When Alan Greenspan Worried Most Overly Large Budget Surpluses

There was a time, less than xx years ago, when a major trace of piece of job concern for the US authorities was how it would bargain amongst the problems of paying off all authorities debt, which was projected to move on yesteryear nearly 2010. Alan Greenspan, as well as hence chairman of the Federal Reserve, made it a major dot inwards his "Outlook for the federal budget as well as implications for financial policy" when he testified earlier the US Senate Budget Committee on Jan 25, 2001. 

Here's Greenspan on what the budget projections looked similar at that time:

"The most recent projections from the OMB betoken that, if electrical current policies rest inwards place, the total unified surplus volition make $800 billion inwards financial twelvemonth 2011, including an on-budget surplus of $500 billion. The CBO reportedly volition live showing fifty-fifty larger surpluses. Moreover, the admittedly quite uncertain long-term budget exercises released yesteryear the CBO terminal Oct keep an implicit on-budget surplus nether baseline assumptions good yesteryear 2030 despite the budgetary pressures from the aging of the baby-boom generation, peculiarly on the major wellness programs. The most recent projections, granted their tentativeness, nonetheless brand clear that the highly desirable goal of paying off the federal debt is inwards make earlier the destination of the decade." 

But this practiced word of an unending futurity of budget surpluses did select some issues to address. For example, when the federal authorities reached nada debt as well as stopped borrowing as well as became instead a holder of an ever-growing pile of financial assets, how would the decisions live made nearly which assets the authorities should hold?

"At nada debt, the continuing unified budget surpluses currently projected imply a major accumulation of private assets yesteryear the federal government. ... I believe, equally I lead hold noted inwards the past, that the federal authorities should eschew private property accumulation because it would live exceptionally hard to insulate the government's investment decisions from political pressures. Thus, over time, having the federal authorities concord meaning amounts of private assets would peril sub-optimal functioning yesteryear our uppercase markets, diminished economical efficiency, as well as lower overall standards of living than would live achieved otherwise."

One possible alternative was to permit private privatized accounts for Social Security, hence that individuals rather than authorities would concord the growing mount of these assets. In addition, the authorities would live wanting to pay off its long-term borrowing earlier the bonds were truly due--which mightiness mean  paying a premium to bondholders.

"But the to a greater extent than of import lawsuit is the potentially rising cost of retiring marketable Treasury debt. While shorter-term marketable securities could live allowed to run off equally they mature, longer-term issues would lead hold to live retired earlier maturity through debt buybacks. The magnitudes are large ... Some holders of long-term Treasury securities may live reluctant to give them up, peculiarly those who highly value the risk-free condition of those issues. Inducing such holders, including unusual holders, to willingly offering to sell their securities prior to maturity could require paying premiums that far give whatever realistic value of retiring the debt earlier maturity."

The primary emphasis was that the federal authorities needed to offset thinking nearly an appropriate "glide path" to the brave novel financial futurity of sustained budget surpluses, as well as the appropriate mixture of revenue enhancement cuts as well as higher spending that was appropriate. Of course, in that location were a few paragraphs pointing out that this futurity equally good depended on avoiding "a major as well as prolonged economical contraction," equally good equally sustained rapid increment inwards productivity. 

"The ground for caution, of course, rests on the tentativeness of our projections. What if, for example, the forces driving the surge inwards revenue enhancement revenues inwards recent years get to dissipate or contrary inwards ways that nosotros produce non right away foresee? Indeed, nosotros all the same produce non lead hold a total agreement of the exceptional strength inwards private income revenue enhancement receipts during the latter 1990s. ... Indeed, the electrical current economical weakness may bring out a less favorable human relationship betwixt revenue enhancement receipts, income, as well as property prices than has been assumed inwards recent projections. Until nosotros have total particular on the distribution yesteryear income of private revenue enhancement liabilities for 1999, 2000, as well as mayhap 2001, nosotros are making petty to a greater extent than than informed guesses of certainly key relationships betwixt income as well as revenue enhancement receipts.

"In the end, the outlook for federal budget surpluses rests fundamentally on expectations of longer-term trends inwards productivity, fashioned yesteryear judgments nearly the technologies that underlie these trends. Economists lead hold long noted that the diffusion of engineering scientific discipline starts slowly, accelerates, as well as and hence slows amongst maturity. But knowing where nosotros right away stand upward inwards that sequence is difficult--if non impossible--in existent time. As the CBO as well as the OMB acknowledge, they lead hold been cautious inwards their interpretation of recent productivity developments as well as inwards their assumptions going forward. That seems appropriate given the uncertainties that environs fifty-fifty these relatively moderate estimates for productivity growth. ... That said, equally I lead hold argued for some time, in that location is a distinct possibility that much of the evolution as well as diffusion of novel technologies inwards the electrical current moving ridge of project design all the same lies ahead, as well as nosotros cannot dominion out productivity increment rates greater than is assumed inwards the official budget projections." 

Influenza A virus subtype H5N1 few thoughts on all of this.

1) "It is real hard to predict, peculiarly nearly the future."  Economic projections depend on the underlying assumptions, as well as those are non written inwards stone.

2) The practiced word is that through strong bipartisan consensus since 2001, the US authorities has decisively addresses the problems of paying off all the authorities debt as well as running overly large budget surpluses for decades into the future. Here are a few snapshots to remind us of what happened, as well as where nosotros right away seem to live headed, taken from the "Selected Charts on the Long-Term Fiscal Challenges of the United States" published yesteryear the Peter G. Peterson Foundation (January 2019, largely based on Congressional Budget Office information as well as estimates).  

Here's federal spending as well as revenue expressed equally a portion of GDP. You tin post away run into that magic minute dorsum inwards early on 2001 when revenue enhancement receipts were on the rising as well as spending was down. You tin post away equally good run into what happened when the dot-com nail ended inwards 2001: non entirely did taxes autumn equally the nail decreased, simply revenue enhancement cuts enacted both inwards answer to the economical as well as stock marketplace slowdown, simply equally good inwards answer to revenue enhancement cuts that were intended both to aid boost the economic scheme out of the 2001 recession as well as equally good (I think) to cut down that pesky high revenue enhancement take. Federal spending did rest below its  historical average through the early on 2000s, simply as well as hence shot upward when the Great Recession striking afterwards inwards the decade.

Interestingly, both federal spending as well as revenues are pretty roughly their historical portion of gross domestic product over the terminal xl years or hence at present.

This figure shows total federal debt held yesteryear the populace (as opposed to debt held internally yesteryear other agencies of government). Again, that downward feint inwards the debt degree inwards the the belatedly 1990s is clearly visible. Greenspan as well as others were definitely seeing something inwards the data! But you lot tin post away as well as hence run into the steep rising inwards authorities debt after the Great Recession, as well as the projected rising (assuming electrical current legislation is unchanged) into the future. 

3) Greenspan's testimony is a reminder of how hence many people idea as well as acted during the dot-com nail of the 1990s--that the surge of project design as well as productivity increment at that fourth dimension had a practiced run a peril of turning out to live permanent.

4) The sense since 2001 equally good points out that if the US authorities inwards its purpose equally financial regulator as well as macroeconomic director could at to the lowest degree minimize the size of the truly bad recessions, similar 2007-2009, it would lead hold made a dramatic divergence inwards the accumulated debt/GDP ratio. In addition, if in that location is a surge inwards productivity that lasts for some years, hence many economical problems from budget deficits to wage increment croak much to a greater extent than manageable. Without that surge of productivity growth, solutions to many of the same problems autumn somewhere betwixt "hard choices" as well as "politically impossible." There's no magic policy dial to plough upward productivity growth. It's a affair of making the needed investments inwards human capital, physical uppercase as well as technology, inwards a context where in that location are incentives as well as rewards for those who try out efficency as well as innovation.