Competing GDPs in the Debt Ceiling

The Economist examined the U.S. government's bookkeeping methods and noticed that our economic models tend to present a rosier outlook than the equivalent European number crunching:

Take public-sector debt. The definition used in Washington, DC, is “federal government debt held by the public”, which stood at 62% of GDP at the end of 2010. But if you instead use Europe’s preferred measure—general government gross debt, which also includes the borrowing of state and local governments and Treasury securities held by other government bodies, such as the Social Security Trust Fund—it jumps to 92% of GDP (see left-hand chart). That is on a par with Portugal’s level of public debt. Likewise, America’s budget deficit of 8.9% of GDP last year would have been 10.6% using Europe’s preferred measure.

Decisions on economic definitions will play a major role in the resolution on the debt ceiling, which still looms large unless Congress takes action in the next 11 days. A clean bill to raise the limit appears unlikely to pass the Republican-controlled House, with some form of debt reduction as the likely compromise. A cap on federal government spending could be the key point of contention between the two sides. Paul Ryan's budget plan proposed capping federal spending at 20.25 percent of GDP, while Obama instead suggested implementing a fail-safe trigger, which would automatically raise revenue and reduce spending if the deficit is higher than 2.8 percent of GDP. The early stages of negotiation have tilted closer to Ryan's vision, with Democratic Sen. Claire McCaskill joining Republican Sen. Bob Corker in suggesting a 20.6 percent of GDP budget cap.

The Economist's article serves as a reminder that these models are not absolutes that exist in and of themselves, but rather are human-created methods of measuring trends. The gap in terminology between Obama and Ryan's plans may be subtle, but the two ideas would result in vastly different options for debt reduction. Absolute caps on federal spending such as Ryan's plan would impede future congressional action based on a single measure and would essentially force Congress to cut programs rather than considering new taxes. Obama's fail-safe would also limit available options, but it at least offers flexibility in determining whether the budget would be rebalanced through adding new revenue streams or cutting existing outlays.

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