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Peterson/CBO Beat for Austerity Goes On!

6:53 pm in Uncategorized by letsgetitdone

Recently, I’ve been writing about oligarchs advocating for entitlement cuts and austerity. I’ve discussed attacks on entitlement benefits for the elderly from Abby Huntsman (of MSNBC’s The Cycle) and Catherine Rampell (a Washington Post columnist), both the children of well-off individuals. These posts have come in the context of the English language release of Thomas Piketty’s Capital in the Twenty-First Century, and the more recent pre-publication release of a study by Martin Gilens and Benjamin I. Page using quantitative methods and empirical data to explore the question of whether the US is an oligarchy or a majoritarian democracy. They conclude:

”What do our findings say about democracy in America? They certainly constitute troubling news for advocates of “populistic” democracy, who want governments to respond primarily or exclusively to the policy preferences of their citizens. In the United States, our findings indicate, the majority does not rule — at least not in the causal sense of actually determining policy outcomes. When a majority of citizens disagrees with economic elites and/or with organized interests, they generally lose. Moreover, because of the strong status quo bias built into the U.S. political system, even when fairly large majorities of Americans favor policy change, they generally do not get it.”

With this as a backdrop, today I want to de-construct a recent statement by Michael A. Peterson, President and COO, of one of the centers of American oligarchy, the Peter G. Peterson Foundation (PGPF), and the son of the multi-billionaire Peter G. Peterson, commenting on the CBO’s Report earlier this month, on its updated budget projections for 2014 – 2024. Read the rest of this entry →

Peterson Thinks We Need Austerity While He Lives It Up!

9:46 am in Uncategorized by letsgetitdone

Pete Peterson’s long-term fiscal problem is a figment of his lack of imagination

The Peterson Foundation reacted to the President’s budget document with a report repeating its usual whining about the debt problem, and the need to cut entitlements. Here are quotations from the report and my explanations of why they are ridiculous deficit/debt terrorist nonsense.

While today’s deficits are much lower than those during the financial crisis and recession, over the next ten years debt will remain at historically high levels under the policies outlined in the President’s budget. Over the long term, our debt is on a rising and unsustainable path that harms our economy and threatens our future standard of living.

First, Government deficits that don’t exceed the sum of private sector savings and trade deficits are not bad for the private economy. They are good because they contribute directly to private sector savings and the aggregate demand and subsequent economic growth it can create. It would be nicer for all of us if Mr. Peterson learned that lesson before his propaganda turns the US into a third world banana republic; unless, of course, that’s what he’s about. Read the rest of this entry →

Bernie Sanders: Self-shackled Champion of the People

1:48 pm in Uncategorized by letsgetitdone

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 →

Dick Durbin Insults Everyone Else’s Intelligence About Social Security

3:33 pm in Uncategorized by letsgetitdone

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 →

The Five Worst Reasons Why the National Debt Should Matter To You: Part Three, The Other Four Worst Reasons

3:06 pm in Uncategorized by letsgetitdone

In Part One of this series, I considered “Fix the Debt’s” claim that high levels of debt cause high unemployment and gave a few reasons why this is a false claim. In Part Two, I followed with a review of the historical record from 1930 to the present and showed that it refutes this claim throughout this period, and that there is not even one Administration where the evidence doesn’t contradict “Fix the Debts” theory. In this part I’ll continue my examination of the other four “top reasons” why “Fix the Debt” insists that the National Debt should matter to you.

2. Debt means more expensive consumer credit: home, auto, student loans, as well as credit cards.

Growing federal debt can drive up interest rates throughout the American economy. That means higher interest rates for people across the country who may be taking out loans for a home, a new car or truck, to pay down credit card cards or for education costs. Higher interest costs mean they will all be more expensive, resulting in higher monthly payments.

Response: This is a proverbial red herring. Interest rates in the United States aren’t determined by private markets, they’re determined primarily by the Federal Reserve, or by the Fed in collaboration with the Treasury. That is not to say that markets can’t drive up interest rates if the Fed does nothing about it. But if the Fed chooses to take counteraction, then it can determine the term structure of interest rates across the Board.

3. Delaying action on the national debt means it will be much more difficult to protect Medicare and Social Security from abrupt, severe, and widespread cuts in the future on all beneficiaries.

Social Security’s disability program will exhaust its assets in 2016, the overall Social Security trust funds will be exhausted in 2033, and the Medicare Trust Fund will run out in 2026. Some of those dates may seem like a long time away, but if we want to protect beneficiaries who rely on these programs from severe and abrupt cuts – especially the elderly who have used up all their savings and other vulnerable groups – we need to start taking gradual steps now.

Response: All of this is false. It assumes that we will fund safety net programs in the way we do today, by continuing to issue debt, and it also assumes that continuing to issue debt and having higher levels of debt are problems for a fiat sovereign. They’re not! Fiat sovereigns can continue to deficit spend regardless of their debt or debt-to-GDP ratio levels. And if we want to get rid of or reduce debt for political reasons, then Congress needs to guarantee annual funding for these programs in perpetuity and for the Executive to ensure that funds are there by using Platinum Coin Seigniorage (PCS), to supply the reserves to cover appropriated deficit spending.

Even if these alternatives aren’t available right now, however, it still makes no sense to cut safety net programs now, based on some long-range projections that may never come to pass. If people really will have to suffer later, because Congress and the Executive are refusing to use their power to remove the need for any suffering at all, then why should we, the people just accept that?

Much better to get ourselves a new Congress and a new President who will do what’s needed to remove any need for suffering at all. We certainly should not let today’s politicians rob us now, so we can plan ahead for poverty, when we have as much as 25 years to replace this crew of reprobates with people who will vote in the interests of most of the people, most of the time, and who will take back the gains of the 1% extracted from the economy and the Government through political influence and outright fraud.

4. If we do not address the debt now, federal investments in education, infrastructure, and research will decline.

We currently spend nearly $225 billion each year in interest payments alone on the national debt. And that number will only continue to rise. These payments – which have to be made – reduce our ability to fund critical investments in areas such as education, infrastructure, and research that are vital parts of a strong economy. In addition, the mindless sequester continued to cut spending throughout many of these programs, without making any decisions on where to target the savings and without focusing on the most unsustainable areas of the budget: increasingly-costly entitlement spending and an outdated, inefficient tax code.

Response: Yet another fairy tale for the gullible. Yes, interest payments are at $225 Billion per year. That’s about 1.5% of GDP. During the 1980s that figure was more than 5% of GDP. Why did it go down?

Not because our national debt got smaller; but because the Federal Reserve drove interest rates down, allowing the Treasury to sell securities at lower interest rates. Again, the Fed can drive down interest rates to virtually zero if it wishes to, and can keep the interest bill of the United States as low as it wishes, ensuring that interest on the national debt will never be a threat to the rest of the budget. So, forget about this. Interest payments on Treasuries can never be a threat to the solvency of the United States as long we maintain the present fiat currency system we’ve had since 1971.

But, of course, apart from such action by the Fed, the option of PCS is always open to the Treasury. It can pay back whatever portion of the debt it likes and refrain from issuing any more debt. So, over time, the Treasury can lower its interest costs as low as it wishes if it believes interest payments are becoming either a financial or a political problem.

5. Taking steps to address our deficit now would mean a more robust economy and significant job growth over the next 10 years.

A Congressional Budget Office analysis indicates that $2 trillion in deficit reduction over ten years could grow our economy by nearly an additional 1 percent by 2023. A healthy, growing economy means more good jobs and higher wages for hardworking Americans.

Response: The CBO projections about deficit reduction growing our economy are wrong. First, because CBO projections are mostly wrong. They’re even wrong four months out. For example, compare CBO projections on the anticipated 2013 deficit published in January and May of 2013. CBO failed to project the four years of Clinton Administration surpluses. It failed to project the recession at the end of the Clinton Administration at the beginning of the year 2000. It failed to project the crash of 2008 in early 2008, and even a few months before the crash.

Then it failed to project the seriousness of the recession in January of 2009. It failed to project the Clinton recovery in 1993, or the boom in Clinton’s second term. All these were relatively short-term errors. But, forecasting errors due to false models accumulate drastically over time. So, CBO has nil capacity to project over a period of ten or more years. All one can really count on is that CBO (and all the other well-known projectionistas will be wrong.

CBO’s projections do not take into account the macroeconomic sectoral financial balances. So, it doesn’t even recognize that long-term proactive deficit reduction means reducing Government additions of Net Financial Assets (NFAs) into the private economy. Of course, lower NFA additions over a decade, due to deficit reduction, do not guarantee a contracting economy and high unemployment in 2023. But, in the absence of a private credit bubble, which will bring another crash sooner or later, they make it much more likely that CBO’s projection will prove false.

In short, the idea that $2 Trillion in deficit reduction now will produce a healthier, more robust economy is false. We might have a more rapidly growing economy in 2023, even with deficit reduction, if the private sector, supported by the Fed, blows that big credit bubble. But that growth will not mean a healthy, robust economy. It will mean a sick one on the point of a huge deflationary collapse produced by another debt crisis. And while the new class of Peterson plutocrats might greatly desire such a result so that they can extract most of the rest of the financial resources of the 99%, I think the rest of us would prefer to base our future expansions on the actual additions to private NFAs produced by Government spending that is not offset by tax revenue.

So, we’ve now seen that “Fix the Debt’s” five top reasons why the national debt should matter to you, are actually the five worst reasons why it should matter. However, there are at least three REAL reasons why the national debt should matter, and why we should fix it without breaking America, or causing people to suffer. In the concluding, Part Four of this series, I’ll give these reasons.

(Cross-posted from New Economic Perspectives.)

What Social Security/Medicare Solvency Problem?

8:56 pm in Uncategorized by letsgetitdone

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. . . .

and:

. . . . 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.)

The Fake Social Security Solvency Crisis Is Congress’s Fault!

6:18 am in Uncategorized by letsgetitdone

Ah…. my fellow Americans, be very, very, afraid of the terrible Social Security crisis that will sink us as a nation. According to Government projections, we won’t be able to pay full Social Security benefits, in 2037 and beyond, unless we cut benefits now, because the Social Security “Trust Fund” will be short of money.

So, say Paul Ryan, Peter Peterson and his minions, Mike Pence, Alice Rivlin, Erskine Bowles and Alan Simpson, and also many other deficit hawks. In reply, the most liberal of the deficit doves say that even though there will be a solvency crisis in 2037; it’s really nothing to worry about because all we have to do to end it is to lift “the cap” on FICA contributions entirely, so that wealthier income earners are paying the same rate on their total earnings, as workers whose wages or salaries are below $106,800 per year.

So, both the hawks and the doves agree that there is “a solvency crisis;” they only disagree about what to do about it. However, the SS solvency crisis is a big fake, like so many of the issues that arise in Washington. It is a fake because the crisis is not due to powerful economic forces that no one can do anything about, and that no one has control over; but rather is due to a choice Congress made when they wrote the original Social Security Act; namely that it would be paid for by raising revenues to fund it through FICA contributions and placing those in a “trust fund,” rather than by paying for it from general revenues. All that Congress has to do to end the crisis is to decide sometime between now and 2037, to pay for SS benefits automatically, out of general revenues, in the same way it pays for that part of the Social Security program called Supplementary Medical Insurance (SMI). End of problem. End of story.

Here’s a link to a post by selise featuring a youtube clip of Stephanie Kelton at last year’s Fiscal Sustainability Tech-In Counter-Conference explaining why this simple move by Congress solves the problem. Audios, Videos, presentations, and transcripts from the Conference which provides the definitive counter-narrative to the deficit hysteria currently rending our nation is here. Professor Kelton summarizes her argument here.

“Funding Social Security is always and everywhere a political choice. The strongest evidence of this comes directly from the 2009 Annual Report of the Trustees. In that report, they predict gloom and doom for Social Security because “there is no provision in current law that would enable full payment of benefits, once the Trust Funds are exhausted”.

In contrast, the Supplementary Medical Insurance (SMI) Trust Funds are “both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet next year’s expected costs.”

It is that simple. The former is in ‘trouble’ because the government isn’t committed to making the payments, and the latter gets a clean bill of health because the government will always make the payments.”

I think this really underlines how arbitrary the projections of financial doom from the Peterson crowd, CBO, and other Government agencies are. Apart from the silly and unreliable projections as far out as 25-65 years from now, the predictions of doom are really based on provisions in law that Congress can change at any time. Which means that just like the fake national debt crisis, the fake Social Security solvency crisis is Congress’s fault.

It is more Washington kabuki politics at its finest.

Selise has this to say in her post on why this is kabuki:

Q: Why is there even a debate about “fixing” Social Security when it’s not broken?

A: Because the focus of the debate is on problems that are unreal.

Focusing on unreal problems makes no sense. Unreal problems are NOT REAL!

Let me explain what I mean here by real as opposed to unreal problems with an example of each:

Unreal = “We can’t afford to Social Security because the Trustee’s report says that costs will exceed payroll tax receipts”

Real = “We can’t produce the goods and services needed by our nation’s seniors to keep them fed and housed.”

The unreal problem is about the availability of dollars. Our federal government is the monopoly issuer of the nation’s currency. We’ve been off the gold standard for almost 40 years and we have floating exchange rates. Therefore, the availability of dollars is a political issue. Tax revenue is not required, borrowing is not required — unless Congress chooses to impose those constraints.

A main reason why this particular instance of kabuki politics still exists is because so-called “progressives,” are unwilling to give up the idea that to keep Social Security safe it is essential that people “pay into it,” so that the opponents of Social Security won’t dare say that it’s a welfare program paying benefits to people that they are not entitled to. Guess what? The problem with this theory is that the opponents do dare say it, and have been saying it for many years through “propaganda” that has made “entitlement” a dirty word.

They don’t care whether people have made FICA contributions or not. For them the only issue is whether the Government “can afford” to pay for SS retirement benefits, not whether people have earned and paid for them, and so “deserve their benefits.” And they say the Government can’t afford it because they’re both busily cutting away at Government tax revenues and also falsely claiming that Government money is limited by a non-existent solvency risk.

Giving up the argument that people have paid into Social Security and so are entitled to it, is what progressives fear. But, nevertheless, since that argument is clearly not working, and also because that argument is bought only at the price of maintaining a very regressive tax on working people, they badly need to give it up in favor of an argument that all Americans, whatever their station, contribute something to the development of American society over time, often in ways that can’t easily by measured by the money they’ve made, or the visible things they’ve accomplished; and that because of these contributions and their American citizenship, each is owed a decent and dignified old age by the nation in the form of Social Security and affordable health insurance (now provided by Medicare).

This is especially true, since the money needed to pay them isn’t directly funded by taxes but only needs to be issued by the Government according to its constitutional authority. It is not money that is taken from anyone, or that is re-distributed. It is not some quantity from a limited supply of gold that is coming out of other people’s pockets. This money gets its value ultimately from the real wealth American society produces, which, in turn, comes from the past and present productive efforts of everyone, and the productive capacity that all of us together have created over the years and still create.

There is no right to share in this wealth equally, and there is no right for the elderly to cause younger people to go without, or to sacrifice opportunity. But American society is wealthy enough to make choices like these unnecessary. It is wealthy enough to provide an old age for its citizens that is free from want and fear.

Roosevelt knew that and it’s part of what he included in his second bill of rights. But Roosevelt’s old enemies, the Hooverians, have come back. They go by different names now. Sometimes, they’re called neo-liberals, sometimes austerians, sometimes Petersons, sometimes deficit hawks or doves. But whatever they’re called, the message is always the same, and that message is that money is limited, and that when it is given to some, it must be taken from others.

If the Government wants to spend money, it must be taxed away from some, or borrowed away from others. And finally, because money is limited, there are always hard choices to make, choices that sometimes put money ahead of people, and that make it necessary for “courageous people,” like the wealthy neo-liberals who talk and write this way, to choose who will prosper and who will suffer, who will be eating caviar, and who will subsisting on catfood or worse. That’s unfortunate, but it’s just the way of the world and we all must adjust to it.

The Austerity Doctrine is not, in the end, part of the American, or the progressive outlook. We are an optimistic people. We know that money isn’t really limited and that our constitution allows us to provide enough of it to make the economy we want. We also know that even though certain real resources are limited, resource limitations can be overcome using new human knowledge, by redefining the practical meaning and use of existing resources. We also know that real wealth, the stock of valuable goods and services, is increasing all the time as the mix of different kinds of capital, human knowledge, and human effort changes in accordance with the development of human society.

So, the truth is not Hooverian, it’s Rooseveltian, we know that Federal money isn’t limited, and we also know that real wealth can be increased through effort that in turn can be mobilized by nominal wealth (Federal money). We aren’t playing a zero-sum game in which some must win and some must lose. We are playing one in which everyone can win.

So, in the nature of things we don’t need to take anything away from retirees, because of some imaginary fiscal crisis. We can easily do what’s right and not only maintain Social Security and other entitlements, but even increase their benefits. All we need to do is to revise a few laws to say that all entitlements will be automatically paid for by the Government in perpetuity out of general funds, and that all entitlement trust funds are abolished. Let’s make Congress get off its high horse, show some real courage, and do it!

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

Why Should We ACT Based on CBO’s Projections?

8:01 pm in Uncategorized by letsgetitdone

Today, Dean Baker questioned the sanity of The Washington Post, after its editorial staff once again came out for cuts in Social Security to avert a crisis which will not be manifest until 2037. In reply to the Post’s observation that this year is the first in which the Social Security program will pay out more than it takes in, and that this is a warning sign, Dean points out that it:

. . . certainly is a warning sign. The falloff in Social Security tax revenue is a warning that the economy is seriously depressed due to the collapse of the housing bubble. Double digit unemployment leads to all sorts of problems, including the strains that it places on pension funds like Social Security.

He then goes on to criticize the Post for not advocating the urgency of the need to get back to full employment to solve any pending shortfall in Social Security, and for advocating instead for possible Fiscal Commission–recommended "balanced" measures, including Social Security spending cuts to be implemented gradually to avert the projected 2037 crisis.

Dean then advocates that we reject this recommendation and wait to act. He says:

A Greenspan Commission size fix put in place in 2030 would leave the program fully solvent for most of the rest of the century.

There is also a very good reason for delay. The opponents of Social Security have been spending huge amounts of money deliberately promoting misinformation. Peter Peterson, the richest and most prominent opponent, has repeatedly asserted that the Social Security trust fund does not exist. This flat earth view of the program has been given respectful treatment at the highest levels of government. When Peterson put on a daylong program on the deficit in the spring both of the co-chairs of President Obama’s deficit commission took part in the program as did former President Clinton.

This massive effort to undermine confidence in the program has been largely successful. Polls show that substantial majorities of younger workers do not expect to receive their Social Security benefits.

That is not a good environment in which to debate substantial changes to the country’s most important social program. Since there are several decades until the program faces any real problems, it is entirely reasonable for those who support the program to focus on educating the public about the program’s financial health and to seek to delay any major changes until the Peterson-type misinformation campaigns have been defeated.

I think this is a very good argument, and I’m glad that Dean has made it. But why have he and other economists chosen not to go directly at the CBO projections that are currently driving much of the WaPo/Peterson/Fiscal Commission/deficit hawk propaganda, not only against Social Security, but also against every form of Government spending that is not deficit neutral, regardless of the vital need for that spending to allow us to meet our increasingly severe national problems?

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 I have pointed out elsewhere, 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.

Fiscal responsibility in Government is using the Government’s fiscal power to fulfill the public purpose, including full employment and price stability, enough economic economic growth that improves the lot in life of all Americans, environmental sustainability, educational excellence, a new energy foundation for the American economy, universal health care, and other public purposes. It has nothing to do with maintaining particular levels of deficits, the national debt, or the debt-to-GDP ratio considered in the abstract. It’s time for The Washington Post and the CBO to begin advocating for real fiscal responsibility and to give up Peter G. Peterson’s wet dream of shredding the Social Safety net

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

Which Would You Rather Cut: Social Security, or Interest for Foreign Governments and Rich Bondholders?

12:01 am in Uncategorized by letsgetitdone

Alan Simpson and Erskine Bowles, the Co-Chairs of “the National Commission on Fiscal Responsibility and Reform,” would have us believe that a deficit and debt crisis threatening the fiscal future of the United States is upon us, that "This debt is like a cancer,” and that unless we begin to make across the board cuts in expenditures, and also raise taxes in a way that distributes the pain across all segments of the population, there is no way we will return to fiscal sustainability. This view is false and also alarmist for many reasons. One is that Bowles’s view that: "We could have decades of double-digit growth and not grow our way out of this enormous debt problem”, is ridiculous, even if one thinks there is “a debt problem.” I’ve shown elsewhere, that all the US needs to do to “grow our way out of the problem” is to return to the historical average decade-long growth rate we experienced between 1940 and 2000 to begin producing surpluses by 2017 and bring the public debt-to-GDP ratio down to 37% by 2020.

A second reason is that there is no “debt problem,” if someone means by that, that our debts can grow so large that there is a solvency risk for the US Government. As I and others, have written before, there is no solvency risk, and so there is no “debt problem.” A third reason why the views of Simpson, Bowles, and other deficit terrorists on the “Catfood Commission,” are false and alarmist is that their conclusion that we are in a crisis, is based on assumptions, that will only be true if we choose to make them so. There are two kinds of assumptions, that, if true, would account for large deficits, and, also, the “debt problem” that is scaring our co-Chairmen out of their wits sufficiently that they want to take a hatchet to Social Security and other entitlement programs, such as Medicare and Medicaid. The first kind of assumption relates to revenue projections. The second kind relates to interest costs.

Revenue assumptions first. Revenue projections are a function of assumptions about future US GDP growth and also the percentage of projected GDP that will be tax revenues. The “Catfood Commission” seems to be relying on CBO’s assumptions used in its recent projections of the Federal Government’s fiscal state from 2010 – 2020. The Commission is then extending projections based on these assumptions out further to 2025, and probably even further to 2050. I’ve pointed out numerous times in previous posts that such long-range projections are just a fairy tale. However, it’s still worthwhile to show how the ending of this fairy tale is dependent on assumptions that have no basis in evidence or valid economic modeling.

CBO’s annual GDP change ratios (not adjusted for inflation) between 2010 and 2020 ranged from a low of 1.027 to a high of 1.060 and averaged 1.044 over the period. These are considerably below historical averages over the decades since 1940 which are about 1.07 – 1.08. So, the CBO economic growth projections are very conservative, taken in historical perspective. Also, tax revenues taken as a proportion of GDP, from 2011 to 2020, vary from a low of 0.164 to a high of 0.196, and are either virtually the same, or increase by a small amount throughout the decade, with an average increase from 2010 to 2020 of 0.003. That is, the CBO projections of tax revenue as a percent of GDP constantly increase from 2011 to 2020.

Now, even though the “Catfood Commission’s” own projections haven’t been released yet, it’s pretty clear, given their limited budget, and their reliance on the Peter G. Peterson Foundation for staff funding that they’ll have to rely on extensions of CBO projections already calculated by staff from other Peterson organizations, such as AmericaSpeaks. However, we already know something about the projections AmericaSpeaks has made because they used these in their recent “Our Budget, Our Economy” national event.

AmericaSpeaks, claiming its projections are an extension of CBOs and are based on them, projects a deficit of $2.46 Trillion in 2025, and says that is 9% of GDP. This means that their GDP projection is roughly $27.33 Trillion, compared to CBO’s 2020 projection of $22.544 Trillion. In turn, interpolation of the intervening year GDP projections between 2020 and 2025, yields estimates of $23.423 T, $24.337 T, $25.286 T, $26.297 T, and $27.331 T. This projects an average annual GDP growth ratio of 1.039 from 2020 – 2025, which is a bit more conservative than the 1.044 that CBO projected from 2010 to 2020. This small difference translates to an expectation of about $125 Billion more in revenue in 2025, improving the deficit picture a bit relative to the $2.46 Trillion projection.

Why does AmericaSpeaks project an average annual growth rate slightly less than CBO’s own very conservative average? I don’t know. But I do know that they claim their projections are based on CBO’s, so they ought be explaining any deviation from the CBO pattern. They don’t explain this one, of course.

When we look at tax revenues as a percentage of GDP, we find that there, also, the AmericaSpeaks projections deviate from CBOs in a direction that makes the projected deficit and national debt worse in 2025. Specifically, the CBO ratio of tax revenue to GDP in 2020 is 0.196, if we were to continue the trend of increase in this ratio to 2025, we’d get something like 0.198, 0.200, 0.202, 0,204, and 0.206 in 2025, an average increase 0.002 per year. Using the AmericaSpeaks GDP projection at $27.33 T, the 0.206 ratio translates to revenue of $5.63 T in 2025, a difference from the AmericaSpeaks projection of $870 Billion in revenue in 2025. When we interpolate the revenue ratios that AmericaSpeaks must have developed for the years 2021 – 2025 in order to get their very low estimate of $4.76 T in tax revenue in 2025, the picture looks something like this: 0.191, 0.187, 0.183, 0.178, and 0.175 for 2025. This means that their estimates of the tax revenue as a proportion of GDP declines over the 5 year period and the decline is an average of 0.004 per year, a much larger average decline than the CBO average increase of 0.003 during 2010 – 2020, and a much larger decline than my assumption that the average increase in the tax revenue proportion would be 0.002

What accounts for this change in both the magnitude and direction in the proportion of tax revenue collected? AmericaSpeaks doesn’t say, but it is clear that this difference in assumptions needs to be explained because 1) it departs from CBO’s projections, and 2) this departure results in an $870 Billion increase in the deficit projected for 2025 than would otherwise have been the case if they had followed the CBO pattern. Also, the higher deficits resulting from both deviations from the CBO pattern I’ve covered, total nearly $ 1 T in projected revenue in 2025, meaning that if AmericaSpeaks had followed the CBO pattern strictly, it would have projected a deficit of roughly $1.465 T, rather than $2.46 Trillion, which, of course, would make those 2025 projections look a lot better than they do now. Also, even though I haven’t troubled to compute the annual deviation of the AmericaSpeaks projection from a CBO-based projection during 2021 – 2024, it’s also pretty clear that the sum of these deviations would total about $2 T, added to the $1 T for 2025, that’s a total of $ 3 T. The Peterson Foundation allied organizations including AmericaSpeaks have been using a national debt to GDP ratio of 114% in 2025 to underline the seriousness of the US’s debt problems. However, taking the $27.33 T estimate for GDP and multiplying by 1.14 gives us a projected national debt figure of $31.15 T, and subtracting $3 T from that gives us a new debt-to-GDP ratio projection of 103%, somewhat less scary than the earlier figure, I think.

So, in short, this analysis suggests that a sizable part of the big “debt problem” the ”Catfood Commission” and its allies see for 2025, is due to assumptions that, without explanation, depart from the pattern of CBOs projections. Whether these are due to errors, or to a deliberate bias toward pessimism even greater than CBO’s, I cannot say. But when the leaders of a National Commission are so committed to the idea that there is a “deficit problem,” one has to assume that any analysis produced by allies of that Commission is likely to make assumptions that produce the kind of results that those leaders want to hear. That, in fact, is what has happened here.

Now, let’s move on to the question of interest costs. CBO estimated that interest costs from 2011 – 2020 would total $5.64 T, extending its projection to 2025 using an annual rate of increase of 1.1, roughly the rate used by CBO in 2019 and 2020, we get AmericaSpeaks projection that interest costs will be $1.49 T in 2025. We also get total interest costs from 2011 to 2025 of $11.8 T. Without these costs, and assuming we take into account the roughly $3 T difference resulting from using CBOs assumptions rather than AmericaSpeaks‘s, the projected national debt in 2025 would be projected at: $16.35 T in 2025, not $31.15 T, or even $28.15 T. And even assuming the very pessimistic GDP figure of $27.33 T, we come out with a public debt to GDP ratio of about 60% in 2025, not very different from what we have now. Also, the projected deficit of $1.465 T in 2025 is completely wiped away and turns into a small surplus if we have no interest costs at all. So, where’s the “deficit problem”?

Well, of course, this analysis has shown that it is partly in shading the CBO assumptions so that they are even more conservative than CBO’s, without even telling people that’s what you’re doing. And it has also shown that the heavy majority of the problem is in the interest costs the US would pay on its debt instruments. So how do we get rid of this ‘deficit problem.” Well, first, we need to quit making assumptions that shade the CBO’s assumptions in an even more pessimistic direction simply because we want to believe that there really is a deficit problem. And second, the Federal Government must stop issuing debt instruments when it spends money. If it does the latter, Federal interest costs will approach zero percent of GDP in a very short time, and we can avoid spending that $11.8 T over the next 15 years.

Alan Simpson, Erskine Bowles, Alice Rivlin, and our other deficit terrorist friends are fond of talking about how we all have to make sacrifices to solve our “deficit problem,” and that entitlements, among other expenditures, will have to be cut in order to solve our problem. But, even if we believe (which I don’t), along with them, that there is, or may one day be, a deficit problem that we need to bring under control, there is no need to solve that fantasy problem either by raising taxes, or by cutting entitlement programs like Social Security, Medicare, and Medicaid. If you insist on believing in either the fantasy of solvency risk, or the fantasy of the bond markets imposing high interest rates on the United States, then the solution to both of these fantasies is the same. It is to stop issuing debt instruments, and, consequently, paying foreign nations and rich investors needing a safe harbor for their funds, interest that we need not pay on debt that a country, sovereign in its own currency, like the United States need not incur.

If you believe that cuts must be made to bring the deficit problem under control, then see clearly the real choice here. Would you rather cut Social Security and other entitlements, as well as other valuable Federal programs, and also raise taxes; or would you rather take care of the whole “crisis” by ceasing to issue debt and stopping interest payments to the wealthy, the Chinese and other foreign creditors who are parking their USD in Treasury Securities rather than spending them on American products? Whose side are you on — the side of the American people who need their social safety net programs to remain in place for themselves, their children, and their grandchildren, or the side of the wealthy, and the foreign nations who want us to continue to pay them interest?

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

The Mythological Narrative of AmericaSpeaks: Part Two

11:53 pm in Uncategorized by letsgetitdone

In Part One, I addressed the question of whether the AmericaSpeaks argument showing that increasing deficits, debts, and public debt-to-GDP ratios is a real problem America needs to solve make sense. I concluded that their reasoning doesn’t show there’s a real problem because they assume that interest rate levels for Government debt instruments are determined by the market because deficits require dollar for dollar financing by debt instruments. However, this assumption is false because the Government can, if it chooses, spend without issuing debt, and implementing this choice, in turn, can drive interest rates toward zero, so that, in fact, Government interest costs can decrease over time on those debt instruments the Government does choose to issue.

Since the above suggests that the deficit/debt problem pointed to by AmericaSpeaks doesn’t exist, I could just leave things there. But, I think I’d be remiss if I didn’t provide some analysis of the quality of the projections on the basis of which they project revenues and expenditures. So here are some comments on their projections. In making these, I don’t mean to suggest that their focus on the deficit, debt, and ratio issues should be taken as indicating the importance of these issues, because what we need to do for the sake of this country and its people is to just forget about deficits, debts, and ratios, and just have Government spend what it needs to spend to enable us to solve the very great variety of our looming problems. However, the narrative suggested by the AmericaSpeaks projections is so at variance with reality, that I think there’s an issue here of the credibility of any organization that would take such projections seriously, including CBO, which is responsible for them up till 2020, at least.

First, I think the projection of spending and revenue are highly questionable. This is partly due to the problem with interest rates and costs I explained in Part One. If interest costs fall to near zero, as the Government can make them do, then the portion of debt accumulation due to increasing net interest costs won’t come close to the AmericaSpeaks projections, and their over total debt-to-GDP ratio would be dramatically effected, even if the other portions of their projections were valid. For example, let’s say that interest costs in 2025 were reduced by Government action to 2% of pre-interest Federal outlays. That would reduce their projection by $1.38 Trillion dollars in that year alone. Reduced interest cost projections in the years between now and then would greatly reduce the national debt projected by AmericaSpeaks and also the public debt-to-GDP ratio.

But, second, however, the non-interest cost projections in the AmericaSpeaks video are also not valid. The reason is that in order to estimate revenues, the CBO/AmericaSpeaks models on which these projections are based have to be able to project the state of the economy and its growth rates, because tax revenues are very sensitive to property values, personal incomes, and sales, and these, in turn, are highly sensitive to economic growth.

But who would bet the proverbial plugged nickel on any economic growth and tax revenue projections that are 30 or 40 years out? Would you bet anything of consequence on CBO’s projections of economic growth and tax revenues even 3 or 4 years out? Did CBO in 1996 project four straight years of Government surpluses at the end of the Clinton Administration? In 2001, did they accurately project the size of the Bush Administration’s deficits, or the rate of growth of the economy in the four years after 2001? In 2005, did CBO project the Crash of 2008, and the falling off of tax revenues we’ve seen as a result?

If one looks at CBO’s numbers on projected GDP in the period 2010 – 2020, one finds a projected growth ratio of 1.55 over the 10 year period, only slightly higher than in the 2000 – 2010 decade when the growth ratio is estimated at 1.50. These numbers are far from the previous historical average which is roughly 2.00. I developed alternative projections to CBO’s from 2011 to 2020, based on 1) the 2.00 growth ratio and 2) the assumption that Government interest costs, which could be driven much lower if we want to do so, would remain, where they are today, at, roughly, 2.26%. The resulting projections show four straight surpluses towards the end of the decade, and also a reduction in the debt-to-GDP ratio declining to 37% in 2020, in contrast to CBO’s ratio of 90%.

To be very clear about this, I don’t think this projection of mine is any better than CBO’s. In fact, I believe that unless there is inflation, the US cannot run substantial surpluses for four years running without causing a very serious recession. But my point here is that fairly reasonable alternative assumptions about key parameters in such projection models can produce wide variations in outcomes. To me, this means that such projections are risky, dangerous and invalid. Minimally rationally rational people should not make major policy changes that could cause great pain to large numbers of working people based on 10 year projections of deficits, debts, and debt-to-GDP ratios, that can vary all over the lot when one varies assumptions about some key parameters. In cases like this, the measures being looked at are not causes of anything, but are themselves dependent on the parameters which determine them. Instead, of shaping policy to manage such endogenous effects, what we ought to doing is developing policies that will effect the key parameters. In this case, I mean growth ratios, and interest rates, rather than their effects.

Later in their narrative, AmericaSpeaks makes reference to projections showing that the debt-to-GDP ratio will increase to more than 300% by 2040. They also say that there is “universal agreement” that if America reaches this debt-to-GDP ratio level, that we will cease to be an economic superpower. Perhaps that’s true, but, if so, the empirical evidence we have so far indicates that the “universal agreement” might be wrong, as it was when there was “universal agreement that the ‘earth is flat.’” Japan currently has a public debt to-GDP ratio in excess of 190%. Yet, last I looked, it is still an economic superpower and has very low net interest costs of 1 – 2 %. This is not to say that a nation with a very high ratio can’t be an absolute mess, as is evidenced by Zimbabwe. What it does show however, is that economic collapse is a function of many factors, and that the debt-to-GDP ratio is not, in itself, a causal factor in economic performance.

Apart, from their argument about rising interest costs, and their assumption of a historically low growth ratio, AmericaSpeaks also predicts that deficits and the debt will increase because we have an aging population, rapidly increasing health care costs, and also, tax policies that won’t generate enough revenue to cover rising health care and Social Security expenditures. However, why is it that they mention these factors in producing debts and deficits, but not the pitiful growth ratio CBO projects for the 2010 – 2020 decade, which AmericaSpeaks projects further out from 2020 to 2025? Why is it they don’t have a number of alternative projections about the period 2010 – 2025? Could it be that they’d rather just figure out how to cut expenditures, or raise revenues, than figure out how to put everyone to work and re-build America? Could it be that they’d rather just accept an America in which the American Dream is lost for most of us, than work for a better economy, a more equal and abundant society, and a healthier democracy?

AmericaSpeaks never says this in its video, but it’s whole orientation is exclusively towards trying to get Americans to figure out and buy into an accounting perspective on how we might cut Government spending and raise additional revenues to fulfill a gold standard view of what sound Government finance is. It is about getting the US Government to accept Governmental Budgetary Constraints (GBCs) that are inappropriate and limiting for a Government sovereign in its own currency and having a responsibility to prioritize public purpose and the public good over mere money.

This GBC/austerity/deficit terrorist orientation is both morally wrong and unworkable. Americans have seen Paree. They don’t want to stay down on the farm. This economy and we, collectively, can make this economy work, to fund all of our basic human needs. But to do that we need to have Government play its proper role, as an active participant in enabling and supporting the economic endeavors of Americans. We need never to forget that Government spending is the only way that the private sector can get new currency, because the Federal Government alone has the authority to issue. As a matter of simple accounting, that national debt is simultaneously the amount of savings accumulated by the private sector since the inception of the Republic. As my friend Marshall Auerback recently put it:

”And the government sector is in the unique position of being able to create new net financial assets, by virtue of its ability to create currency. When a private entity goes into debt, its liabilities are another entity’s asset. Netting the two, there is no net financial asset creation. When a sovereign government issues debt, it creates an asset for the private sector without an offsetting private sector liability. Hence government issuance of debt results in net financial asset creation for the private sector. Private debt is debt, but government debt is financial wealth for the private sector.”

If a country is, as we are, a net importer of goods, it needs its Government to run deficits to create new financial assets to fund its growth. AmericaSpeaks wants us to work towards balanced budgets and surpluses as a virtuous goal we ought to seek. But they are mistaken in this. They would be right, if the Government were a Household, a business, or even a State which wasn’t sovereign in its own currency. But for us, balanced budgets and surpluses aren’t virtuous. They are just meaningless abstractions. We need to manage Government spending according to its planned and real outcomes, its consequences, and our ideas about whether these consequences are in accord with aspects of public purpose like full employment, price stability, great education for all, public safety, a healthy environment, and many other well-known dimensions of public purpose. Among such dimensions is not where we stand on deficits and debts. Those are just old metrics that have no relevance in themselves any longer. They are a waste of time, energy, and effort. It is just silly for any Government commission and an associated effort like AmericaSpeaks, to be focused on the deficit/debt issue because, as we’ve seen, high levels of those things are a fantasy problem. It’s "Look over there, it’s the out-of-control public debt-to-GDP ratio," and no one to say "Bull Shit, where’s your commission on ending this recession in 90 days."

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).