Statement by Bruce R. Bartlett before the Committee on Finance, United States Senate

NATIONAL CENTER FOR POLICY ANALYSIS
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Statement by Bruce R. Bartlett before the Committee on Finance, United States Senate

Notes:

1. See Lewis H. Kimmel, Federal Budget and Fiscal Policy, 1789-1958 (Washington: Brookings Institution, 1959), pp. 7-25.

2. Hamilton spelled out his views on this matter at great length in his First Report on the Public Credit in 1790, and his Second Report on the Public Credit in 1795.

3. See John Steele Gordon, Hamilton's Blessing: The Extraordinary Life and Times of Our National Debt (New York: Walker & Co., 1997); Edwin J. Perkins, American Public Finance and Financial Services, 1700-1815 (Columbus: Ohio State University Press, 1994); Forrest McDonald, Alexander Hamilton: A Biography (New York: W.W. Norton, 1979).

4. It should be noted that foreign ownership of the publicly held debt has risen to 35 percent, about twice its 1991 percentage. However, most of the increase resulted from purchases of Treasury bonds by foreign central banks, which use them as backing for their currencies, rather than foreign individuals. In any case, all of such bonds are denominated in dollars, eliminating the principal concern over foreign borrowing.

5. Address to the American Retail Federation, May 22, 1939.

6. Marshall A. Robinson, The National Debt Ceiling: An Experiment in Fiscal Policy (Washington: Brookings Institution, 1959).

7. Theo Francis, "Treasury Inflation-Protected Securities Shine," Wall Street Journal (May 25, 2001). TIPS, as they are called, give the Federal Reserve valuable information about market expectations of inflation.

8. Actually, they exceed it because debt held by the public includes that held by the Federal Reserve. At the end of October, the Fed owned $544 billion of Treasury securities. If one subtracts this amount from the debt held by the public, GSE debt is significantly greater.

9. Budget of the United States Government, Fiscal Year 2003: Analytical Perspectives (Washington: U.S. Government Printing Office, 2002), p. 203.

10. Gregory Zuckerman and Patricia Barta, "Fannie Mae Sells $11.5 Billion in Bonds, Fueling Its Efforts to Become Benchmark," Wall Street Journal (August 2, 2000).

11. Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2003-2012 (Washington: U.S. Government Printing Office, 2002), p. 14.

12. Herbert Stein, "How to Solve Almost Everything," New York Times (February 3, 1999).

13. Studies finding little, if any, impact from deficits on interest rates include Douglas W. Elmendorf and N. Gregory Mankiw, "Government Debt," Finance and Economics Discussion Series 1998-09, Federal Reserve Board (January 1998); Paul Evans, "Are Government Bonds Net Wealth? Evidence for the United States," Economic Inquiry (October 1988), pp. 551-566; idem, "Do Budget Deficits Raise Nominal Interest Rates?" Journal of Monetary Economics (September 1987), pp. 281-300; idem, "Interest Rates and Expected Future Budget Deficits in the United States," Journal of Political Economy (February 1987), pp. 34-58; Gregory P. Hoelscher, "Federal Borrowing and Short-Term Interest Rates," Southern Economic Journal (October 1983), pp. 319-333; Charles Plosser, "Government Financing Decisions and Asset Returns," Journal of Monetary Economics (May 1982), pp. 325-352.

14. The great historian Thomas Babington Macaulay, after a long study of England's debt, concluded, "The power of a society to pay its debts is proportioned to the progress which that society has made in industry, in commerce, and in all the arts and sciences which flourish under the benignant influence of freedom and of equal law." The History of England from the Accession of James I (Philadelphia: J.B. Lippincott, 1868), vol. IV, p. 265.

15. Economists generally believe that inflationary expectations have more impact on long-term interest rates than any magnitude of federal borrowing. For a standard textbook discussion, see Robert D. Auerbach, Money, Banking, and Financial Markets, 2nd ed. (New York: Macmillan, 1985), pp. 358-383.

16. It is worth noting that regardless of what one thinks of the economic impact of the debt, the way it is calculated is a poor measure of it. For example, inflation alone will pay off about $90 billion of the debt this year alone. For a discussion of such issues, see Robert Eisner, How Real Is the Federal Deficit? (New York: Free Press, 1986); Robert Heilbroner and Peter Bernstein, The Debt and the Deficit (New York: W.W. Norton, 1989).

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