Life After Debt

By Doug Bowles (UMKC)

The CBO’s post-election report released a couple of days ago (apparently in support of advancing the prospects for a Grand Bargain, aka the Great Betrayal) is grounded in relatively pessimistic projections with regard to federal deficit and debt growth.  (See this powerful critique of CBO’s methodology by Follette and Sheiner)  In assessing just how much credibility these projections deserve to be accorded in our policy debate, it might also instructive to remember how wildly optimistic the CBO projections were not so very long ago with regard to complete elimination of the federal debt.

Regular readers of this blog may already be familiar with a Planet Money report by David Kestenbaum (October 20, 2011) about “a secret government study outlining what once looked like a potential crisis:  the possibility that the U.S. government might pay off its entire debt.”   The study is titled “Life After Debt,” and was obtained through the Freedom of Information Act.  You can read the Planet Money blog post and download the original “Life After Debt” pdf document they obtained from the government here.  Kastenbaum describes it as having a “strange, science-fictiony” quality.

The essence of the issue, of course, is that when you start thinking seriously about the elimination of U.S. Treasury debt instruments, you must then confront the potential loss of the extraordinary instrumental value they represent in the world financial system.  This leads immediately to a more theoretically (or perhaps philosophically) informed consideration of the “value” of the U.S. debt, as opposed to the disutility with which it is conventionally regarded.

For your edification, I have taken the liberty of parsing and annotating the “Life After Debt” document posted by Planet Money.  The full document (14 pages in length) is followed by three pages of a second document, containing edits of the first one.  Be sure not to miss the highlighted comments on those last three pages.  They might be the best part of the whole thing.

A couple of final notes:

1. “Life After Debt” was originally proposed as a chapter in the final Economic Report to the President of the Clinton Administration, but it was eventually jettisoned as too provocative.
2. Annotation tools for text in pdf documents can be a little bit touchy.  Sometimes the highlighter works, other times it doesn’t.  I’ve supplemented highlights with underlining where necessary.  Also, I used green highlights to distinguish references to the (unattributed) CBO projections for debt elimination from the yellow highlights featuring concern with the problems that elimination represents.