An interesting view of Bush/Gore and the surplus from Seattle Times today:
Economic Memo: Paying the bills
Stephen H. Dunphy, The Seattle Times
The big jet lifted off the runway at Seattle-Tacoma
International Airport, climbed laboriously into a typical
fall day in the Northwest and headed on its long journey to
Europe. I settled into my seat, enough reading material in
front of me to last the eight-hour flight.
I was on my way to Europe to do two things: write my
Newsletter column from overseas for a week and learn how
the World Trade Organization was faring a year after its
debacle in Seattle.
As the seat-belt sign went out, I suddenly heard a familiar
voice from the aisle.
"So, Stevie my boy, how did you talk them into a boondoggle
like this to Europe?" the voice said. Turning, I saw my old
friend Walt Bagehot standing in the aisle, leaning over to
talk to me, a bit difficult in a nearly full plane. He
motioned me toward the back where there was a little room
to chat.
Bagehot is a well-known British economist, especially in
historic circles. We seem to bump into each other every
once in a while and compare notes about the world and
economics.
"You been listening to the debates between Al Bush and
George Gore?" Bagehot asked, with his familiar grin. "I
guess there are differences, but they sure pound away at
the same issues."
Trying to be the neutral reporter, I didn't respond
directly but asked Bagehot what the top issue between them
was, in his humble opinion.
"All this talk about the surplus," Bagehot responded
quickly. "You get the feeling that this surplus is building
up in some government savings account ready to be spent as
soon as the election is decided. What they don't say is
that the surplus is already a reality and it already is
being spent."
"Let me guess," I said. "The bond-buyback program?"
"Stevie, my boy, you are getting to be a not-bad amateur
economist," he said. "Still an amateur, but you're getting
there. You're right, the bond-buyback program is using the
surplus already, about $30 billion of it this year alone."
Bagehot explained how the government was acting like a
prudent investor or household. There is some extra money
sloshing around in the checking account, so why not pay
down old debt or get rid of an expensive loan taken out
when rates were much higher.
"OK, I understand that," I said. "But what are the policy
implications? How does this sort itself out given the
differences between the Gore and Bush plans?"
Bagehot said both presidential candidates have come up
with grandiose economic plans that would dissipate a $2.17
trillion, 10-year, non-Social Security surplus. Bush would
spend most of the budget bounty on big tax cuts, while Gore
promises expansive new social-spending programs and some
selected tax cuts.
Either way, he said, the bond market would have a bigger
supply of Treasuries to contend with than if the surplus
were just left alone.
"What matters from the bond market's point of view is both
candidates plan to completely use the surplus," said
Bagehot. "We're spending the surplus now, putting it to
work through the credit markets and bringing the federal
debt down, at least a little bit.
"Bush and Gore would put the money back into the economy
through the household sector. Just what we need - another
stimulus for consumers to spend."
I thought about what he was saying. "So putting the money
to work in the credit markets means that with less
government borrowing, there might be more money available
for the private sector to borrow to build a new factory or
something," I said.
"Bingo," Bagehot said.
Bagehot started talking about inverted yield curves and
other technical jargon in the bond market. No wonder
investors think bonds are dull.
"Wait a minute," I said. "Let me play amateur economist
again. What you are saying is that in the bad old days of
budget deficits, longer-term debt usually had higher yields than short-term IOUs to compensate investors for the risk
of having to hold the securities longer."
Bagehot nodded, apparently impressed with my analysis.
"But that relationship was turned on its head in January,
after the government announced it would use some of the
budget surplus to buy back longer-dated debt," I
continued. "Now it's kind of flipping around because of
short-term, market-driven price movements."
"Very impressive, Stevie, my boy," Bagehot said. "Main
thing to remember is that bond prices now are subject to
political whim. Get used to it, and remember that surplus
is already going out the door - and pretty effectively, I
might add."
The plane hit a pocket of turbulence, and we were forced
back to our seats. Dinner came; the flight droned on. I
caught a glimpse of Bagehot walking quickly away from the
gate after we landed, talking quietly with a well-dressed
executive who had met him.
I wondered briefly what they were talking about. Some big
deal, probably. I headed across the terminal to my
connecting flight, wondering to myself about whether the
World Trade Organization would be as impressed with my
status as an amateur economist.
seattletimes.nwsource.com |
