A billboard with a ticker keeps track of the US national debt. Photo: YouTube
by Daniel Blitz and Robert Dugger
by Daniel Blitz and Robert Dugger

The US deficit is much larger than official estimates – if hidden costs are taken into account

Daniel Blitz and Robert Dugger say upgrading the country’s infrastructure and transitioning to clean-energy systems are upcoming expenditures that are not accounted for in the US’ calculations of its deficit

Former US Treasury Secretary Lawrence H. Summers recently quipped: “Fiscal stimulus is like a drug with tolerance effects; to keep growth constant, deficits have to keep getting larger.”

People like Summers worry about deficits because they doubt that the money the government is borrowing is being spent in ways that will push the long-term growth of gross domestic product above that of the debt. Unless the mix of spending changes, the debt-to-GDP ratio will continue to grow, foretelling disaster.

Others do not share such concerns. On the political left, Nobel laureate Paul Krugman, for example, argues that for “a country that looks like the United States, a debt crisis is fundamentally not possible.” On the right, John Tamny, a Forbes contributor, says, “Ignore the endless talk of doom, budget deficits really don’t matter.”

But while judgments differ about the sustainability of US government debt, they both accept the standard measure of it as accurate. This is a mistake, and possibly a catastrophic one.

The Congressional Budget Office (CBO) recently reported that the federal budget deficit in the first 10 months of this fiscal year was US$116 billion higher than it was at the same time last year. The CBO is now projecting that the annual deficit will reach US$1 trillion by 2020. This is worrying, but it does not reflect the harsh truth. The annual deficit almost certainly surpassed US$1 trillion last year.
US Federal Reserve chairman Jerome Powell testifies on monetary policy before the House Financial Services Committee on Capitol Hill in Washington on February 27. Photo: Abaca Press/TNS)

To understand why, think of America as a home with a leaky roof. If you wanted to sell that home to a buyer who is financing the purchase with a mortgage, federal real-estate law would require you to get an appraisal, which would show that the roof needs repairs.

In this scenario, your maintenance delays cannot be ignored. The law requires that you disclose and pay for the hidden costs of repairing the roof. Otherwise, you are stealing from the buyer.

True, unlike the mortgage on your balance sheet, you may not regard roof maintenance as a current liability. But putting it off doesn’t make it disappear. It is still a real debt – just one that has gone unaccounted for.

The federal government also has debt that has not been accounted for, and which one doesn’t often hear about. The debt that has been accounted for is the US$15.6 trillion held by the public in the form of US Treasury bonds.

The debts that have not been accounted for include the deferred costs of maintenance on roads, water systems and 54,560 structurally deficient bridges as well as the yet-to-be-built low-carbon energy systems necessary to mitigate the catastrophic effects of climate change. And these are just two broad examples.

A power plant is seen behind the Manhattan Bridge in New York in March. Both US infrastructure and energy systems are due for an upgrade. Photo: EPA-EFE
So, just how much hidden US debt is there? At this point, we must rely on rough estimates. For example, according to a 2016 report from the American Society of Civil Engineers (ASCE), upgrading the country’s crumbling infrastructure would cost US$5.2 trillion.
Because climate change and infrastructure security are national issues ... the federal government is ultimately responsible for that US$11.8 trillion in infrastructure- and environment-related debts
And, according to a 2014 International Energy Agency (IEA) report and our own calculations based on the US share of global carbon dioxide emissions, transitioning to a clean-energy system would cost an additional US$6.6 trillion. All told, that is $11.8 trillion in unaccounted-for non-inflation-adjusted liabilities.
To be sure, these debts are not solely federal liabilities. In the past, state and local governments were responsible for most infrastructure and climate costs. However, already burdened with more than US$3 trillion of municipal debt, state governments are overwhelmed by the scale of their deferred-maintenance liabilities and the only recently documented costs of climate change abatement.

However, because climate change and infrastructure security are national issues, rather than local, the federal government is ultimately responsible for that US$11.8 trillion in infrastructure- and environment-related debts. They are America’s national “leaky roof”.

That figure increases every year, because as bridges continue to weaken, it costs even more to fix them, and as sea levels and temperatures continue to rise, and as forest fires become more severe, it costs more to mitigate the damage. In fact, between 2012 and 2016, the ASCE increased its estimate of America’s annual infrastructure-investment gap by US$221 billion – about US$55 billion per year.

And between 2012 and 2014, the IEA increased its estimated cost of moving to a clean-energy system by roughly US$270 billion per year. Together, the unaccounted-for inflation-adjusted deficit amounted to US$345 billion – just from delaying needed infrastructure and climate abatement spending.

The 2017 US federal deficit was US$665 billion, reflecting the amount by which debt that is actually accounted for increased. If infrastructure and climate debt that is not accounted for were to be included, the all-in deficit in 2017 would have been over US$1 trillion. Yes, these are back-of-the-envelope calculations, but they point to an urgent question: why isn’t the US counting its hidden debts?

The short answer is that the law doesn’t require it. The federal “debt limit” was never a firm construct, and under pressure it became a squishy “ceiling suspension” that allows the government to borrow as much as it wants.

Meanwhile, a congressional rule that was intended to ensure fiscal responsibility by prohibiting deficit increases above US$1.5 trillion within a 10-year window has become an accounting trick to escape responsibility for the 11th year and beyond.

But just as we are stealing from the homebuyer if we do not disclose and pay for our leaky roof, we are stealing from future generations of Americans when we ignore the full extent of government liabilities. Until all debt is counted, we cannot even begin to know whether fiscal policies are having positive or negative effects on future growth.

Daniel Blitz is an investment management consultant. Robert Dugger is managing partner at Hanover Provident Capital. Copyright: Project Syndicate