Fed Governor Speaks on Surplus Options

June 12, 2001 (PLANSPONSOR.com) - Federal Reserve Governor Edward Gramlich emphasized the importance of maintaining the increase in national savings resulting from the recent fiscal surplus, amid concerns over national debt levels.

In an address at Georgetown University, Gramlich pointed out that the high national savings rate has led to an increase in capital investment, a key factor in an upsurge in productivity.

The recent decline in household savings has been offset by ongoing increases in national government surpluses, which have, to some extend been used to pay down the national debt.


Gramlich noted that the US government has retired its marketable debt securities to just over $2.9 trillion and the Congressional Budget Office projects the nation to be debt free by 2010, provided the surplus isn’t spent on tax cuts. Slight allowances for spending increases and a decrease in revenue pushes this back to 2012.

He added that even if present rates of debt retirement cease, at some point it becomes inefficient to retire remaining portions of the debt since some government bonds are held by investors who will only part with it at a premium. Another portion is held within the banking system.

Once the outstanding Treasury debt falls to low levels, new choices will have to be made, Gramlich said. The government could use the surplus to either:

  • boost the rate of private saving, by cutting taxes
  • reform Social Security through private investment, or
  • purchase domestic or foreign assets.

All three options pose problems. Gramlich noted that research shows tax cuts as having a poor track record in boosting private saving, since they often lead to increases in consumption. Successful implementation would likely demand a transition from an income tax system to a consumption tax system, he pointed out.

Privatizing Social Security faces the problems of warding off government influence, and the challenge of ensuring that recipients do not make poor investment choices.

Home and Away

In terms of purchasing domestic assets, this would have to be conducted in such a way that normal affairs of private business are not influenced. Gramlich noted that state and local governments successfully invest employee pension funds in domestic assets in a structure much the same as that imagined for the Treasury.

Investment in foreign firms may be politically unfeasible for some due to the possible impact on the exchange rate, although Gramlich pointed out that while fiscal deficits, accompanied by high interest rates, have raised currency values in the past, large surpluses, low interest rates but high investment, productivity growth and stock values, may increase the value of the currency.

– Camilla Klein          editors@plansponsor.com