After urgent warnings from Treasury Secretary John Snow that the United States would soon reach its debt limit, Congress has voted yet again to raise the debt ceiling: the fourth such increase in just five years. The current increase of $781 billion raises the overall limit to $9 trillion.
On March 15, one day before the vote, the Treasury’s Bureau of Public Debt reported the total national debt “to the penny” stood at $8,270,134,498,375.29. Five years earlier, just months after President Bush took office, it stood at $5,724,494,097,883.09.
Prior to World War I there was no official debt limit; Congress had to authorize each separate debt issue. The enormous borrowing needed to finance the war forced a change, however. Beginning with the Second Liberty Bond Act of 1917, Congress authorized the Treasury to set the terms of each bond issue.
Usually, congressional leaders (of both parties) try to attract as little attention as possible when increasing the debt limit, because it reminds voters that Congress lacks fiscal discipline.
Since 1941, when Congress first began setting a statutory limit on the total debt permitted, Congress has voted more than 80 times to increase the limit, extend the duration of temporary increases, or change the definition of “debt” subject to the limit. In the last 25 years, the limit was raised 28 times.
In short, the debt ceiling has had little practical impact on fiscal policy.
Currently, the debt limit applies only to the gross federal debt, which includes debt held by the public, such as savings bonds and T-bills, and that held in various government accounts, such as the Social Security, Medicare, and airport and highway “trust funds.” The debt limit does not apply to other government liabilities, such as the myriad “contingent” liabilities the government has assumed from the insurance and guarantees it provides to bank deposits, certain pension plans and the debts of government-sponsored enterprises such as Fannie Mae.
From an economic perspective, what really matters is the amount of debt held by the public, rather than the gross debt.
Publicly held debt represents federal borrowing in the credit markets. Such borrowing competes with private borrowers for the savings of households and businesses and increases the taxes needed to pay interest on the federal debt.
Interestingly, while the gross debt has been soaring, increasing from $712 billion in 1980 to more than $8 trillion today, the share of debt the public holds has been decreasing sharply, from 78 percent in 1980 to less than 60 percent — or $4.8 trillion — today.
As a percentage of gross domestic product (GDP), publicly held debt peaked at 109 percent of GDP in 1946, just after the end of World War II. By 1974, it equaled just 24 percent of GDP. Then it started to fluctuate, rising to 49 percent in 1993, declining over the next seven years, and increasing again starting in 2001. Most experts expect it to increase for at least several more years, perhaps to 40 percent of GDP by 2009.
This level of debt is neither extraordinary nor unmanageable. It was much higher as a percentage of GDP, for example, during the Reagan years.
What is troubling is the long-term outlook. In just two years, the first Baby Boomers will turn 62 and become eligible for Social Security. Three years later, in 2011, they will be eligible for Medicare. All those government IOUs now in the Social Security and Medicare “trust funds,” which represent most of the $3.5 trillion in “intragovernmental” debt holdings (money the government theoretically owes itself), must be paid.
Social Security and Medicare already account for about a third of all federal outlays. As more Baby Boomers retire, the share will grow. If the government is forced to borrow additional money to pay the Baby Boomers their promised benefits — which some estimates see costing at least $10 trillion — the federal debt limit would have to be increased another 140 percent or more. And that’s for these two programs alone.
If ever there was a reason to get serious about Social Security and Medicare reform, this is it.
Kerry Lynch is research director at the American Institute for Economic Research, Great Barrington, Mass.