BY James C. Miller III
For nearly three decades, annual outlays of the U.S. government exceeded annual receipts, and the federal debt rose steadily - until 1998. Since then, the federal government has run significant annual surpluses. Paying off a major portion of the debt within a decade appears not only feasible but altogether likely. This presents a set of questions heretofore not addressed. For example, what proportion of the national debt could be paid off without incurring unreasonable costs? At present, the public debt is $ 3.4 trillion. Even if the Treasury Department were to end the Savings Bond program, the state and local series, and other such programs, as well as suspended the issuance of longer-term debt, some $ 500 billion would mature after 2011. To pay down more, Treasury would have to engage in very aggressive "buy-back" strategies, and these can be costly. Using more reasonable assumptions about policy and economics, the Office of Management and Budget and the Congressional Budget Office project that roughly $ 1 trillion would be unavailable for redemption in 2011 - a concept Fed Chairman Alan Greenspan recently labeled the "irreducible minimum." Even assuming you could pay off the national debt, it would not make sense to end the program completely. First, the federal government needs to borrow in order to cope with month-to-month variances in receipts and outlays. Furthermore, it needs the ability to borrow on a substantial scale if circumstances demanded it. How much debt it would be prudent to pay down and whether to end the program forever are matters over which experts can endlessly disagree. But the more vital issue is what the federal government might do with this surplus once the debt was paid down to this "irreducible minimum." There are really no good answers to this question. The federal government could place these hundreds of billions, or even trillions, of dollars in bank accounts. The government presently maintains bank accounts in order to facilitate thousands of transactions each and every day. But it doesn't load up these accounts with massive balances, nor should it. Purchasing assets appears the obvious answer. But as Chairman Greenspan has cautioned, "It would be exceptionally difficult to insulate the government's investment decisions from political pressures." Moreover, disposing of such huge surpluses in this fashion would mean government controlling or outright owning substantial portions of the U.S. economy. Under CBO's and OMB's base lines, more than $ 3 trillion in such "excess surpluses or excess cash" are projected by 2011. If all were invested in equities, the U.S. government would be able to control roughly 10 percent of the total stock market in 2011. The prospects for harmful effects on economic efficiency, not to mention the potential for political chicanery, are chilling. If surpluses were to continue after the debt was retired, another course would be to create a system of personal investment accounts. These could be for the purpose of augmenting individuals' retirement accounts, health care coverage or even promoting other worthy goals like education. In effect, the government would be forcing people to pay according to the canons of the tax code and then guiding them in their purchase decisions. Our choice would be between creeping communism and creeping socialism! But the question has to be asked: Why run a surplus once the debt is paid? Why should the U.S. government, not to mention the American taxpayer, be put in such a bind? What reason is there for the government to accumulate substantial cash balances? It could create some sort of "rainy day fund," as some states have done. But surely the kind of balances we are talking about far exceed any reasonable need along those lines. Moreover, the "rainy day" device is not so important for the national government, which is subject to far less swings in revenues and outlays, and which has a much easier time of issuing debt if warranted. The obvious answer is to phase out the surplus in a thoughtful and cost-effective manner. As Chairman Greenspan recently testified, "it is far better . that the surpluses be lowered by tax reductions than by spending increases." In fact, to avoid a return to deficits, Congress and the president must take action to lower spending in the future. As for the debt, it should be placed on a glide path to reach the "irreducible minimum," and the remaining surplus should be returned to whom it belongs - the American taxpayer. James Miller is a former director of the Office of Management and Budget. He is now counselor to Citizens for a Sound Economy Foundation, a market-oriented research and education organization in Washington, D.C.
