Budget surpluses could erase debt or decrease taxes

OUTLOOK

Both options for serving economy in 21st century have solid arguments

July 04, 1999|By Rachel Sams

LAST WEEK President Clinton announced that U.S. budget surpluses would be $1 trillion more than expected over the next 15 years, enough to pay off the national debt by 2015. The closest the nation has been to being debt-free was in 1835, during Andrew Jackson's administration, when the debt was $33,733.05.

How reliable are the economic projections on which the surplus forecast is based? What would be the impact of paying down and ultimately erasing the debt? What would it mean for economic growth? For the average American?

Stephen Moore

Director of fiscal policy studies, Cato Institute, Washington, D.C.

I don't put much credence in longer-term forecasts. It's like trying to predict the stock market five years from now.

There's no question that in the next four or five years we will have a large and growing budget surplus. I know that the public has a lot of skepticism about whether these surpluses really exist -- they do. We've really made substantial progress in moving from debt to surplus in just the last 10 years.

I don't believe retiring the debt should be the top priority. We have an economically dysfunctional tax system. Americans are paying record amounts of taxes when they shouldn't have to be -- we're not in any kind of war period. Retiring the debt would do virtually nothing for people's personal finances. It would make a much bigger difference for American families if we cut their tax burden. The Social Security system is really robbing people of a good return on their money. It would be far superior to spend this trillion-dollar surplus on solving those two problems.

Retiring the debt will not have a significant effect on economic growth. The debt has not been a huge burden on our economy, contrary to popular belief. The debt as a share of the total economy has been falling and will fall very rapidly in the next 10 years, even if we don't retire the debt. The major impact of retiring the debt would be freeing up resources for other things. I think it's important that people realize debt is not necessarily a bad thing. It depends on what you're using the debt for.

David Orr

Chief economist, First Union Corp., Charlotte, N.C.

The forecasts seem very prudent and very reasonable. It's not a rose-colored glasses scenario. I would argue that they have erred on the side of conservatism, primarily because the GDP projected growth rate is only 2.4 percent, and in the last three years it has been 4 percent.

Paying down the debt would provide considerably more capital availability to the private sector of the U.S. economy. It would mean somewhat higher economic growth because the private sector can use the capital more productively than the government would use it.

For the average American, retiring the debt would mean freedom of mind. It doesn't sound like they plan to give us any tax decreases, but it would save us from having to worry about tax increases.

The only drawback might be that financial markets would no longer have Treasury securities, which are currently the benchmark that other securities are measured against. They would have to find another benchmark, but it would be well worth it.

If they paid down the debt, as soon as the baby boomers started retiring en masse around 2020, they would have to start issuing debt again. This is a very temporary pay down. It shouldn't be misinterpreted as a permanent situation. It's better than nothing, but it's not permanent.

Kathleen Stephansen

Senior economist, Donaldson, Lufkin & Jenrette Securities Corp., New York

One never really has a very accurate long-term forecast on the economy. However, [forecasting] serves an important purpose: the need to have a base from which to decide if there are some fiscal policy changes and also some debt management changes that might be needed.

Paying down the debt should have some positive impact on interest rates. All else being equal, if you pay off the debt, interest rates will go down. Essentially, the cost of borrowing money goes down, which is a very positive development. In more practical terms, the supply of government bonds coming into the market will shrink dramatically. The Treasury Department will have to buy back debt. I don't think the government can address the situation simply by cutting down on the size of the issues being offered.

Paying down the debt gives more latitude to economic policy. If you are in a position of strength in terms of public finances, the government has the luxury of applying more expansionary fiscal policy if you are in an economic downturn in order to avoid recession.

The average American would be affected via the interest rate structure. Lower interest rates would filter through to various interest rate-sensitive sectors, which would lead to the preservation, if not growth, of jobs and therefore of income.

Charles McMillion

Chief economist, MBG Information Services, economic and forecasting consultancy, Washington, D.C.

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