As I wrote in Part One of this series, “deficit hawkism” is the ideology that prioritizes bringing tax revenues and Government expenditures into balance ahead of other far more essential national needs and priorities. Right now, deficit hawkism is becoming increasingly prevalent, and its expressions very strident. It’s not limited to Republicans, but is bipartisan. It is not limited to blue dog Democrats, but is also espoused by some, like Senator Russ Feingold, who have unquestioned, and well-earned, progressive credentials. Despite all the politicians, policy makers, and pundits, who propound it, deficit hawkism is a false ideology, and following it now is something we ought not do. In fact, taking any serious action to reduce Federal Budget deficits in the foreseeable future, barring the return of inflation, is a form of slow national suicide, and is entirely inappropriate for Democrats, the party of the people, to even be contemplating, much less agitating for. In this diary, I will lay out the reasons why, by analyzing the assertions, reviewed in Part One, of both Evan Bayh and his Senate compatriots, and David Broder, and showing that they are arrant nonsense.
Bayh: CBO forecasts $10 trillion in additional deficits over the next 10 years.
First, that figure is exaggerated. CBO now forecasts about $7.1 Trillion in additional deficits, or about 30% less than Bayh claims. Second and more importantly, however, CBO’s deficit estimates are very sensitive to forecast errors in revenues, which, in turn, are themselves sensitive to forecast errors in economic recovery and growth. CBO’s accuracy in these forecasts is not very great over a period of a decade, and it also doesn’t claim accuracy for them. Historically, there is great variation in change in GDP over a decade, and projections ae difficult based on past history.
For example, during the period between 1930 -1940, GDP remained nearly constant and was very slightly lower in 1940. During, the period between 1940 and 1950 GDP increased by a multiplier of 2.82, and in other decades up to the present ranged from a high of 2.69 between 1970 and 1980, to a low of 1.49 between 2000 and 2010 (estimated).
CBO’s forecast of economic growth during the next 10 years is clearly based on the immediate past history of the Bush Administration economy primarily. But the mean decade-long multiplier since 1930 is 1.96, while its standard deviation is 0.60. This makes the past decade an atypical decade in the economic history of the United States. Of course, the CBO forecast can be defended by saying that it flows from the current structure of the economy, which still hasn’t changed much from the Bush economy. That’s true. But CBO has no way of taking account of the structural changes that are bound to take place in the next few years, in part spurred by the new programs and legislation causing the very large deficits the Government is running right now, and by other programs it has yet to implement. So, the CBO forecast of economic growth, revenue growth, and therefore the deficits over the decade have to be in error. The only real question is whether the multiplier will collapse as it did in the 1930s, or whether it will rebound to a number closer to the historical average multiplier of 1.96. If that were to happen, then there would be no deficit at all to speak of at the end of 2019. In short, Bayh’s panic over “the $10 Trillion deficit” is without foundation because 1) it’s only $7 Trillion, and 2) there’s every reason to believe that even this forecast is in error, and even some reason to believe that there may be no deficit at all.
Bayh: The baby boomers are retiring.
CBO forecasts take account of that on the expenditure side, where the long-term forecasts are much better than they are on the revenue side. The more interesting question is what the impact of these retirements will be on the revenue or economic growth side of the economy. The CBO and Bayh, both see Boomer retirements as an expenditure drain. But Boomers will both spend more and work more than previous age cohorts, and their potentially greater economic activity than we have seen before may produce unexpected revenue that CBO and Bayh and his colleagues overlook in their forecasts.
Bayh: The American taxpayer (actually the Federal Government) made interest payments of $250 billion in 2008 to creditors.
Bayh, of course, is suggesting that this interest burden will get so great over the next decade that Federal Government efforts to pay the interest on the national debt will necessitate increased borrowing from creditors in private markets. The only problem with this assumption is that the Federal Government doesn’t have to borrow money. It can just “print” what it needs to, in order to pay off either interest on the debt, or the debt itself. This brings us to an important general point. The Federal Government controls the currency, which means it is very different from any family, Company, private or non-profit organization, or State and local Government. Other entities cannot credit themselves with more money than they take in from others. But the Federal Government can.
Bayh: “Long-term deficits will drive up interest rates for consumers, raise prices of goods and services, and weaken America’s financial competitiveness and security.”
My reply to the statement just before this one, suggests that long-term deficits, if necessary to get the economy going, don’t have to drive up interest rates, for the simple reason that the Federal Government has no need to be out there borrowing money to repay its debts. However, apart from that, one really has to wonder what world Bayh and his colleagues have been living in that they would subscribe to a statement that is so contrary to recent facts that Bayh and his colleagues have lived through. Really, do they read the newspapers, or just live in their own little dream worlds which no facts can penetrate?
Every year from 1970 through 1997, the Federal Government ran a deficit. Throughout that period, we saw interest rates vary all over the lot, and the only relation between running a deficit and interest rate levels readily observable was caused by Paul Volcker’s decision to wring inflation out of the economy by raising interest rates out of sight, and bringing economic activity to a standstill. Of course, Volcker lowered interest rates during the early 1980s, just in time for Reagan to run his deficits, which were often twice as large as Jimmy Carter’s, but which, nevertheless, never seemed to bother Volcker. During the Reagan, Bush 41, Clinton, and Bush 43 Administrations, we saw a downward trend in interest rates over the long term, regardless of whether the Administration ran deficits or not. Of course, the largest deficits as a percent of GDP are those we have right now, and the prime rate is close to zero.
Bayh: Long-term deficits rob us of resources we need to invest “in energy, education, health care, and tax relief for small businesses and middle-class families.“
This notion seems to be based on the idea that long-term deficits take money away from the rest of us, which we cannot use to invest in the economy. But this idea is precisely the opposite of the truth. Federal deficits actually add resources to the economy, because, as Warren Mosler says:
”Any $US government deficit exactly EQUALS the total net increase in the holdings $US financial assets of the rest of us- businesses and households, residents and non residents- what’s called the ‘non government’ sector.”
That is: the amount of the deficit exactly equals the amount of increased savings for the rest of us. So the greater the Government deficit is, the more resources are provided by the Government to the rest of us. This simple fact of economics has been known since at least the 1930s. Why don’t Bayh and his colleagues know it.
Bayh: The bigger our deficits, the more we will have to borrow from foreign creditors to finance our massive debt.
Again this notion is based on the idea that the Government is like other organizations or like families, or individuals. But the Government is not. It can generate its own currency and its own ability to pay. If the Government chooses to for policy reasons, or because its leaders don’t understand economics, it can choose to borrow from foreign creditors. Alternatively, it can finance all of its debt by “monetizing” it, by issuing itself credits to pay its creditors with. These creditors must accept payment in this currency because the debts involved were incurred in dollars.
Broder: "people understand that we’re stealing from future generations," by passing on our debt to our children and grandchildren.
Broder has been one of our biggest deficit hawks since the 1970s. He continually worries about the huge debts we are passing on to our descendants. That’s because he assumes that our descendants will have to pay it back. He never asks, however, who will make them pay it back, or who they will pay it back to? But, still, he has this idea, that if they have to pay it back, it will be a terrible hardship for them and will make them poor.
Now, when I contemplate Broder, or the very many politicians who continuously warn the public of the burden that we are passing on to our children and grandchildren in the form of the national debt, I have to wonder whether, given the amount of time they’ve been hanging around Washington, they’ve never heard an economist explain some simple facts about the national debt; or alternatively whether this whole business of concern trolling about the national debt is just lying to the public to manufacture an excuse not to do things that need doing. First, most of the debt is held by the American public. So, who will our children and grandchildren pay it back to if not themselves? Second, if the Government wished to pay back all of the national debt held by the public tomorrow, it could do so, just by issuing credits to the bank accounts of all the people holding the debt. Everyone would have to accept that repayment, because it was repayment in dollars that the Government promised. This applies, equally well, by the way to foreign countries and investors as well as to US entities. In all cases the debt may be repaid in dollars, and the Government has an unlimited amount of those it can credit to other accounts. Some of the debt, of course, is owed from one Government agency to another, but, of course, it is no problem to repay this at any time. It’s just shifting money from one pocket to another.
The really essential thing to keep in mind about the “national debt burden” on our children and grandchildren, is that however large the national debt becomes, its size will not stop our children from consuming or owning everything they are clever and diligent enough to produce during their lives. They will never have to send any of their real wealth back in time to us or to the creditors who lend us money today. And as for the descendants of those creditors, they can pay them back using US currency that their Government will control.
To understand this, it’s useful to know that the Government repays debts by changing values in its accounting spreadsheets. Mosler puts it this way:
”. . . paying off the national debt is but a matter of subtracting the value of the maturing securities from one account at the Fed, and entering [sic] adding that value to a bank account at the Fed.”
And since that’s all that there is to it, Broder and Bayh and his colleagues, ought to know that there is no burden on our children and grandchildren from the national debt. And they should be very ashamed that they evidently don’t know that, and that they think this is a serious issue that has a more important priority than any other except, of course, the need to fight wars and avoid full-blown depressions.
What’s really behind all this angst about deficits is the mistaken idea that the Government can have a problem of solvency. It can run out of money and so go broke. But the fact is that this fear is due to a misunderstanding,a throwback to the days when the currency had to be backed by some finite resources such as gold. We live in a different time. The currency or credits issued by the Government are backed by nothing except the full faith and credit of the United States of America, and that means that our Government can always pay its previous debts at any point in time. There’s no solvency issue and no solvency risk. America can’t go broke, as Robert Samuelson suggested this past Monday. The Government doesn’t need either taxes, or borrowing, to finance its expenditures. All it needs is continuing economic activity in the United States. And its job is to keep that economic activity going whenever it begins to decline due to glitches in the economic system.
Is there anything to the idea that we shouldn’t run deficits? Actually, there is, but it has nothing to do with the issues most often raised by the deficit hawks. There is a problem with running deficits when economic activity is so great that demand begins to exceed supply. When, as economists have been saying for ages, there’s too much money, chasing too few goods and services. When that happens, taxes are necessary to withdraw money from the economy so that demand doesn’t exceed supply. In the United States today however, we have no such problem. Instead we have greatly weakened demand and idle productive capacity. In that kind of situation the Government needs to get people working again and to increase demand so that real wealth continues to be produced and so that the capacity to produce it is not destroyed.
This brings us to the national suicide part of my title. The point of “deficit hawkism” is to say to people and to Democrats, in particular, because they’re the party who wants government to spend money to do things, “hey, you need to go slow. You can’t do everything you want. You can’t educate America’s children, or have national health insurance, or recreate the energy sector and create a green economy, or modernize our infrastructure, or modernize rail transportation, or create an entirely new industrial economy based on 21st century technology, or spend money cleaning up the environment, and fighting global warming, or creating jobs for people so that the unemployment rate is cut back down to 4% or less, or invest in scientific and medical research, or in the Arts, or give people more leisure for their families and for private pursuits. And you can’t do all these things, because money for them is limited. The Government can raise only a limited amount of money through taxes and borrowing, so we just can’t afford all these good things progressives and Democrats want to do.”
Well, there are two replies to this. The first is that it’s false to say that the Government has limited money. It does not have to raise money through taxes and borrowing. It can issue whatever credits it wants to in order to facilitate the private sector doing the things that America needs, and it can even do some things itself, if the private sector isn’t interested in doing them. And second, most of the items I’ve listed above are things we have to do for the well-being of the United States and our democracy. There’s no question now, that the well-being of the American middle and working classes in the the United States has been declining since the early 1970s. Sure, there have been local variations in long-term trends, but middle and working class income has become stagnant and it is an old story that economic gains have been going to a smaller and smaller percentage of the population. Our infrastructure and many of our industries have been aging and failing. Our public education system is very much inferior to the systems in other industrial nations, which educate people better, and at far lower cost. The same is true in health care. Apart from reforming health insurance, the quality of our health care and its processes must be improved to the standard set by world health care leaders such as France and Japan. Our energy dependency on other nations and their fossil fuels, is a continuing and increasing threat to our national security that leads us into foreign interventions. Environmental, climate, and sustainability problems must be seriously addressed, whatever the cost in money, because they threaten the very existence of modern society. Most of these problems are long-standing, and we have not solved them. They must be solved soon, or life in the United States will rapidly become “nasty, brutish, and short," and our democracy will evolve into a plutocracy that will not easily be overthrown.”
If we intend to address these problems with the urgency and sense of purpose they deserve, we cannot afford to be fighting rear guard actions over a false issue like the deficit. Wealth is created by a society when its members are free to do what needs to be done to create real value. When we say that we can’t afford to create value, because we have to worry about the deficit, we are not being economical by saving money we can’t afford to spend. What we are doing instead is refusing to use the unlimited money we can issue to create real wealth, because we believe in “the deficit lie,” in the myth that is the old-time religion. We have to stop believing in the myth that the Government can’t do things because its money is limited, and start believing in the idea that the Government is us acting together to solve serious American problems that can’t wait. The Government belongs to all of us. It is ours, and we shouldn’t let Bayh, or Broder, or Samuleson, or Pete Peterson, or Russ Feingold, or anybody else, talk us into the idea that we shouldn’t use its unlimited authority to issue credits to help us to act together to solve our serious and long-standing problems. That way lies the decline and fall of the United States. It is national suicide.
(Also posted at the Alllifeisproblemsolving blog where there may be more comments)