“Interest costs matter,” my friend tells me over lunch.
“Even a small primary deficit matters because it will increase the overall debt. As the debt increases, the interest increases — and so on.”
The topic here isn’t the impact of higher interest rates on car or home buyers. It is a much bigger subject. It’s the impact of soaring interest costs and rising debt on the federal government.
It affects all of us.
This isn’t a casual topic for Michael Granof. A professor emeritus of accounting at the McCombs business school at the University of Texas, Austin, Professor Granof has devoted his career to the study of government and non-profit accounting. He served 10 years as a member of the Governmental Accounting Standards Board (GASB – the board that sets accounting rules for state and local governments) and an equal number of years on the Federal Accounting Standards Advisory Board (FASAB – the one that sets the rules for the federal government). Currently, he serves on a couple of public pension fund boards.
We met for lunch at the ATT Hotel and Conference Center in downtown Austin.
“It’s arithmetic,” he continues, “Simple arithmetic.”
He’s pointing out that accounting, however difficult the CPA exam, is not astro-physics. If debt keeps increasing, interest on the debt will increase. At some point it will overwhelm everything else.
Perpetual rising debt that increases relatively faster than the country’s gross domestic product is unsustainable.
“Yet,” he adds, “all administrations recognize this. They know what they are doing. In the federal government it’s in official documents that are signed by the secretary of the Treasury, who represents the president.”
But nothing changes.
The particular government document he’s talking about is a little-known accounting exercise called “The Financial Report of the United States Government.” The most recent report is for fiscal year 2022. I think it’s fair to say that he has a lot of respect for this report and the effort that goes into constructing it.
That’s what disturbs him.
It announces, in numbers and English, that the financing of our government is unsustainable. This is not news. It’s a conclusion found in a multitude of government documents that go back decades. It suggests that if our government reaches a financial crisis in the future, it will be one of the most thoroughly documented, projected and expected events in history.
The origins of the report trace to mid-1970s. It is an effort to present the true condition of our government in terms of a corporate-like annual report. This year’s effort clocks in at 251 pages. It is signed by Treasury Secretary Janet Yellen. It’s shorter than the 270 pages of the Social Security Trustees report or the 267 pages of the Medicare Trustees report. It’s also massively longer than the first “Prototype Report,” for 1974-75, which was signed by Treasury Secretary William Simon.
While Professor Granof and I have talked about the report before, what brought it up this time was the rise in Federal debt between the start of June and late July – more than a trillion dollars. Today, federal debt exceeds $32.6 trillion, give or take a hundred billion.
That’s a lot of debt.
The recent increase is one the fastest in our entire history. On a chart, the only other period of such rapid increase was the second quarter of 2020. That’s when public debt rose nearly $3 trillion in three months, the start of Covid.
While most politicians and many economists discuss government finances in terms of the federal deficit, down to $1.375 trillion for 2022 from $2.775 trillion in 2021, the real condition of our government is far worse.
How can that be?
Well, it’s all about what is included, or ignored, in your bookkeeping.
Page 1 of the executive summary of the report tells it like it is.
“A Snapshot of the Government’s Financial Position & Condition” notes two important numbers.
One is the “net position” of our government. That figure represents the total assets of our government, nearly $5 trillion, less its total liabilities, about $39 trillion. This leaves our government with a “net position” of negative $34 trillion. It increased $4.1 trillion from 2021’s “net position” of negative $29.9 trillion.
This week’s move by Fitch Ratings to downgrade U.S. government credit put a renewed focus on that, just as the economy is shaking off recession talk.
Another figure reveals the change in the unfunded liabilities of our social insurance programs. Those now total $75.9 trillion. That’s an increase of $4.9 trillion from the previous year. The number is the difference, in present value dollars, between what our social insurance programs will spend and the revenues they expect to receive over time.
Add those increases together — $4.1 trillion and $4.9 trillion – and the financial condition of the United States government has deteriorated by a stunning $9 trillion in a single year.
If you read to Page 7 in the report, you’ll see a wide blue band across the page. It says, “An Unsustainable Path.”
It would be comforting, here, if we could point a finger at a single president and expunge the problem with a few magical strokes. But we can’t. This has happened over decades. It has also happened under presidents of both parties. It has happened under Bidenomics and Clintonomics. It has happened under Reaganomics and Trumponomics.
But, as Professor Granof noted, it’s still simple arithmetic – even if the numbers are in trillions.
Related columns:
Scott Burns, “Social Security: It’s All About the Cash,” 06/03/2023: https://scottburns.com/social-security-its-all-about-the-cash/
Scott Burns, “Social Security: It’s Still in the Woods,” 8/2/2015 https://scottburns.com/social-security-its-still-in-the-woods/
Scott Burns, “More Social Security, Not Less?,” 12/13/2015 https://scottburns.com/more-social-security-not-less/
Sources and References:
Financial Report of the United States Government, Fiscal Year 2023: https://www.fiscal.treasury.gov/reports-statements/financial-report/
Debt to the Penny: https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny
Social Security Trustees Report, 2023: https://www.ssa.gov/oact/TR/2023/tr2023.pdf
Medicare Trustees Report, 2023: https://www.cms.gov/oact/tr/2023
Professor Michael Granof: https://www.mccombs.utexas.edu/faculty-and-research/faculty-directory/michael-granof/
Photo by Karolina Grabowska on Pexels.com
(c) Scott Burns, 2023
1 thought on “ Our Unsustainable Government: “It’s arithmetic” ”
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Both the Administration and the Congress have to agree on a budget, you should also mention the leaders of Congress, particularly in the Senate; 2007-2023 Harry Reid, Mitch McConnell, Charles Schumer.
There is no rise in debt in the time between reaching the ceiling, and raising the ceiling, as seen in the flat spots in the debt graph Aug-Oct 2021 and Jan-July 2023. Once the ceiling is raised again, the debt has to rise rapidly due to the backlog of “extraordinary measures” that have to be unwound. Thanks to NPR MarketPlace for pointing out this is completely predictable.