The Lexington Column on the U.S. Budget and Debt and Deficits

This will be a brief note on the “Lexington” column in The Economist of February 4, 2023.  The article mainly hammers away at the political dysfunction of the U.S. government budget process: “Both parties have learned that, by luxuriating in polarisation, they can ignore that governing requires trust and compromise. Republicans can have their tax cuts, Democrats can have their spending, and they can blame each other for the debt.”

This is simplistic political analysis. For example, the Trump Administration was not adverse to spending, and deficit reduction has been more of note during Democratic rather than Republican Administrations. Tax cuts have been more characteristic of Republican administrations, but, after a tax cut that went too deep at the beginning of the Reagan Administration, it endeavored to increase revenues. And, parenthetically, I would note that the one of the best tax bills to pass Congress in the last 40 years (or more) was the Tax Reform Act of 1986, which required a bipartisan effort and was set in motion by Republican Treasury Secretaries Donald Regan and James Baker. (Some of its more notable features have since been jettisoned.)

In addition, there is the implied assertion that the current level of the debt is bad or dangerous and that the coming additions to the debt through future deficits is also bad or dangerous. Perhaps this assertion is correct, but the nearest the article comes to making this case is to point out that the debt to GDP ratio is high, that the debt held by the public is $24 trillion, and that the cost of servicing this debt represents 7% of federal outlays and that this will increase as interest rates go up. Numbers meant to be scary are not by themselves a convincing analysis.

Nevertheless, I am happy to note that Lexington did not refer to the headline figure of the debt limit ($31.8 trillion) but rather to debt held by “the public.” In the peculiar way the English language is used by the Treasury, the “public’ excludes government trust funds, such as Social Security, but does include the Federal Reserve Banks, which are technically “private” corporations. If you subtract out from the publicly held public debt the holdings of the Federal Reserve, the resulting number is sometimes referred to as the “privately held” public debt. It’s all very confusing.

For reference, here is my recent post about public debt numbers. A good, objective explanation of the statutory debt limit is in this Pew Research Center article, “5 facts about the U.S. national debt.”