What's Wrong With Paying Off The National Debt

Vice-President Al Gore recently declared that his top domestic priority as President would be paying off the national debt and keeping America debt-free. This is a stunning stance for a Democratic Presidential candidate. Is it smart politics? Necessary economics?

Gore's position is one part campaign tactics and one part embrace of a fiscally conservative economic growth strategy associated with the Brookings Institution. Some background: The great budget accord of 1997 committed Congress to balance the budget by 2002. But the deal's budget caps proved so stringent and economic growth so prodigious that the budget balanced by 1998.

TOO EASY. This success left the Democrats in a tactical quandary. If they left this surplus "on the table," Republicans would give it back to the taxpayers. So the Administration devised a strategy to spend the money in ways presumably more popular than cutting taxes. First, shore up Social Security and Medicare. Then, spend a relatively small amount on popular programs such as prescription drug coverage for the elderly, more police on the streets, and aid to failing schools.

But as the projected surplus mounted, it became too easy for Republicans to insist that we could afford both a Social Security/Medicare rescue and a large, across-the-board tax cut. Enter debt retirement. Specifically, the idea is to use the surplus to pay down the entire portion of the national debt held by the public, leaving only the debt that the government owes to the Social Security system. The effect will be to reduce the total public debt to under 25% of gross domestic product, its lowest level since before the Great Depression. This approach soaks up so much money that little is left for tax reductions.

Clever, but is it good economics? The Brookings view, embraced by Gore and his advisers, rests on a number of premises. Sustained economic growth is said to depend on a higher rate of domestic savings. Since private savings are at a record low, the only way to make up the shortfall is through public savings, i.e., debt retirement. And because 20 years from now, baby boomers will be retiring, we will need higher rates of savings and growth, as well as the capacity to resume public borrowing if necessary.

What's wrong with this? For one thing, public and private savings are not interchangeable. They finance different things. If the private savings rate is too low, we need to address why it's too low. In recent years, there has been a credit boom. Corporate and household debt has doubled in two decades. Margin debt is way up. Indeed, the inflated stock market crowded out private savings because households, on average, felt wealthier and spent all their earnings on goods and services.

Private debt finances consumption and corporate investment. Public debt finances public goods that private investors fail to provide. To some extent, today's info-tech boom rests on yesterday's public investments in education, basic science, and defense technology. But the public share of research and development spending is down by half.

A savings shortage has not hampered the current boom. If anything, what's holding back even faster economic growth is the low skill level of millions of potential workers. Is the marginal dollar of debt better invested in one more dot-com IPO or in educating inner-city kids? A strong economy for the baby boomers' retirement surely depends on more than savings rates. It also depends on the productivity of today's teenagers who will be tomorrow's workers and taxpayers.

READY FOR RAIN. Something like half of the increased budget surplus is not a windfall from higher-than-projected economic growth. It reflects the needlessly stringent cuts in public outlays that were the excessive part of the 1997 budget deal. Medicare took a $115 billion hit, leading to a dramatic cut in home nursing care. The federal share of public education outlays is below its level of 30 years ago. You might expect a Democratic Presidential candidate, even a fiscally moderate New Democrat, to be crusading to restore some public spending.

The Gore camp contends that when the proverbial rainy day comes, it will be easier to resort to new public borrowing if we pay the debt down now, while times are good. But with Democrats as well as Republicans drumming into public consciousness the virtue of debt retirement, it will take a brave soul to challenge that received wisdom. It's hard to know which is odder: George W. Bush running as a compassionate moderate with the support of the hard right, or the labor-backed Gore campaigning as Herbert Hoover.

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