The Tax Smoothing Implications of the Federal Debt Paydown

George J. Hall and

GJH

George J. Hall Yale University

Stefan Krieger

SK

Stefan Krieger Yale University

Discussants: Benjamin M. Friedman and

BMF

Benjamin M. Friedman Harvard University

Mark Gertler

MG

Mark Gertler

AFTER NEARLY THIRTY straight years of deficit spending, the fiscal position
of the U.S. government has experienced a dramatic turnaround. In
fiscal years 1998 and 1999, for the first time since the 1950s, the federal
government ran back-to-back budget surpluses. With the government no
longer a net borrower, the Treasury has started paying down the federal
debt: debt held by the public fell from $3.5 trillion in March 1998 to
$3.0 trillion in July 2000. And both the Office of Management and Budget
(OMB) and the Congressional Budget Office (CBO) are forecasting
that these surpluses will continue over the next decade,1 in amounts large
enough that the public debt will be fully redeemed in 2012. Although these
official forecasts may prove too optimistic, it is reasonable to expect that
the quantity of publicly held debt will shrink considerably over the next
decade.