Bartlett: There is a Hidden Deficit
Bruce Bartlett writes:
When federal finances are discussed, it is almost always in terms of the difference between expenditures and revenues. Usually, the former exceed the latter and we have a deficit. The cumulative total of deficits less the occasional surpluses is what we call the national debt. When we analyze the debt in terms of its burden, it is usually by looking at it in terms of the gross domestic product. Presently, debt held by the public, the most common measure of federal debt, is $9.3 trillion or about 60 percent of GDP.
If the federal government was a corporation and one was contemplating buying shares of its stock, however, one would certainly want to know much more about its finances. One would want to know about the government’s assets as well as its liabilities. And one would want to know whether there are any liabilities other than those included in the figures for debt held by the public, among other things.
These data are not easy to come by. For many years they appeared only in an obscure mimeographed document called the Statement of Liabilities and Other Financial Commitments of the United States that the Treasury Department produced only because it was required by a 1966 law to do so. The reason is that the financial statement showed vast government liabilities not included in the usual figures for the national debt. Since 1998, these data have been published in a document called the Financial Report of the U.S. Government. The fiscal year 2010 edition was released on Dec. 21.
The most important difference between the Financial Report and the federal budget is that the former calculates costs on an accrual basis, whereas the latter only measures cash flow. Thus if the federal government incurred a debt that would not be paid until some time in the future, that cost would not be part of the conventionally measured national debt. It would only add to the debt when cash had to be expended to cover the expense that had been incurred. It’s worth remembering that private corporations are required to use accrual accounting and corporate executives would be jailed for using the sort of accounting that the federal government routinely uses.
The difference in accounting methods is most easily grasped in terms of Social Security. It has a liability over the next 75 years of $8 trillion more than the projected revenue from payroll taxes and interest on the Social Security trust fund. In every meaningful sense of the term, this is part of the national debt, but is excluded from the official debt figures.
Another consequence of ignoring future liabilities in calculating the national debt is that programmatic changes that save money in the future are similarly ignored. Thus, according to the Financial Report, Medicare had estimated liabilities in excess of future revenues over the next 75 years of $38 trillion at the end of fiscal year 2009. However, in the meantime, Congress enacted the Affordable Care Act, which contains significant cost controls on future Medicare spending. As a consequence, Medicare’s long-term liabilities fell by $15 trillion in 2010.
Of course, these Medicare savings will pay to subsidize health insurance for the uninsured. Whether that cost will be more or less than $15 trillion over the next 75 years, we don’t know because there are no estimates of the 75 year cost of ACA. Nevertheless, it is important to know that one portion of our nation’s indebtedness shrank very significantly as a result of health reform. Yet, oddly, I don’t recall the Obama administration ever calling attention to this fact. Perhaps it felt that it was not politically expedient to remind the elderly that health reform is largely financed on their backs.
The unfunded liabilities of Social Security and Medicare aren’t the only ones left out of the national debt calculations. The federal government also owes federal employees and veterans future benefits of close to $6 trillion. The Financial Report also estimates more than $300 billion of future environmental cleanup costs and more than $600 billion of costs associated with loan guarantees, insurance commitments and liabilities related to Fannie Mae and Freddie Mac, the big housing agencies.
The costs associated with loan guarantees are based on estimates of losses that will be incurred if borrowers with guaranteed loans fail to repay them. The face value of these guarantees – the theoretical maximum cost if every loan went bad – is much greater, estimated by the Financial Report at close to $2 trillion. Theoretical insurance commitments are even larger. Those for federal deposit insurance, pension benefit guarantees, and potential losses from flood insurance would add up to many trillions of dollars.
