The Forgotten Conservative Campaign to Save the National Debt

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On my birthday I got to be reminded that I’m old enough to remember stuff that some of my colleagues missed out on. For example, the bizarre episode in 2000 and 2001 when a mainstream view among right-of-center economists was that the nation was facing a threatening situation in the form of possible elimination of the national debt. That’s right, the Clinton administration’s budgeting had not only eliminated the budget deficit, but was seen as possibly leading toward paying off all the accumulated debt of the Reagan years. And the right was afraid! One leading exponent of this view was Alan Greenspan, who used it as a reason to push for the Bush tax cuts, tax cuts that would save us from the curse of surpluses:

As a result, [Fed Chairman Alan Greenspan] said, there is a greater likelihood that the government will run surpluses for years to come — and that the government will soon confront the welcome but tricky question of what to do with surplus revenue when the debt is zero.

Lacking anything else to do with the money, Mr. Greenspan said, the government might eventually end up buying stocks and corporate bonds on Wall Street, involving Washington heavily in private enterprise.

To translate this idea into now-familiar terms, the idea was that we might pay off the national debt and then decide to put further surpluses into what we nowadays term a “sovereign wealth fund.” Specifically, the Social Security trust fund could have been transformed from an accounting rule into an independently managed fund that would hold a diversified portfolio of financial assets. This, in turn, would make it possible to fund future Social Security benefits without dramatically impacting the rest of the federal budgetary situation.

The official view on the right was that this would be a disastrous situation that led to undue government meddling and horrifying socialism. The reality, however, is that a large and diverse set of countries—from Norway to Singapore to Abu Dhabi—successfully manage sovereign wealth funds. Indeed, conservatives regularly cite Singapore’s mandatory savings approach to social insurance seemingly without noticing (or at least without mentioning) that it substantially takes the form of just this sort of publicly managed collective investment in financial assets. Many people think Greenspan was simply lying and just wanted tax cuts for the heck of it, but I think people may have actually believed in their analysis and just genuinely felt that budget surpluses were a terrifying idea.

At any rate, even without budget surpluses you can in principle seek to run this play. The government could simply issue large quantities of bonds in order to raise funds to invest in a diverse portfolio of financial assets. If done in a halfway sensible manner, such activity would be profitable and take advantage of the government’s superior ability to bear risk. Of course there are limits to the scale at which this would work, but it’s hard to know what that scale is without trying.