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What Happened!!! Allan Greenspan!!!


NEIL REYNOLDS

From Friday's Globe and Mail


October 5, 2007 at 6:02 AM EDT


Ottawa ˜ Superficially, it appears prudent to use surplus federal revenue to pay down the national debt. Thus, superficially, Prime Minister Stephen Harper and Finance Minister Jim Flaherty appear prudent in directing this year's surplus revenue ($15-billion) to the national debt ($414-billion).

But novel concerns now arise. Surpluses are growing inexorably larger. Will we pay down the debt too fast? What happens when we pay it down completely? How will our economy change when government bonds disappear? Former U.S. Federal Reserve Board chairman Alan Greenspan, in his memoirs, tells an instructive and relevant tale - revealing his private apprehension, only five years ago, that the U.S. was paying down its debt much too quickly.

"Strange as it may appear in hindsight," Mr. Greenspan relates in his autobiography, The Age of Turbulence: Adventures in a New World, "the issue that loomed large for the [Fed] in January, 2001, was the disappearance of the national debt."

"A decade of rising productivity growth and budget discipline had put the U.S. government in a position to generate surpluses as far as the eye could see," Mr. Greenspan says, reversing the metaphor used by U.S. President Ronald Reagan's budget director two decades earlier to describe the prospect of federal deficits.

"The Congressional Budget Office was getting ready to revise its projection of the surplus to a stunning $5.6-trillion [U.S.] over the next 10 years."

The bipartisan CBO had determined indeed that the U.S. would pay down all of its payable debt within six years - even with allowance for a couple of recessions along the way.

"I felt an odd sense of loss," Mr. Greenspan recalls.

"The economic model I carried around in my head seemed obsolete. Congress was not spending money faster than the Treasury could take it in. Had human nature changed?" His colleagues at the Federal Open Market Committee (FOMC), the board of directors of the Fed, were disoriented, too. The Fed's primary mechanism for influencing monetary policy was the buying and selling of government bonds - "Uncle Sam's IOUs." How could the Fed operate without them? The Fed had no answer to this question.

By CBO calculation, the U.S. government would make its final debt payment in 2006 and then accumulate $500-billion in surplus revenue every year thereafter.

"As I contemplated this prospect, I felt stunned," Mr. Greenspan says. The anticipated annual surplus was an enormous amount of money - equivalent to the combined assets of the five largest U.S. pension funds, piling up each year.

What would the country do with all this money? Where could it be invested? Who would control it? "I found myself imagining American government officials as the world's largest investors," Mr. Greenspan says. "I found the idea very scary."

The prospect had first arisen two years earlier when President Bill Clinton proposed investing $700-billion in Social Security funds in the stock market - theoretically protected from political interference. Mr. Greenspan dissented, telling Mr. Clinton that he did not believe it was feasible to insulate such huge funds from government meddling. "I could readily envision the abuses that might occur," he said, "under a Richard Nixon or a Lyndon Johnson."

"I finally came to a stark realization that chronic surpluses could be almost as destabilizing as chronic deficits," Mr. Greenspan says. "I decided to propose a way for Uncle Sam to pay off his debts - but in a way that left no surplus revenues to invest once the debt reached zero." The obvious way to do it was with tax cuts that would put the U.S. on a "glide path" to balanced budgets and zero debt. Thus, when President George W. Bush took office at this very moment - in January, 2001 - Mr. Greenspan championed the Republicans' proposal for a broadly based, $1.3-trillion tax cut.

"I was willing to be optimistic," Mr. Greenspan says. "The tax cut would work down the surpluses before they became dangerous. And, were the economy to stall, it could prove serendipitous." This is what happened. Within months, government revenue was shrinking - reflecting, in the short term, the fall of equity markets and, in the longer term, the rise of deficit spending to finance the high cost of waging war against global terrorism.

In some ways, the CBO analysis that tormented Mr. Greenspan now applies to Canada. Our federal surpluses continue to rise inexorably and could well reach $30-billion a year or more. It would be prudent for Mr. Flaherty to put Canada on its own "glide path." It would be prudent for him to use broad-based tax cuts to reduce the surpluses and to protect against recession. It would be prudent for him to slow the process of paying off the national debt.

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