What does it mean to have a rich Uncle Sam? What issues arise when the federal government has excess cash?
Strangely, having too much cash is a problem, although not quite so thorny as the alternative. It forces a fundamental re-evaluation of current policies in much the same way that running out of money does. Are we spending it right? Do we have the right amount and kind of income? While too much is a nicer kind of problem than too little, both compel a return to the drawing board. In the annual
Economic Report of the President
, released last week by the
Council of Economic Advisors
, the CEA discusses trends in national saving, among other topics. It points out that the share of national income that is saved has risen by three percentage points over the past seven years, although that share remains low in relation to the saving rates of the 1960s and 1970s. Improvement in the net rate, however, masks deep changes in the sources of saving.
Personal saving has declined by five percentage points over the period, while corporate saving has improved slightly. Put these two sectors together and the result has been a deterioration in private-sector parsimony. This is more than compensated for by increased thriftiness in the government sector; total government -- federal plus state and local -- has swung from a net borrower position at the rate of 2% of GDP in 1992 to a net saver status scaled at nearly 5% of GDP today. Add it up: 7% from government plus 1% from business produces 3% for the nation as a whole when netted against minus 5% from households.
As long as saving takes place, perhaps we shouldn't worry about where it comes from. But government as a source of saving raises issues that differ from those arising from private-sector saving.
For one thing, the former may be inherently less stable. The boom in tax receipts that has been an important contributor to government budget surpluses at all levels is clearly derived from a soaring economy. A turn for the worse in economic activity will, first, cause spending to rise in a variety of government assistance programs and, second, cause private-sector incomes and tax liabilities, and therefore government tax receipts, to fall. Of course, private-sector saving is also subject to cyclical volatility, but not with quite the amplitude of governments'.
Impermanence of budget surpluses may arise from the political process as well. Washington is currently very well-behaved, as all within the Beltway are pleased to take credit for the sterling state of federal finances. But having cash rolling in well in excess of current needs naturally raises the question of whether we're being too tight-fisted in spending. Creating the budget means establishing policy goals and priorities. Excess cash means that difficult debates about priorities may end in positions of compromise that would not have been possible in the absence of that excess. You vote for my program and I'll vote for yours.
Or maybe we're overtaxed. There's no doubt about that in the minds of some, if we're taxed, we're overtaxed. But their case is stronger, and is perhaps compelling even for those who have less antipathy to governmental pick-pocketing. Explain to me again, they may ask, why I need to pay hundreds of billions of dollars in taxes beyond the current needs of government programs.
In an election year, questions on both the tax and the spending sides of the ledger are likely to be debated intensely. A clear implication is that surpluses are likely to come in below current services budget estimates.
But the outlook remains, nonetheless, for significant surpluses. What can rich Uncle Sam do with spare cash? Same as you and me. Pay down debt. Put it in the bank (in Treasury tax and loan accounts at commercial banks) or hold it at the
. Or purchase investments, such as common stocks both domestic and foreign, or real estate, or bonds of issuers other than its own Treasury.
Buying stocks means taking "ownership of the means of production." (That
resonance alone may be enough to disqualify this option.) Let's use some very round numbers here. If federal surpluses come in near $1 trillion over the next 10 or so years, Uncle Sam's excess cash would amount to a significant share of the roughly $14 trillion that is today's U.S. stock market capitalization. Do you want Uncle Sam on your board? Which stocks should he buy? Or which indices? Do we want taxpayer money buying foreign stocks, or, for that matter, would foreigners permit it? There are lots of interesting questions here. Too much cash turns out to be a tougher problem than first imagined.
The "money in the bank" approach won't work either. Treasury balances that balloon at either the central bank or commercial banks will create big problems for the bankers. Will commercial bankers be able to expand their earning assets in scale and at margins that will permit them profitably to service their giant depositor? What about risk-based capital adequacy? For the Fed the problems are devilish. If Treasury balances cause Fed liabilities to surge, the governors will have to drain bank reserves and manipulate asset holdings in an ongoing struggle to retain control of monetary policy.
These approaches are too problematic to be feasible. The only real option for Uncle Sam is to pay down debt and shrink his balance sheet. It's not feasible for the federal government to do what you or I might do in the face of a persistent excess of cash, which is to add assets and build up our balance sheets.
But paying down debt is not exactly a walk in the park in terms of complexity. The announcements that have issued from Treasury in the past two weeks, together with the Congressional Budget Office estimates of astonishing future surpluses, have caused mighty mischief in the T-bond markets. In the past 10 trading days, 30-year bonds have swung from a 6.50% yield to 6.05% and back to 6.45% before closing last week at 6.29%. It hasn't been easy coming to grips with the idea of the disappearance of the deepest, most liquid capital market in the world.
The Fed doesn't run the federal budget, but if it did it would be pleased to deal with the problems inherent in paying down the national debt. Rising surpluses create "fiscal drag" and fiscal drag is another means, besides tighter monetary policy, to slow the economy. But the fact is that it is politicians, elected officials of both legislative and executive branches, who control the budget. Who knows just what they will do over the years ahead when confronted with the reality of excess cash? We can guess.
Uncle Sam is rich, rolling now in sudden wealth. This development creates problems, although there are much worse problems to have. Scholars don't yet know quite how to think about the issues raised when a formerly poor uncle comes into sudden wealth. Maybe repeat episodes of the
would make good source material?
Jim Griffin is the chief strategist at Hartford, Conn.-based Aeltus Investment Management, which manages institutional investment accounts and acts as adviser to the Aetna Mutual Funds. His commentary on the financial markets is based upon information thought to be reliable and is not meant as investment advice. While Griffin cannot provide investment advice or recommendations, he invites you to comment on his column at