On May 29, London's Financial Times reported some startling news about the U.S. national debt. Instead of being about $3.5 trillion, as commonly understood, it was actually $44 trillion, according to a suppressed Treasury Department report by economists Kent Smetters and Jagadeesh Gokhale.
This was an odd story to put on page one, since it mostly just repeated information that had been in the public record for a while. Smetters revealed the $44 trillion number during congressional testimony on March 6. On May 9, the supposedly suppressed report was the object of a conference at the American Enterprise Institute and was posted on the institute's website. On May 19, economists Laurence Kotlikoff and Jeffrey Sachs published an op-ed article in the Boston Globe that discussed the study in detail.
Moreover, the idea that the study was suppressed in any way fell apart when the authors denied it. This fact was easily confirmed because the Financial Times posted interviews with the study's authors on its website in which they rejected the charge. It also turned out that much of the substance of the study appeared in the 2004 budget in a chapter titled "The Real Fiscal Danger," as well as the Financial Report of the United States Government released in March.
Once these facts became known, the press lost interest in the story. No American paper followed up on the Financial Times report. However, it continues to be a topic of interest in cyberspace, where several websites known as "blogs" have run extensive commentaries. These include those of economists Brad DeLong and Kevin Drum.
The first thing to know is that this $44 trillion figure is based on projecting taxes and government spending under current law in perpetuity -- two-thirds of the debt comes more than 75 years in the future. To put the numbers into today's dollars, they are adjusted both for inflation and the rate of interest. When calculating figures this way, very small changes in assumptions can radically alter the results. In any case, the debt is not particularly large when put in context. When the size of the future economy is calculated the same way as the $44 trillion debt figure, it comes to $682 trillion. Thus this astronomical debt that so alarmed the editors of the Financial Times turns out to equal just 6.5 percent of the gross domestic product -- something to be concerned about, but hardly a crisis in the making.
The real purpose of the study was not to alarm people about deficits 100 years or more from now, but to help inform policymakers considering significant changes to programs such as Social Security and Medicare. Using a conventional 75-year time horizon, for example, tends to exaggerate the cost of shifting toward private accounts for Social Security, because much of the saving will fall more than 75 years in the future.
Nevertheless, the figures reveal important imbalances in our largest entitlement programs. The study shows that the biggest fiscal problem we have is in Medicare. It accounts for $37 trillion of the $44 trillion debt. Almost all the rest is accounted for by Social Security, which has promised benefits $7 trillion greater than future revenues will support.
Interestingly, the non-entitlement portion of the budget -- national defense and everything else the federal government does -- runs a substantial surplus. Future revenues are estimated at $85 trillion and spending at $80 trillion. When one throws in the national debt, as conventionally measured, the non-Social Security, non-Medicare portion of the budget is roughly in balance.
This fact puts a lie to the notion that recent tax cuts have somehow contributed significantly to a $44 trillion debt. The imbalances in Social Security and Medicare are inherent in those programs and will not be cured except by fundamentally restructuring them. Raising taxes or rescinding recent tax cuts will not suffice. Payroll taxes would have to roughly double immediately and stay at that level forever to cover the deficit, or income taxes would have to rise by 70 percent.
Of course, if taxes did rise by such an amount, future economic growth would be affected. We would not get $682 trillion of GDP in the future, but considerably less. That will require even higher taxes to pay promised benefits, which in turn will further reduce growth.
In any case, it is extraordinarily naive to think that higher taxes today will ever be used to reduce deficits 75 or more years in the future. The money will just get spent today. If anyone really cares about the federal government's indebtedness, they should oppose new entitlement programs, such as the prescription drug plan being considered in Congress, as strenuously as possible.