Reply #18: Buying down the debt. [View All]

[myopic4141]

In the last years of the Clinton economy, the administration was using the surplus to buy down the debt instead of giving a tax cut. This infused money into the private sector without having the government compete for borrowed money. As a result, interest rates remained at a natural low rather than an artificial low giving the following growth correlation (year, USGD as a function of GDP, GDP): 1998, -1.39%, 5.57%; 1999, -1.89%, 5.61%; and 2000, -8.04%, 5.93%. 2001 saw no buy down of the debt from surplus; but, did see a tax cut. The final Clinton budget was in effect, no money was infused into the private sector, and the tax cut was not to take place until 2000 which resulted in the following correlation: 2001, -0.15%, 2.62%. 2002 saw a modest increase in the GDP; but, the government was well into competition with the private sector for needed funds giving the following correlation: 2002, 7.60%, 3.61%. Another factor that puts money into the American private sector is the trade surplus. For the years associated to those given, the trade surplus as a percent of GDP was: 1998, -0.04%; 1999, 0.25%; 2000, 0.24%; 2001, 0.22%; and 2002, -0.09%. In 1998, the deficit was offset by the buy down whereas in 2002, it was not. The conclusion is that debt buy down is a better way to infuse money into an economy than a tax cut. An added advantage not mentioned is that a buy down reduces the cost of doing business in the out years via reducing the debt service cost whereas borrowing increases the out year debt service cost.