Today's Wall Street Journal Editorial

["Goncalo Fonseca" <fonseca@xxxxxxxxxxxxxxxxxx>]

Doesn't this argument sound familiar?  It's from today's Wall Street Journal
(in case you missed it).

http://www.opinionjournal.com/editorial/feature.html?id=85000758

                When Debt Is Good

Don't worry about what the government owes. What it takes is much more
important.

Tuesday, March 27, 2001 12:01 a.m.

If four separate opinion polls all found that 75% of the American people
thought Members of Congress should eat Mom's apple pie for lunch every day,
Congress would cram down apple pie unto eternity. Similarly, opinion polls
of yore asked the American people the same apple-pie question about paying
down the national debt, and by golly, the people said yes and by golly,
Congress is going to cram down the national debt come rain or come shine.

Thing is, we've had both rain and shine and have now paid off as much of the
national debt as is prudent or sensible. Yet even Democrats are professing
belief in debt payoff, proving conclusively it's now not much more than a
Beltway totem pole. We return to this piece of nonsense because the national
debt pay-down is starting to get in the way of things that the public might
actually want from Congress, such as long overdue tax cuts or Social
Security reform. Nearly all current tax-cut proposals are tethered to some
arcane interplay between surplus projections and national-debt repayment.

At its most simplistic, this idea stays afloat because of the attractive
metaphor that paying down the debt is like Americans paying down their home
mortgages.

It isn't. The American family is not remotely like the federal government.
As far as we know, no family has the power to back up its debt by printing
money or taxing citizens.

The only point of similarity between mortgage debt and the national
debt--and it is an important one--is that both financial instruments make
excellent sense. It is a refinement, not a curse, of the financial markets
that Americans can borrow to buy a house instead of waiting a zillion years
to make that purchase in cash. Ditto for the ability of the government to
borrow funds to buy highways, aircraft carriers and parks instead of
plunking down the requisite cash; for purposes of public finance, these are
assets suitable for depreciating over their life cycle.

In fact, the moment has arrived to praise the existence of the national debt
as a positive force for economic growth. Currently, the debt-to-GDP ratio is
around 35%. That's about half the average of other industrial economies and
well below a ratio of 50%, the point beyond which many economists argue that
the size may become worrisome.

Here, then, are good reasons for Congress to get over the debt neurosis:

The national debt, which expresses itself in the form of Treasury
securities, functions as a crucial cog in the world financial mechanism.
Since Treasury securities represent claims on the U.S. government, they are
therefore backed by the money-printing and taxing power of the government
and are considered stable and risk-free assets.

This makes Treasury securities perfect benchmarks against which other assets
and derivatives can be priced. Banks use them as part of their capital
accounts, and pension funds pour them into portfolios to satisfy prudential
regulations. Anything that makes global financial markets more efficient is
good for growth, and that includes U.S. debt. The IMF, an organization that,
one would think, has a huge stake in the efficiency of world financial
markets, recently gummed this issue to a pulp in a report titled, "Financial
Implications of the Shrinking Supply of U.S. Treasury Securities."

The national debt, to the extent it represents long-term borrowing and
investment on depreciable infrastructure, can go toward creating,
maintaining and improving the wherewithal necessary for high-level economic
functioning. To the degree it substitutes for higher taxes, national debt
frees money to be directed by the market into productive endeavors. Money
that doesn't go to Washington can find its way into capacity-creating,
job-creating investments in the private sector. This is true as well for tax
cuts--money that doesn't go to paying down the debt. The economy will
experience higher growth from cuts in marginal tax rates than it will from
lower or zero national debt.

If the surplus is returned to taxpayers, instead of paying off the debt, the
economy could be several trillion dollars richer when the boomers start to
retire and the Social Security pay-as-you-go fund runs dry. (That's when the
Social Security trust fund antes up those bogus bonds from the bogus lockbox
and the true situation is revealed; to wit, in order to redeem these pieces
of paper, the federal government will either have to raise taxes, issue new
debt or cut spending.) An economy that has been boosted by an extra several
trillion dollars would really come in handy, since the goods and services
promised to the boomers will have to come out of resources then available.

Finally, if the debt is paid down to zero, the government, after 2011, is
likely to start investing any surpluses in private assets. The government
could own chunks of corporations. Congress, with money in play, would be
tempted. Why take that chance?

The issue before us, including Congress, is economic growth. The solution
won't be found in ancient opinion polls on the national debt. The solution
will be found in reducing the burden of taxation on productive Americans.