Paul Krugman, for example, pronounces the debt problem “mostly solved.” Matt Yglesias of Slate asks, “What sovereign debt crisis? There certainly isn’t one in the United States.” Bruce Bartlett, every liberal economist’s favorite former conservative, adds that “our long‐term budget situation is not nearly as severe as even many budget experts believe.”
Bolstered by a study from the left‐wing Center on Budget and Policy Priorities, the debt deniers claim that a combination of economic growth, tax hikes, and projected (but not yet realized) spending reductions have already significantly reduced deficits. They argue that a mere $1.2 trillion in additional tax hikes over the next ten years, and the resulting savings on interest, would enable us to “stabilize” our debt at a mere 73 percent of GDP by 2022.
Now there’s something to get excited about: stabilizing our debt at an amount equal to nearly three‐quarters of the value of all goods and services produced in this country each year. Yippee!
But even if you think that’s good news, it’s not really the truth. The 73 percent figure actually represents only that portion of the federal government’s debt classified as “debt held by the public,” primarily those U.S. government securities that are owned by individuals, corporations, and other entities outside the federal government itself. Debt held by the public currently totals roughly $11.6 trillion and is expected to rise to roughly $19.1 trillion by 2022.
Left out of this analysis, however, is roughly $4.9 trillion in “intragovernmental” debt, which consists of the debts that the federal government owes to itself, through more than 100 government trust funds, revolving accounts, and special accounts, such as the Social Security and Medicare Trust Funds (worth $2.7 trillion and $344 billion respectively). The combination of debt held by the public and intergovernmental debt yields our current $16.4 trillion in total red ink.
The debt deniers justify ignoring intragovernmental debt on the grounds that only debt held by the public competes with investment in the nongovernmental sector. Moreover, while interest on debt held by the public is paid in cash and creates a burden on current taxpayers, intragovernmental‐debt holdings typically do not require cash payments from the current budget and don’t present a burden on today’s economy.
Intragovernmental debt can also be considered somewhat “softer” than debt held by the public, since the government can control when and whether trust‐fund debt is paid through, for example, alterations to the Social Security benefit formula.