Look at the Gross

I’ve always been told “never to look at the gross” on my paychecks. By the time that taxes from local, state, and federal government come out I’ll be left with a (more) paltry net sum. But it turns out that the same complex accounting that makes me look only at the net should increase my attention to the government’s gross. According to recent presentations to the President’s Fiscal Responsibility Commission, the US now carries a debt burden in excess of 80 percent of GDP. Yet many experts continue to quote the more reasonable-sounding “debt held by the public”, which produces a debt to GDP ratio closer to 60 percent.

The net value on a paycheck on a government budget or debt level measures only the value of transactions today. For an individual worker this makes since, I expect to receive payments tomorrow but only if I keep working. Yet the government obligates itself to make payments to long-standing programs like Social Security and Medicare well into the future. These future obligations generate massive differences between gross and net debt levels.

As the figure below shows, the United States resembles other advanced economies in hidden gross debt.

Emerging economies have a lesser wedge between net and gross debt primarily because they have weaker social safety nets. Of course, the United States created it's safety nets in punctuated phases. Take for instance, the first Social Security beneficiaries who got very large benefits relative to their contributions. If an emerging market economy were to start such a program immediately it would of course radically alter the gross/net wedge

What separates the United States from both advanced and emerging markets is the sheer size of all debt. Within the IMF data, the United States ranks only behind Greece, Italy, Japan, and Belgium in its level of overall debt. In fact in 2010, IMF estimates show the US crossing the 90 percent threshold cited by Reinhart and Rogoff as a trigger for debt crises.