What is the Government Debt?

A student emails me a question about government debt:

Professor Mankiw,

I am a student majoring in Economics at Drexel University and I really enjoy reading your blog. I think you are doing a great job with the blog as you did at the CEA and as a Harvard Professor! It is a great honor to write to you.

My question is, can you please explain in detail (or point to a good source) whether Intergovernmental Holdings, one of the two parts of the National Debt (the other being Public Debt), has an effect on the economy? Because I cannot entirely understand from my readings why it states the Intergovernmental Holdings as being only an Accounting function, yet Social Security and other such programs are a large part of the future government debt?

Thank you very much!
[name withheld]

The distinction you raise is important. If you look at, say, the back of the Economic Report of the President, you will learn that the "gross debt" is about $9 trillion and the "debt held by the public" is about $5 trillion. Most economists view the second number as more meaningful. The gross debt includes debt that the government owes to itself, such as the debt in the Social Security Trust Fund.

Here is one way to think about it. Imagine you wrote yourself an IOU and put it in your pocket. You could then say your debts have gone up (you now have to pay off that IOU), but so have your assets (that IOU is an asset to its holder--you). Writing yourself the IOU has not really changed anything. Similarly, if the govenment decided to deposit more bonds in the Social Security Trust Fund, its gross debt would go up, but its overall financial position would be neither better nor worse.

If you want to read more on the topic, let me point you toward economist Robert Eisner. Eisner makes a good case that both measures of government indebtedness are far from perfect as indicators of the government's financial condition.