A Zombie of Fiscal Hawks

It is from my personal conversation  with someone else.

That Person: The U.S. government has never run surplus since it went off the Gold Standard.
Me: It did sometimes. It barely did and the most recent one is in the Clinton era.
That Person: That is because he included Social Security Funds. Without it he did not actually run surplus. He balanced the budget but did not run surplus. So he did not decreased the debt.

Oh gosh. This kind of zombie comes to me whenever I talk with fiscal 'hawks'.

First, the fact: it is very simple. Even without Social Security funds, the Clinton Administration would still run surplus. The 2000's surplus including Social Security surpluses was 236 billion dollars. Social Security surplus was the biggest contributor to the surplus, but without it the U.S. federal government would still run 86 billion dollar surplus. Including Social Security budget balance is, in my opinion, much better because social securities benefits ought to be paid by the government if it runs out of fund. If it runs deficit, the government must take the deficit like it takes surplus.  

Second, these people do not understand what really matters when it comes to public debt. What matters is net public debt to GDP ratio, not total amount of public debt or gross public debt to GDP ratio. Why does public debt matter in the first place? If public debt is considered too large, it will drive up interest rates, so both private sector and public sector will be worse off eventually. Both will suffer from too high borrowing costs. Then, we must learn how financial institutions make decisions to lend money to a government. It is basically the same as lending to the private borrowers. They assess the government's assets in terms of value and safety and revenue collection, in other words, income. That shows the government's borrowing (more precisely paying-back) ability. However, here, the government is always in a better position than private sector. Due to its size and authority, usually, financial institutions do not require the government to provide collateral. It is enough for the government to issue bonds as security to promise it will pay back its loans. Therefore, what really matters is not total debt amount. What matters is debt to GDP ratio. If GDP is growing, then debt to GDP ratio can fall even though the total debt amount is increasing, as long as GDP grows faster than debt. Growing GDP means growing tax revenue in the given tax rates. Financial institutions know that, and so has kept lending money to the U.S. federal government even though it has huge amount of debt in total. Then another question can arise: why net debt to GDP ratio? The U.S. states and sub government agencies have debts to the federal government. The federal government may just erase those debts if it finds those states or agencies never pay back. Therefore, the actual burden to the public is only net debt. It also means the federal government ran surplus but gross debt can increase if sub-national government or sub-agencies ran greater deficit. However, net debt may still decrease and indeed did during Clinton's last three years. This is what happened then.

Or, if you still remain zombified...