From: thompson@atlas.socsci.umn.edu (T. Scott Thompson)
Subject: Re: DEBT vs. DEFICIT
Reply-To: thompson@atlas.socsci.umn.edu
Organization: Economics Department, University of Minnesota
Date: Tue, 25 Aug 1992 19:28:00 GMT

whitlock@vaxb.gbus.virginia.edu (Reid E. Whitlock) writes:

[stuff deleted]

>>It depends on how you define "the" debt.  Suppose we define the
>>government debt to be the _net_ indebtedness of the U.S. Treasury.
                            ^^^^^^^^^^^^^^^^^^
>>This seems to be the most reasonable definition.

>O.K. so, far so good.

>>Then if the government runs a budget surplus, the debt is
>>"automatically" paid down by that amount _by_ _definition_.

>If the government generates the surplus by, say confiscating billions of 
>drug money illegally laundered, or by getting incredibly good at 
>collecting taxes from waitresses and hookers, or from raising taxes on 
>booze and cigarettes, then the debt --- the obligation of the U.S. 
>Treasury to make good on Treasury bills, savings bonds, etc..--- would, it 
>seems to me, be unchanged (i.e. not "automatically" adjusted). A separate 
>action would have to take place, that of making good on some bonds or T-
>bills due and NOT issuing more new ones to replace them. Better yet, the 
>government would use the new revenue (the "surplus") to buy back its debt, 
>even if it were doing so prematurely (before maturity). The analogy here 
>would be to buying back one's shares if one is a firm. The value of the 
>shares remaining (using the analogy---the relative exchange rate---the 
>perceived value of the U.S. dollar) would RISE. I'm not sure this separate 
>action would necessarily take place at all. 

Not true.  You seem to think of the national debt as being simply the
sum total of U.S. Treasury liabilities in the form of T-bills and
T-notes.  The point of my post is that this is not a very good
definition, since it ignores the fact that the government holds assets
as well.  This is why I started by defining the debt as _net_
government indebtedness.  If the government brings in more revenues
(by confiscating cash, selling confiscated goods, making the IRS more
efficient, etc.)  then the assets of the U.S. government rise.  Since

    net indebtedness = liabilities to other parties - assets held

you can decrease the debt by increasing assets held.  There is no
requirement to call in T-bills in order for the national debt to
shrink.

In fact, some economists (not me!) claim that the real national debt
is very small, since many official assets (such as buildings, land,
roads, submarines, etc.) are not counted in the official statistics.

I'm not sure I get your point about exchange rates.  I never tried to
suggest that the particular mix of assets and liabilities in the
government's portfolio has no effect on prices.  Quite the contrary.
It certainly matters whether the Treasury finances a deficit by
selling gold vs. selling T-bills, for example.

>>The deficit is _by_ _definition_ the change in net government
>>indebtedness. 

>In a given year, right?

In any given period.  The official fiscal year for the U.S. government
runs from Oct. 1 to Sept. 30.  (Fiscal 1993 will start on Oct. 1,
1992, for example.)

>> Thus a government surplus occurs if and only if the
>>deficit is paid down by exactly the same amount.

>Same amount as what?

Sorry about the confusion.  I used "deficit" where I should have used
"debt" in this sentence.  The idea is that the size of the surplus in
any given period must be exactly the same as the reduction in the debt
in the same period.

>>Looking at cash reserves vs. T-bills does not change the basic
>>argument that surpluses are equivalent to reductions in the deficit.
>>The U.S. Treasury holds some cash because it needs cash to buy things,

>what does the Treasury (U.S. government) need to buy with CASH? I'd think  
>that it, of all entities, would work almost exclusively by checks and 
>electronic transfers.

You are right. I was using the term "cash" in a somewhat generic
fashion.  Most economists make essentially no distinction between
"cash" as in "currency" and "cash" as in checking accounts or other
demand deposits in banks.

>Even though I was the one who made the original posting as a confused 
>person, I think you're maybe making matters worse here. Aren't you mixing 
>up "profit and loss" with "assets and liabilities"?  Treasury reserves, as 

How do you define "profit" or "loss" for the U.S. government?  For
example, when the government builds a new highway, or pays out a
welfare check, are these to be considered "losses?"  If the Internal
Revenue Service brings in more money than it spends, is this a
"profit".  I don't think these terms have much meaning when refering
to government.

I suppose that you could define the net profit of the U.S. government
in any given fiscal year to be revenues received - expenditures (which
we normally call "net cash flow").  This would just be the same as the
budget surplus.

>I understand it, whether gold, cash, foreign currency, Special Drawing 
>Rights or whatever, are assets. They are part of the country's wealth. 
>They have nothing (necessarily) to do with any current year transactions. 
>It seems to me you could pay down the debt by "selling assets", but that 
>does not affect the deficit.

You are right that selling assets does not by itself affect the
deficit.  However, selling assets does not affect the debt either.  It
merely exchanges one kind of asset for another.  (The money received
in payment is also an asset.)  On the other hand, if the government
brings in more money than it spends through the "current year
transactions" then the difference goes on deposit somewhere, is used
to purchase a real asset, or is used to retire old debt.  In each
case, net indebtedness falls.  Thus current year transactions are
intimately linked to total net indebtedness.  The link to individual
government assets (such as gold, etc.) is much weaker, since an
increase in holdings of one asset may be offset by a decrease in
holdings of another asset without any change in net indebtedness
taking place.

>Does it require Congressional approval even if it's the Treasury itself that 
>brings in the windfall (rather than some other agency, not directly involved 
>in the management of the country's money)?

Yes.  The U.S. Treasury is not authorized to spend any funds, no matter
what the source, without Congressional authorization.

P.S. I tried replying by e-mail but it bounced.
--
T. Scott Thompson              email:  thompson@atlas.socsci.umn.edu
Department of Economics        phone:  (612) 625-0119
University of Minnesota        fax:    (612) 624-0209
Newsgroups: sci.econ