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No wonder, then, that the CBO itself warns that “gross federal debt is a poor indicator of the government’s overall financial position.” 

As the CBO explains, if we want a measure of the debt that is more economically accurate than the FDHP, we would end up with a lower, not a higher number. One such alternative nets out government financial assets, such as the outstanding balances on student loans. As of 2020, that lowers the debt ratio by about 10 percent, as shown in Figure 1. A further adjustment recognizes that the Federal Reserve is de facto a part of the federal government, and thus excludes its large holdings of treasury securities from “debt held by the public.” Adjusting for both government assets and the Fed’s securities holdings reduces the 2020 value of the federal debt to 65 percent of GDP. Figure 1 shows only the 2020 values of the alternative debt measures, but because both student loans and the Fed’s portfolio of securities have grown rapidly in recent years, showing full historical values would reduce the apparent rate of growth of the debt ratio as well as its current value. 

Do we even care about the debt ratio?

Rather than quibbling over whether debt held by the public overstates or understates the government’s financial liabilities, perhaps we should ask the more fundamental question of whether the debt ratio is a meaningful measure of fiscal sustainability in the first place. In a recent paper, economists Jason Furman and Lawrence Summers argue that it is not. The problem with the debt ratio, say Furman and Summers, is that it compares the stock of debt with the flow of GDP. But that is not how we normally think about our finances either as borrowers or as lenders. 

Suppose you are a young person on the first rung of a promising career, and you are looking to buy your first home. Of course, you are not going to pay cash – you will take out a mortgage. Accordingly, what you want to consider in deciding how much house you can afford is not the ratio of the mortgage principal to your current annual income (a stock-to-flow comparison), but rather, the ratio of your monthly payments to your monthly income (a flow-to-flow comparison). 

The payment-to-income ratio is also what the bank will look at. The 28/36 rule is a widely-used flow-to-flow formula that says monthly mortgage payments should not exceed 28 percent of a borrower’s income, and that total debt service, including car loans and credit cards, should not exceed 36 percent of income. 

Figure 2 shows what a flow-to-flow comparison looks like for the federal government. The peak of federal interest outlays as a share of GDP came in the 1980s and early 1990s, at a time when the debt ratio was less than half what it is today. The trend from 2007, projected forward to 2020 and beyond, shows not a further increase in the ratio, but a return to normal, or even a little below what was normal for the post-WWII period. There is no sign of an impending fiscal cliff like the one that looks so alarming in Figure 1.

“Every family in America has to balance their budget. Washington should, too,” John Boehner liked to say when he was Speaker of the House, a sentiment often echoed by fiscal conservatives. By that standard, the debt service burden of the federal budget looks pretty modest in comparison to the 28/36 rule that is considered prudent for households. Federal interest outlays, which the CBO now pegs at about 2 percent of GDP and expects to decline toward 1 percent, figures out to just 5 to 10 percent of federal receipts. Furman and Summers consider 2 percent of GDP to be a reasonable standard for the long run. The budget in the twenty-first century is comfortably within that range so far. 

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