- The Washington Times - Monday, February 12, 2001

Is it really good fiscal policy to pay off all of the federal government's publicly held debt? As the budget surplus rainfall turns into a flood, that is one of the key economic policy questions being considered by the American Enterprise Institute and other policy groups, as well as by thoughtful lawmakers in Congress.
The answer is, not all of it. We are approaching a time in the near future when it will be prohibitively costly and unwise to pay off the remaining debt.
Worse, if we do not send enough of the surpluses back to the taxpayers as President Bush proposes, the government, faced with the necessity of doing something with its extra cash, would be forced to buy up stocks, bonds and real estate. That, warns debt hawk Alan Greenspan, would be an untenable situation that would wreak havoc on our financial markets.
A lot of otherwise sensible people have argued that paying off the debt should be the No. 1 goal of sound budget policy. That idea, peddled by many candidates in the 2000 elections, threatened to undermine the GOP's economic-growth policies, which Ronald Reagan championed. Then Mr. Bush and a few others began arguing that while we should continue to pay down the debt, reducing the tax burden is far more important to our economy.
Cutting tax rates will unleash increased incentives to work, save, invest and take risks. That will expand the economy, which in turn will produce higher tax revenues. And higher tax revenues will make it easier to pay our debt. Also, when the economy grows, the size of the debt shrinks as a percentage of our gross domestic product which is exactly what has been happening. Government debt in and of itself is not necessarily a bad thing.
The feds borrow money and pay lucrative interest payments to lenders. To the borrower it is debt, but to the lender it is an asset. Many Americans are living comfortably in retirement in part because of interest payments from safe, secure Treasury notes. Banks, mutual funds, overseas central banks and many others hold Treasury bonds, the safest investment you can have. In world currency crises, U.S. debt is a safe haven. The Fed manages the money supply by using open-market transactions in Treasury debt.
Despite the debate over how much of the surpluses should be used for tax cuts vs. debt reduction, the truth is we are paying down the debt in a methodical, measured way.
In 1997, the public debt stood at $3.7 trillion. That figure will be down to $3.1 trillion by the end of this fiscal year.
As we continue to put Social Security and Medicare surpluses into debt repayment, the debt is forecast to be about $2.7 trillion in 2003.
But the latest Congressional Budget Office report, which just boosted its 10-year forecast of the surpluses to $5.6 trillion ($1 trillion higher than last summer's estimate), says we will reach the limit of our debt reduction (about $1 trillion) by 2006. And that is where we begin to run into trouble.
The reason: Buying back short-term debt is easy. Treasury bills mature in a few months or a few years, and the government buys them back as they come due. But long-term debt is much harder to pay off because the holders are pension funds and major banks that do not want to give up years of good, risk-free income.
"The only way to get these investors to part with (their bonds) would be to pay them far more than the securities are actually worth," says House Majority Leader Dick Armey, Texas Republican, who once taught college economics. And that, he says, would be "ludicrously expensive."
At that point, with the surpluses piling up and they will probably pile up much higher than present forecasts say they will there will be no place for the Treasury to put this excess money. The government will be forced to put it into private assets.
That's what is worrying Mr. Armey and other economists, and that is what especially troubled Alan Greenspan when he testified last month that Congress would be better off cutting tax rates along the lines Mr. Bush has proposed. The goal is not only to keep the economy strong, but also to prevent the feds from getting into the dangerous situation of having bureaucrats buying large chunks of the private economy.
It would not only be "exceptionally difficult to insulate the government's investment decisions from political pressure," Mr. Greenspan said. It would also "risk suboptimal performance by our capital markets, diminished economic efficiency, and lower overall standards of living than would be achieved otherwise."
But this is exactly the path Democratic opponents would put us on by their insistence that Mr. Bush's $1.6 trillion tax cut plan be cut in half.
The Democrats say Mr. Bush's tax cut is "too large." In fact, it is smaller as a percentage of the nation's economy than the Reagan tax cuts of 1981. America's taxpayers will send $23 trillion in taxes to Washington over the next 10 years. Returning $1.6 trillion of it to the people who earned the money is "not unreasonable," Mr. Armey says.
What Democratic opponents of the Bush tax cuts have to ask themselves, he says, is whether they want the feds buying up huge amounts of the private economy, because "their scheme risks precisely that."

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