Who says old dogs can’t learn new tricks? Last fall I got tired of listing to my iPod playlist while working out at the Y and learned to download pod-casts to listen to. My favorites include Car Talk, Garrison Keillor, NPR topics, It’s All Politics (surprisingly fair and balanced!), and Planet Money, and it was on the latter, catching up, that I tapped into segment #316 from last fall entitled, “What If We Paid Off The Debt?”.
As most people know, the national debt is historically high, soaring past 100% of GDP because of two un-budgeted wars, the Bush II tax cuts and recession stimulus spending. Its unprecedented growth is the prime reason for the Tea Party’s angst and predictions of doom. So when I saw that subject, I tuned in. What I heard I thought worth repeating for you, dear reader, especially since economics is a subject that can use all the clarification it can get (IMO):
Planet Money has obtained a secret government report outlining what once looked like a potential crisis: The possibility that the U.S. government might pay off its entire debt.
It sounds ridiculous today. But not so long ago, the prospect of a debt-free U.S. was seen as a real possibility with the potential to upset the global financial system.
We recently obtained the report through a Freedom of Information Act Request. You can read the whole thing here. (It’s a PDF.) [Blogger’s note: I’ll gi
The report is called “Life After Debt”. It was written in the year 2000, when the U.S. was running a budget surplus, taking in more than it was spending every year. Economists were projecting that the entire national debt could be paid off by 2012.
“It was a huge issue … for not just the U.S. economy, but the global economy,” says Diane Lim Rogers, an economist in the Clinton administration.
The U.S. borrows money by selling bonds. So the end of debt would mean the end of Treasury bonds.
But the U.S. has been issuing bonds for so long, and the bonds are seen as so safe, that much of the world has come to depend on them. The U.S. Treasury bond is a pillar of the global economy.
Banks buy hundreds of billions of dollars’ worth, because they’re a safe place to park money.
Mortgage rates are tied to the interest rate on U.S. treasury bonds.
The Federal Reserve — our central bank — buys and sells Treasury bonds all the time, in an effort to keep the economy on track.
If Treasury bonds disappeared, would the world unravel? Would it adjust somehow?
“I probably thought about this piece easily 16 hours a day, and it took me a long time to even start writing it,” says Jason Seligman, the economist who wrote most of the report.
It was a strange, science-fictiony question.
“What would it look like to be in a United States without debt?” Seligman says. “What would life look like in those United States?”
Yes, there were ways for the world to adjust. But certain things got really tricky.
For example: What do you do with the money that comes out of people’s paychecks for Social Security? Now, a lot of that money gets invested in –- you guessed it — Treasury bonds. If there are no Treasury bonds, what do you invest it in? Stocks? Which stocks? Who picks?
In the end, Seligman concluded it was a good idea to pay down the debt — but not to pay it off entirely.
“There’s such a thing as too much debt,” he says. “But also such a thing, perhaps, as too little.”
The copy of Life After Debt we obtained reads “PRELIMINARY AND CLOSE HOLD OFFICIAL USE ONLY.”
The report was intended to be included in the official “Economic Report of the President” — the final one of the Clinton administration. But in the end, people above Jason Seligman decided it was too speculative, too politically sensitive. So it was never published.
The danger that we would pay off our debt by 2012 has clearly passed. There are plenty of Treasury bonds around these days. U.S. debt held by the public is now over $10 trillion.
The moral to the tale, I suggest, is that the sky is not falling because of the national debt, that debt is something that is part and parcel of what makes government work, and that a proper national debt serves the same excellent purpose for an economy as a hydraulic accumulator does for a hydraulic system, to use an engineering metaphor. A hydraulic pump transmits power to remote cylinders by applying pressure to the system, but just as an economy has its ups and downs the work done remotely varies wildly. Without an accumulator, basically an air-pressurized tank that smooths the load and supplies power in sudden down cycles, the system would quickly fail from pressure extremes.
This is a short story about only one aspect of a complex subject, the dismal science. I do not offer it as denial that our national debt is too large – it surely is, and it’s now larger than it was last fall. But I think it is interesting evidence that, unlike with family finances, some national debt is not only good but necessary, and that what is needed are long-term measures, not short-term panic.
There is a good reason why the report was never published – most pols don’t think the public is capable of understanding economic concepts. What do you think?
“Slow and steady wins the race.” — Aesop