Yesterday, I scored the SOTU on the 7 Fairy Tales I discussed previously, and concluded that the President was subscribing to at most two of them, and that he accepted the deficit reduction framing of the Republicans as a basis for negotiation, and was trying to point the US in the same direction as export-led economies emphasizing fiscal austerity, thus joining the world’s race to bottom. Today, I want to analyze the details of the portion of the SOTU dealing with deficit reduction. The President said:

Now, the final step – a critical step – in winning the future is to make sure we aren’t buried under a mountain of debt.

The President is talking about the national debt here. He’s most definitely not talking about private sector debt. Generally speaking, and neglecting distributional issues which are very significant to working people, the greater the Government’s debt, the less private sector debt. This is true because of the macroeconomic sectoral balance model, an accounting identity that must be true.

The Government sector spending/savings balance and the non-Government sector spending/savings balance must equal zero during any period of monetary flows.

So:

– If the Government runs a surplus, reducing the national debt, then the non-Government sector, including the US private sector must, unless it has a trade surplus, run a deficit, which means it must increase its debt. So, without an export surplus, Government policies that succeed in creating a Government surplus, mean more private sector debt.

So, the Government’s attempt to escape from its “mountain of debt,” only produces another mountain of debt for people. Do you really think it’s good for you for the Government to decrease its debt and force you to increase yours? I don’t think it’s good for me. I’d rather see the Government increase its debt, so that I can reduce mine, especially since the Government can literally make more money whereas I have to get already existing USD from others.

– If the Government runs a deficit, then the non-Government sector, including the US private sector must, unless it has a trade deficit bigger than the Government deficit, run a surplus, which means it will increase its savings. So, if the Government runs a deficit, then you and I are more likely to be able to run a surplus and reduce our debts. I know I want to do that. How about you?

– If the Government reduces its deficit, then the non-Government sector, including the US private sector must, unless it has a trade deficit bigger than the Government deficit, run a smaller surplus, which means it will increase its savings and reduce its debts, but by less than it would have if the Government has run a larger deficit. So, if President Obama is successful and implements his fiscal austerity plans, then you and I will likely be poorer for his doing so. Do you want that? I know that I don’t.

So, the question is: If we want to “win the future” are we really better off getting rid of our mountain of debt, or are we better off increasing it? The answer provided by the uncontroversial macro-economic accounting identity is that we, you, and I will all be better off increasing deficit spending, not reducing it, and that if this means increasing the national debt, as it does under the present Congressional mandate to issue debt when we deficit spend, then still we will be better off for it.

We are living with a legacy of deficit-spending that began almost a decade ago. And in the wake of the financial crisis, some of that was necessary to keep credit flowing, save jobs, and put money in people’s pockets.

Much more of it was necessary to end unemployment. The President blew the stimulus opportunity. To make it effective, he needed first to take the big banks into resolution; second, to persuade Harry Reid to get rid of the filibuster, and third, to put through a stimulus that was at least twice as large focused on a payroll tax holiday, State Revenue sharing, and a Federal Job Guarantee.

But now that the worst of the recession is over, we have to confront the fact that our government spends more than it takes in. That is not sustainable. Every day, families sacrifice to live within their means. They deserve a government that does the same.

Well, the worst of the recession goes on for most Americans. There’s massive U6 unemployment, waves of foreclosures and bankruptcies, and depressed wages and salaries for most working Americans, and while things have improved for the President’s Wall Street friends, they are worse than they were for most Americans when the President took office.

As for the rest of the statement this is the famous argument that Government deficit spending isn’t sustainable because the Government is like a household and that since households sacrifice to live with their means, Government ought to do that too. The problem with this is that Governments like the United States, that are sovereign in their own currency aren’t like households. Households can’t make their own currency and require that people use that currency to pay taxes. Households can run out of money; but the US can’t ever run out of money as long as Congress decides to appropriate spending and gives the Executive the authority to implement that spending.

So, it’s false that continued deficits are unsustainable. If economic conditions call for it, then Governments like ours (but not Greece, Ireland, other members of the Eurozone, or nations that owe debts in foreign currencies) can sustain deficit spending indefinitely until full employment and full use of the nation’s productive capacity is reached.

So tonight, I am proposing that starting this year, we freeze annual domestic spending for the next five years. This would reduce the deficit by more than $400 billion over the next decade, and will bring discretionary spending to the lowest share of our economy since Dwight Eisenhower was president.

This freeze will require painful cuts. Already, we have frozen the salaries of hardworking federal employees for the next two years. I’ve proposed cuts to things I care deeply about, like community action programs. The Secretary of Defense has also agreed to cut tens of billions of dollars in spending that he and his generals believe our military can do without.

The President shouldn’t be crucifying Federal employees and important Federal programs on the cross of austerity and using fear mongering about a non-existent deficit problem to do so. There are many Federal programs that ought to be cut because they don’t fit the standard of the public purpose, and produce more harm than good. But none should be cut on the grounds that the Government is like a household and can’t sustain continued deficit spending.

I recognize that some in this Chamber have already proposed deeper cuts, and I’m willing to eliminate whatever we can honestly afford to do without. But let’s make sure that we’re not doing it on the backs of our most vulnerable citizens. And let’s make sure what we’re cutting is really excess weight. Cutting the deficit by gutting our investments in innovation and education is like lightening an overloaded airplane by removing its engine. It may feel like you’re flying high at first, but it won’t take long before you’ll feel the impact.

Versailles commentators had a fit over the joke ending the paragraph. Evidently it violated their principles of good messaging textbook, or something. However, I thought the joke was well-done, and very apt. If it hadn’t been presented in the context of agreement with the frame of deficit reduction, I might even have been pleased with it.

Now, most of the cuts and savings I’ve proposed only address annual domestic spending, which represents a little more than 12% of our budget. To make further progress, we have to stop pretending that cutting this kind of spending alone will be enough. It won’t.

The bipartisan Fiscal Commission I created last year made this crystal clear. I don’t agree with all their proposals, but they made important progress. And their conclusion is that the only way to tackle our deficit is to cut excessive spending wherever we find it – in domestic spending, defense spending, health care spending, and spending through tax breaks and loopholes.

The President repeats the fable that the Fiscal Commission made some proposals. It did not, because it couldn’t assemble the required 14 votes to pass any proposal.

The Co-chairs presented a proposal, and others on the Commission offered their own individual proposals, but there were no Commission proposals as both the President and such doyen of the cable media as Nora O’Donnell love to claim. More importantly, however, in this paragraph the President embraces the frame that we need to cut “excessive spending” wherever we find it both in programs and tax expenditures. But, again, there’s no need to cut anything because we can’t afford the spending, and one person’s excessive spending, will be another person’s necessary program, so that what turns out to be “excessive” will be determined by the politics of the matter, once people have agreed on how much spending has to be sacrificed to the austerity Gods. This stuff is truly “Aztec Economics.”

This means further reducing health care costs, including programs like Medicare and Medicaid, which are the single biggest contributor to our long-term deficit. Health insurance reform will slow these rising costs, which is part of why nonpartisan economists have said that repealing the health care law would add a quarter of a trillion dollars to our deficit. Still, I’m willing to look at other ideas to bring down costs, including one that Republicans suggested last year: medical malpractice reform to rein in frivolous lawsuits.

He’s delivering fairy tales again. He’s not willing to entertain the best idea to bring down costs and still deliver universal health care. That idea, of course, is Medicare for All.

That is likely to reduce national expenditures on health care by 1/3, or as much as $800 Billion per year from its current level of $2.5 – 2.6 Billion. Of course, this would probably raise the Federal deficit in the short run. But it would make the private sector and working and middle class people richer, and would greatly reduce the rate of increase in health care expenditures by taking the insurance companies out of the equation and requiring the providers to negotiate with the Government directly. And, of course, since continued Federal deficits are sustainable for as long as necessary, there is no fiscal problem associated with Medicare for All.

To put us on solid ground, we should also find a bipartisan solution to strengthen Social Security for future generations. And we must do it without putting at risk current retirees, the most vulnerable, or people with disabilities; without slashing benefits for future generations; and without subjecting Americans’ guaranteed retirement income to the whims of the stock market.

The call for a bipartisan solution is trouble for the American people. The Republicans are out to radically change Social Security and privatize or destroy it. They’re after the guaranteed incomes of working people in their old age. There can be no bipartisan solution that won’t involve Democrats giving something away to the Republicans’ desire to make Social Security less effective and less popular. So, the best thing for people is that there be no “solution.” There are two reasons for this.

First, Social Security’s supposed need to cut benefits to 75% in 2037 is a false problem, because even if current projections prove correct 26 years from now (a ridiculous contention), the Government, which again, can never run out of money, can easily deliver full benefits to people, when they are due. And second, the problem with Social Security is not the imaginary problem of Government solvency, but the real problems that the full benefits retirement age is too high, and the cost of living adjustment needs to take into account the higher percentage of income the elderly pay for Medical care than other age groups. Democrats should be talking about these real problems; not agreeing with the austerity frame that Social Security needs a “bipartisan solution.” And they should be taking Social Security off the table of change, until the political winds shift again and they can pass a solution to Social Security’s patent inadequacy.

And if we truly care about our deficit, we simply cannot afford a permanent extension of the tax cuts for the wealthiest 2% of Americans. Before we take money away from our schools, or scholarships away from our students, we should ask millionaires to give up their tax break.

It’s not a matter of punishing their success. It’s about promoting America’s success.

Progressives loved this because they hate the Bush tax cuts. However, the framing is wrong. It accepts that there must be either cuts in spending or tax increases to ‘”fund” our education programs. The truth however, is that we need neither one. All we need is for Congress to appropriate the money and remove artificial constraints, like forced debt issuance and the debt ceiling, from the Executive branch so that it can spend what Congress appropriates. Again, the US can never run out of money, except by Congress’s own choice.

It would be a good thing to end the Bush tax cuts for the top 2%, but the framing used should be that we have an increasingly unequal distribution of wealth in the US, that this is dangerous for the future of Democracy, and that the top 2% must be patriotic enough to accept the ending of these cuts with good grace. We need to end the tax cuts as soon as possible as a first step toward restoring a more reasonable distribution of wealth similar to the distribution existing in this country from 1945 – 1970.

In fact, the best thing we could do on taxes for all Americans is to simplify the individual tax code. This will be a tough job, but members of both parties have expressed interest in doing this, and I am prepared to join them.

So now is the time to act. Now is the time for both sides and both houses of Congress – Democrats and Republicans – to forge a principled compromise that gets the job done. If we make the hard choices now to rein in our deficits, we can make the investments we need to win the future.

Simplifying the tax code is good. But historically, tax reform has often meant lower marginal tax rates for the wealthy. Now, however, we must have a different outcome. We may need a simplified tax code; but we need even more a progressive tax code that redistributes wealth again. Simplification shouldn’t occur unless it’s coupled with more progressive taxation.

In my last post, I said that the President’s orientation in the SOTU was toward joining the race to the bottom and creating an export-led economy. And I also pointed out the implications of this move for working people who would have to endure austerity, both due to less Government spending, and also to lower wages and a lower standard of living. That is what the President was really advocating in the SOTU, and that is the true meaning of his call for innovation, education, and infrastructure spending, while also calling for doubled exports and Government deficit reduction at the same time. He’s asking Americans to get used to more poverty, and privation, worse Medicare, greater inequality, and increasing acceptance of the emerging global plutocracy and its American affiliate.

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

In “All Together Now: There Is No Deficit/Debt Problem,” I warned against the message calling for deficit reduction that the President would probably deliver in his State of the Union Address. And in a series of later posts, I looked at 7 fairy tales I thought he would tell. Finally, in a summary post, I offered a table summarizing the fairy tales and corresponding truths. In this post, I’ll do a post-mortem. How many of the 7 fairy tales did he tell us? How heavily did he emphasize the non-existent deficit/debt problem? And what are likely to be the practical consequences of his continuing expressed concern about the deficits and the national debt?

How Many Fairy Tales?

1. The Government is running out of money. Maybe!

The President said that now that the worst of the recession is over, we now need to reduce Government deficits, and that it is not sustainable to spend more than Government takes in. He never said that this was because the Government is running out of money, but this is the clearest implication of the erroneous claim that deficits aren’t sustainable and that we need to reduce them. In any event it isn’t true that deficits aren’t sustainable.

In fact, in economies that have a trade deficit, and whose private sector wants to save, the leakage in aggregate demand from that private sector means that the Government must run a deficit equivalent to the leakage of demand to private savings and imports. If the Government refuses to run that deficit by cutting spending, raising taxes or both, then the private sector will be forced to both import less and save less, or not at all, and GDP will inevitably decline, as will employment, unless the private sector compensates for the lack of Government spending by saving less and eventually increasing private debt. This is not speculative. It is a consequence of the Macro-economic sectoral balance model based on an accounting identity. Again, If the Government forces deficit reductions, then the consequence of that is private sector and GDP shrinkage, or, if GDP is to increase, the private sector must save less, and finally incur debt, in response to the reduction in Government deficit spending.

So, ironically, it is not deficits that are unsustainable. Instead it is deficit reduction itself. The very thing the President, and even more, the Republicans, are calling for.

2. The Government can only raise money to spend by either taxing or borrowing. No!

3. We can’t keep adding debt to the national credit card. No!

4. We need to cut government spending and make do with no more money. Yes!

In saying that continued deficits are unsustainable and in mostly talking about spending cuts, the President seemed to buy into this one, even though he also said that the Bush tax cuts for the wealthy should not be extended further than they already have been. Of course, I don’t agree that we need to cut spending and make do with no more money. In fact, I think the acceptance of that is to accept high under- and unemployment. We simply don’t have enough deficit spending yet to create full employment.

In particular, we’ll be grievously hurt if we don’t help the States to meet their $140 Billion shortfall with a $500 per person revenue sharing plan, because the loss of State-level jobs about to occur will reverberate throughout the economy. We also need to stimulate consumption further, because unless demand is out there, business won’t spend and create those jobs. With a Republican House, the President should propose a payroll tax holiday for employers and employees until full employment is reached. That will immediately produce more aggregate demand with a high multiplier and get business spending. Finally, it makes no sense to sit around and wait for the privates sector to end unemployment, telling people that “prosperity is just around the corner.” That is Hooverism. What we need is a Federal Jobs Guarantee program for anyone who wants full-time work that will pay a miniwage plus Medicare health insurance and other fringe benefits. This program will be self-adjusting since it will pay a miniwage of $8.00 per hour, and the Government spending for it will automatically decline as the private sector hires people away from the program.

Measures like these are needed to create full employment once again and really get the economy growing. The President’s approach involving innovation, education, and infrastructure, funded through deficit neutral spending, will subtract aggregate demand from the economy, while it adds it. It’s possible that this approach may produce a positive Keynesian multiplier if the spending that’s cut has a lower multiplier than the new spending fulfilling the President’s approach. But if it doesn’t there won’t be a net gain in jobs. Also, unlike the measures I’ve described just above, the gains in jobs will be some time in coming, even if the Republicans cooperated. Meanwhile we have close to 20% under- and unemployment. Jobless Americans can’t wait for Hooverism to create new jobs. The human cost is too great, and if we continue to fiddle while waiting for businessmen to create new jobs, then we can’t just expect Main Street, to just sit quietly and endure its continuing descent into third-world poverty. It’s not going to happen. There will be political instability, and our political and economic oligarchs will have no one but themselves to blame.

5. If the Government borrows more money, the bond markets will raise our interest rates. No!

Perhaps this one isn’t quite so surprising Presidents don’t usually talk about Bond Markets in SOTU addresses

6. If we continue to issue more debt, our main creditors: the Chinese, the Japanese, and our oil suppliers, may cease to buy our debt making it impossible for us to raise money through borrowing which, in turn, would force us into radical austerity, or perhaps even into insolvency, which would then be followed by radical austerity and repudiation of our national obligations. No!

I was really surprised that the President didn’t tell this one. It’s really scary to many people.

7. Our grandchildren must have the heavy burden of repaying our national debt. No!

And I was really surprised that we didn’t hear about our grandchildren’s burden in the deficit reduction context, since that’s such a popular meme of the deficit hawks. So, the President gave us, at most 2 out of the 7 Fairy Tales. And all in all, there wasn’t a great deal of “shock doctrine” in the speech, which was a good thing. However, when the Republicans come back with their debt ceiling antics, and later when we get to the Omnibus spending bill, then we can expect a lot of shock doctrine from both sides and then we’ll see whether the President continues to defend Social Security as he appeared to do in this speech, with some language that appeared to leave room for cuts that wouldn’t be interpreted as “slashing” the program.

In addition, there was only one mention of Medicare and Medicaid in the speech, blaming them for the deficits and the deficit reduction problem, and given the deficit reduction framing of key parts of it, I think we can expect attempts to cut both Medicare/Medicaid. And, of course, the proposal to freeze “discretionary” spending for years to come, is effectively a cut in many of those programs, which would reduce aggregate demand, and have to be made up by private sector spending, at a time when the private sector is still more interested in saving than it is in spending.

How Heavily Was Deficit Reduction Emphasized?

On the surface, the emphasis on deficit reduction was light. This certainly wasn’t a Peter G. Peterson speech. Nor did it accept the proposal of the Co-Chairs of the Catfood Commission, Erskine Bowles and Alan Simpson. Nevertheless, the framing of all future advances in innovation, infrastructure, and education, was in the context of the importance and necessity of deficit reduction because, supposedly, continued deficits, presumably at the same level as we now enjoy, are unsustainable. So, this gives in to the Republican argument, shares their frame, and ensures that attempts to create jobs in the future, or to accomplish anything that will cost money, will have to be deficit neutral, or even projected to cut deficits, as the health care “reform” bill was. The President didn’t spout deficit hawkism, but his deficit dovism, combined with his emphasis on the need for bipartisan solutions to the “deficit problem,” doesn’t leave me with a great deal of confidence that ruinous cuts won’t be coming as part of a “necessary compromise” in response to Republican pressure.

Consequences of the President’s Deficit Reduction Orientation

The deficit reduction orientation in the speech, took a back seat to the over-riding theme of the need for increased national competitiveness. The President proposed spending on innovation, education, and infrastructure. Since that spending will have to be deficit neutral or even to involve surpluses, it may not be much of a job generator unless the private sector responds with decreased savings or even increased debt. So, that means there needs to be another source of jobs and also a way to reduce the leakage of demand to the trade sector. That means increasing exports. In fact, the President’s competitiveness model for progress implies that he wants America to be more like nations with export-led economies.

Good luck with that! It’s not that America can’t be competitive with other nations. We can certainly grow our competitiveness. But the problem is that all nations are attempting to reach prosperity this way, and that it is not possible for all to succeed. There must be some nations that lose in that race, and other nations that win. But even more important, if every nation is trying to have an export-led economy, then the competitors must race to the bottom in cutting costs, in order to be competitive. We know that in such races to the bottom the burden mostly falls on working people to cut their incomes and real wages. So, to engage in that kind of race may produce jobs for Americans. But it will be a very tough race against Europe, China, Japan, and India. And it’s very doubtful that it will produce good jobs for very long, or even at all, unless we are can completely reverse the trends of the past 40 years.

I’ve written about the race to the bottom before, and you can see what I think of it in more detail here and here. But, meanwhile, I’ll conclude by saying that in entering the race among export-led economies, the President is doing something else that will benefit the oligarchs and continue the United States on the road to plutocracy and undemocratic globalization. This isn’t really surprising to me since he seems to do very little that is aimed at any other result.

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