A Surprising Deficit Worry

Who do you think is the biggest holder of U.S. government debt?

The U.S. government.

Whenever Social Security collects more payroll tax money than it needs, it buys U.S. securities. Retaining cash would mean no return, buying stock could be risky and, government bonds are still the safest investment. Consequently, government agencies buy U.S. treasury securities. Similarly, to affect interest rates, bank reserves and the money supply, the Federal Reserve needs to buy and sell U.S. debt.

So, when NPR’s Planet Money secured a government document called “Life After Debt,” they discovered that, in 2000, the White House was worried about 3 years of no federal deficit. The paper asked, “What if the government no longer had to borrow money?”

Their answer takes us back to Social Security, the Fed, and a third group.

1. What would government agencies such as the Social Security Trust Fund do with their excess funds?
2. Could the Federal Reserve use other securities or maybe even stock to implement monetary policy?
3. Is there an alternative investment for the households, businesses, and countries who buy treasury securities because they can depend on the “full faith and credit” of the U.S. government?

Our bottom line: A manageable debt and deficit can be beneficial. As Alexander Hamilton said in 1781, “A national debt, if it is not excessive, will be to us a national blessing.”

The Economic Lesson

Even if the deficit were ever eliminated, the U.S. would still have a massive debt. The deficit is the shortfall when spending exceeds revenue. The debt is the total amount that the U.S. owes.

An Economic Question: Why might the U.S. have had no deficit for 1998-2001?