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What That Letter Should Have Said

9:54 pm in Uncategorized by letsgetitdone

On Valentine’s Day, Senator Bernie Sanders sent a letter to the President, authored by himself and signed by 15 other Senators, all Democrats. The letter was a response to the rumors that the President intends to include his Chained CPI proposal to cut Social Security benefits in the budget he will soon send to Congress. It summarized:

Mr. President: These are tough times for our country. With the middle class struggling and more people living in poverty than ever before, we urge you not to propose cuts in your budget to Social Security, Medicare, and Medicaid benefits which would make life even more difficult for some of the most vulnerable people in America.

We look forward to working with you in support of the needs of the elderly, the children, the sick and the poor – and all working Americans.

The letter also stated a number of the usual talking points made in arguments against cuts to Social Security. In addition, it also contained praise for the President for his actions in improving the economy, creating jobs, and reducing the deficit, and it mentioned some specifics, including reduction of the Federal deficit to less that half of the $1.4 Trillion deficit he began with. The letter also asserted the need to do much more, especially in the areas of the economy, reducing unemployment and wealth and income inequality, and reducing the deficit “. . . in a fair way.”

It is a positive development that a group of Senators decided to preempt the President’s budget offering stating their disagreement with any proposed cuts to SS, Medicare, and Medicaid, but I think there were a number of ways in which the letter could have been done more effectively. First, It would be great if progressives urging the President not to cut the safety net would stop reinforcing the frame that lower deficits are good and that the President is due praise for cutting the deficit so sharply (CBP projects a 3.0% of GDP deficit this fiscal year). It is not good that he has cut the deficit so much, because in doing so, he has subtracted from Federal Government additions of Net Financial Assets (NFAs) to the economy. These contributions are projected to be so low this year that they will only compensate for the demand leakage due to the trade deficit, leaving no additional NFAs for net aggregate private sector savings.

Given the presence of unequal economic power to collect financial assets in the hands of economic elites, the implication of this is that the lower deficits will only further exacerbate inequality in the United States as well as contribute to continued high and long-term unemployment and stagnation (low growth) in the economy. In short, the austerians, including the President and other Democrats and Republicans who have been insisting on lower deficits are responsible fr the stagnation we see all around us.

Second, the letter would also have been more effective, if it had more than 15 signatures on it. Many Democratic Senators are running for re-election this year. Do they really want to be running as one of the faces of a party whose head is advocating for cuts to Social Security? Is this really good for Kay Hagan, Jeanne Shaheen, Mary Landrieu, Mark Pryor, Mark Warner, Cory Booker, Tom Udall, Mark Udall, Chris Coons, and John Walsh? So why haven’t they signed the letter? Do they really expect to re-elected if they decide to support a budget that contains chained CPI, and, even if they don’t support it, will they benefit if their party leader is proposing chained CPI? So why wasn’t Bernie Sanders able to get these additional signatures from Democrats who face challenges and are running this year?

And third, this letter would have been much, much stronger if the Senators who signed it said to the President directly that they know that there is no short or long-term debt problem and hence no further need to worry about cutting the deficit to achieve fiscal sustainability or ficsal responsibility. And that they also know that any debts that the Treasury has incurred in the past, or deficits that it incurs in the future, can be either paid off as they fall due, or covered completely by revenues from High Value Platinum Coin Seigniorage (HVPCS) used under the authority provided by legislation on denominations, specifications, and design of coins, passed in 1996. (Full details and issues surrounding HVPCS are given in my e-book.) They also should have added that since there is never any need based on the idea that “we’re running out of money,” to cut any safety net programs, that they want the President to know that everyone signing the letter is committed to voting to kill any budget offered by the President including the chained CPI, or any other provision cutting safety net programs.

A letter enhanced in the three ways I’ve just outlined would have been a damn sight more effective in warning Obama off the chained CPI, than the one Bernie Sanders and the other 15 Senators sent. And it also would have been much more effective in getting those Democratic Senators who signed it and are running, elected in November.

Cross-posted from New Economic Perspectives.)

Dear Dr. Krugman: Please Let Me Explain

8:35 pm in Uncategorized by letsgetitdone

Paul Krugman looking downwards

Krugman misses his deficit hawk friends.

Paul Krugman can’t explain why the deficit issue has suddenly dropped off the agenda. He says:

. . . quite suddenly the whole thing has dropped off the agenda.

You could say that this reflects the dwindling of the deficit — but that’s old news; anyone doing the math saw this coming quite a while ago. Or you could mention the failure of the often-predicted financial crisis to arrive — but after so many years of being wrong, why should a few months more have caused the deficit scolds to disappear in a puff of smoke?

Why indeed are they so quiet? Could it be because the deficit hawks have succeeded in getting the short-term result they want, which is a likely deficit too small to sustain the private savings and import desires of most Americans, and also because the political climate is such right now that they cannot make progress on their longer term entitlement-cutting program until after the coming elections have resolved the issue of whether there will be strong resistance to such a campaign if they renew it? Let’s look at the budget outlook first.

Here’s CBO projecting deficits of 3.0% of GDP this fiscal year, followed by 2.6%, 2.8%, and 2.9% for fiscals 2015, 2016, and 2017. Those deficits are mostly smaller than Warren Buffett’s and the Eurozone’s favorite deficit target of 3.0%. They are the same too small deficit targets that have prevented the Eurozone’s PIIGS from responding effectively to the crash of 2008, and the prolonged depression and astronomical unemployment rates which have engulfed them since. When one considers that CBO’s projections are usually too conservative when it comes to projected deficits, so that the reality of these is likely to be smaller, as it has been regularly, for the past few years, then it’s even more apparent that Peter G. Peterson and his other austerian friends have gotten where they want to go for the time being.

Nor are there any other major influences in Washington, DC advocating higher deficits. Even “progressive” groups and politicians always talk about “pay fors” and offer 10 year deficit reduction plans that envision deficits averaging far less than the 3% target.

So, the deficit hawks have already gotten to their short – term goal. Their long – term goal of hollowing out the social safety net has met with increasing resistance over the past four years. And the resistance is strong enough that the Democrats have no stomach for bipartisan compromises cutting Medicare or Social Security for the present.

The deficit/debt hawks now need a breather. They needed to go into wait-and-see mode to see what the elections of 2014 produce.

If they produce the right mix of tea partiers, and Republican and Democratic debt hawks. They may be able to produce a new “Grand Bargain” early in 2015 before 2016 election pressures become intense, and the influence of Hillary Clinton’s candidacy on Democrats in Congress becomes too great. I say this not because I think that Clinton will necessarily oppose any such bargain in the long term; but because such a bargain would be risky for her candidacy and the Democrats in the run-up to the elections of 2016.

So, from my viewpoint I don’t think the time is propitious for the deficit/debt hawk forces to keep pressuring for entitlement reforms and a long-term solution to their favorite, and non-existent, financial problem of excessive public debts in fiat sovereign nations like the United States. And I think they know that.

Instead, it is a good time for them to regroup and plan their next attack on entitlements. That will come under cover of the Republicans’ next debt ceiling attack, which is a good possibility for March of 2015.

So, I see the Peterson forces beginning to beat the drums again towards the end of the year and build up the intensity of their appeals from January to March. I don’t see a strong move to cut entitlement spending in the lame duck session, since there will be no debt ceiling cover then to generate leverage heavy enough to get Democrats to accept part of the blame for cutting entitlements.

Cross-posted from New Economic Perspectives.

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

2:15 pm in Uncategorized by letsgetitdone

This is the concluding post in a four part series on the “Top” reasons why the national debt should matter. In Part One, I considered “Fix the Debt’s” claim that high levels of debt cause high unemployment and argued that 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 Debt’s” theory. In Part Three I showed that the other four reasons advanced by “Fix the Debt” also had very little going for them. In this part, I’ll give reasons why the national debt does matter, and why we should fix it without breaking America, or causing people to suffer. Read the rest of this entry →

Revisiting the Budget Plague

10:08 am in Uncategorized by letsgetitdone

Deficit spending by the government is merely the counterpart of private sector saving. What government deficit spending does is to permit the private sector to achieve its level of desired saving. When the latter changes, government spending ought to be adjusting in the opposite direction to offset it (unless the current account balance happens to do the job).

This very simple statement by Marshall Auerback reflects the Sector Financial Balances (SFB) Model I discussed in “A Plague On All Your Budgets.” The Sector Financial Balances Model:

Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0;

once again, is an accounting identity that provides a focus for macroeconomic analysis, explanation, and prediction by economists applying the Modern Money Theory (MMT) approach. The terms refer to flows among the three sectors of the economy in any defined period of time. Since we’re dealing with an accounting identity, the equation must always be valid.

So, for example, when the domestic private sector balance is positive that means that more financial wealth is flowing to that sector taken as a whole than it is sending to the other two sectors. Similarly when the foreign sector balance is positive that means that more financial wealth is being sent to that sector than it is sending to the other two sectors. When the private sector balance is negative that means that the private sector is sending more to the other two sectors and so on.

In “A Plague On All Your Budgets,” I used the SFB model to show that all four sets of projections of budget deficits then current by: the Congressional Progressive Caucus (CPC), the CBO, the House, and the Senate; all implied austerity over a 10 year period assuming that the foreign balance (the US trade deficit ) would remain at 3% of GDP or greater. Why?

Simple. Look at the equation. If the foreign balance is greater than or equal to 3% of GDP in any year, then unless the Government runs a deficit of 3% or greater, the domestic private balance must be negative. That doesn’t mean every private sector person or organization would lose nominal financial wealth over that year, but it would mean that other than temporary and illusory financial gains due to credit bubbles and accompanying excessive evaluation of assets, the accumulation of financial wealth in the private sector would be a zero sum game, with some people and organizations winning and some losing every year the private sector balance was negative because the foreign balance was at +3% and the government balance was greater than -3%. If the Government ran a surplus of say 2% of GDP in any year, then private sector wealth would decline by 5% of GDP in that year. Of course, three years of that would be an economic catastrophe

Over a period of years, and again, neglecting the effect of credit bubbles, the result sooner or later has to be constriction in aggregate demand, economic stagnation, and recession or depression. In my previous post, I concluded that even under the most “liberal” 10 year projection planned by the CPC we could expect domestic private sector savings losses from 2016 on, and even perhaps in 2015 if there were a slight deviation in the projection. We could not have too many years of those losses without hitting another great recession.

So, the CPC budget may be better than others for a couple of years, but the danger in it is that if the CPC plan were taken seriously and the budget course projected was actually implemented, then it would be deterred eventually only by the inevitable crash. Hopefully this crash would occur in very short order, rather than being postponed by another credit bubble, only to be even more severe later on.

Since my earlier post, the White House has weighed in with its budget and 10 year projection. One item in the President’s budget has received an enormous amount of attention, and that is the chained CPI proposal. I’ve written rather trenchantly about that immoral proposal here and here. But, the overall implications of his austerity budget from a macroeconomic point of view haven’t been widely discussed. The Table below includes these new projections.

2013 Budget Projection Comparison

You can see that the White House budget has increasingly serious austerity implications as the years go by. In my previous post, I said that all four of the budget projections in the earlier table, if implemented, could only correspond to a bleak, stagnating economic future for the United States, with the House Budget producing the worst result by far. The addition of the White House budget as a fifth alternative doesn’t change that conclusion at all.

You can see that, with the exception of the CPC “back to work” budget, the President’s budget is the most expansive of all of them in 2013 – 2015. Still, it doesn’t allow for much private sector savings in a nation still recovering from the crash of 2008, and the CPC budget is quite a bit more expansive in these early years of the projections than the President’s plan. Beginning in 2016, however, the White House budget implies that private savings must be increasingly negative with greater and greater losses of private financial wealth to 2023. Its implications for negative savings in these years are less serious than the CPC budget, but, nevertheless, the fact that the White House either can’t or won’t recognize that its budget condemns the country to a recession within “the long depression” we are experiencing now, only makes the prognosis for the economy that much more serious, because it means that, like the Europeans, the White House is likely to double down on its austerity budget in the future if its deficit/debt projections are wrong. Like Herbert Hoover, and the Eurozone oligarchs, it will believe that “prosperity is just around the corner,” if only it stays the austerity course it has been increasingly setting.

Also, apart from the SFB model’s macroeconomic considerations and their significance for declining domestic private sector wealth over time, the situation looks even worse when we take economic and political power considerations and their likely effect on the economy into account. The history of the US since 1970 shows clearly that when the private sector gets a cold, the household sector gets pneumonia.

Big businesses, the financial sector, and wealthy oligarchs will use their economic and political power to see to it that their nominal financial wealth will continue to increase even as the private sector as a whole is losing 20% – 30% of its financial wealth, over the period of a decade. That will exacerbate the already ridiculous level of inequality we see in American society, and accelerate the movement toward plutocracy in America if we allow any of these austerity plans, or any variations between the “liberal” CPC proposal and the “right-wing” House proposal to be passed and implemented.

I’ll repeat what I said in my previous post with some small changes. All of these budgets are illustrations in fiscal fantasy, or perhaps I should say, in fiscal science fiction using bad fiscal science. In taking a fiscal approach based on reducing budget deficits, all the budgets are doing the wrong thing for the economy and the wrong thing for America. They are all fiscally unsustainable and fiscally irresponsible over a decade unless a credit bubble temporarily “bails out” the Government from experiencing the ultimate effects of its actions, allowing it to run unconscionably small deficits and pretend that everything is hunky-dory until the inevitable collapse of demand forces it to face reality.

The right approach to take to fiscal policy is to design and implement programs that will guarantee full employment at a living wage for everyone who wants to work full time and is able to do so. It is not to try to force small deficits or surpluses onto an economy that is not producing them out of its own robust activity.

The government needs to let the domestic private sector determine what both the foreign balance and the domestic private sector balance should be. If it does that, then these sector balances would drive the government balance. That balance could be a surplus or a deficit of a particular size, though in the case of the United States it would probably be a large deficit, or, as I prefer to call it, a large Government addition, to domestic private sector wealth, for some years to come. But it would be determined by the wishes of people in the domestic private sector, with the Government’s role being one of accommodating the surpluses or deficits.

Seeing this conclusion, I’m sure that some readers will ask: how the United States can afford to run deficit after deficit while continuing to accumulate its national debt? Well, first, it doesn’t have to accumulate and can even pay off its national debt without inflation. I’ve explained how it can do that in my new e-book on Fixing the Debt without Breaking America.

But second, even if the US does the politically unwise thing of continuing to accumulate a larger and larger national debt, when it can avoid doing that by taking advantage of its coin seigniorage authority, it can follow that debt accumulation course without either solvency or inflation problems. Scott Fullwiler has done a very good job of explaining how that can happen in a recent series of his, which concludes here.

Scott shows that deficits can be run indefinitely by nations with non-convertible, fiat currencies, with floating exchange rates, and no external debts in currencies not their own, without either solvency or inflation problems as long as the Government doesn’t deficit spend beyond full employment. That’s the kind of fiscal policy we should be making, not fiscal policy deliberately aimed at deficit reduction. So, to all the fiscal budgeteers in Washington looking to implement long-term plans for deficit reduction, including the President: a plague on all your budgets. You’re ending America, as we’ve known it!

(Cross-posted from New Economic Perspectives.)

A Plague on All Your Budgets

8:39 pm in Uncategorized by letsgetitdone

The Sector Financial Balances Model:

Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0

is an accounting identity that provides a focus for macroeconomic analysis, explanation, and prediction by economists applying the Modern Money Theory (MMT) approach. It leads to a very critical line of thinking about the budget deficit projections produced for our consumption by the Congressional Progressive Caucus (CPC), Congressional Budget Office (CBO), the House, and the Senate. The US has recently had a sharp decline in its balance of trade deficit. It now stands at about 3% of GDP; which means that the rest of the world has a surplus, a balance of +3% of US GDP in its annual trade with the United States.

Assuming that surplus is unlikely to shrink anymore, we can see from the equation that unless the Government balance is less than -3% of GDP, the Domestic Private Balance in the United States economy will not be positive (a surplus, and addition to nominal financial wealth) and is very likely to be negative (a deficit, a subtraction from nominal financial wealth). So, the private sector taken as a whole will be losing rather than gaining Net Financial Assets (NFAs), every year for as long as the situation lasts.

The Table below presents the CPC, CBO, House and Senate budget projections through 2023.

2013 Budget Projection Comparison
The table shows that any space for the Domestic Private Sector to accumulate Net Financial Assets would quickly disappear if any of these deficit projection plans were actually adopted and worked as advertised. The CPC projections are OK for 2013 and 2014. They provide some space for continuing repair of private sector, including household, balance sheets after the crash of 2008. But by 2015, the space for savings in the private sector would be nearly gone, and from 2016 – 2023, we see nothing but deficits small enough that the domestic government balance doesn’t even cover the aggregate demand leakage due to the foreign sector balance, much less any demand leakage that the private sector desires in the form of savings. Sooner or later a budget course like that projected by the CPC would, in the absence of the banking system blowing a big credit bubble the way it did during the Clinton and Bush 43 Administrations, result in a new crash.

The CBO projections are worse than CPC’s from 2013 – 2015; but thereafter, its larger deficits are less damaging to aggregate demand than the CPC’s deficits. But they are not large enough to provide for anything but economic stagnation, unless, again, there’s a credit bubble, which would then mean a crash from mere stagnation somewhere down the line.

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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).

Myths of Peter Orszag

10:50 pm in Uncategorized by letsgetitdone

Orszag’s maiden voyage at the New York Times entitled “One Nation, Two Deficits,” is full of myths, and that’s the polite way to say it. I’ll review these and comment on each of them one-by-one.

“The nation faces . . . . an unsustainable budget deficit over the medium and long term.”

This is an article of faith among deficit hawks and deficit doves too, but neither group has been able to explain what they mean by “unsustainable” budget deficits, or to explain why they are “unsustainable.” This statement applies to OMB, to CBO, to the Catfood Commission, to the Peter G. Peterson Foundation, to the International Monetary Foundation, and even to people like Paul Krugman who share the view that the United States has a medium and long-term deficit problem.

We can’t let them get away with this any longer. We need a clear definition of fiscal sustainability from them, and we also need to know what that definition implies about what levels of the deficit, the national debt, or the debt held by the public to GDP ratio, are, in their view, unsustainable. Until that is done the view that there are unsustainable budget deficits in any of the short, medium, or long-terms has to be considered a myth when it is applied to a nation like the United States, sovereign in its own fiat currency, able to create that currency by spending and marking up accounts at will, and owing no debts to anyone except debts denominated in the currency it has full authority to create to pay its obligations. In short, nations with monetary systems like ours have no solvency risk. So it is up to the deficit hawks, including Orszag to explain how a nation with no solvency risk can possibly have “a fiscally unsustainable deficit”, national debt, or public debt-to GDP ratio.

“. . . Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.”

Worth it? That really depends entirely on your point of view. In Orszag’s view, Government spending must be funded either through tax revenues or through borrowing. That’s another myth. I don’t hold it. I know it’s not necessary to end the tax breaks for the rich because we need the money for other things. The truth is that we don’t. We (the Treasury and the Fed) can always make more money.  . . . Read the rest of this entry →

Kotlikoff’s Folly and the IMF’s Too

8:32 pm in Uncategorized by letsgetitdone

Laurence Kotlikoff has been making waves by using "inter-generational accounting" and CBO and IMF data, to compute a fiscal gap of $202 Trillion in present value. He concludes that this gap shows that the US is "bankrupt" as of now. Evidently, publications like Bloomberg take this sort of thing seriously since they publish it. But Modern Monetary Theory (MMT) economists, think it’s nonsense, due to the inapplicability of inter-generational accounting to Governments sovereign in their own currency.

Mike Norman, an MMT economist with a very good blog, got the chance to comment on Kotlikoff’s views, and also some nonsense of Tim Geither’s and President Obama’s, at RT.com.

Mike has very emphatic views on Kotlikoff and inter-generational accounting. In addition, he doesn’t think much of the plans of Geithner and Obama to base our US economy on austerity and exports. In fact, his broad smile at the very mention of these ideas, along with his comments, tell the whole story. The idea that the US can or should have an export-led economy anytime soon is a recipe for economic disaster for ordinary Americans. As Mike makes clear, it asks us to forego receiving real wealth and live in poverty, while we send our own real wealth to foreign nations in return for their own non-convertible currencies.

The fact that Obama would even entertain such a policy for America indicates how wrong-headed and foolish the thinking of he and his economic team are. Anyway, enjoy Mike’s interview. He doesn’t pull his punches.

(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).

Imaginary Problem: Hurtful Solutions

10:41 am in Uncategorized by letsgetitdone

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!”

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