What was the surplus used for in 1998, 1999, and 2000?

[bedstuy]

It would be idiotic to repay the entire national debt.  That would wreck havoc in the financial system because banks need to have treasuries to operate.

Also, think about this.  What if the government borrows money at a low cost, spends it on a bridge, and the bridge increases the GDP and resulting tax revenue above the borrowing cost.  The net result is a surplus for the government.  What's the problem with that? 

[bedstuy]

It would be idiotic to repay the entire national debt.  That would wreck havoc in the financial system because banks need to have treasuries to operate.

Also, think about this.  What if the government borrows money at a low cost, spends it on a bridge, and the bridge increases the GDP and resulting tax revenue above the borrowing cost.  The net result is a surplus for the government.  What's the problem with that? 

You could still have a national debt even while running surpluses into the forseeable future. Large capital projects, could be financed by treasuries, that sort of thing.

What do you mean by financed by treasuries?  That's what the national debt is. 

I think you're missing my point as well.  If you care about the long-term fiscal condition of the country, you have to look at the whole picture.  If the cost of running a consistent surplus is a lower rate of growth, it's not necessarily worth it.

[bedstuy]

It would be idiotic to repay the entire national debt.  That would wreck havoc in the financial system because banks need to have treasuries to operate.

Also, think about this.  What if the government borrows money at a low cost, spends it on a bridge, and the bridge increases the GDP and resulting tax revenue above the borrowing cost.  The net result is a surplus for the government.  What's the problem with that? 

You could still have a national debt even while running surpluses into the forseeable future. Large capital projects, could be financed by treasuries, that sort of thing.

Capital spending on infrastructure is debt as much as the defense budget, or Social Security, are debt. It might be "better" debt is the sense of being a positive investment in the future, but it's still debt. Either you have a net surplus or you don't.

That's missing my point.  I'm saying that the best policy on debt is much more complicated than people let on.  Cutting spending and raising taxes might sound "responsible" and in many cases it is.  But, if that policy reduces economic growth and foregoes necessary investments, it may not be worth it.  The consequence of contracting the economy now clearly could be lower tax receipts (and thus higher deficits) in the future.  Infrastructure is only one example.  You could say many of the elements of Obamacare are similarly cost justified. 

[bedstuy]

It would be idiotic to repay the entire national debt.  That would wreck havoc in the financial system because banks need to have treasuries to operate.

Then just pay it down to the point where there is only something like $500 billion left in debt.  And banks could find something else to substitute for treasuries.  What did banks do before there was any national debt?

$500 billion wouldn't be nearly enough.  I have no idea what best amount would be but if you look at the institutions that hold large amounts of treasuries, $500 billion ain't enough.

And could anything substitute for a treasury bond?  I have no idea but think about how essential the treasury bond is to the financial system.  Rates are tied to treasuries, the Fed uses treasuries, Social Security depends on treasuries and large institutions need to have them on their balance sheets.  And it makes sense because of the huge secondary market and lack of default risk.  Obviously, there are other assets with similar properties but it seems unique to me.

What did banks do back before a national debt?  I believe we've had public debt during the entire history of the USA under the Constitution.  However banks were operating back then, it was certainly less efficient than today.

[bedstuy]

What about senior bonds of banks such as Citigroup? Those rates should be nearly identical to Treasury rates, since the government would certainly bail them out. The Federal Reserve could also set a long-term discount rate. Instead of Treasuries, the Federal Reserve could buy private bank bonds to hold on its balance sheet.

 

Huge moral hazard problems and less efficiency for a bunch of reasons.  Why would that be a better than having some public debt?

[bedstuy]

What about senior bonds of banks such as Citigroup? Those rates should be nearly identical to Treasury rates, since the government would certainly bail them out. The Federal Reserve could also set a long-term discount rate. Instead of Treasuries, the Federal Reserve could buy private bank bonds to hold on its balance sheet.

 

Huge moral hazard problems and less efficiency for a bunch of reasons.  Why would that be a better than having some public debt?

It just allows us to avoid having public debt for the sake of having it. And it doesn't increase moral hazard at all. Those banks already have an implicit guarantee, so leveraging that implicit guarantee to set things like mortgage rates isn't a stretch in the slightest.

It would exacerbate the too big to fail problem.  Not only would a few big banks have a government funded guarantee, the US would be one of their major creditors.  And you say that they have an implicit guarantee, but remember Lehman Brothers?  Imagine if a Tea Party type wins in 2016, there would be doubt as to whether the government would save the financial system in a crisis.   

More basically, the big banks bonds are not the same quality of bond as US treasuries.  They have lower ratings and in practice, they are not treated as identical to US government debt.  I would also bet that JPMorgan Chase, Goldman, Morgan Stanley, BOA and Citi don't have enough debt to allow the financial system to function properly either.

[bedstuy]

It would exacerbate the too big to fail problem.  Not only would a few big banks have a government funded guarantee, the US would be one of their major creditors.  And you say that they have an implicit guarantee, but remember Lehman Brothers?  Imagine if a Tea Party type wins in 2016, there would be doubt as to whether the government would save the financial system in a crisis.   

More basically, the big banks bonds are not the same quality of bond as US treasuries.  They have lower ratings and in practice, they are not treated as identical to US government debt.  I would also bet that JPMorgan Chase, Goldman, Morgan Stanley, BOA and Citi don't have enough debt to allow the financial system to function properly either.

Well, long-term consumer debt is indexed to Treasuries; it doesn't carry the same rates as Treasuries. So even if big bank long term corporate debt carries a higher rate, it doesn't mean that other private long-term debt can't be indexed to those rates; the spread between the consumer rate and the corporate rate would just be lower.

Realistically, the too big to fail problem will never go away. Even if the big banks were broken up into smaller entities (which I actually support), the financial system as a whole would still be bailed out by the government in the event of a crisis. Contrary to popular belief, bailouts aren't needed because the banks are so big, they're needed because the financial system as an industry is uniquely interconnected. Hence, even a Tea Party president would have to save it in the end. Most Tea Party types these days are just extremely conservative Republicans in any case. But none of them are actually crazy enough to let the financial system fail.

I still don't see how that's in any way preferable to having a moderate amount of debt.  There's still the problem of replacing the amount of treasuries in the system and the huge fairness problem of giving the big banks free money essentially.   As to the too big to fail problem, obviously there is no perfect solution.  But, there is a range of incentives and regulation that can alleviate or exacerbate the problem.