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The folks running around yelling about deficits are confident that their serious demeanor, powerful positions, and financial backing will prevent anyone from scrutinizing the substance of their claims. Thus far their confidence has been warranted, as nearly all the voices in major news outlets have accepted their assertions at face value.
Big Money wants to dismantle your safety net.
However any careful look at their claims quickly reveals that they do not hold water. The basic story in their deficit story is that we have not been saving enough to afford the retirement of the baby boom cohort. The story is that by increasing saving, we would be able to make ourselves rich enough to afford the retirement of the baby boomers. (We’ll ignore the impact of the downturn for the moment — just like the deficit hawks.)
This is not a new story. The Peter Peterson deficit hawk types have been pushing it for more than two decades, all the time using it as a rationale for cutting spending, especially on Social Security and Medicare. In this context it is worth mentioning a set of projections that the Congressional Budget Office (CBO) made back in 1996.
This was before economists recognized the uptick in productivity growth associated with computer technology that had just begun the prior year. CBO’s projections contrasted the long-term impact of maintaining a balanced budget forever with a baseline where we let our deficits grow. The balanced budget story of course showed higher GDP. By 2030 it was around 3 percent higher compared to a scenario that kept the debt to GDP ratio constant at the 1996 level, and it was around 10 percent higher than a baseline that assumed large and growing deficits.
Of course we did have the uptick in productivity growth. If we compare where we sit today with the virtuous balanced budget scenario, per capita income is considerably higher now than was projected in 1996 in the balanced budget scenario. This means that if in 1996 Peter Peterson and Co. thought that we could pay for the baby boomers if we just balanced the budget forever more, we are actually better able to pay for the retirement of the baby boomers given the track that we have actually followed.
This is the sort of thing that we would be talking about if people in the budget debates actually cared about data and evidence, but hey this is Washington. (I discuss this issue and others related to the deficit in a paper I wrote for the New America Foundation.)
This fact makes the point that the issue is not our ability to afford the retirement of the baby boomers. For the Peterson clique, it’s about destroying SS and Medicare.
Dean Baker is co-director of the Center for Economy and Policy Research. He also writes a regular blog, Beat the Press, where this post originally appeared.
Image by Donkey Hotey using a NASA photo, released under the Creative Commons license.
16 Comments
Recommended. The linked article is a myth buster about the impact of an aging population, about the impact of deficits, and the difference between government programs’ costs and the rising costs of healthcare.
is the title of Dean Baker’s article.
And even Warren Buffet agrees. He was featured on Jon Stewart this week, and he and Jon discussed how worker productivity has gone way way up.
There ya go again, Mr. Baker. Messin’ up the Beltway narrative with a bunch of them pesky facts…
Good piece. I also recommend this piece from James Galbraith. Very succinct and to-the-point.
Re: “The balanced budget story of course showed higher GDP. ”
What is the balanced budget?
There are two types of balance A and B.
A. (State taxes = state spending – state debt), for the states and
B. ( Federal Deficits = Net Private Savings + Net Imports,) for money creating USA.
Which one?
CBO is talking about the Federal budget.
If B is the one, with deficit = 0, net private savings = -net imports and the recession will continue and get worse. The present net imports is on the order of 500 billion.
B is a simple consequence of the fact that dollar-denominated transactions are zero-sum games: the payees take away exactly what the payer pay in (i.e., the winners’ winnings are equal to the losers’ losses but of opposite sign). No matter how many transactions (zero-sum games) you add up, you’re still playing a zero-sum game. In particular, the federal government’s losses (deficit) minus the foreigners’ winnings (the U.S. trade deficit) is exactly equal to the private sector’s savings (winnings).
It’s a mathematical certainty that we’ll have that balance and that any deficit decrease that sends the deficit below the trade deficit will represent losses (negative savings) for the private sector, which usually leads to a depression or recession in the U.S.
No problem.
If with deficit = 0, net private savings = -net imports, then obviously
net private savings[1%] + net imports = -net private savings[99%]
or more pointedly
net private savings[1%] + net imports = -asset extraction[99%]
The above equation is true even if the US Federal Deficit is a constant (non zero).
And that’s Peterson’s agenda.
Oops should read:
net private savings[1%] + net imports = asset extraction[99%]
Well done, Synoia!
I agree that the classical three sector partitioning is not particularly helpful. Breaking up the private sector into the 1% and 99%, as you have done, gets away from the fallacy that all deficits of the same size are somehow equal.
A deficit of a given size that involves both high taxes and high spending tends to redistribute more money than a deficit of the same size where both taxes and spending are diminished by the same amount.
Wish someone would draw a picture of B. ( Federal Deficits = Net Private Savings + Net Imports,) for money creating USA.
Really.
Mr. Baker I’ve read your material and seen you on the TeeVee several times. You seem like a reasonable person. With good evidence to back up your arguments, to boot. I’m not a fool an also agree with your points and I speak, sometimes, for my peers on these matters because I follow these things more than they do. At this juncture in time, however, my peers and I have lost our patience with the logic of statistics. We are not interested in making math make sense to the likes of crooks and scoundrels like Mr. Petersen or Larry Kudrow or Grover Norquist. We are more interested in seeing these traitors and liars swinging from the branch of a solidly rooted oak tree. Sincerely, Wynota
I think that the simplest explanation is that they don’t want to redeem the bonds and pay back the money in the trust fund. Alan Simpson has practically said as much.Once money starts flowing out of the general budget into SS checks, the jig is up. They will have to raise taxes (or cut the pentagon)to make up the difference. We can keep saying that Social Security is separate and not part of the deficit, and that is true in one sense. But when they melded SS into the regular treasury to pay for the wars, it became a cash cow that produced money to replace tax cuts.
Thank you,WS. We have plenty of solid oak trees here in Florida. Ninety percent of the people i talk to would agree with your solution. When do we begin?
Pitchforks, whether sharpened or not, are farm implements often used in parades to promote agricultural ideals in America.