Imagining a world without U.S. debt
We’ve all heard the horror stories about what would happen if the U.S. debt burden spiraled out of control. But what if we went in the other direction and paid off our debt entirely? Back in the late 1990s, with the economy galloping and the government racking up budget surpluses, this prospect didn’t seem so implausible. The folks at Planet Money have dug up a fascinating memo from the era, in which Clinton staffers contemplated a world without U.S. indebtedness.
If the U.S. totally paid off its debt, the economists noted, it would no longer need to sell off Treasury bonds to borrow money. And, given the linchpin role that Treasuries play in the world economy, that would mean some major adjustments. Not only that, but the Social Security Trust Fund has long parked its excess money in Treasuries. Without U.S. debt, Social Security might have to invest in stocks or corporate bonds instead. How would that work? Who would pick?
This all sounds fanciful. But was it, really? Back in January 2001, just as George W. Bush was entering office, Federal Reserve Chairman Alan Greenspan was worrying publicly about much the same issues. At the time, the Congressional Budget Office was predicting that the government would pay down its public debt within a decade. Greenspan was worried that, as the government ran surpluses, it would start buying up private assets. “It would be exceptionally difficult to insulate the government’s investment decisions from political pressures,” he warned.
To avoid that scenario, Greenspan ended up endorsing tax cuts as a way of reducing surpluses. The Bush administration happily obliged (albeit without the “triggers” that Greenspan preferred). And, as it turns out, both the CBO and Office of Management of Budget were wrong in their forecasts — the United States wasn’t going to pay down its public debt anytime now. Instead, big tax cuts, two wars, and a severe recession followed, and we’ve plopped back into an era of deficits. And now it’ll be a long time anyone writes a memo imagining a world without U.S. debt.