February 22, 2001


View PDF version
View PDF of Full Report
View HTML of Full Report

If you cannot access the file through the link, right-click on the underlined text, click "Save Link As," download to your directory, and open the document in Adobe Acrobat Reader.

On February 22,the Center on Budget and Policy Priorities released an analysis, "The Peril of Zero Debt and the Long-Term Budgetary Outlook: Some Questions Regarding Chairman Greenspan's Recent Testimony." This analysis evaluates the argument that Federal Reserve Chairman Alan Greenspan has advanced that because of the "peril of zero debt," a large tax cut is needed.

Chairman Greenspan noted that projected budget surpluses are sufficiently large that the public debt may be eliminated within the next ten years. At that point, continued surpluses would necessarily result in public investment in some sort of private assets (since there would be no debt left to pay down). Chairman Greenspan argued that public investment in private assets could lead to political interference in private capital markets and, as a result, would risk "sub-optimal performance by our capital markets, diminished economic efficiency, and lower overall standards of living than would be achieved otherwise." This is the so-called "peril of zero debt." To avoid that peril, Greenspan recommended that projected surpluses be dissipated in part through tax cuts.

Dissipating the surpluses through tax cuts, however, would result in lower national saving than if the surpluses are saved by paying down debt (since the funds used for the tax cuts or spending increases would not be saved, while the funds used to pay down debt would be). Higher national saving offers significant benefits to the nation in preparing for the retirement of the baby boomers, since it raises the productivity of future workers and thereby reduces the burden of supporting the baby boomers in their retirement. Given these benefits of higher national saving, Chairman Greenspan's argument about "the peril of zero debt" merits careful scrutiny. A critical question is whether the economic costs associated with public investment in private assets outweigh the economic costs of failing to undertake as much national saving. The Center's analysis paper finds:

Given the experience of state and local government pension funds in the United States and of national governments in other countries in managing investments in private assets, and the protections that could be erected to avoid politicization of the capital markets from investments in private assets through the Social Security trust fund, the peril of zero debt does not provide a sound rational for enacting a large tax cut today. Passing a large tax cut merely to avoid the possibility of public investments in private assets would not represent sound policy.