The Congressional Progressive Caucus (CPC) recently issued its “Better Off Budget” document as an alternative to the White House/OMB document, and the coming House budget document, a Republican/conservative alternative. The “Better Off Budget” has received enthusiastic evaluations from writers affiliated with the DC progressive community. Richard Eskow’s recent treatment is typical and provides other reviews that are laudatory. These “progressives” clearly see the CPC budget as anything but an austerity budget. But is it, or is it not? Read the rest of this entry →
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I gotta love Bernie Sanders, because he seems so much like people I grew up with and like myself too, and he also seems to have that passion for equality and democracy that is so important for the future of America. Sometimes I think Bernie is one of the few champions of the people left in Congress. But I also think that along with other progressives he has constructed chains for himself that prevent him from being as effective a champion of the people as he otherwise might be.
His chains are the chains of either false beliefs or a decision not to speak the truth about fiscal matters for fear that the “very serious people” in the Washington village will marginalize him even more than they do right now. I can’t say which of these is true, but I think whichever reason is operative, his self-shackling hurts his effectiveness.
Read the rest of this entry →
Yesterday on Fox, Senator Dick Durbin said:
WALLACE: I’m going to talk about ObamaCare on a second, but you’re not answering my question. Why does taxes — why do taxes have to be on the table? Why can’t you just make a deal, short-term spending for long-term entitlement reform — which, Senator, you support and President Obama support. You have supported the idea of some entitlement reform.
DURBIN: That’s right. I do, and I’ll tell you why — because Social Security is going to run out of money in 20 years. I want to fix it now, before we reach that cliff.
Medicare may run out of money in 10 years, let’s fix it now. And that means addressing the skyrocketing cost of health care. That’s what ObamaCare is focused on, and yet, the Republicans want nothing to do with it.
If we don’t focus on the health care and dealing with the entitlements, the baby boom generation is going to blow away our future. We don’t want to see that happen. We want to make sure that Social Security and Medicare are solid.
The “. . . may run out of money. . . . ” and “. . . dealing with entitlements. . . “ memes, in reply to Chris Wallace’s question suggests that a deal trading increased revenues for Social Security and other entitlement cuts is acceptable to him. So, Durbin’s argument is that because Social Security Trustee and CBO projections, based on very pessimistic economic growth projections for the whole period, show a shortfall in the Social Security “Trust Fund” in 20 years, it is acceptable to make entitlement cuts now if the Democrats can get increased revenue from higher taxes, as if entitlement “reform” were the only way to meet the perceived Social Security solvency problem. But who would it be acceptable to? Read the rest of this entry →
For years now, economists using the ideas of Modern Money Theory (MMT) have been telling us that the so-called long-term “funding” problems of Social Security (SS) and Medicare emphasized incessantly by supporters of austerity are faux problems. The MMT economists believe this because the US is a currency issuer of a non-convertible fiat currency, has a floating exchange rate, and incurs no debts in any currency except US dollars. So, the US Government can issue whatever financial resources it needs to carry out its obligations without raising any solvency issues. The only problems involved in carrying out these obligations are problems of political will, not problems of financial incapacity, which is why, from an economic point of view, they are faux problems.
There are other economists who also believe these are faux problems, even though they don’t subscribe to the view that the government can’t become insolvent. They also view them as problems of political will because they think that the SS long term “solvency” issue can be easily solved by Congress just by lifting the payroll tax cap on income; while the problem of rising health costs threatening long term Medicare “solvency” is easily solved by passing a Medicare for All bill such as HR 676, which creates a single-payer for most health care services and puts the private insurers out of business, while holding down provider costs through negotiations.
Still other economists and fiscal policy analysts, believe, or say they believe, that the Federal Government does have fiscal limits, that the Government can only fund activities through taxing or borrowing, that deficit spending must be avoided or kept to a low level because it corresponds to growth in public debt, which will eventually create spiraling interest rates in the bond markets leading to financial insolvency for the United States, or at least to very damaging periods in which the US must impose extreme austerity on its citizens and forgo economic growth, because it must, at all costs, reduce its public debt substantially, and in short order.
These “austerians” suggest that this last fate be avoided by cutting deficits now, and, even more, by implementing long term deficit reduction plans that cut entitlements. Since the passage of the stimulus bill in 2009, the counsel of austerians of varying degree has dominated the US Government leading to conflicts among some who want to lower deficit spending to extreme levels and others who want to lower deficits more gradually and to levels a bit higher than their “starve the beast” opponents. Despite conflicts among them, the austerians have, through a few rounds of “debt ceiling,” fiscal cliff,” and “sequester” conflicts managed to implement considerable deficit reduction with serious costs to the economy and efforts to decrease unemployment substantially.
This conflict has created the present situation where the sequester and recent increases in Social Security taxes have set the stage for a “grand bargain” that would begin deep cuts in entitlements by implementing the Administration’s “chained CPI” proposal. But, a number of things have now happened to slow down the austerity train and even threaten its derailment.
Reality, the Austerian Retreat, and Entitlements
The first of these things has been the record of austerian deficit reduction efforts from 2010 to the present. The impact of austerity on economies the world over has been abysmal. Unemployment in many economies, including many of the Eurozone nations is now at levels not seen since the Great Depression, and in is even higher in some nations, especially among younger workers. In addition, in many nations brutal cuts in government spending have only increased deficits and debts while creating greater unemployment.
Nations like Canada, Australia, New Zealand, and the US, which haven’t implemented extreme austerity after initial stimulative reactions to the crash of 2008, but also have put in place efforts at deficit reduction in response to increasing influence of the austerians, haven’t suffered as much as other nations that have implemented full bore austerity. But they have suffered losses in employment and economic slowdowns as a cost of lowering deficits. The UK, which like the US, could have chosen to be less aggressive about deficit reduction, instead elected a Conservative-Liberal coalition that bought into the dogma of “expansionary austerity” and created a declining economy suffering periodic dips after the initial recession.
Second, the intellectual underpinnings of austerity have recently taken a big hit from academic studies showing spreadsheet errors, and various other errors in analysis, in the major academic studies supporting the idea that public debt-to-GDP ratios cause slower GDP growth. More and more analysts and observers now seem to believe that it is likely that low growth causes high public debt, rather than the opposite belief, which had fueled the austerity efforts of politicians and government officials.
Third, in the United States, the deficit reduction outcomes of Congressional/ Executive conflicts, while reducing actual deficits somewhat, have reduced projections of future deficits even more, and are perceived as both having reduced actual deficits and as holding back economic recovery. So, political sentiment has been gradually building against additional austerity efforts. There is now much opposition to further deficit reduction including opposition to proposals providing for entitlement cuts. And there are claims from progressives that “austerity is dead,” and advocacy that we should no longer make deficit reduction the centerpiece of fiscal policy but should immediately shift to an emphasis on creating jobs.
This past week saw a recent important defection from the ranks of advocates for austerity. The Center for American Progress (CAP) published a report by Michael Linden which concludes:
What does it mean to reset the debate? First, it means starting from the understanding that there is no longer a looming fiscal crisis—if there ever even was one. . . . .
Second, resetting the debate means discarding other fiscal theories that have fared poorly over the past several years. . . .
Third, we must recognize that there are costs to elevating deficit reduction above all other concerns. . . .
. . . . we can no longer afford to pretend as if the benefits of deficit reduction always, in all circumstances, outweigh the costs. And we cannot allow the continued perception of a deficit-reduction imperative to prevent us from fixing the sequester and avoiding more economic damage.
It is time to reset the entire budget debate. No more pretending that the sky is falling. No more rash actions to cut the deficit without regard for real-world impacts. No more calls for an ever-elusive grand bargain. No more super special committees or draconian automatic punishments intended to force action. Improving our national finances is still an important goal—that has not changed. But so much else has, and the debate must change too.
It is good to see this beginning of wisdom, and even implied opposition to entitlement cuts, in a report from an organization with direct lines to the White House. But it’s important not to mistake this report, with its fine rhetoric, for actual opposition to the Federal Government continuing to pursue an inadequate level of deficit spending to simultaneously contain the growth of debt while somehow creating substantially lower levels of unemployment than we have now.
Progressives and Centrists like CAP still don’t understand that austerity is destroying private sector net financial assets by cutting government spending and/or raising taxes in such a way that Government additions of net financial assets to the non-government portions of the economy (government deficits) fall to a level low enough that they are less than the size of the trade balance, whether in deficit or in surplus. Right now the trade deficit is 3.5% of GDP. That means Government deficits must be at least 3.5% of GDP to prevent contraction in net private sector financial assets. That’s a roughly a $560 B deficit in 2013, just to remain in place. CBO’s latest projections are for a deficit of $642 Billion this year, a bit higher than break even; but not by very much. The deficit could well be smaller than that, however, since it’s dropping fast.
If the economy recovers further, it’s likely that the trade deficit will grow larger as a proportion of GDP. If the Government deficit isn’t allowed to grow, then the result will mean declining net financial assets and greater inequality since the scramble for declining net financial assets will favor the economically well-positioned over most of the rest of us.
The question is: will the progressives and centrists who have had enough of austerity be ready to run deficits large enough to both compensate for the trade deficit and also allow enough saving of net financial assets to fuel renewed aggregate demand and the growing consumption needed for an expanding economy? Since deficits large enough to do both might range anywhere from 6 – 10% of GDP or more, I doubt that they will be up for that, because despite their protestations about leaving austerity behind, their de-emphasis on deficit reduction doesn’t mean they’ve abandoned their fear of increasing debt-to-GDP ratios, or their belief that high debt-to-GDP ratios are hurtful to economies.
In fact, a recent “austerity is dead” post at Think Progress (a project of the Center for American Progress Action Fund) in advocating for Michael Linden’s recommendations to repeal the sequester at least for the next few years, and invest $82 Billion (roughly 1/2 of 1 percent of GDP) on “pro-growth investments” to create jobs, cites the CBO projection favorably that shows the deficit falling sharply right now, and falling below 3% annually in 2014 and staying below that level until 2019.
But that projection is actual government austerity from now until 2019, barring a substantial decrease in our trade deficit over that period. Also, if there’s no private credit bubble during this time, it’s very likely that the economy will do nothing but stagnate until 2019 and beyond. We are looking at a Japanese “lost decade” scenario for the US economy.
And most “progressives” don’t see it because while they joyously proclaim that “austerity is dead,” they also, with equal joy, plan for austerity-level deficits of 3% or less for the foreseeable future. Now hear this CAP, Campaign for America’s Future, and other “village” DC/New York progressive organizations: Warren Buffett’s 3% deficits are the very essence of austerity, as the Eurozone well knows.
Make no mistake about that. So, when you tell us that “austerity is dead,” please don’t tell us at the same time that you’re planning to maintain deficits at the 3% level or below, and with them austerity for the indefinite future.
And how about the more determined austerians? What do they think about the death of austerity? Well, generally, they don’t believe it. They still hold that high debt-to-GDP ratios are problematic for growth. And while they’re now willing to grant that it may be wise to back off deficit reduction somewhat in order to emphasize job creation a bit; austerians like the Peter G. Peterson Foundation, and the Washington Post editorial writers, are still persuaded that now is the time to pursue arrangements for long term spending reductions in Social Security and Medicare entitlements. So, for them, and for the White House, pursuit of a “grand bargain” is still not off the table that the President has so persistently set, since at least the beginning of 2010.
In brief, the hard-core austerians still believe that deficits and the GDP ratio are very important and must be reduced even at the cost of considerable economic pain for those who aren’t wealthy. Given their view, it’s unwise for people who really think that austerity is, or should be, dead to relax now, because it’s a good bet that if the austerians can make a deal with the Republican right to reduce entitlement spending, then they will do just that, and also spring their deal on Congress suddenly and at the last moment.
The No Debt/No Inflation Platinum Coin Solution to the “Long Term Entitlement Solvency Problem”
So, let’s address a solution to the long-term entitlement spending solvency problem that really kills austerity for entitlements dead. Of course, it’s a faux problem in the sense that there is no economic or financial solvency problem, since the Federal Government can never involuntarily run out of money to pay Social Security and Medicare obligations, as long as Congress is willing to provide the authority to meet those obligations. But there is a real political problem in that Congress may decide not to do that because spending on entitlements in future years may exceed FICA tax revenues year after year until “the trust funds” cannot “cover” the deficit between annual tax revenues and annual spending.
The austerians want to solve this political problem by cutting back on entitlement benefits. “Progressives” want to solve it by eliminating the income cap on FICA taxation. The advantages and disadvantages of both solutions are very well-known so I won’t repeat them, but will just point out that both will subtract net financial assets from the economy, and offer a third solution that doesn’t have that problem.
That solution is for the Executive Branch to use its Platinum Coin Seigniorage (PCS) authority under 31 USC 5112(k) and 31 USC 5136 to mint a single proof platinum coin each year to cover any shortfall between FICA revenues and spending on Social Security and Medicare. If that were done annually in advance, based on projections, then there would be no further depletion of the “trust fund” credits, and no further political issue of Social Security and Medicare insolvency.
This solution also has at least the following other advantages.
– It requires no Congressional action to implement. The necessary authority is there already;
– It will not increase spending, beyond that already scheduled for Social Security and Medicare, so it won’t add any inflation beyond that already built into the system;
– It will not increase the public debt subject to the limit, so that worry needn’t trouble people;
– It will educate people about the fact that the Government can spend without having to tax or borrow if it needs to do that;
– It will educate people about PCS as an alternative to taxing and borrowing;
– It will educate people to the idea that neither the Treasury nor the Government can become insolvent because it can always mint coins;
– It will educate people about the fact that the US Government need not ever borrow back its own previously issued currency from anyone else, unless it wants to;
– It will educate people to the idea that their grandchildren won’t have a burden of public debt that they can’t always easily pay back by using PCS;
– It requires neither an increase in taxes nor cuts in Social Security or Medicare benefits.
– Also, if benefits were increased in the future there wouldn’t need to be any tax increases to “fund” them.
– It would be a great political success for any President who did this, because it would have the effect of safeguarding the major components of the safety net for good, and that President would be remembered by a grateful populace for having done that.
There are, of course, some disadvantages to this third solution, too.
– The opposition to the President will attack she or he for using PCS, claiming that it is the dreaded “printing money,” practiced, so infamously, by the Weimar Republic and Zimbabwe. This may be an effective attack in holding down the President’s approval rating for a limited period of time; but once people observe that no inflation results from using PCS, this attack will fade away; it’s effectiveness destroyed by experience and reality;
– To make PCS effective, the President may have to force the Federal Reserve Chairman to create reserves in exchange for Treasury’s platinum coins. This may create a firestorm politically if the Fed Chairman resigns in protest. However, eventually, the President will find a successor who will credit the Mint’s Public Enterprise Fund (PEF) account for platinum coins with very high face value, because the law is clear that in cases of disagreement between the Fed and the Secretary on matters of interpretation, the opinion of the Secretary is to prevail.
– The opposition may attack the President for “grabbing more power.” This may make a few headlines; but since the President’s action would halt any further depletion of the Social Security and Medicare “trust funds” it is hard to see the public either disapproving of the action, or getting motivated by any perceived power grab.
– The opposition to the President in Congress may become enraged by the loss of leverage against entitlement spending they experience as a result of the Administration using PCS to stop depletion of the “trust funds.” However, I can’t see this anger going anywhere unless it somehow gets extended to the country at large. But, then again, the only reason why most people would get angry at this is if inflation were somehow triggered using PCS. Since this is a very unlikely prospect, the anger in Congress will just go to ground in the sweep of events.
Two weeks after the minting each year, there will be other issues to fight about. After a few years of use, PCS will be institutionalized as the way to ensure the sustainability of Social Security and Medicare regardless of fluctuations in the economy and in tax revenues.
So, that’s it. Using PCS to cover the shortfall between entitlement spending and FICA revenues is a quick and relatively easy solution to the political problem of ensuring that the Social Security and Medicare “trust funds” are sustainable, provided that a president will use it. When will this, or the next, or the next president make this happen and really kill “austerity” politics targeting the entitlements that most Americans love so well? When will this or some future president hear the voice of the people?
(Cross-posted from New Economic Perspectives.)
It makes a good headline; but it’s dangerous to say “austerity is dead,” just because new budget projections indicate that the deficit has already been cut by $200 Billion more than in previous projections, and because the Reinhart-Rogoff study has been debunked successfully, and, hopefully, irretrievably. Austerity will only be dead when legislators, Presidents, Prime Ministers, Central Bankers, and international lending organizations stop trying to implement it, whether or not they stop because deficits have already been cut.
Of course, those claiming austerity is dead, mean by their claim that deficit cutting efforts have already been successful enough in the United States that future projections in all the mainstream budget plans now show only “moderate” deficits (See the Table which now includes CBO revised budget projections.) These don’t signal a debt crisis, and instead suggest that we can now turn to the really serious economic, health, and environmental challenges we face.
In addition, deficit reduction efforts in the rest of the world seem to clearly show that austerity efforts have been unsuccessful nearly always and everywhere in that their costs in economic damage have been far greater than any gains that have been made by nations purposefully pursuing these efforts. In cases, such as Greece, Ireland, Italy, Latvia, Portugal, and Spain, deficit reduction efforts have actually made debt problems worse than they were before harsh austerity measures cutting government spending were taken, because their negative effects on national economies and employment have also reduced tax revenues by more than the savings achieved from cutting government programs.
But Everybody’s Still Doing It
The Washington Post editorial page has been one of the primary MSM outlets for aggressive deficit terrorism. There is an axis of deficit terrorism in Washington DC today. It runs from Hooverite Republicans such as Judd Gregg and Mike Spence, to Blue Dog Democrats like Evan Bayh and Kent Conrad, to media organizations like CNN, WaPo, and the Peter G. Peterson funded The Fiscal Times, to foundations like The Peter G. Peterson Foundation, and Peterson-funded think tanks like AmericaSpeaks, to the Congressional Budget Office (CBO), to high-level Administration people like OMB Director designate Jack Lew, and judging by his speech and actions, to Barack Obama himself. This axis has been laying down a carpet of continuous propaganda for many months now distracting attention from the immediate problem of getting people back to work, and toward doing something about an assumed long-term problem, that some argue is fictional, and that many others think may, but, will most probably not, occur
Last Saturday, the WaPo added to its place in progressive infamy with an editorial that managed, in a few short paragraphs, to repeat many of the false arguments the deficit terrorists use to scare Americans into thinking that we really have to cut Government spending as soon as we can or we will be facing unbearable suffering in future years. This post will review that editorial in detail. It begins:
”Sometimes a chart is worth a thousand editorials. The one we reproduce here, courtesy of the Congressional Budget Office, is one of those. It shows the federal debt throughout U.S. history and the daunting slope of what is likely to happen in the next few decades.”
It’s true that charts can have a lot greater impact on people’s understanding than editorials without them can, but that impact may or may be related to the truth. In this case, the Chart depicts projections of the public debt-to-GDP from the CBO. I’ll discuss the “truth value” of these projections as we move through the editorial. For now, I want to call attention to the phrase “. . . likely to happen. . . “ just above. And I want to ask: How do the WaPo editors know that these projections describe anything remotely like what is likely to happen? Do they have some expertise in economics that we don’t know about? Have they been right about what is “likely to happen” with the Federal Budget in past years? What gives them the ability to say the CBO projections are “likely to happen”? What reason do we have to do anything but laugh out loud at the idea that Fred Hiatt and his friends at the WaPo know what is likely to happen over the next 25 years, or the next 10 years, or even the next 2 years? In fact, CBO itself doesn’t say that its projections are likely to happen. It says instead:
”Neither of those scenarios represents a prediction by CBO of what policies will be in effect during the next several decades. The policies adopted in coming years will surely differ from those assumed for the scenarios. (And even if the assumed policies were adopted, their economic and budgetary consequences would certainly differ from those projected in this report.) Nevertheless, these projections, encompassing two very different sets of policy assumptions, provide a clear indication of the serious nature of the fiscal challenge facing the nation.”
So, CBO claims that its projections provide no more than “a clear indication” of the fiscal challenge we’re facing. They don’t say anything close to the idea that what they project will happen either over the short run or the long-run. The WaPo, in claiming that these projections are likely to happen is going way beyond what CBO is saying. It is giving us mere opinion. Why should we believe their opinion about what things will be like over the next 25 years? Let’s remember that as we move through the rest of the WaPo editorial.
”The federal debt held by the public — and, increasingly, "the public" means foreign governments and investors — has mushroomed from 36 percent of gross domestic product at the end of the 2007 fiscal year to a projected 62 percent of GDP at the end of fiscal 2010. By way of comparison, only during and just after World War II has the federal debt exceeded 50 percent of GDP.”
The editorial mentions that ”federal debt,” and especially Treasury Bonds held in foreign accounts at the Fed has mushroomed recently. So what? Why does this represent a danger or a disadvantage to the United States? The editorial assumes that it is. But why should we believe that? Also, why is it important that the level has gone above 50 percent of GDP? Again, so what? Is there some magic percent number beyond which the Government’s capability to spend is compromised? Obviously, the editorial wants us to believe that. But, why should we? WaPo goes on:
But that’s not the scary part. The scary part, as outlined in the CBO’s new issue brief, "Federal Debt and the Risk of a Fiscal Crisis," is the Matterhorn-like incline of what happens next. Assuming the unrealistic — that is, assuming that the Bush tax cuts are allowed to expire, that the alternative minimum tax is allowed to hit a growing number of taxpayers — the next several years would simply continue the current, unhealthy level of debt. After that, however, growth in spending on federal health-care programs and Social Security would drive up debt to about 80 percent of GDP by 2035. That is, actually, the rosy scenario.
Where do I begin with this one? Maybe the Bush tax cuts will be allowed to expire, maybe they won’t, or maybe only part of them will be allowed to expire as the Administration wants, but it seems to me that any of these possibilities is quite possible right now, and none of these is “unrealistic.” Also, the editorial is vague about the course of increases in the public debt-to-GDP ratio. The CBO’s Extended Baseline Scenario projects an increase in the ratio from .62 to .66 through 2020, increasing to .69 by 2025. Not a very alarming increase over the next 15 years even if the projection were to come true. So, the bottom line is that the increase in the ratio accelerates after 2025 through 2035, which years are the least likely to occur as projected in this scenario because of the accumulation of projection errors. Having pointed that out however, I also have to admit that I wouldn’t give a plugged nickel for the likelihood of even CBO’s 10 year projection out to 2020.
Next, the off-hand comment that the extended baseline scenario is the “rosy” one, leaves me open-mouthed. For one thing, it’s apparent that CBO has made a key assumption contributing greatly to increasing debt. That assumption is that Federal interest costs will increase over time because these costs are dependent on the international marketplace and what rate people will accept to induce them to but Treasury Bonds. Neither CBO, nor the WaPo, either mention, or question this assumption. Yet Federal deficits and contributions to Federal debt are not the same. The Federal Government can decide to stop issuing debt on a one-one basis with new spending. Alternatively, the Federal Government can stop issuing long-term debt beyond 3 month instruments, and flood the banks with overnight reserves to bring down overnight rates very close to zero, which, in turn will also drive down three-month rates to close to zero. So, as proved empirically by Japan, whether the Government wishes to pay interest costs is, in large measure, subject to policy and not determined by the market as CBO and the WaPo assume.
Further, if the Government stops issuing debt as it spends, then there won’t be any “crowding out problem.” CBO places heavy emphasis on “crowding out” as a drag on the economy in its projections. I think there’s no such thing as “crowding out” and that this is false theory affecting CBO’s projections. However, even if there is a ”crowding out” effect to worry about, stopping or reducing debt issuance will put an end to that problem in future projections. Elsewhere, in an examination of some projections out to 2025 by AmericaSpeaks, I pointed out that ceasing debt issuance could result in $11.8 Trillion less in Federal Government spending between now and 2025. In short, Federal policy on debt issuance or control of short-term interest rates, can pretty much invalidate both scenarios of CBO, and this point alone shows that while the Extended Baseline Scenario may be “rosy” relative to the Alternative Fiscal Scenario, it is far from “rosy” relative to other scenarios that are very easy to generate by assuming a policy change in a key area.
Another reason why WaPo’s remark that the Extended Baseline Scenario is a rosy scenario makes me laugh is because its GDP projections reflect a relatively low growth rate in GDP. In fact, CBO projects the nominal growth rate of GDP at 1.55 over the decade ending in 2020, while the growth rate in GDP for the decade ending in 2010 is 1.50. So they’re saying that during the next decade the US economy won’t grow very much faster than it did in the decade during which the Great Recession occurred. I find this implausible and pessimistic. The average GDP growth rate beginning with the decade ending in 1950 and ending with the 2010 decade is nearly 2.0. If we directly projected GDP growth based on that history, and extended things out to 2025, we’d be looking at a nominal GDP of roughly $42 trillion in 2025, compared to $27 Trillion using a CBO-like scenario. Of course, this change in assumptions means that projected tax revenues between now and 2025 would be greater by many Trillions of dollars, assuming the same rate of revenues to GDP. Summing up, if one assumes that debt issuance policy is changed and also that Government spending policies get the economy moving at the average rate of growth over the past 70 years, then one comes up with an entirely different projection scenario for the Federal Debt-To-GDP Ratio than CBO’s. This figure provides such a scenario out to 2025. It shows the debt-to-GDP ratio beginning to decline by 2013, declining to 37 percent by 2020 and then to 2 percent in 2025, with surpluses in 2017 – 2025.
So, here’s WaPo telling us that CBO’s Extended Baseline Scenario is a “rosy” scenario, and yet, it’s pretty easy to develop an alternative scenario (See the above figure again) that gives you the opposite result from CBO’s very pessimistic Alternative Fiscal Scenario, based on its own spreadsheets that, in turn, are based on the CBO model. So, how good is a projection model that with relatively minor changes can produce a scenario that projects a result that almost completely contradicts the “. . . clear indication of the serious nature of the fiscal challenge facing the nation”? Not very good, I’m afraid, since such a model imposes few constraints on reality that can serve as a guide to policy.
Also, in thinking over what I’ve said, please don’t assume that the alternative scenario I’ve developed is the most optimistic one that can be formulated within the confines of the CBO model. It’s not. The decade ending in 1950 had a nominal GDP growth rate of 2.82. So, if one is looking for a really “rosy” scenario, that would be the one to look at. Let’s go on with WaPo’s editorial.
”The more realistic scenario — that the tax cuts are extended, the alternative minimum tax is indexed, Medicare payments to physicians are not dramatically reduced — would bring the debt level to dizzying heights. By 2020, debt would be close to 90 percent of GDP, reaching 180 percent of GDP by 2035. "Under the alternative fiscal scenario, the surge in debt relative to the country’s output would pose a clear threat of a fiscal crisis during the next two decades," the CBO report says.”
Well, of course, for reasons I’ve outlined, there’s no reason, except the expectation that the Government will follow extremely stupid economic policies, to believe that “the more realistic scenario” of CBO’s is at all "realistic". But let’s say it happened, and that we had economic stagnation without the political will to solve our problems, would we then have a fiscal crisis by 2030? That depends on what one means by “a fiscal crisis.” If one means that the Government would no longer have the capability to spend to get the economy growing faster than growth in the debt, then I think there would be no such crisis. The Government would still retain the authority to spend and to create full employment and a growing economy. It has no Government Budget Constraints of the kind that applies to the American States, or to the members of the Eurozone. So, where’s the crisis? If the reply is that a debt-to-GDP ratio of 146 percent (the value by 2030 in the CBO scenario) would cause inflation, then my reply is where’s the evidence from a nation sovereign in its own currency? Japan, in fact has already gone way beyond the 146 percent level of the ratio and is now at around 190 percent. It retains its authority to spend and inflation has been very low there for two decades, as have interest rates on Government debt. WaPo goes further:
”Even absent a crisis, this debt load would be stifling. So much government borrowing would crowd out private investment. Rising interest payments would require higher taxes or lower spending. The government’s flexibility to respond to events such as war or recession would be curtailed. Then there is the risk of fiscal crisis — a situation in which investors decide the United States isn’t such a good bet after all and they don’t want to lend money, except at prohibitively high interest rates. If that were to happen, "policy options for responding to it would be limited and unattractive." Debt could be restructured, the currency inflated or an austerity program (tax increases plus spending cuts) implemented. None of these would be pleasant.”
This scenario, of course, is wholly based on these ideas: 1) the Government must borrow ether before or after it spends to get the money it needs; 2) when the Government borrows it will “crowd out” private lending; and 3) the Government’s great debt load would drive up interest rates. However, we have already seen that 1) and 3) are false, and also that if 2) turns out to be true, a highly questionable economic theory, that problem can be ended quickly by continuing to spend while ceasing to issue debt. So, in short, the whole scenario in the WaPo paragraph just above, is a bad dream, that cannot happen if the Government uses the tools it has to either no longer issue debt, or drive short-term interest rates down close to zero, and no longer issue long-term debt.
WaPo ends with:
”Which gets to the fundamental point: "The later that actions are taken to address persistent budget imbalances, the more severe they will have to be." Under the realistic budget scenario, to keep the debt to GDP ratio stable over the next 25 years would require immediate and permanent tax increases or spending cuts of about 5 percent of GDP. That is a significant amount, equivalent to about one-fifth of all non-interest government spending this year. But waiting and hoping is not a good alternative. As the CBO put it, "Actions taken later, particularly if there was a fiscal crisis, would need to be significantly greater to achieve the same objective. Larger and more abrupt changes in fiscal policy, such as substantial cuts in government benefit programs, would be more difficult for people to adjust to than smaller and more gradual changes.
”In short, fiscal responsibility and caring for the needy are not antithetical goals. One is necessary to ensure that the government can continue to do the other.”
It’s hard for me to express my disgust and contempt for this argument of WaPo and CBO’s. First, they have failed to establish that it is necessary to keep the debt-to-GDP ratio “stable.” But, if they did, they would still have a responsibility to tell us what the appropriate level of that ratio is. But, they have no rigorous theory nor empirical evidence that tells us anything about what that level is.
Second, why would it be any harder to get stability in the public-debt-to-GDP ratio in 2030, than it is in 2010? All the Government has to do in either of these years is to stop issuing debt to cover deficit spending, then, whether the debt-to-GDP ratio was at 60 percent, or at 146 percent, it would remain at that level if the Government regulated its debt issuance. So, there is no crisis, and there is no loss of ability to stabilize the debt-to-GDP ratio at whatever level, if that’s what we want to do.
But third, I mention contempt and disgust because both WaPo and CBO are suggesting that the CBO projections, which admittedly are not predictions, and in CBO’s own view are extremely unlikely to come true, should be taken as the basis for actions this Fall that will put in place a framework for spending cuts that will hurt very real and very vulnerable people, if not this year or next, then certainly in the next few years, when the current economic crisis ends. But this contention is insanity. It is the height of true fiscal irresponsibility.
It is one thing to ask people to sacrifice to fight a war for survival, or to respond to dangers that they have a clear expectation will come true at some time in the future. But, it is entirely another to ask people to sacrifice for some projected state of affairs that by CBO’s own admission is “not likely” in the sense that scientific predictions are likely, and that is “unlikely” in the sense that CBO itself doesn’t think they will occur. CBO’s scenarios are not as likely as an assertion that a Katrina-like hurricane will hit New Orleans again sometime in the next decade. They are not as likely as the scenario that we have a double-dip recession during the next year. Its projections are not predictions that will come true. They are projections based on a policy environment and on policy choices that “we” can change at any time.
And, as we have seen, the so-called projected fiscal crisis is not based primarily on the structure of our current expenditures, or even on the projected growth of our health care and Social Security entitlements. Rather, if it is real at all, which I very much doubt because the absolute level of the public debt-to-GDP ratio has no significance in the abstract, it is because we are refusing to stop issuing Governmental debt, and even more importantly, because we are refusing to provide full employment, out of an exaggerated fear of inflation. If we stopped issuing debt, and also provided a Federal Job Guarantee program ensuring full employment at all times, we could cut out the huge projected interest expense and also, restore economic growth rates to historical norms and even beyond, and then the automatic stabilizers would give us a surplus problem rather than a deficit problem soon enough.
So, because WaPo and CBO are unwilling to consider, or to envision such initiatives, or any other changes that would make a real difference in their projections, except myriad little cuts in spending or tax increases that would cause most Americans to suffer; they tell everyone who will listen that austerity, sacrifice, and suffering are the only way out. And, of course, they expect us to believe this. But what we ought to believe instead is that these institutions have no interest in solving real problems, but are only interested in offering painful solutions to problems they’ve conjured up to maintain their own sense of authority and relevance.
So, WaPo and CBO, fiscal responsibility in Government is using the Government’s fiscal power to fulfill the public purpose, including full employment and price stability and enough economic economic growth that improves the lot in life of all Americans. If you can’t recommend fiscal policies that will do that, but instead recommend only actions that stabilize some abstract numerical ratio whose relationship to full employment, price stability, and public purpose escapes you, then all we ought to be saying to you is:
“You have sat too long here for any good you have been doing. Depart, I say, and let us have done with you. In the name of God, go!”