A debt free United States: what would that mean exactly for all of us?

[telemann.livejournal.com]

Had Gore won in 2000, what would a debt free United States mean?

As I posted early Saturday morning (cf. this post), Bill Maher listed the state of the United States economy that Bill Clinton handed off to President Bush, and suggested the Republicans squandered their reputation as financial conservatives by talking about their record once in power. Mr. Maher referenced a Congressional Budget Office Report*, that essentially said ten years of budgets surpluses with payments on the national debt would leave the country essentially debt free.



Now, I actually remember some scuttle butt at the time (President Clinton signed two payments on the National debt) about the ramifications of no debt. Economists were not sure we actually wanted to go that route, because our system is actually predicated on having it. So as a hypothetical, let's say Al Gore won Florida in 2000 by a significant margin, by passing the need for recounts and the Supreme Court decision. And let's not get bogged down in a lot of arguing over that, or why such a projection would have never happened, and let's just assume the projections held true: ten years of budget surpluses with significant payments on reducing the National debt.

I know there are some really bright people here in the community that are Economics majors. What exactly is the benefit economically of not having any debt? I understand surpluses mean that the government is borrowing money from the private sector, thereby taking money out of the system that would otherwise go to private investments and economic development, but were those naysayers in the heady days of the late 1990s wrong? If we had no debt, how would our country be different?

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* cf. supplemental tables are viewable here as well.

Comments

[udoswald.livejournal.com]

I'm not an economist but I think there would be good and bad elements.

The good element would be that the country wouldn't be in debt and we wouldn't owe much of that debt to foreign governments including China. We'd also have more of the budget to devote to programs instead of paying off interest on the debt. Also, we wouldn't have the debt as a bludgeon the Republicans could use every time they wanted to cut a needed social program (though I'm sure they'd come up with something else).

The bad part would be that it would encourage those in Congress who know even less than I do about economics, or at least pretend they do, to go out of their way to cut taxes every chance they got, without any thought to saving some of that money as a buffer in bad times. Then they'd still come after social programs as a means to further decrease the budget to provide further tax cuts for the rich.

Also, I would argue, it's not entirely clear that Gore would have been any more successful than Bush was in maintaining that surplus over these years. There still would have probably been 9/11 or a similarly devastating terrorist attack during Gore's two terms. He would have been under immense pressure to go to war with Iraq and we all know how Democratic politicians respond to pressure from the right. Also, the seeds of the banking crisis were already being planted during Clinton's terms so it's entirely possible this economic crisis still would have happened regardless of the government's debt situation, drastically decreasing revenues (which, as I said, Republican majorities would have likely cut down to the bare minimum) and necessitating borrowing.

[telemann.livejournal.com]

Thanks ;)

Also, I would argue, it's not entirely clear that Gore would have been any more successful than Bush was in maintaining that surplus over these years.

I agree 100 percent. And the linked report and tables in my post have several caveats listed as well (including some you mentioned here). I was more curious about -- what are the exact ramifications of a debt free United States.

[badlydrawnjeff.livejournal.com]

Mr. Maher referenced a Congressional Budget Office Report*, that essentially said ten years of budgets surpluses with payments on the national debt would leave the country essentially debt free.

Absolutely. What the CBO also projected was no negative GDP, i.e. no recession. And the CBO couldn't have projected 11 September, either.

As much as you don't want to have the discussion about the projections, it matters - if we're trying to have a discussion about whether a no-debt opportunity is good or bad, we first have to worry about whether such a scenario can actually exist.

That's why keeping the debt at sustainable levels is best. We're still in sustainable territory today, but Obama's spending binge is quickly changing that scenario.

If we had no debt, how would our country be different?

The argument against tax cuts would be even weaker than it already is. That's about it.

[enders-shadow.livejournal.com]

Why wouldn't such a scenario actually be able to exist?
I mean, didn't the US have zero debt in the early 1800's? Wasn't that one of the first things we as a country did, was pay off our debt so we could really be all independent and stuff?

[korean-guy-01.livejournal.com]

What the CBO also projected was no negative GDP, i.e. no recession. And the CBO couldn't have projected 11 September, either.

Exactly. Liberals need to read up on the ASSumptions that were made up over GDP growth and revenue generation regarding Obamacare instead of taking CBO stats as gospel and a relevant starting point.

[squidb0i.livejournal.com]

"Obama's spending binge"

HAHAHAHAHAHA

[capthek.livejournal.com]

But that's the thing, you go into debt when the economy is bad and then pay it back when the economy is going well. Thus we were paying it back in the 90s, it made sense to spend a little and cut taxes during the early 2001 recession, but when the economy began to do well by 2003 or 2004 we should have went back to paying debt again. It is just like a person and their bills, you save up for the bad times, you don't spend like crazy during the good times and assume there will be no future downturn.

[root-fu.livejournal.com]

US GDP is negative.

Largest GDP gains have come by way of investment and real estate. Its not real growth as it impacts a very tiny population demographic.

"We're still in sustainable territory today ..."

[russj.livejournal.com]

Just how sustainable is borrowing over 40% of what we are spending?
The federal government has been borrowing at this level for two years now.

I'm going to venture and ask you: How many years can we do this and call it "sustainable"?

If it is not sustainable, then we need to cut spending in a big way, or increase taxes in a big way, or some combination of the two.

One problem with raising taxes is that people have a limited tolerance to ever-increasing tax rates. Take sales taxes. They seem to be just around 7%-8% just about everywhere. People are comfortable with this much taxation, but there seems to be a psychological barrier to sales taxes approaching the double-digit level.

With income taxes, it's not so easy, since one seldom knows what they are really paying, until you finish filling in the forms, and by that time all we care about is if we owe or if we get a refund.

[korean-guy-01.livejournal.com]

Al Gore wanted Social Security under a lock-box (which I agreed with), effectively negating any "budget surplus" whatsoever.

[surferelf.livejournal.com]

Yes. I remember being somewhat frothy about this at the time. With the SS money removed from the equation we were still running hefty deficits. Then Bush comes along with his tax cuts and I was all head asplody. But then Dick Cheney explained to me that Reagan proved deficits don't matter and everything was fine again.

[anfalicious.livejournal.com]

A Keynesian would argue that you want surpluses in times of strong economic growth so that you can create a bank of funds that can pay for stimulus measures. In reality, most of the money is wasted on tax cuts to buy votes by short sighted politicians. Of course, you could argue as you do that it is taking money out of the economy at the time which stymies development. This is true, unfortunately it has been popular to have tax cuts going to the wealthiest who don't put the money back into the economy but lock it up as savings (so essentially the same thing as the government saving it, only then the government doesn't have it to stimulate the economy when it's needed).

One of the main reasons the US economy is so buggered IMO is that they have tried to be Austrians in the good times and Keynesians in the bad times so neither system has worked. Given the way the US has been run for the last 30 years, it would have made more sense to grind the whole economy into the ground and start again; the "too big to fail" banks should have failed. It would have been far worse for people now, but probably better for people in 10 years time. Countries who didn't spend the boom of the 2000s racking up debt have come out of the GFC pretty well.

[rasilio.livejournal.com]

"
One of the main reasons the US economy is so buggered IMO is that they have tried to be Austrians in the good times and Keynesians in the bad times"

Lol. No they havent.

They have never in history tried to be Austrians. At best they have been Chicago School Monetarists in good times but more appropriately they have been some flavor of Keynsean the entire time because for pretty much my entire life there was some economic doom just over our horizon that the government needed to spend money on so they could keep GDP from falling.

[ja-va.livejournal.com]

Just like private borrowing, public borrowing could be a good or a bad thing depending on how it is spent. If you invest in your future- pay for education, build factories, roads, scientific research- borrowing is good. If you waste money on fun things to do - buy a second, larger car, bigger TV, cool hat - borrowing is a stupid way to go.
It is safe to say that the money borrowed between 2001 and 2008 were wasted. No investment has been made, most of it gone into wars and bubbled up in the real estate market (empty houses in suburbs- somebody's money wasted).

BTW, most of the budget deficit was covered by financial inflows from abroad, i.e. China and others buying American assets. It means we get cheap crap for free and pay with I.O.Y.'s so that you could get that deal in Target or Wall Mart. Your children or grandchildren some day will cover the difference ;)

[root-fu.livejournal.com]

Its dependent upon how efficient the mechanism handling debt, is.

If a government wastes 50% or more of the debt it incurs on structural and circumstantial inefficiency, potential gains are minimized or null as productivity and wealth are obliterated via systemic inadequacy.

[root-fu.livejournal.com]

Having no debt decreases the risk of economic failures which led to the collapse of the Soviet Union. It decreases risk of hyperinflation, stagflation, becoming stuck in a vicious cycle of a government needing to raise taxes ad infinitum to sustain obligatory spending.

Having little or no debt is a low risk, low danger, economic policy. High deficit / debt is the opposite.

This precedent is also reflected in terms of socioeconomic standards & stability. A low debt government implies stable living standards for its citizens. High debt may imply economic troubles -- job losses, predatory practices by banks and corporations, increases in crime due to economic upheaval and turmoil. Compare to the number of home foreclosures before and after the TARP bill was passed to bailout banks.

Other advantages to low debt include higher credit rating, higher safety margins for non-discretionary social programs and education.

The trouble with low vs high debt has to do with intangibles and causality with the potential to make effects difficult to determine.

[lordtwinkie.livejournal.com]

I highly doubt a Gore presidency would've stopped the massive propped up tech bubble that was the major impetus for the clinton era surpluses from bursting.

[telemann.livejournal.com]

That's not the question I asked though.

[kylinrouge.livejournal.com]

I honestly don't know the answer to this. I can only look at other countries and how they handle their deficits, and it seems that they invest in their social safety nets, which seems like a good long-term idea. After all, keeping money in people's pockets in bad times allows them to maintain spending levels and all the juicy economical benefits that it brings.

Using a surplus to just give tax cuts to the rich doesn't seem to stimulate the economy in any way. The rich have historically just saved that money instead of 'investing in jobs' or whatever mythical activity the rich do for poor people.

[the-rukh.livejournal.com]

That's the problem-

The economy will go up and down. If we chop income during good times, we're going to be borrowing during bad times. As long as we use tax cuts as a political carrot, we'll end up in this situation once again. That goes for all parties involved.

[rasilio.livejournal.com]

"The rich have historically just saved that money instead of 'investing in jobs' or whatever mythical activity the rich do for poor people"

Care to speculate on what exactly the rich invested that money into if it did not lead to job creation?

Oh that's right, the only investment in existence that does not create new business, Government Debt.

If there were no government debt for them to buy they would have little choice but to invest it in new business/capital creation which always creates jobs.

[underlankers.livejournal.com]

This argument assumes 1) no 9/11 and subsequent Afghanistan War and 2) if Gore is President he completely avoids an Iraq War, which given that Clinton bombed it no less than three times is not exactly clear-cut. It also assumes that Gore post-2000 is the same as the Gore picked by Clinton because he was more prone to appeal to the family values types. Not only this, but it also assumes that Gore would have uninterrupted control of Congress and a good working relationship with Democratic politicians, neither of which are a guarantee.

This is an alternate history scenario that assumes rather too much.

[surferelf.livejournal.com]

2) if Gore is President he completely avoids an Iraq War, which given that Clinton bombed it no less than three times is not exactly clear-cut.

It's about as clear cut as an imaginary thing can be.

[allhatnocattle.livejournal.com]

It was 2004 when Alberta's debt was finally paid off (http://www.ctv.ca/CTVNews/TopStories/20040713/klein_albertadebt_20040712/). It was nice. We got two "Ralphbucks" cheques paid to every citizen here in Alberta as part of our share of the surplus. And then the gov't eliminated healthcare premiums, which we (citizens) still don't pay. But then when the shit hit the fan in 2008 and $147 oil fell to $40 in a week, it got the gov't into a little jam and we've been running deficeits ever since. Actually I think we`re in a position to start eliminating debt again. Ah the ups and downs of the economy can`t be too steady for very long.

[rasilio.livejournal.com]

Ok ignoring how inane your setup is (had Gore beaten Bush we still would have had the recession in 2000 - 2001 and odds are that his response would have been larger spending than Bushes was even if you include the tax cuts as spending. Lets look at your root question.


What does it mean for the country to have absolutely no debt. Here are a few...

1) Either more money to spend on programs or cut taxes with because you are not having to pay the interest payments. True at the moment the amount is not *that* large because interest rates are so low, however doubling them would still put them below historical averages would leave you with roughly an extra 12% of revenues to either spend or cut taxes with.

2) More stable economy and money supply. No debt means the temptation to use Fed monetary policy as a means of managing debt repayment goes away leading to more stable interest rates and therefore a more stable economy.

3) Greater ability to respond to and weather future economic disruptions. If you start from a no debt position and have a natural disaster or economic bubble burst government has a greater ability to issue debt and spend it to turn the economy around

4) More investment in the private sector and in growing economies. With no US Treasury bonds to buy the $14 trilion currently tied up in them would have to go seek out some alternative home, most likely in buying the bonds of emerging markets and greater emphasis on entrepreneurial ventures.

5) Some combination of More US Exports or more foreign investment in the US. Currently all of the countries that we send dollars to can spend most of those dollars buying Treauries. With no treasuries to buy they would have no choice but to start buying either American Goods or American Equities.

[underlankers.livejournal.com]

It's not an insane set-up, Gore lost the election due to being a dipshit and asking for recounts of counties Bush won, as opposed to the entire state, which *he* won. A big difference, however, would be that in contrast to President Obama, who is the first President since the Elder Bush to win a majority in an election the first time, Gore would have won due to a recount and thereby made himself greatly vulnerable to the GOP which would start probably a Recounter conspiracy akin to the Birthers and Deathers.