Mises Daily

Home | Library | The Surplus Hoax

The Surplus Hoax

November 3, 2000

The ever-growing budget surplus of the U.S. Government is exciting the
spending instincts of most politicians. It stirs their passions and
encourages them to find and concoct new spending programs that will tap
into the surplus.

In defense of their position and income, most
politicians are ever eager to take as much money as possible from
taxpayers so that they may buy the favors of the voters. They wax
eloquent about the great benefits of spending but fall silent about the
costs and consequences of taxation. Most of them may even engage in the
art of fiscal legerdemain which turns a tax into a benefit and a deficit
into a surplus. The budget surpluses of the Clinton Administration are
current examples of such deception.

A budget reflects a president's aspirations and hopes, his wishful
thinking as well as his philosophy of politics. It's a mixture of
financial planning and political campaigning in which fiscal legerdemain
knows no limitations of party or time. The federal budget surpluses since
1998 are no exception to the rule. They obscure significant federal
expenditures through bookkeeping gimmickry, such as borrowing new money to
pay off old loans and calling it "debt reduction."

Imagine a corporation
suffering losses and being deep in debt. In order to boost its stock
prices and the bonuses of its officers, the corporation quietly borrows
funds in the bond market and uses them not only to cover its losses but
also to retire some corporate stock and thereby bid up its price. And
imagine the management boasting of profits and surpluses. But that's what
the Clinton Administration has been doing with alacrity and brazenness.
It suffers sizeable budget deficits, increasing the national debt by
hundreds of billions of dollars, but uses trust funds to meet expenditures
and then boasts of surpluses which excites the spending predilection of
politicians in both parties.

If a corporation executive were to engage in
such deceit, the Commissioners of the Securities and Exchange Commission
(SEC), who are supposed to promote full public disclosure and protect the
investing public against malpractice in the securities markets, would
intervene with severity; when a president of the United States and his
appointees engage in similar practices, all his men fall silent.

The surplus deception is clearly discernible in the statistics of
national debt. While the spenders are boasting about surpluses, the
national debt is rising year after year. In 1998, the first year of the
legerdemain surplus, it rose from $5.413 trillion to $5.526 trillion, due
to a deficit of $112.9 billion. Since then it has risen to $5.643
trillion today, October 15, 2000, with another deficit of $117 billion.

The federal government spends Social Security money and other trust funds
which constitute obligations to present and future recipients. It
consumes them and thereby incurs obligations as binding as those to the
owners of savings bonds. Yet, the Treasury treats them as revenue and
hails them for generating surpluses. If a private banker were to treat
trust fund deposits as income and profit, he would face criminal charges.

In the coming years, the trust fund surpluses are estimated to grow
significantly, inviting ever more fiscal legerdemain.

Estimates of Trust Fund Surpluses
(In billions of dollars)
1998 $99.195
1999 123.690
2000 147.834
2001 159.639
2002 172.002
2003 184.318
2004 194.618
2005 213.654

The Congressional Budget Office (CBO), which is the research arm of
Congress, is rather pessimistic about future trust fund surpluses. It
warns of lurking deficits in the distant future. Within a decade the
members of the baby-boom generation will retire and put financial strains
on Social Security and Medicare. The number of beneficiaries will soar as
will the cost of health care due to advances in medical technology.

estimates that federal total spending on retirement and health programs
will more than double, rising from 7.5 percent of gross domestic product
(GDP)in 1999 to more than 16.7 percent in 2040. Deficits are expected to
reappear in 2020 and climb to 9.5 percent of GDP by 2040. CBO suggests
that structural reforms are needed, no matter how politically difficult
they may be. Without such reforms the trust fund deficits together with
the Treasury deficits would soar to record levels.

The present trust fund surpluses do affect the capital markets in a
favorable manner, which most critics do not care to mention. Whenever
government suffers a budget deficit, it drains the capital market of
valuable liquid funds, which otherwise would have produced capital
investments or private consumption; and it raises interest rates and
crowds out private activity. Trust fund surpluses offset the ill effects
of Treasury deficits. Whenever the surpluses exceed the deficits, they
even provide productive capital as Treasury obligations are retired. But,
no matter how advantageous the trust fund surpluses may be for the capital
market, they constitute tax exactions that reduce the income and level of
living of taxpayers.

The Treasury's dependence on trust fund revenue is visible also in the
shift of the national debt from the hands of individual and institutional
investors to the coffers of federal trust funds, that is, from marketable
obligations to non-marketable IOUs. The Treasury calls it "debt
reduction"; it actually is mere "debt shifting" from bill and bond holders
to Social Security claimants. During the past two years, the marketables
declined by some $223 billion while the non-marketables rose by more than
$450 billion, the balance representing new debt. At this time, the
marketable debt of some $3 trillion still surpasses the non-marketable
debt of of $2.6 trillion.

President Clinton proposes to devote the entire Social Security surplus
to reduce and finally eliminate the Treasury debt held by the public. He
reasons that "creating a debt-free United States will eliminate debt
service costs and result in substantial interest savings."(The Budget for
Fiscal Year 2001, p. 36). He obviously infers and wants us to believe
that "debt shifting" is "debt reduction," that the U.S. Treasury will be
debt-free when the Social Security Administration holds all its debt, and
that this shift will result in substantial interest savings. The
President palpably engages in the art of legerdemain which turns debt
shifting into debt reduction, a huge national debt into freedom from debt,
and interest payments payable to the Social Security Administration into
interest savings.

The "Miscellaneous Receipts" of the Treasury are legerdemain revenues
created by the U.S. Congress. They consist primarily of the net earnings
of the Federal Reserve System. In fiscal 1998 and 1999 the System
deposited $32.658 and $34.929 billion respectively with the Treasury; in
fiscal 2000 they are estimated to exceed $37 billion.

The Budget document
unfortunately does not reveal that the System financed massive U.S.
government expenditures by purchasing $507 billion of U.S. Treasury
securities with money it printed; the Treasury then paid an interest of
more than $30 billion to the Fed, which then returned the funds to the
Treasury as "Miscellaneous Receipts." In short, one government agency,
the Fed, now prints money at minimal costs; another agency, the U.S.
Treasury, spends it, but pays an interest to the Fed, which then returns
the funds to the Treasury. (Federal Reserve Bulletin, October 2000, p. A5,
A26) If a corporation were to engage in such practices, its officers would
soon be languishing in federal penitentiaries.

Such machinations obviously build on the power of the Federal Reserve
System to print legal-tender money which every American is forced to
accept. Having grown accustomed to this force, most Americans no longer
question it although it is the very essence of wrongdoing. The power to
print money and force it on the people is the power to engage in
inflation, which is one of the political evils of our time.

The money
thus printed, the Federal Reserve notes, constitute "high-powered money"
and as such serve as the base for multiple credit expansion of M1, M2, and
M3, which continually erode the purchasing power of the American dollar.
Throughout the years, the $507 billion of Treasury securities bought by
the Fed not only enriched the Treasury directly, but also indirectly
provided annual depreciation gains on the Treasury debt of $5.6 trillion.
At an inflation rate of just 3 percent, those gains amount to some $168
billion annually; the U.S. Budget makes no mention of them.

Whoever takes office in 2001 is likely to make short shrift of any and
all trust-fund surpluses. If we add his budget proposals to the
expenditure growth of the last three years, when spending on domestic
programs increased an average of 5.5 percent a year, the future deficits
may soar to the lofty levels of the 1980s. Moreover, the remarkable rise
in federal revenues in recent years, which flowed from the feverish boom
on Wall Street and greatly boosted capital gains tax receipts, is bound to
come to an end. When economic activity declines and unemployment rises,
most politicians are likely to go into overdrive spending. After all,
they always delight in seeking to amuse, coax, and engage the fancy of the

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

Follow Mises Institute