[Congressional Record Volume 141, Number 154 (Friday, September 29, 1995)]
[Extensions of Remarks]
[Pages E1882-E1883]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




   REMARKS OF CONGRESSMAN NICK SMITH AT A.B. LAFFER, V.A. CANTO AND 
                 ASSOCIATES 36TH WASHINGTON CONFERENCE

                                 ______


                            HON. NICK SMITH

                              of michigan

                    in the house of representatives

                       Friday, September 29, 1995

  Mr. SMITH of Michigan. Mr. Speaker, I would like to submit for the 
Record my speech I made this morning at the A.B. Laffer, V.A. Canto and 
Associates 36th Washington Conference.
  There are two points I wish to make. First, that a failure to 
increase the debt ceiling, even for a prolonged period, will not result 
in a default. Second, the Federal debt has become a burden on everyone 
in our society and congressional fortitude in balancing our budget 
would result in lower interest rates.
  Since the Second Liberty Bond Act was passed in 1917, Congress has 
set an overall dollar ceiling on the amount of debt the Treasury can 
issue. Prior to the act, Congress voted on each debt issuance. The 
limit applies to nearly all debt of the Federal Government, including 
nonmarketable securities issued to trust funds. Periodically the debt 
reaches the ceiling and Congress is faced with the question of whether 
to increase the limit. Since 1940 Congress has responded with an 
increase 77 times. In October of this year, the debt ceiling will again 
be reached and this will be the leverage that my colleagues and I will 
use to ensure the American people get a balanced Federal budget for the 
first time since 1969.
  The Secretary of Treasury and the President have called for 
separating the increase in the debt ceiling from the budget. However, 
there exists substantial precedent for using the debt ceiling to affect 
legislation, particularly on budget issues. There were prolonged 
interruptions in the debt ceiling associated with the debate over the 
Balanced Budget and Emergency Deficit Control Act--Gramm-Rudman-
Hollings--in 1985. The debt ceiling vote was withheld, and the Treasury 
began under-investing trust funds in early September of 1985 and by 
November of 1985 actively disinvested trust funds in order to make 
payments. A permanent increase in the debt ceiling to $2.0787 trillion 
was enacted on December 12, 1985.
  The 1990 budget was resolved during six temporary increases in the 
debt ceiling between August 9 and a permanent increase on November 5. 
During this session the Treasury primarily used the postponement of 
auctions to manage the cash flow.
  The Congressional Budget Office, as of yesterday, estimates the debt 
limit will be reached sometime at the end of October. Treasury's first 
potential cash management problem could occur November 3. At this 
point, Social Security payments must go out. During the first week of 
November, these payments, along with other retirement and disability 
payments, will reduce Treasury's cash by about $37 billion. The next 
hurdle will be on November 15, when interest payments of approximately 
$25 billion are due. Overcoming this hurdle will require clever cash 
management on Treasury's part.

  Some have argued that failure to raise the debt ceiling will result 
in a ``train wreck'' which will cause Treasury to default and forever 

[[Page E 1883]]
harm the credit of the United States. This need not be true. Treasury 
Secretary Rubin has told me, both in a letter and in personal 
conversation, that in the case of reaching the debt ceiling Government 
obligations would be paid on a first-in-first-out basis. I have 
introduced H.R. 2098, which would alter this. H.R. 2098 provides that, 
in the case the Treasury is unable to borrow on a timely basis due to 
the debt ceiling being reached, the Secretary of the Treasury has 
authority to follow a priority of payment as established by the 
President. This will ensure that vital payments will be made as the 
cash flow is managed in order to preserve the soundness of the existing 
debt obligations.
  In every month that Treasury is likely to be at the debt limit, there 
is sufficient cash to make all interest payments, Social Security 
payments, Medicare payments, and other essential payments. Nonessential 
payments might have to be delayed, but there is no question that 
interest and principal on Government obligations would be paid.
  Moving to my second point, some have argued that it would be 
irresponsible to not increase the debt limit, even if we do not get a 
balanced budget agreement, because the financial markets will be so 
shaken by the possibility of a delay in payments that interest rates 
will skyrocket. However, it is high long-term real rates that are 
putting a drag on the economy. A firm commitment by the Congress to 
balance the budget, to the point of willingness to risk short-term rate 
increases, could easily flatten the yield curve and shift it down, in 
other words, lower long-term rates.
  Government borrowing consumes massive amounts of America's financial 
capital. The outstanding debt subject to limit stands at $4.86 
trillion. To put this in perspective, $4.86 trillion if stacked in 
$1,000 bills would reach more than 300 miles into space. The effect of 
such a debt reaches beyond the obvious effect on interest rates, it 
places a burden on those who will follow us in shaping this great 
Nation of ours. Each child born in our country today, during their 
lifetime, will pay approximately $187,000 in taxes just to pay their 
share of the interest on the national debt. That doesn't include paying 
off one penny of the principal. Boston University economist Laurence 
Kotlikoff forecasts that, if Federal spending continues at its current 
rate, a child born today could have up to 84 percent of his income 
consumed by taxes. In 17 years, if we continue on the current path, all 
tax revenue will be consumed by entitlements and interest payments on 
this enormous debt.
  Balancing the budget will take several hundred billion dollars out of 
the demand for loanable funds. The reduction in Treasury demand is part 
of the reason Chairman Greenspan and others are predicting such a 
decline in rates. But rates could drop prior to the actual balancing if 
Congress takes a firm enough position on the issue. Thus, I predict 
failure to raise the debt ceiling in order to force a balanced budget 
by 2002 will cause a decline in long-term rates and possibly even 
short-term rates, given the term structure of U.S. debt.

  Nobel Laureate Milton Friedman was espousing his crowding out 
hypothesis some 30 years ago. He was correct. Government spending will 
crowd out private investment. Another Nobel Laureate, James Buchanan, 
and his colleague, Richard Wagner, warned us almost 20 years ago that 
an unconstrained Federal deficit would lead to high interest rates and 
eventually high inflation as the Fed is forced to monetize the debt. In 
addition, we have seen, over the last 15 years, a massive rise in our 
trade imbalance. The latter is in good part due to our huge Government 
borrowing, resulting in foreign countries lending us money instead of 
buying our goods. It is time that we put a stop to this. We cannot 
sustain a Leviathan government and retain economic growth and our 
personal freedom.
  What Thomas Jefferson wrote in a letter to Samuel Kercheval in 1816 
should be the motto for the debt limit coalition as pressure mounts to 
compromise: ``And to preserve their independence, we must not let our 
leaders load us with perpetual debt. We must make our election between 
economy and liberty, or profusion and servitude.''

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