Adios to the T-Bill?

[Seth Ackerman]

	Doug Henwood wrote:

> Ian Murray wrote:
> 
> >But because the projected surpluses are large and have a momentum of
> their
> >own, it could happen a lot faster than many think.
> 
> Or it may not happen at all. The U.S. has never run substantial 
> surpluses for more than a few years in a row, and in the five or so 
> times it did, recession or depression followed. As far as I know, no 
> other First World country has ever run a substantial string of 
> surpluses over the last 40-50 years, and maybe more.
.

---

The New York Times 
March 11, 2001, Sunday, Late Edition - Final 
SECTION: Section 3; Page 4; Column 5; Money and Business/Financial Desk 

LENGTH: 812 words 

HEADLINE: ECONOMIC VIEW; 
Down Goes The Market. Is the Surplus Next? 

BYLINE: By TOM REDBURN 

BODY: 
WITH the nonpartisan Congressional Budget Office projecting a budget surplus
of $5.6 trillion over the next decade, Alan Greenspan, the Federal Reserve
chairman, has taken to warning repeatedly that the federal government could
end up paying off nearly all publicly held debt within a few years. That
justifies a big tax cut, he argues, because otherwise Washington would
accumulate so much excess cash that it would have no choice but to start
buying big chunks of American companies. 

My guess is he can stop worrying about that problem. Indeed, before too
long, he could again be raising the specter of the return of budget
deficits. 

Lots of people have questioned the budget office's estimates of the surplus
under current policies. The agency itself acknowledges that its projections
-- which lawmakers use to evaluate the impact of their budget plans -- are
subject to great uncertainty. Under normal circumstances, though, the budget
office's figures are just as likely to be too low as they are to be too
high. 

But these are not normal circumstances. For nearly a decade, the United
States has enjoyed not just a robust economy but also an extraordinary stock
market boom. Strong growth, low unemployment and greater fiscal discipline
have helped eliminate the old deficits. But it was the market, by generating
tremendous taxable profits for investors and option-holding employees, that
accounted for the lion's share of the unexpectedly large surpluses of recent
years. 

You may have noticed that the boom has stopped. So have three of the
smartest economists I know -- Mark Zandi, chief economist at Economy.com;
Robert J. Barbera at Hoenig & Company; and David Levine, who retired not
long ago from Sanford C. Bernstein & Company. 

O.K., it doesn't take a genius to see that the market has fallen. But all
three experts have also come to the conclusion that the end of the boom will
translate -- probably not this year but soon afterward -- into a big plunge
in tax revenue from capital gains and other market-related sources of
income. And that's worth paying attention to. 

For example, Mr. Zandi, without changing any of the budget office's economic
assumptions, estimates that instead of accumulating a 10-year surplus of
$5.6 trillion, the government will have no more than about $2.9 trillion to
spare for tax cuts and higher spending. The Bush administration and leaders
in Congress already plan to use that up and much more. If Mr. Zandi is
right, those moves will wipe out all of the remaining surplus and plunge the
federal budget back into the red. 

In contrast to the budget office forecasts, Mr. Zandi looks at what might
happen if the market stays about where it is for the next couple of years.
He calculates that profits from capital gains and income from stock options
will probably shrink by half within the next two or three years. 

As a government entity, the Congressional Budget Office justifiably makes no
effort to predict the market. Instead, it starts with last year's estimated
level of capital gains realizations of $652 billion and projects that they
will only gradually fall as a share of the economy, stabilizing at over $550
billion around mid-decade. 

"C.B.O. is assuming these extraordinary capital gains revenues are here to
stay," Mr. Zandi said. "That's fundamentally where they've got it wrong." 

Mr. Barbera goes further. "Given current swelled coffers, a substantial tax
cut will certainly be enacted," he wrote in a recent report, but "estimates
of revenues will prove to be greatly exaggerated." 

"In combination," he added, "less equity-market-driven tax receipts, slower
growth and a large tax cut will prevent any flirtation with paying off U.S.
Treasury debt." 

Nobody is accusing Congressional estimators of deliberate error. Somebody
has to produce an honest budget score sheet and the agency does the best job
that it can. 

"Producing a budget outlook is an art, not a science," said Melissa Merson,
the budget office's communications director. "There's always an enormous
degree of uncertainty, but we feel our forecast is very reasonable." 

Still, if the critics are right, the consequences of relying on today's
forecasts could be severe. And if the economy fails to recover soon, it
would get a lot worse. 

"I think most people are about to be very surprised," Mr. Levine said.
"Should it prove true, which is possible, that we are entering a recession,
the swing in the budget over a two-year period could easily reach $400 to
$500 billion. Even without a recession, the surplus could easily disappear."


Mr. Zandi fears the worst. "We've had years of stock-juiced surpluses at all
levels of government," he said. "But a flat equity market will quickly weigh
on government's good fiscal fortunes. Policy makers will be sorely
disappointed and the economy's long-term performance will suffer." 
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