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
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
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:
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
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.
View expressed are those of the author and do not necessarily reflect those of Political USA.