Ross Perot, who made reducing the deficit one
of the hallmarks of his erratic 1992 campaign, described the twin
problems of the deficit and the debt as a “crazy uncle that nobody
in the family likes to talk about.” Well, maybe that uncle isn’t
so crazy after all, and he’s gotten a bad rap.
American politics has been paralyzed by an inordinate and misplaced concern about our national debt for a long time, but no more so than now. A generation ago, it was Republican candidates who equated a balanced budget with economic happiness. Now, it is Democrats who believe that economic prosperity requires that we continue to pay off the debt at the exclusion of everyone else. Indeed, Bill Clinton said in 1998 that “saving Social Security” requires that we forsake tax cuts for the foreseeable future. As the Bush Presidency is only a couple of weeks away, there is a consensus that tax cuts are needed to ameliorate the economic slowdown; unfortunately, the imminent tax cut will be far smaller than it should be, because of misplaced concern about the debt.
Now let’s clear up a
couple of things right off the bat. The idea of using the current
surplus to strengthen Social Security instead of tax cuts of any kind
is based on a fallacy. The surplus does not go into any kind of trust
fund, but is merely used to pay down the debt, as there is no real
“trust fund” for Social Security, because it is a pay-as-you-go
system. Put another way, we are not shoring up the Social Security
system directly, but indirectly, as we are paying down the debt now so
we can increase the debt at a later date to meet those Social Security
The federal government
is doing nothing more than paying a dollar now off the debt so as to
add a dollar of debt at a later date. This is like emptying a bucket
of water so as to fill it up again. That's fine if you want no return
whatsoever on your investment. But it is not a great use of capital at
all: if you put a dollar into anything, one would hope for more than
$1 dollar when the return on the investment comes 15 years from now.
The second thing that
must be pointed out is that we are very close to achieving the policy
goal of paying off the debt in the first place. The federal budget is
poised to have a surplus of US$250 billion next year, and unless a
real recession ensues, we should have a US$300 billion surplus that
will be dedicated to paying down the $3.7 trillion debt in Treasury
securities by 2012 or 2013. At that future date, the US$300 billion
and the current interest on the debt, which adds up to around $500
billion dollars, can be dedicated to Social Security at that time, or
anything else that the federal government wants to tackle at that
time. Moreover, any additional surpluses accumulated over the next
several years can be used for spending or tax cuts, with no harm
whatsoever to the plan to pay down the debt. Put simply, we are very
close to paying down the debt anyway.
But what about the
claim that fiscal discipline and paying off the debt will continue to
keep the economy rolling? Clinton Administration officials like Dr.
Laura Tyson and Gene Sperling consistently have taken credit for the
recent economic conditions by attributing strong growth to reduction
and eventual elimination of the debt. But this doesn’t hold up to
the evidence one iota.
To begin, when
Gingrich and company were advocating a balanced budget by the year
2002 way back in 1995, Democrats in Congress and the executive branch
were decrying the reductions in spending being advocated as
“extremist”. (Remember the “Contract with America?”)
After that political debacle, there was no effort to reduce
spending, as annual increases in federal expenditures between 1995 and
1999 remained in the 3.3%-3.7% range. Spending increases this year
were even higher.
So the current surplus
did not derive from less spending, but from increased economic growth,
which propelled revenues to exceed spending increases in staggering
amounts for the past two years. But how can deficit reduction cause
economic growth, since economic growth came first, and only then did
the deficits decline? Nobody in their right mind can say that X is the
cause of Y if Y came before X. Such pronouncements may be politically
appealing, but they have no bearing on the irrefutable historical and
economic information that we have at our disposal.
what about the deficit dividend that results in smaller interest
rates? Well, if one measures the relationship
reducing the debt does not promote economic growth, nor does it reduce
interest rates, nor does it provide a
© Scott Gillette, 2001
View expressed are those of the author and do not necessarily reflect those of Political USA.