MITCH MCCONNELL: It's completely preposterous at a time when 14 million Americans are looking for a job in this country for the president to be riding around on a bus, saying we should raise taxes.
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ALEX BLUMBERG, HOST:
Hello and welcome to PLANET MONEY. I'm Alex Blumberg.
DAVID KESTENBAUM, HOST:
And I'm David Kestenbaum. Today is Friday, October 21. That was Senate Minority Leader Mitch McConnell you heard at the top.
BLUMBERG: Today on the podcast, we at PLANET MONEY have an exclusive. We got our hands on a secret, unpublished government report outlining a potential danger that our government looked like it might be facing. This danger was not terrorism; it wasn't meteors from outer space. The danger was that we might pay off the national debt.
KESTENBAUM: Coming up, but first, the PLANET MONEY Indicator from Jacob Goldstein.
JACOB GOLDSTEIN, BYLINE: Today's PLANET MONEY Indicator - it's 1.2. The interest rate on 10-year French bonds - it was 1.2 percentage points higher than the interest rate on 10-year German bonds this week.
BLUMBERG: And, Jacob...
GOLDSTEIN: Don't play like you don't love credit spreads because I know you do.
BLUMBERG: Adam and I did a story last year where we said that the single scariest, boring finance phrase out there is - and I quote - "sovereign credit spreads in Europe are widening," and that is what you're talking about, right, Jacob?
GOLDSTEIN: It is. And as you guys said last year, you see sovereign credit spreads widening - that means the gap between what different countries have to pay in interest to borrow money. You see that when investors are getting nervous. And in this case, it means they're getting a little bit nervous about France. In fact, the spread between France and German debt is now at its widest since the euro was created.
BLUMBERG: And, Jacob, I have to say this actually seems doubly scary because when Adam and I did that story last year, we were talking about the spreads widening for Greece, Ireland, Portugal and maybe Spain. And now you're telling me that they're starting to creep up for France? France is the country which is supposed to be the strong country that's supposed to rescue the rest of these guys.
GOLDSTEIN: Yeah, exactly. This is exactly why this, you know, seemingly boring little number seemed Indicator-worthy to me. Although I should say before I go, the actual interest rate France is paying on its debt - it still is pretty low - it's just over 3 percent. That's way lower than the countries that are in a lot of trouble, so it's not like France is, like, right on the edge of some debt crisis. But you know, as we have seen in country after country in Europe, these things can pick up speed pretty fast.
BLUMBERG: All right, thanks, Jacob.
GOLDSTEIN: Thanks, guys.
KESTENBAUM: All right, onto the podcast. So a while ago, I was talking to an economist who had worked in the Clinton White House, and she told me about this unpublished document that was looking at what today seems like a very strange question. The question was, what would happen if we paid off the U.S. debt? The document I was told had a great title. The title was "Life After Debt."
BLUMBERG: David, I remember when you mentioned that document, "Life After Debt," you mentioned it at a story meeting that we were having, but that was a long time ago, right? I had sort of forgotten about it.
KESTENBAUM: (Laughter) It was a year ago. I submitted a Freedom of Information Act request to the Clinton library to try and get a copy. Somehow my request got lost. They were very apologetic about it. And then finally, I got this little cardboard box in the mail with a big orange sticker on it, saying magnetic media; do not X-ray. And inside the box was a CD, and on the CD was a scan of the report.
BLUMBERG: All right. So I have a copy here. It says on top preliminary and close hold, official use only. This is hot stuff.
KESTENBAUM: All caps (laughter). So I showed the report to Diane Lim Rogers. She was an economist on Clinton's Council of Economic Advisers. She's actually the one who tipped me off to this, and she hadn't seen it for 10 years.
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DIANE LIM ROGERS: Wow. I mean, I - the document just reminded me of a lot of things I'd forgotten - like, I'd completely forgotten that we were projecting that the debt would be completely paid off by 2012.
BLUMBERG: I mean, that is so crazy. I mean, if you look it up right now, it is - the current debt is over $10 trillion. And they were predicting that next year, we would have paid the whole thing off. And this was not that long ago that they were projecting this. I mean, this was just, like, a little over a decade ago. I mean, I remember that. That was, like, back during the sort of the end of the Clinton era. The economy was booming.
BLUMBERG: Things were feeling good.
KESTENBAUM: We were actually running a surplus. The government was taking in more money than it was spending, and it was beginning to pay off the debt. Now, paying off the national debt seems like a good thing. And everyone basically agreed it was a good thing, but it did pose a strange danger. And the danger was that if the U.S. paid off its debt, that meant there would be no more U.S. Treasury bonds in the world.
BLUMBERG: And remember, a Treasury bond - that is how the government borrows money. It issues these bonds. In other words, it says, if you give us a lot of money right now, we will pay you back that money with interest. So if there was no more debt, there'd be no more of these Treasury bonds.
KESTENBAUM: And the U.S. has been issuing these Treasury bonds for so long - the U.S. has been in debt for so long - that the entire world has come to depend on them. Treasury bonds today are one of the pillars of the global economy. So these economists were wondering, what happens if they go away?
BLUMBERG: And this is one of these strange things. Like, you probably don't think about it very often, but Treasury bonds are everywhere, and they're affecting our lives in ways we don't even realize. For instance, your bank - your bank needs a safe place to put money. It buys Treasury bonds. Treasury bonds are super safe. They are the definition of safety. And even more to the point, there are tons of them. So there's enough so that the entire banking system can use them as basically a mattress to put the money in a safe place.
KESTENBAUM: Also, another place Treasury bonds pop up - there's a good chance your mortgage is tied to interest rates on U.S. Treasury bonds. Interest rates on Treasury bonds are like a universal reference point for all kinds of loans. Banks can issue someone loan. They say, well, I'll give you the interest rate on U.S. Treasury bonds plus 2 percent or something.
BLUMBERG: And if we still have not convinced you, consider this. The Federal Reserve - our central bank, the institution charged with keeping our economy on track - the main way it keeps the economy on track is by buying and selling Treasury bonds. It's doing this all the time.
KESTENBAUM: So there is this question - if you take Treasury bonds away, what would happen? Would the world unravel? Would it adjust somehow?
ROGERS: It was a dramatic issue. It was a huge issue for not just the U.S. economy but the global economy, and that's why we felt initially that we had to address it somehow.
JASON SELIGMAN: I probably thought about this piece easily 16 hours a day, and it took me a long time to even start writing it.
KESTENBAUM: And here finally is the author of The "Life After Debt" report, Jason Seligman, another economist on the Council of Economic Advisers. A world without Treasury bonds, it was a strange, science-fictioney (ph) question.
SELIGMAN: What would it look like to be in a United States without debt? What would life look like in that - in those United States?
KESTENBAUM: That seems like a funny question now.
SELIGMAN: Yeah, it was a funny question then, too.
BLUMBERG: And basically what Jason found and wrote in "Life After Debt," this secret report that you got your hands on, David, is that there aren't any easy answers.
KESTENBAUM: Take, for instance, the question of, what will replace the Treasury bond as the world's mattress, the safest thing? Well, there are German bonds or AAA-rated corporate bonds, but there is just no way you're going to have enough of those to go around.
BLUMBERG: Question 2 - if Treasury bonds go away, what will people use as a reference point for interest rates? Well, Seligman writes, you could use the interest rates on bonds issued by Fannie Mae and Freddie Mac.
KESTENBAUM: At this point in the draft, there is a comment by someone who is reviewing it. Quote, "this is a sensitive issue. Get affirmative clearance from my colleagues in domestic finance."
BLUMBERG: (Laughter) Right. And this is one of the strange sort of things about reading this document. It has all these editorial comments that people have written in the margins as they were reviewing it. For instance, after this one line in the report, the sentence that's written is by running surpluses instead of deficits, the federal government will be shrinking rather than expanding the supply of this valued financial asset for the first time in history. And then there's this funny comment just written on the side, quote, "the last sentence has this tone suggesting that we're doing something stupid by running these darn surpluses."
KESTENBAUM: But there were all of these problems - like, what about the Fed, right? Remember, the Fed buys and sells Treasury bonds to - basically to adjust the amount of money in the economy. When the Fed wants to increase the money supply, they print the money, but then they've got to get it out somehow. So they do this typically by buying Treasury bonds. Now, the Fed could buy something else, but the Fed buys in such huge
KESTENBAUM: quantities - hundreds of billions of dollars - they would risk distorting the market for whatever thing they decided to buy.
SELIGMAN: There had never been a time where the Fed didn't have this instrument to purchase.
KESTENBAUM: As I was reading this, I kept thinking about Treasury bonds, and I was remembering all the places where they crop up - like the Social Security is invested in Treasury bonds basically, right?
SELIGMAN: Correct, yes.
KESTENBAUM: So if there are no Treasury bonds to buy anymore, what do you do?
SELIGMAN: The answer is, we don't know.
KESTENBAUM: In the end, Jason Seligman determined that you want to pay down the debt, fine. But you probably do not want to pay it off entirely.
SELIGMAN: There's such a thing as too much debt but there's also such a thing perhaps as too little.
KESTENBAUM: I mean, the world really - it needs the Treasury bonds. It needs the U.S. government to be in debt so it can buy that debt.
SELIGMAN: You don't want to go too far with that argument because it can be very self-serving, but there is some saliency to the argument, yes.
BLUMBERG: So Jason Seligman writes his arguments up into this paper, gives it a catchy title, "Life After Debt," and hands in to be included in the Economic Report of the President of 2000. This is the final economic report of the Clinton administration. It's a big deal, summing up the state of the economy at the end of President Clinton's second term at the end of the millennium.
KESTENBAUM: "Life After Debt" gets reviewed by people at high levels in the government. And in the end, people above Jason decide to spike it. Jason remembers hearing from a colleague that life after debt was not going to see the light of day.
SELIGMAN: I think Chad broke the news to me, if I recall. And I think I felt really sad for a moment. But I also understood - I also really understood that I certainly didn't want to be the guy that wrote something that was ironically destructive.
BLUMBERG: So how could simply mentioning that this is a possibility be destructive? Well, people were worried that just simply by writing it down, you could move markets somehow. People would read this report and start doing things with their money that are unexpected - you could somehow change the future in ways that you don't want to.
KESTENBAUM: And the whole thing was just was very speculative - is also very politically sensitive - issue of surpluses - what are you going to do with the surplus? I mean, one of the concerns the Clinton staff had was that if you even suggest that there is a problem with paying off the debt, politicians will say, oh great no problem, we've got a surplus? You've got a pile of money? I can help. (Laughter) We'll cut taxes or we'll spend it. I talked with one of the people who decided not to publish this thing.
MARTIN BAILY: My name is Martin Baily - B-A-I-L-Y - without an E. And I was chairman of the Council of Economic Advisers under Bill Clinton.
BLUMBERG: And even though Martin and his colleagues kept the report secret, what they feared would happen did happen. The surplus disappeared. We started adding to the debt. And today at almost exactly the moment the authors were predicting the debt would be almost gone. It now stands at a near record level of $10 trillion dollars.
BAILY: I think - I feel a little bit, sort of betrayed by what what has happened because we ended the 2000 with a budget surplus and instead of using that prudently, we ended up basically - with increases in spending - a lot of military spending, even non-military spending went up. And revenues were reduced by the tax cuts - two rounds of tax cuts. And so we went into this deep recession that we've gone into after 2007 without the resources to really tackle the problem.
BLUMBERG: So that raises the question - how did this happen? What went wrong? How did the debt get so big when it looked like just a decade ago we were going to pay it off by now? We found a couple more or less nonpartisan reports that attempt to answer this question. One of the reports is from the Congressional Research Service. Another is from the Pew Charitable Trusts.
KESTENBAUM: They both have pretty much similar numbers. Let's just go with the Pew numbers. They have a nice pie chart, which we'll link to on the blog. One of the reason the debt grew is just that the economy started booming. So tax revenues dropped. Also there were things the model doing the projections got wrong and you put those two things together that explains about one
KESTENBAUM: third of the run up in debt.
BLUMBERG: Nondefense spending increases were another 10 percent. And because we continued to have debt, we had to pay interest on that debt. That accounts for 11 percent. And then, there's the stimulus package - all the other spending programs and tax cuts, that's about 9 percent.
KESTENBAUM: There are two other big things - what people call the Bush tax cuts and the wars in Iraq and Afghanistan. Together, those two are about a quarter of the pie.
BLUMBERG: Martin Baily, Clinton's economic adviser, says, it's pretty clear to him whose fault this is.
BAILY: Well, these were the policies of George Bush and his economic team. And so, I guess I blame them.
BLUMBERG: Who would have been your parallel in the Bush administration?
BAILY: Glenn Hubbard. Glenn was sort of a, you know - Glenn is a good economist and I like him personally, but I think he became wedded to this philosophy of - that you could cut taxes and somehow you would get back the revenue and increase growth. And that just wasn't true.
BLUMBERG: I called up Glenn Hubbard, Bush's economic adviser, to get his answer to what went wrong. He did not have time to talk and, to be fair, I just reached out to him a couple of days ago. But he emailed me and he said I should talk with Alan Viard, an economist, at the American Enterprise Institute. And I ran the numbers by him that we just gave to you. And he said yeah, those numbers are about right.
ALAN D. VIARD: They're in the ballpark. You know, you can always raise questions about them. Though, one objection that's been raised on the tax cuts, of course, is that the estimates exclude any macroeconomic effects that the tax cuts may have had.
BLUMBERG: Macroeconomic effects - he means the idea that those tax cuts stimulate the economy so that they're helping us in other ways that we're not necessarily counting. But even he says, that's probably a small effect. And on the whole, yes, those tax cuts added to the debt.
VIARD: The one myth that we certainly should reject is the notion that the incentive effects are going to be big enough so that the tax cuts actually fully pay for themselves. You know, so they don't lose any revenue or that they gain revenue. That's simply not a realistic outcome for broad-based taxes, not even remotely. And no ...
BLUMBERG: Was that case ever made with the Bush tax cuts that they would pay for themselves?
VIARD: Not by reputable economists. And not by any economist working in the Bush administration. There is unanimous agreement among economists - liberals conservatives, Democrats, Republicans, supporters of tax cuts, opponents of tax cuts. The tax cuts did not fully pay for themselves. They did create a revenue loss. And, you know, you have to take that into account in deciding whether the tax cuts were good or bad.
KESTENBAUM: So if I had to ask you to be partisan, where do you place the blame for the $10 trillion run up in debt?
VIARD: I mean, I think it's clear there's plenty to go around. Because if you look at the policies that were adopted, many of them actually had bipartisan support. You know, the Medicare prescription drug benefit - the Democrats, if they've been in power, actually would have adopted a larger prescription drug benefit. The war in Afghanistan was certainly supported, I think, by virtually all Americans in the wake of 9/11. Although the Iraq war was obviously controversial. The truth is, too, that the Bush tax cuts were largely bipartisan. There's no dispute, I think, that if Democrats been in power during this period, that they would also have adopted tax cuts that I think would have been quite substantial.
KESTENBAUM: The Bush administration, he says, gets blamed a lot for the debt but he says, even if Democrats were in power, it's hard for him to imagine that things would have come out much differently.
BLUMBERG: In the end, the thing that Martin Baily and his colleagues were worried about is probably the case. When there's a big surplus, it's hard for politicians not to spend it.
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KESTENBAUM: Jason Seligman, as you heard, was sad that "Life after Debt" was never published. Jason, thanks to the Freedom of Information Act, we are going to make it happen 10 years later. You can find it on our website, npr.org/money.
BLUMBERG: As always, we want to know what you think. Send us emails to firstname.lastname@example.org. Or find us on Facebook, Twitter, and Spotify. I'm Alex Blumberg.
KESTENBAUM: And I'm David Kestenbaum. Thanks for listening.
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