Perspective on federal debt makes it less awesome
The federal government's borrowing requirements aren't so big. They are far less serious than in 1975, at the conclusion of the last recession.Skip to next paragraph
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That statement may sound strange in light of the talk of a $100 billion budget deficit. But two economists at the Federal Reserve Bank of Philadelphia have made some measurements that make the federal deficit seem substantially less alarming.
In fact, their study makes Wall Street's concern that federal debt will ''crowd out'' private investment and force up interest rates seem highly exaggerated.
What the two economists, Brian Horrigan and Aris Protopapadakis, have done requires several steps:
1. They take the federal budget deficit by a calendar year - not the fiscal year (first column in accompanying table).
2. They add in federal government borrowing that does not appear in the federal budget (Column 2). That includes debts of the Postal Service, the Tennessee Valley Authority, the Federal Financing Bank, and so on.
3. They include borrowing by state and local governments, since these debts also have an impact on the private credit markets (Column 3). Federal government spending amounts to about 20 percent of gross national product (GNP), but total government spending represents 32 percent of GNP.
4. Then they subtract the federal debt bought by the Federal Reserve System as it creates new money, or bought by such federal agencies as the Social Security Administration as an investment, or by state and local governments. That portion of the debt need not be bought by the public. The rest is privately held total government debt, or ''gross borrowing'' (Column 4).
5. Even that number exaggerates the effect of government sector borrowing on the credit market, because it does not take account of inflation. Inflation wipes out the real cost of a portion of outstanding federal debt. So the authors take the current inflation rate and take that percentage of the total federal government debt held by the public (about $800 billion today). The result is subtracted from gross borrowing to get ''federal net borrowing.'' The same subtraction process is done to get ''governmental net borrowing.''
The authors conclude: ''Net borrowing is the correct gauge of any potential crowding out of private borrowers from the credit markets.''
To most people these figures are probably surprisingly small. ''Federal net borrowing'' in calendar 1981 was only $23.2 billion. Or, if you wrap in state and local government finances, ''total government net borrowing'' was just $19 billion, far lower than the $52.8 billion in 1975.
That $19 billion number compares with net private investment in 1981 of $130. 2 billion. In other words, there wasn't that much crowding out last year. The authors add in an article in their bank's Business Review: ''The data show that net government borrowing was very small relative to net private investment in the last decade.'' In 1980, for instance, net government borrowing was only 12 percent of net private investment. Only during the 1975 recession was government borrowing large relative to private investment that year of $89.1 billion.
Another way the authors gauge the importance of government net borrowing is to compare it with government net investment. Net government investment measures the net addition to the physical capital stock, such items as buildings, bridges , highways, and defense installations owned by the federal, state and local governments. In 1981, total net government investment increased $26.5 billion, somewhat more than the $19 billion of government net borrowing.
The authors say that ''government net borrowing is considerably smaller than government net investment, except during periods of recession. Government has been collecting more taxes than it needs in order to finance its current expenditures. All of net borrowing and some tax revenues go to finance government investment projects. . . .''
Messrs. Horrigan and Protopapadakis find it ''difficult to see how these relatively small amounts of net borrowing could have caused the record high interest rates experienced recently.''
Looking at this year, when the administration is forecasting a budget deficit of about $97 billion, federal net borrowing will amount to $46 billion, the two economists calculate. That is large by historic standards. But it is some 47 percent less in real terms - if deflated dollars are used - than the total government net borrowing in 1975.
Said Mr. Protopapadakis in a telephone interview, ''That figure is small. It's not a big deal.''
However, if Congress allows the deficit to grow to, say, $200 billion by 1985 and inflation were running only 3 or 4 percent, then government borrowing would become significant. ''That is a big deficit,'' Mr. Protopapadakis said.
So Congress must continue its efforts to trim the deficit. But the deficit must be kept in proper perspective. There should be less alarm - more action.
Government debt and deficits in billions of dollars (Annual increases in total government debt can be quite different from budget deficit) Reported Rise in Rise in Rise in federal total state, city, privately held budget federal and federal government Year deficits debt debt debt 1981 61.6* 98.0* 119.3* 89.0* 1980 61.2 84.5 108.9 90.3 1979 14.8 54.5 72.7 43.4 1978 29.2 68.5 90.9 60.2 1977 46.4 63.7 80.9 53.2 1976 53.1 77.9 91.0 63.0 1975 69.3 83.6 97.2 83.3 1974 11.5 23.3 38.1 24.7 1973 5.6 20.4 33.3 11.9 1972 16.8 25.1 39.3 26.0 *Preliminary estimates Source: Federal Reserve Bank of Philadelphia