...against fictions and other tall tales

Saturday, 22 October 2011

The downside of paying down the national debt

Tom Hickey (via Mike Norman Economics) points us to a NPR article in which we learn of a report outlining some of the reservations of Washington officials during the Clinton years about paying down the US federal debt.

The NPR story reminds me of Alan Greenspan's testimony before the Budget Committee of the House of Representatives on March 2, 2001.  During that testimony, the Chairman of the Fed stunned Congress when he explained that the objective of zero debt might come at a cost.  According to Greenspan,
...continuing to run surpluses beyond the point at which we reach zero or near-zero federal debt brings to center stage the critical longer-term fiscal policy issue of whether the federal government should accumulate large quantities of private (more technically, nonfederal) assets. 
At zero debt, the continuing unified budget surpluses now projected under current law imply a major accumulation of private assets by the federal government. Such an accumulation would make the federal government a significant factor in our nation's capital markets...
In other words, what Greenspan was trying to hint at is that an "accumulated surplus" (i.e., negative debt) would either result in a reduction in the money supply, which would be deflationary, or force the US government to acquire private financial assets, which would be tantamount to the nationalization of US industry.  I remember like it was yesterday the look of disbelief on the faces of Committee members upon hearing Greenspan's testimony.

Of course, there are other problems with paying off public debt.  As I've discussed in a previous column, in the case of Canadian provinces, years of public debt and deficit reduction have led to the increased financial vulnerability of the household sector in those provinces.  Policymakers beware.

Federal Reserve Board, Current Fiscal Issues, "Testimony of Chairman Alan Greenspan Before the Committee on the Budget", US House of Representatives, March 2, 2001

h/t: Tom Hickey


  1. Nice twist, Circuit!!!. Amazing that he testifed, but did he (Greenspan) author the 'stark realization: chronic surpluses could be almost as destabilizing as chronic deficits' LOL When you read the above in his memoir, looks like the guru for balanced budgets and debt reduction, rethought alone fiscal strategies. How randian, juo?

  2. Indeed, it would appear that his 'stark realization' actually came about in the form of a briefing note! There's enough email addresses in the draft WH report to know that close to an entire unit was working on developing those strategies. Not to mention that this was an interagency exercise. Good call in going through his memoir!

  3. yours! was a good call, circuit. it's an important reminder that the Fed was not an intellectually monolithic organization. the memoir is too ideologically bent, and as a result unfortunately becomes shallow. but you're correct, as is gc's ironical quibble, no man does it alone. well, maybe Volcker, although he had great people surrounding him, and good peers in the twelve districts and on the board. ag's terms were less demanding of the system and less polemical with respect to approaches.

  4. Circuit, good post.

  5. @SW: Glad you like it. BTW, the document released by the NPR is actually a good read. The NPR did us a favor in releasing it to the public. There's some valuable insight, as well as cross-jurisdictional evidentiary support for their conclusion.

    @JH: Research coming out of the Fed (and FRS) these days seem to support the view that the range of viewpoints is, at present, quite varied. I wonder if anyone has ever examined that issue more in depth. Also, hopefully the BoC is heading in that direction.

  6. I really enjoy the anecdotes you and your audience offer, especially the personality tips It makes for great reading, and contextualizes the events. The recent posts on the UK are very interesting. I look forward to the next series. Maybe on the Franco-Germanic pact and how to keep the world out of their mess.

  7. I have a problem integrating the logic of Greenspan's testimony to his overwhelming accommodating approach to free markets and its actors. One of readers suggests that the position may not have been his, and in fact, his memoir's suggestion of a 'realization' is very suspect. It's difficult to appreciate how such a caution could have been abandoned so expeditiously afterwards. In fact, similarities were not even resurrected.

    Very interesting footnote, circuit.

  8. juo would have answered the query; gc and mi will probably abstain. I presume they're still too close. One thing is certain, there is enormous intellectual diversity in the FRS. It certainly has some of the best surfers in public finance in the world. It has also Chaired some of the best skaters in the world. AG was obviously a great skater.

  9. Thanks GM and welcome. Glad you enjoyed the columns on the UK. I intend to keep an eye on the UK economy. Cameron seems smart but he needs inspiration with the economics.

    GH, thanks for comment and welcome. You bring up an interesting point. Perhaps you might disagree with me but I've never considered AG overtly ideological when it came to monetary policy specifically. His deep ideological penchant, I always thought, came out when he shared his views on government programs such as social security or when discussing his dislike for regulation. But on the issue of setting the rate, I never found AG to be the free-market ideologue that everyone makes him out to be. Any thoughts? Also, you make a good point on the issue of caution. He seems to have been selective in that regard. For instance, on the regulatory side, it's now obvious something was amiss.

  10. nice work. started reading FRB over the weekend. i like the blend of history and policy. i always thought that policy was best-served by history, but never quite found the pudding that could accommodate the topping until reading some of your june and on columns and comments. i find FRB very interactive, revelatory and respectful, although i do get a snicker from some of the odd snickers. the wit makes it a great dessert. the comments are always pertinent and some line up into blogs. fine and timely initiative.

  11. P. Cresson Montreal24 October 2011 at 09:44

    Par voie du write-up sur Wikip au sujet de MMT, je suis parvenu a votre excellente rubrique. Fascinant de trouver cette niche canadienne qui facilite aussi une conversation en français.

  12. Thanks JK and welcome. IMO, good policymakers know their history. Take austerity, for instance. There are a few examples of successful austerity campaigns going back decades. But to be able to replicate them, policymakers have to know the context in which the measures were undertaken. I don't see many examples of economies right now that could replicate Canada's experience in the 90s. And it doesn't matter that Cameron has Canadian policymakers from that era on payroll. But history matters.

    PC, je vous souhaite la bienvenue. Merci de votre commentaire. J'espère que le contenu canadien continuera à vous plaire.