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John McCain's Bad Idea: A Response to William Swann

By Scott D. Gillette
sgillette@politicalusa.com

1/31/2001

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I am writing in direct response to William Swann's column about John McCain's "good idea", which appears on January 23.  I have no beef with Mr. Swann personally or otherwise, and I don't want to dissuade him from writing further for Politicalusa.com. However, his viewpoint encapsulates the conventional wisdom on fiscal policy matters perfectly, and I disagree with this mindset so thoroughly that I feel compelled to address Swann's arguments point-by-point. (Excerpts from Mr. Swann's columns are italicized.)

Swann begins by saying, "We either head into the future dramatically slashing taxes, or ramping up spending. The frightening possibility this year is that we'll try to do both. What goes unrecognized is the third option, (paying off the debt)." I donít know what else Mr. Swann would want, because for the past three years both political parties have agreed by default to make debt reduction their top priority. The federal government has a $237 billion surplus for the fiscal year that just ended, and we'll supposed to have a $260 billion surplus in 10 months. At this point, we're very much on track on paying off the national debt in about 12 years.

How do you make funds available to the system ten, twenty, or thirty years from now?  You pay down the debt.  A lean government approaches the coming demographic crisis with an ability to borrow money.  An already bloated government doesn't. The United States has a debt/GNP ratio of about 57%, which is one of the lowest in the industrialized world. That percentage rate will only decline further in the next decade. We'll have the ability to increase our debt burden to cover future retirees no matter what.

But more importantly, we won't have to rely on increasing our debt burden if we continue to grow our economy, and that requires tax cuts that give individuals and institutions the proper incentives to develop and prosper. That only can come from tax cuts, not debt reduction.

And how do you keep a roaring economy going?  Dramatic debt reduction lowers interest rates for everyone.  People's mortgage rates, car loans, credit card payments all go down.  Businesses can borrow money cheaper. It's like a tax cut with a wonderful extra silver lining. No it's not, because there is no historical link between debt levels and interest rates. Interest rates are determined by inflationary expectations, what the Federal Reserve does, and of course by a loan's inherent risk. Debt levels have little to do with it. Otherwise, how could one explain why interest rates were so low after World War II, when our debt/GNP ratio was about 130%? Interest rates were much lower then than now.

But they've forgotten the bigger idea ... the one that smashes the broken records both parties carry around on economic policy, and quite possibly gives us the keys to a bright future. By what standard will we measure success? Will we somehow be blessed if our national debt goes down to a certain point, and cursed if we don't?

If I sound like a Marxist when I say the following, so be it: it is the ruling establishment in this country that focuses on debt reduction above other priorities. This is because those with a hold on wealth and power wants to see the economy grow, but at a steady and moderate pace so their own interests are not jeopardized by competition. This viewpoint is disseminated throughout society, and it does appeal to certain sensibilities of the human character. Both Bill Clinton and John McCain have tapped into the notion of debt reduction as a way of appealing to a broad segment of moderate voters. But there has to be a counterbalance to such policy prescriptions; otherwise, we are selling our potential short. Investments or tax cuts by the government can create a larger return in the future than merely paying down the debt for its own sake.

If I were never to go into debt, I would never be able to buy a house or a car. Such thinking is even more outlandish for a government, which has a revenue source far more stable than most individuals.

I have not even addressed the fact that the national debt is what maintains our national currency. If we were to eliminate the entire national debt, we would have to take every single dollar out of circulation. But that's for another time. I do not mean to be strident with Mr. Swann: I just want him to see that not only are his concerns being addressed, but to a point of excess.

© Scott D. Gillette, 2001

 

Mr. Swann Responds:

Thank you for the detailed response, and for furthering what I take to be a very basic discussion of economic and fiscal policy that will probably be fundamental to our future.

I'd like to respond to a few of your comments.

First, you present what I think is by far the prevailing view, now -- that surplus projections have escalated so dramatically that we needn't be concerned about the debt ... that we can afford tax cuts, and perhaps new spending, while still paying off significant portions of the debt.

I think almost all politicians on both sides work from this assumption.  It's constantly reinforced by the media, and I suspect most people accept it as fact.

As one example, I would point to President Clinton's comments in the waning days of his administration, crediting his administration with the largest debt payments in history.

It isn't surprising to me to find that there's something fishy in these numbers.  Take a look at federal debt figures, which are tracked and reported to the penny at the web site The Public Debt Online (http://www.publicdebt.treas.gov/opd/opdpenny.htm).

Here are a few of their figures, which they draw from the Bureau of the Public Debt:

Date

Debt

1/26/2001

$5,740,435,844,198

12/29/2001

$5,662,216,013,697

11/30/2000

$5,709,699,281,427

9/29/2000

$5,674,178,209,887

9/30/1999

$5,656,270,901,615

9/30/1998

$5,526,193,008,898

Our current debt (as of yesterday), is 5.74 trillion.  It's increased by about 30 billion over the last two months, by 65 billion over the last year, by 80 billion over the last two years, and over 200 billion over the last three years.

These were of course the latter years of one of the greatest periods of economic expansion in our nation's history.  And it appears we made no payments on the debt, and actually allowed it to gradually rise.

Take a closer look, too, at the fiscal projections that are being widely reported in the media.

Just a few days ago, the Congressional Budget Office increased it's ten-year surplus projection by a trillion dollars, to 5.6 trillion.

What's widely misunderstood is that the CBO is required to make certain unrealistic assumptions when calculating these figures.  Among other things, they're required to assume that spending caps enacted by law in 1990 will be followed.

Congress has already used "emergency designations" in each of the last two years to violate the caps.  They are essentially dead in the water, politically.  Nobody follows them, or intends to follow them. 

The CBO also assumes that productivity will continue to increase at a rate similar to the 2.5% it has been increasing over the last 5 years, and not at rates closer to historical averages (1.6% per year over the past quarter-century).

If that's a bad assumption, the projections collapse and even lapse into new deficits.

Factor this in with the overall fiscal picture.  Spending may very well grow at a greater rate than it has over the past three years, particularly if a prescription drug benefit is added to the Medicare program.  Even if it grows only at the  present rate, though, more than half of the projected non-Social Security surplus disappears (http://www.concordcoalition.org/federal_budget/001011issuebrief.htm).

If Bush were to get all of his proposed tax cut, the rest would disappear too.

And so, as always, we get no payments on the national debt. 

That's my basic point.  There is really no constituency for paying the debt.  Democrats always want to spend more.  Republicans want to cut taxes.  Politicians always want to either give us more benefits through social programs or give us our money back.

They don't want to pay old bills, and never will unless we insist.

I think a reasonable, centrist policy could lead us very much in the right direction, both in terms of economic growth and managing the debt.

Suppose, for example, we were to peg tax cuts to the achievement of specific debt reduction targets.  We could agree to give back an amount equal to whatever savings we achieve in debt-servicing payments. 

So if we reduce the debt by enough to lower our yearly servicing payments by, say, 100 billion, in the following year we give back 100 billion in the form of a broad-based tax cut.

That way, we lead with debt reduction, and follow with some sensible tax cuts that essentially distribute the benefits of our debt-reduction achievement.

Meanwhile, reduction in debt probably does reduce overall interest rates, which helps spur the economy.

Suppose we follow this policy for a period of, say, 5 years.  Continue until we've cut the debt at least in half, which would make it quite manageable, and at that point start giving more back in tax cuts and/or new spending.

That's a reasonable, disciplined approached.  It's what most of our families would do when faced with the combination of huge debts and income surpluses.  We'd start by paying some of those old debts.

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