To be fair, it seems to be that it only makes sense too look at the current deficit and national debt in terms of percentage of GDP. I haven't really seen these numbers (haven't looked).
Of course that's what disturbs me about consumer debt right now - the record percentages.
Does anyone think we're headed for the "liquidity trap"?
ac, my point here was to show how bad things can happen (pension plans fail) and that makes the current unified budget improve! Not exactly good news, and why we need to look past the unified budget for the real story.
Last month I noted: "As a percent of GDP, the deficit has improved slightly over the last few years." This post was already too long, so I left that out.
The structural Bush deficit is about 4.5% of GDP - and that is the #1 fiscal challenge for the U.S.
Ellen1910, I'm not worried about most of this debt being converted. Unlike the SS trust funds, most of these other funds grow slowly over time.
monkyboy, there is the annual surplus for Social Security - the CBO is estimating the surplus (a positive number) will be $177 Billion this year. I think it will be even higher.
And, yes, the on-budget deficit is higher than the unified deficit because SS is positive.
The CBO projects the on-budget balance to be minus $437 Billion. If you add the SS annual flow of positive $177 Billion, you get the unified budget balance of minus $260 Billion.
The increase in the National Debt will be about $600 Billion this year. That means the Federal government is spending $600 Billion more than it takes in income, corporate and other taxes.
Luckily Social Security is running a surplus of $177 Billion and other trust funds an usually high surplus of $163 Billion this year. So the Federal Government borrows those surpluses with Intragovernment Debt.
Then the government only has to borrow $260 Billion from the Public. And that is the number that is reported as the "unified budget".
monkyboy, it's hard to compare the government budgeting to a company. Companies follow accrual accounting rules, and it mostly makes sense for governments to follow cash accounting rules.
Even when the government is trying to address a demographic issue (like having the Boomer's prepay a portion of their SS) it still makes sense to be on a cash basis - and separate SS from the rest of the accounting - exactly what the Greenspan SS commission recommended and also happens to be the current law. Whenever the budget is reported, by law it should exclude SS - except no one follows the law, and the media doesn't report the on-budget deficit. Very frustrating.
As the post noted, there are some special problems with the Other Trust Funds this year. When more pension plans fail, the unified budget improves - and that doesn't make sense.
Also, each trust fund is reported using accrual accounting (like the Pension BGC or SS). So issues can be identified and addressed on a fund by fund basis.
Why do you think it makes sense to view government accounting on a cash rather than accrual basis? Is it because many of the debts are "contingent liabilities", both hard to estimate and not certain to be paid? (Congress can erase many of the governments obligations by changing the laws that create them, after all.)
Still, an accrual-based accounting would address your main point in the piece, that getting a one billion dollar asset for assuming 2 billion dollars of future debt looks marvelous on a cash accounting basis, but not so marvelous with accruals. Normal corporate accounting may not be appropriate for government, but pure cash accounting opens the door to quite a lot of funny business, no?
Thanks much for your blog, one of the best, informative, well-explained, and concise.
I always poo-pooed the "Debt Clock," but I'm beginning to wonder whether it's coming time to treat the Debt/GDP ratio seriously.
US debt is, now, around 2/3 of GDP, and if IIRC about half of that total is comprised of non-negotiable instruments held by government trust funds -- principally, the SSTF. Fifteen or so years out we'll begin cancelling these instruments -- that is, Treasury will sell a GO instrument to investors, hand the proceeds to the SSTF trustees, and cancel an equal amount of SSTF non-negotiable instruments, all as a wash transaction.
Now, assuming that investors (foreign central banks and the public, foreign and domestic) recognize the total debt as subject to full faith and credit, we should conclude that a 2/3 debt ratio does not make our debt unattractive -- or even, particularly noteworthy.
Is there, though, some debt/GDP ratio at which we begin to have to pay significantly higher interest rates to get our debt sold? What, if anything, does economic history tell us?
Central Banks Favor U.S. Agency Debt Over Treasuries (Bloomberg)
"Central banks are diversifying their assets at a faster rate. They bought about $14 billion in agency debt on average every month this year, up from $12 billion in 2005. The banks now hold $535 billion in agency securities, Fed data show."
Steve Waldman, great question. The cash accounting provides some useful information - how much the U.S. needs to borrow in a given year from the public.
Accrual accounting would just provide a big scary number. What we would really like to know is what percent of GDP, over the years, do have to dedicate to that big scary number. If the economy grows fast enough, the debt will be small as a percent of GDP, and the debt will be easy to handle. If the economy grows too slow, the government will change the rules (as you suggested)!
So I guess it is complicated. I don't think cash accounting is sufficient - for reasons I outlined in this post. And I don't think accrual accounting is appropriate. So we need some combination of both.
CR,
One cash accounting item that concerns me is the pension liability accruals that are not included in compensation costs in the year earned. Pensions are part of employee compensation. With some of the generous pensions offered in federal jobs, this can easily amount to an effective deferral of up to 40% (assume income level with inflation, 30 working years, 20 retirement years).
I don't believe these pensions can be retroactively altered.
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To be fair, it seems to be that it only makes sense too look at the current deficit and national debt in terms of percentage of GDP. I haven't really seen these numbers (haven't looked).
Of course that's what disturbs me about consumer debt right now - the record percentages.
Does anyone think we're headed for the "liquidity trap"?
ac, my point here was to show how bad things can happen (pension plans fail) and that makes the current unified budget improve! Not exactly good news, and why we need to look past the unified budget for the real story.
Last month I noted: "As a percent of GDP, the deficit has improved slightly over the last few years." This post was already too long, so I left that out.
The structural Bush deficit is about 4.5% of GDP - and that is the #1 fiscal challenge for the U.S.
Best Wishes.
CR --
Are all (almost all?) of the assets of the various trust funds you listed invested in non-negotiable US debt instruments?
And will the appetites of foreign central bankers and the public be there when we want to convert this debt?
Isn't the Social Security balance negative?
Otherwise, subtracting a positive number would actually increase the on-budget balance??
Or is the Social Security balance just ignored for the on-budget balance???
I'm so confused?!?!?
Ellen1910, I'm not worried about most of this debt being converted. Unlike the SS trust funds, most of these other funds grow slowly over time.
monkyboy, there is the annual surplus for Social Security - the CBO is estimating the surplus (a positive number) will be $177 Billion this year. I think it will be even higher.
And, yes, the on-budget deficit is higher than the unified deficit because SS is positive.
The CBO projects the on-budget balance to be minus $437 Billion. If you add the SS annual flow of positive $177 Billion, you get the unified budget balance of minus $260 Billion.
On-budget = unified budget - SS.
Best Wishes.
monkyboy, maybe this will be clearer:
The increase in the National Debt will be about $600 Billion this year. That means the Federal government is spending $600 Billion more than it takes in income, corporate and other taxes.
Luckily Social Security is running a surplus of $177 Billion and other trust funds an usually high surplus of $163 Billion this year. So the Federal Government borrows those surpluses with Intragovernment Debt.
Then the government only has to borrow $260 Billion from the Public. And that is the number that is reported as the "unified budget".
Best Wishes.
Thanks, CR.
Would a company that funded its pensions in the same manner as the U.S. government be breaking any laws, BTW?
monkyboy, it's hard to compare the government budgeting to a company. Companies follow accrual accounting rules, and it mostly makes sense for governments to follow cash accounting rules.
Even when the government is trying to address a demographic issue (like having the Boomer's prepay a portion of their SS) it still makes sense to be on a cash basis - and separate SS from the rest of the accounting - exactly what the Greenspan SS commission recommended and also happens to be the current law. Whenever the budget is reported, by law it should exclude SS - except no one follows the law, and the media doesn't report the on-budget deficit. Very frustrating.
As the post noted, there are some special problems with the Other Trust Funds this year. When more pension plans fail, the unified budget improves - and that doesn't make sense.
Also, each trust fund is reported using accrual accounting (like the Pension BGC or SS). So issues can be identified and addressed on a fund by fund basis.
Best Wishes.
Thanks again, cr.
A little off topic info...
Iraq's inflation rate seems to have hit 70% a year!
Iraqi inflation hits 70% | 2006 | AMEinfo.com
I imagine it can't be easy working in the Iraqi Finance Ministry these days...makes our finance problems seem...solvable.
Speaking of Iraq, isn't Bush still funding this outside of the budget?
Captain Spaulding wrote, Speaking of Iraq, isn't Bush still funding this outside of the budget?
Outside the normal appropriations process, because IIRC much/most of the Iraq spending is in the form of emergency bills.
That doesn't mean it's "off-budget," though, IIRC.
CR,
Why do you think it makes sense to view government accounting on a cash rather than accrual basis? Is it because many of the debts are "contingent liabilities", both hard to estimate and not certain to be paid? (Congress can erase many of the governments obligations by changing the laws that create them, after all.)
Still, an accrual-based accounting would address your main point in the piece, that getting a one billion dollar asset for assuming 2 billion dollars of future debt looks marvelous on a cash accounting basis, but not so marvelous with accruals. Normal corporate accounting may not be appropriate for government, but pure cash accounting opens the door to quite a lot of funny business, no?
Thanks much for your blog, one of the best, informative, well-explained, and concise.
I always poo-pooed the "Debt Clock," but I'm beginning to wonder whether it's coming time to treat the Debt/GDP ratio seriously.
US debt is, now, around 2/3 of GDP, and if IIRC about half of that total is comprised of non-negotiable instruments held by government trust funds -- principally, the SSTF. Fifteen or so years out we'll begin cancelling these instruments -- that is, Treasury will sell a GO instrument to investors, hand the proceeds to the SSTF trustees, and cancel an equal amount of SSTF non-negotiable instruments, all as a wash transaction.
Now, assuming that investors (foreign central banks and the public, foreign and domestic) recognize the total debt as subject to full faith and credit, we should conclude that a 2/3 debt ratio does not make our debt unattractive -- or even, particularly noteworthy.
Is there, though, some debt/GDP ratio at which we begin to have to pay significantly higher interest rates to get our debt sold? What, if anything, does economic history tell us?
Central Banks Favor U.S. Agency Debt Over Treasuries (Bloomberg)
"Central banks are diversifying their assets at a faster rate. They bought about $14 billion in agency debt on average every month this year, up from $12 billion in 2005. The banks now hold $535 billion in agency securities, Fed data show."
Steve Waldman, great question. The cash accounting provides some useful information - how much the U.S. needs to borrow in a given year from the public.
Accrual accounting would just provide a big scary number. What we would really like to know is what percent of GDP, over the years, do have to dedicate to that big scary number. If the economy grows fast enough, the debt will be small as a percent of GDP, and the debt will be easy to handle. If the economy grows too slow, the government will change the rules (as you suggested)!
So I guess it is complicated. I don't think cash accounting is sufficient - for reasons I outlined in this post. And I don't think accrual accounting is appropriate. So we need some combination of both.
Thanks for the nice comments too.
Best Wishes to all.
CR,
One cash accounting item that concerns me is the pension liability accruals that are not included in compensation costs in the year earned. Pensions are part of employee compensation. With some of the generous pensions offered in federal jobs, this can easily amount to an effective deferral of up to 40% (assume income level with inflation, 30 working years, 20 retirement years).
I don't believe these pensions can be retroactively altered.
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