Now that presidential vetoes have killed all chances for significant tax relief, the debate over how best to use next year's projected $268 billion budget surplus has boiled down to one question: How much should go toward paying down our $3.4 trillion national debt? But here's a better question: Is this really a good idea?
Such a query flies in the face of conventional wisdom. The debt must be paid off, we're told, in order to increase savings and promote economic growth. To the extent the government buys and retires federal bonds, the former bondholders would then have extra money to invest in private capital markets. Besides, paying off the debt would end federal spending on debt interest, now running at about $220 billion per year.
But the problem is that running a large budget surplus until the national debt is retired means keeping taxes much higher than they need to be. And excessively high taxes would crimp economic growth, probably much more than paying down the debt would help.
Powerfully convincing evidence from the 1920s, '60s and '80s shows how strongly tax cuts can enhance economic growth. This is supported by foreign experience as well, and a by-now vast literature of economic studies. There's no equivalent literature or experience supporting a payoff of the national debt.
Indeed, under Keynesian economics - the reigning orthodoxy in liberal-dominated academia - running a budget surplus to pay down the debt would slow the economy. And under the supply-side formula preferred by conservatives, higher-than-necessary taxes would have a sharply negative effect on economic growth.
Debt repayment also complicates our nation's monetary policy, which hinges on the buying and selling of federal bonds by the Federal Reserve. The Fed buys such bonds with newly printed money to increase the money supply, and sells the bonds to the public for cash to reduce the money supply. But with no national debt, there would be no federal bonds to buy and sell, and the Fed would be more restricted in its ability to control inflation and other facets of U.S. monetary policy.
The size of the current national debt is just not an economic problem. By the end of the next fiscal year, the debt will have declined to about 31 percent of our nation's gross domestic product (GDP). Federal debt equaled 80 percent of GDP in 1950 and 46 percent in 1960.
Finally, as a matter of politics, prudent-sounding calls to pay off the national debt may prove little more than a snare and a delusion. With large amounts of surplus money piling up in Washington, voracious special interests will have no trouble coming up with one "spending emergency" after another, year after year. In the face of these teary-eyed demands, those trying to preserve the surpluses to pay off the debt will be depicted as cold-hearted accountants. They will cave, and the surplus will be spent, with little remaining to reduce the debt.
Indeed, it's becoming increasing apparent that the left is embracing debt repayment as a way to hoard that extra tax money in Washington until spending is politically safe again. Clinton and Gore have adopted paying off the debt as their economic mantra precisely to short-circuit the political appeal of a major tax cut. But their rapidly escalating spending demands show that debt retirement is not really on their agenda.
When liberals held sway in Congress, lawmakers routinely promised to cut spending (usually to win passage of tax increases). But the spending continued unchecked. The promise to pay down the debt could just be Lucy holding the football for Charlie Brown again.
One thing's for sure: The federal debt is not an economic problem. How ironic, then, that trying to pay it off may help create one.
Note: This essay by Peter J. Ferrara, an associate professor of law at George Mason University, was adapted from a longer article in Policy Review, the magazine of The Heritage Foundation (www.heritage.org).
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