown River of Red Ink

August 01, 2013

However bad you think it is, it’s worse.

Much, much worse.

In a new working paper for the National Bureau of Economic Research, James D. Hamilton examines the “number of implicit and explicit commitments” not included in the federal government’s official debt account.

“Publicly held debt” is, in the description offered by the U.S. Department of the Treasury, “held by individuals, corporations, state or local governments, foreign governments, and other entities outside the United States Government less Federal Financing Bank securities.” It’s at $11.9 trillion. (The nation’s credit-card burden stood at $6.3 trillion when the White House’s current occupant arrived -- nice going, Mr. President.)

“Intergovernmental debt” is, according to the Treasury, “Government Account Series securities held by Government trust funds, revolving funds, and special funds; and Federal Financing Bank securities.” Primarily composed of Social Security IOUs, it’s at $4.8 trillion, and together with fedpols’ publicly held borrowing, yields the oft-cited “national debt” of $16.7 trillion. (Last year’s gross domestic product was $16.2 trillion.)

But Hamilton, a professor of economics at the University of California, San Diego, dug into the obligations that seldom appear in headlines, sound bites, and talking points. Not-on-the-books debt is acquired for three reasons, he notes: to prevent financial crises, promote “socially desired activities,” and keep promises made to retirees. The third item pinches the most. Social Security’s “trustees” estimate that the system’s unfunded liabilities -- the present value of future taxes to be paid, minus the present value of future payments to be made -- total $26.5 trillion. Medicare’s gap is $27.6 trillion. “These numbers,” Hamilton avers, “are so huge it is hard even to discuss them in a coherent way. … This reality is unambiguously going to be a key constraint on the sustainability of fiscal policy for the United States.”

At the end of 2012, the Federal Deposit Insurance Corporation covered $7.4 trillion worth of Americans’ savings. The FDIC’s “assets” consist of little more than the “future taxation authority of the Treasury.” Largely due to its hyperactivity during the Great Recession, the Federal Reserve, a “government” entity which “maintains a separate balance sheet … from the U.S. Treasury,” is on the hook for $1.1 trillion.

“Government-sponsored enterprises” are entities D.C. created during the New Deal and Great Society because fedpols couldn’t leave the market alone. Best known are the boondoggles Fannie Mae and Freddie Mac, but the list includes the Farm Credit System, Federal Agricultural Mortgage Corporation, Federal Financing Bank, and Resolution Funding Corporation. Hamilton’s calculation of GSE debt is $7.5 trillion.

Loan guarantees are another exposure. The U.S. Department of Education (subsidized college tuitions) and Export-Import Bank of the United States add a few hundred billion dollars to the bill. And Social Security doesn’t have the only “trust fund” that claims as assets “debt obligations of the U.S. Treasury that are not included in the … debt held by the public.” The Civil Service Retirement and Disability Fund and Military Retirement Fund are counting on taxpayer generosity -- to the tune of $1.3 trillion -- to meet beneficiaries’ expectations.

Hamilton puts 2012’s “total off-balance-sheet federal liabilities” at $70.1 trillion -- “six times the size of the federal debt itself.” However shocking, his figure is conservative. It leaves out several “potentially substantial” items. The Pension Benefit Guaranty Corporation, which backs up the retirement incomes of 43 million Americans, might require rescue. The National Flood Insurance Program is another lurking threat. (After Hurricane Sandy struck, Washington provided a $9.7 billion bailout.)

While $70.1 trillion is a perfect-storm scenario, the economist reminds us that “there are many historical episodes in which off-balance sheet liabilities ended up having quite significant on-balance-sheet implications.” The Federal Savings and Loan Insurance Corporation, for example, was unable to weather the S&L crisis of the 1980s, and taxpayers got stuck with a $124 billion tab.

There are ways to remove the chokehold actual and potential debt have placed around taxpayers’ necks. “Entitlements” need to be gradually phased out. (And for the affluent, ended immediately.) Privatization experts are eager to draft real-world plans for auctioning off GSEs. The federal government must stop making loans to college students -- if higher education is a good “investment,” banks will be delighted to do business with applicants who have impressive earning potential. It’s time for corporate welfare to disappear. (The Export-Import Bank should be target number one.)

In short, the Era of Unlimited Government must end.

It’s austerity now, or more-painful austerity later. The cuts need to be broad and deep, and they need to start immediately.

D. Dowd Muska (www.dowdmuska.com) writes about government, economics, and technology. Follow him on Twitter @dowdmuska.

# # # # #