| Robert Dodge: Is paying down debt a bad idea? 04/09/2001 By Robert Dodge / The Dallas Morning News WASHINGTON – During the era of big budget deficits, political leaders frequently spoke out about the horrors of the growing federal debt. Future generations, they argued, must be saved from the crushing debt burden.
No one could have imagined how quickly the booming economy of the 1990s would change things. With the federal surplus projected to grow every year, paying down the $3.4 trillion of public debt is possible.
Now there are concerns that might not be such a great idea.
"I see no economic benefit or otherwise to paying it off," said Bruce Bartlett, a senior fellow at the National Center for Policy Analysis, a conservative think tank in Dallas.
Such comments would have been economic blasphemy just a couple of years ago. But today, they have currency, largely because Federal Reserve Board Chairman Alan Greenspan gave them legitimacy by being the first policy-maker to question whether surpluses should be allowed to mount after the debt had been eliminated.
There are two primary reasons given for not eliminating the debt:
• The Treasury would incur substantial additional costs if it tried to redeem securities before they mature.
• Treasury securities serve numerous purposes in financial markets and the economy for individual investors, as well as central banks and state and local governments.
And Mr. Greenspan had other concerns about what happens if the government pays off all its debts and continues to accumulate a surplus.
Testifying before the Senate Budget Committee, he said the government could not hold cash and would have to invest in something. And that something, he warned, would be stocks and bonds, turning the federal government into a big holder of assets in the private economy.
"The federal government should eschew private asset accumulation, because it would be exceptionally difficult to insulate the government's investment decisions from political pressures," Mr. Greenspan said.
If investment decisions were driven by politics, Mr. Greenspan reasoned, it would eventually result in a lower standard of living.
Deciding how much debt to pay down is difficult, and controversial. With three years of surpluses in the bank, the Treasury has paid down $363 billion of debt. And President Bush's budget proposal calls for paying down an additional $2 trillion by 2011.
But Mr. Bush would leave $1.15 trillion in public debt outstanding.
The administration contends that is the lowest they can cut the debt without having to pay substantial premiums to holders of Treasury securities. The investors include foreign governments and central banks, as well as state and local agencies in the United States, all of which might demand a high premium for selling their Treasury securities before maturity.
But Gary Gensler, who served as undersecretary for domestic finance under President Clinton, told Congress the debt could be lowered to about $500 billion, less than half of the Bush administration's estimate. Mr. Gensler argued the Bush team underestimated the debt that can be prepaid without penalty and that Treasury would not have to issue new debt as it retired old securities.
Some of those Treasury securities are held by institutions because they are low risk and provide a variety of maturity dates that can be used to help balance an investment portfolio. Foreign central banks use Treasury securities to back their local currencies with the U.S. dollar.
The Fed also holds Treasury securities, which it uses to implement monetary policy, buying and selling securities when it needs to either remove or add money to the economy. Without Treasury securities, the Fed also would be faced with holding private stocks and bonds to engineer changes in interest rates.
"Certain people and institutions have an extremely high demand for federal government debt, ... and you might have to pay extremely high prices to wrestle that debt from them," said Paul Kasriel, chief economist at Northern Trust of Chicago.
For years, analysts and lawmakers have told us that reducing the debt is good for the economy. When the government is not elbowing its way into financial markets, the demand for capital falls and that will result in a drop in interest rates.
So, some analysts find the sudden reluctance to pay down more debt a bit puzzling.
William Gale, a senior fellow at the Brookings Institution, thinks he has discovered the missing pieces. If less debt is paid off, he reasoned, then Mr. Bush has more money available for his $1.6 trillion tax cut.
"The administration chose a number that was convenient for their tax cut," said Mr. Gale, who served as an economic adviser to former President George Bush.
Analysts said the surplus also could help underwrite the cost of the president's plan to privatize a portion of Social Security.
Mr. Kasriel, the bank economist, thinks it's a great idea, because it would increase national savings and be available for investment. If the surplus were returned as tax cuts, he said, taxpayers would save some but more likely would spend most of what they got back from the government.
"You are guaranteeing that it becomes savings in the truest sense of the word," he said.
Robert Dodge reports on U.S. economic issues from the Washington bureau of The Dallas Morning News.
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