U.S. Proposes to Buy Down National Debt

The federal government, responding for the first time in a generation to the dizzying sensation of having too much money, pulled in its alms cup Wednesday and offered a plan to reduce its enormous accumulated debt.

The Clinton administration proposed new rules for conducting reverse auctions at which, instead of borrowing, the government would buy back some of its $3.6 trillion in outstanding IOUs.

So far, the administration has coped with the sudden shift from deficits to surpluses by slowing its borrowing and paying off some IOUs as they came due, a strategy that has already whittled $142 billion off the total debt. Under the new rules, it would go out and try to retire higher-cost IOUs even before they came due.

“This is the first time in the modern era that the federal government has, in effect, tried to call in its debt,” said G. William Hoagland, staff director of the Senate Budget Committee.

In a sign of the confusing cross-currents at work in a Washington flush with cash but still distrusted by voters, both Republicans and Democrats embraced debt reduction and insisted they are as committed to the cause as they are to such signature issues as tax cuts and new spending programs.

They held out the prospect of many good things, from a government no longer shackled by billions of dollars in interest costs to a private sector no longer forced to compete with the government for credit. That could lead to lower interest rates on everything from mortgages to auto loans.

President Clinton renewed his call for eliminating the public debt over the next 15 years, something the federal government has not succeeded in doing since the mid-1830s.

“Let’s refinance our nation’s mortgage and then wipe the slate clean,” Clinton told a midday news conference. “Paying down the debt creates wealth, creates jobs, creates opportunity. . . . We have the chance of a lifetime to do it.”

Republicans quickly asserted that they too want to bring down the mountain of government IOUs. Independent analysts noted that, even with the party’s huge tax cut, the GOP’s budget outline would shrink the debt $200 billion more than Clinton’s over 10 years.

“It annoys me to see the president drape himself in the debt issue when his plan does less than the Republicans’,” said Carol Cox Wait, president of the Washington-based Committee for a Responsible Federal Budget.

And both plans--because they include tax cuts or new Social Security spending--would leave the debt higher than doing nothing at all, Cox Wait said.

The fact that the federal government is about to run its first back-to-back budget surpluses since 1956-57 does not mean Washington will stop borrowing any time soon. In part because of a mismatch between when it collects money and when it must pay bills, the government will keep going to the credit market for some time to come.

Even as they unveiled their debt buy-back plan, Treasury officials announced they would auction off $37 billion in notes and bonds next week, using almost $29 billion to pay off old debts that are coming due and keeping the rest for routine expenses.

But the officials also said the government will cut back on the offering of new debt, reducing the sale of 30-year bonds from three times a year to two and perhaps slowing the pace of one- and two-year note sales as well.

By cutting the number of new debt auctions and shrinking their size, the Treasury expects to lower the public debt by $87 billion in the fiscal year ending Sept. 30. Over the last two years, officials said, the Treasury has paid off $142 billion.

Debt reduction is important for more than its symbolic significance--but not necessarily as important as some politicians have asserted.

The government’s interest costs may eventually go down as it pays interest on a shrinking amount of principal, but analysts said the interest bill will probably go up at first because the Treasury will have to offer debt holders above-market prices to persuade them to part with their high-interest bonds.

“We’ll have to see what bondholders will demand in terms of premiums before we know how much this will cost,” Hoagland said.

Similarly, politicians have argued that they have contributed to the nation’s long economic boom by converting the government’s annual budget deficits to surpluses.

Further surpluses--which will further reduce the national debt--are the ticket to extended good times, according to this argument.

In fact, according to analysts, some real and relatively immediate benefits do come from paying down the debt. Among them is reducing the portion held by foreigners.

Foreign investors now own 39% of the federal government’s debt, on which they collect almost $90 billion in interest a year.

The U.S. runs the risk that these investors will dump their holdings someday and take their money home, a move that could send the U.S. economy into a tailspin. Reducing their debt holdings eases that danger.

Administration officials argued Wednesday that the effects of debt reduction are already showing up in mortgage and auto rates that are lower than they would otherwise be.

But independent analysts said substantial economic benefits are likely to be felt only very slowly.

“You’re not in hog heaven when you have no public debt,” said Robert D. Reischauer, an economist with the Brookings Institution in Washington.

“What we’re trying to do fits with common-sense, family-budget values,” said Gene Sperling, head of the administration’s National Economic Council. “It’s about meeting your obligations before you decide to take a vacation or buy a new car.”