August 01, 2013
you think it is, it’s 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.
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.)
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
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
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.
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.
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
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
provided a $9.7 billion bailout.)
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
In short, the
Era of Unlimited Government must end.
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.
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