Senate Budget Committee

This past Tuesday, the Senate Budget Committee met with three highly reputable economists that are also professors at U of M, MIT, and Georgetown, respectively, to discuss the problems with the deficit.  Head of the committee, Senator Kent Conrad, clearly labeled what Congress is doing to the American Public.   The goal of the committee is to bring the budget to 3% of GDP in five years and to balance it in 10 years starting from the day the budget is finalized.  The challenges facing the government could and well be the most important challenges we have faced to date.  Senate Conrad also defined the differences between the different terms thrown around for national debt.  See below. 

Public debt, money borrowed from public (includes anyone who purchases U.S. bonds and treasury notes), is currently at 60% of GDP.  Gross debt is at 90%.  Difference between the two is that gross debt also includes what’s owed from trust funds, Medicare, social security.  The budget focuses on gross debt, as all debts must be paid.  So, from a budgetary standpoint, debt can only be paid by current income.  There is a real budget consequence when entitlement programs were producing more money they needed, then the process reversed, and now are spending more money than the trust accounts are taking in.  This has happened to Social Security and Medicare, which are both cash-negative, TODAY. 

Economists start with public debt because gross debt understates the situation.  From a budgetary standpoint, future commitments have covered by a trust fund (secured income).  So they add up all future explicit commitments to some large number that doesn’t apply to today’s debt (it isn’t a debt until the commitment is due).  Furthermore, public debt numbers are readily available and fairly easy to quantify.  As Dr. Johnson put it “The great thing about being the United States is that we are the only reserve currency particularly given the situation with the Euro zone”.  This means that the market will allow us to run up more debt at low interest rates as we are the only safe option out there.  This is also extremely risky because that means the fate of the world’s economy lies in American’s hands.  The committee goes further into detail on how there are many implicit liabilities from internal debt (exchange of funds between government accounts) that haven’t been quantified, which is on the list of things-to-do for the experts.

The methodology used by the economists is to start with public debt, find out what is owed and what the market will pay for issuing new debt, forecast the budgetary repercussions contingent upon future liabilities and different scenarios around that model.  If we have a few more crisis, the model will need to be changed to reflect Gross debt, but for the current time, the country should focus on the public debt.  By establishing a fiscal commission now to begin creating medium-term fiscal framework, the financial industry can begin clearing the clouds of uncertainty.  A part of why we get what we get is because we don’t address the issues immediately and allow for uncertainty to remain in the marketplace.