The Magazine

The Joy of Debt

The last thing we should want is a U.S. Treasury flush with cash

Mar 26, 2001, Vol. 6, No. 27 • By JAMES K. GLASSMAN
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Last Wednesday, investors, panicky over banking troubles in Japan, drove the Dow Jones Industrial Average down 300 points in the first few minutes of trading. Bloomberg Business News reported a worldwide "flight to quality" -- from stocks into U.S. Treasury securities. But imagine if there were no such securities to buy. That's not such a farfetched notion. According to the latest estimates by budget experts, in five years, the market for Treasuries -- the safest, most liquid, most popular investment in the world -- will disappear.

Squirreled away on page xvi of the latest report of the Congressional Budget Office there's a very tiny but very scary graph. It shows a flat horizontal line at zero from the years 2000 to 2006, then a sudden soaring trajectory, like a cruise missile, blasting off at a 45-degree angle, then arching ever more vertically. By 2011, the graph shows the line exceeding $ 3 trillion, which is the equivalent of about $ 30,000 for every family in America.

The graph depicts something that has never happened before, in America or anywhere else in the world. It shows a government that has retired all the debts it can and begun accumulating vast "uncommitted funds" -- a concept so new that the CBO had to invent the phrase. In theory, these surplus tax dollars will just sit there and sit there. In practice, however, they will be put to use. And that's the scary part.

One likely use of the money will be investments by the government (probably the Social Security trust fund) in private assets. This is the specter that worried Alan Greenspan so much that, as a way to forestall it, the Fed chairman switched his position and forcefully backed President Bush's tax cut. At a time when the rest of the world is privatizing state-owned companies, it would be ironic -- and dangerous -- for the United States to move in the opposite direction, with government ownership of shares or bonds issued by U.S. companies and (inevitably with such ownership) government control of those companies.

Greenspan told a congressional committee in January that "it would be exceptionally difficult to insulate the government's investment decisions from political pressures." The result, he fears, would be "sub-optimal performance by our capital markets, diminished economic efficiency, and lower overall standards of living."

When the Clinton administration two years ago first proposed investing tax dollars in the stock market, the Senate unanimously passed a resolution opposing the idea. Certainly, government investing in private assets is a dramatic policy shift which, at the very least, needs to be debated publicly. We shouldn't blunder into it.

Another use of the money might be in new government programs -- or an expansion of old ones. One salutary effect of the deficit was to prevent big new spending ideas from being funded. Was that so bad? During a decade of restraint, the unemployment rate dropped sharply, poverty and crime decreased, and the U.S. economy grew for the longest period in history. But already, the surplus has inspired both Democrats and Republicans to start spending again -- at growth rates not seen since the 1970s.

A tax cut could prevent both of those consequences, but a cut of the size offered by President Bush -- a total of just $ 1.6 trillion, phased in slowly, during a period when the federal government will be collecting about $ 25 trillion in taxes -- is unlikely to be large enough or quick enough to prevent the scary graph from becoming reality.

The truth is that Washington is rolling in dough. There is so much cash flowing into the Treasury from tax revenues that every working day, on average, the federal government pays off another $ 1 billion in loans that it has made over the past three decades. The loans are in the form of U.S. Treasury debt securities -- bonds, notes, and bills. In the past, when those securities matured, the Treasury (since it didn't have the money) would simply roll them over -- that is, pay off the old bondholders and issue new debt, typically in a higher amount.

No more. In fact, in its latest report, the CBO estimates that "surpluses [will] exceed the amount of debt available for redemption in 2006." In other words, in five years, all the loans from the public that the government can repay will be repaid. And the money will keep flowing in; hence, the scary chart.