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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 →

The Procrustean Democracy of AmericaSpeaks: Part Three

9:47 am in Uncategorized by letsgetitdone

In my first two posts analyzing the June 26th AmericaSpeaks Community Conversation event I attended in Falls Church, VA, I presented the steps in the decision process used for the event and discussed the pre-conference phase and the first two steps. As we saw, these steps reflected a strong bias toward socializing participants into the idea that there is a deficit problem and that it has to treated by cutting expenditures and/or raising taxes. The bias was reflected in many little ways in the materials used for the meetings and in the way the first two steps were carried out. Here I continue my account with Step Three.

Participants are given a pre-survey to fill out while the national meetings are going on, and watch results of the same survey given at those events.

The pre-event survey was called Fiscal Futures Research. It began with 6 propositions to “cut the budget deficit” by either raising taxes or cutting expenses, with 5-point rating scales ranging from strongly support to strongly oppose. Neither increasing economic growth and reaching full employment, nor ceasing to issue debt after Government spending were included among the six propositions. The six propositions themselves contained well-known options for deficit cutting on both the left and the right side of the spectrum. So, the bias was neither left nor right there, but where it existed was in the framing which implied that deficits could only be cut by raising taxes or cutting spending.

Four questions followed, designed to test knowledge about politics and the budget. One of these was a question about the sources of spending causing increases in the deficit. Respondents were supposed to identify the source out of four choices that “does NOT contribute significantly to future deficits.” The choices were: 1) rising health care costs; 2) corporate bailouts; 3) the aging population, and 4) major tax cuts. The question has clear biases. First, for example, it doesn’t contain a 5th choice of continuing to issue debt, dollar-for-dollar, after Government spending. Probably because the designers didn’t want the question to suggest that the Government had the option to cut deficits by not issuing debt and paying interest. Second, however, the suggestion that one of these doesn’t contribute to future deficits is questionable. It assumes that the recent health care reform, which many think is a continuing corporate bailout of the insurance companies, won’t contribute to future deficits by contributing to rising health care costs. Also, it assumes that past corporate bailouts haven’t created a strong propensity for future bailouts. If they have, then that will contribute to future deficits. But the biggest problem with this set of choices is that it fails to mention continuing foreign wars, and recurring recessions or depressions. The first would contribute to future deficits, and the second would just about ensure that they occur. Failing to include the choices I’ve just mentioned in the instrument involves a casual, but serious bias. AmericaSpeaks has so far exhibited an obviously limited perspective in almost every question about political attitudes they asked the participants up to this point in the process.

The pre-survey next presented a number of questions relating to political participation, competence, trust and democratic attitudes. They are background questions which will be used by analysts to see if there’s a relationship between such orientations and attitudes about spending and the deficit. The next set of questions were about eliciting information rating economic conditions in this country, whether they’re better or worse than a year ago, how things are for your family, anxiety about being able to pay rent, mortgage, or housing costs, and having enough savings for retirement, and whether one is part of a group working to achieve fiscal or monetary reform. The pre-survey ended with a set of questions on demographics, including employment status. There were no obvious biases in the above questions, but values always enters social research, and without knowing the theoretical formulation intended to guide the analyses, using data from these questions, it can’t be concluded that bias hasn’t entered into the selection of these questions also.

Discussion of everyone’s vision for America in the Future and rating of agreement/disagreement on 7-point rating scales with 3 primary “value” statements, and watching results from the meetings in various cities.

The meeting began in earnest with the facilitator asking the participants:

”Share your name, where you are from, and complete the phrase: And in a sentence, I’d like you to share your greatest hope for the future of the country that your children, grandchildren and future generations will inherit.”

Once names were shared each person gave their greatest hopes. The question served to orient everyone to think in terms of the future, and also to think of others and the country rather than of themselves. The bias in the question toward collective rather than individual concerns is palpable. But also the question connects up easily to one of the favorite arguments of deficit hawkism, namely that deficits lead to accumulating debts that our children and grandchildren will have to pay off. This proposition is a myth, but clearly, AmericaSpeaks, was trying to connect up to it here.

Once everyone gave their answers to the question, we were directed to look at a list of ground rules for meeting discussions, and asked whether anyone objected to them. These were non-controversial, and are simply civility rules. No one objected to them, and the group proceeded on to a reading of the agenda and then to demographic polling. These questions were a shorter version of the list of demographic questions included in the pre-survey. Questions about whether one was a liberal, moderate or conservative, and also whether one was satisfied about the tone of political discussion in the country were also asked. The group next listened to the web-streamed national results responding to these questions, and then moved on to provide some attitudes toward the economic recovery in a 15 minute discussion. That discussion focused on two questions:

”How have you, your family and neighbors been most affected by the recession?

What is your highest concern today about the state of our economy?”

Answers were restricted to a sentence or two from each of us. If one of us had more to say than that, the moderator intervened to invoke the civility ground rules about letting others get their fair share of time. Then a quick poll was taken about whether 1) economic conditions were getting better, or worse, or staying the same; 2) you were supportive or unsupportive of Congress spending money on unemployment benefits and preserving jobs at the state level if that meant increasing the deficit; and 3) you think that the Government should be doing more, less, or the same to strengthen the economy. This part of the program had very little discussion (15 minutes) attached to it. It was as if the organizers wanted to get people to think about projecting the future in the context of their feelings about the present, but were not interested in people exchanging views about why they felt one way or another about the recovery and its importance relative to deficit spending. This is consistent with the AmericaSpeaks biases we’ve seen so far. Their interest was in getting people to talk about the problem as they defined it for the participants. They didn’t want to provide participants with any freedom to develop their own views about whether there was a problem or not, which an extended group discussion of the recovery efforts might have produced.

So, at this point the group moved on very quickly to watch the video on Federal Budget 101 prior to a discussion of “values.” The video summarized the position and argument taken in the booklet I’ve analyzed in Part Two, so there’s no reason to say anymore about it here. Immediately afterward, the facilitator moved on to get us working on “values.” The over-arching values question was:

”What are the core values that should guide decisions about our country’s fiscal future?”

The facilitator did not allow the participants to provide their own “core values” but directed the group toward providing ratings on three 7-point scales of each of three dichotomies. The ends of the dichotomies "anchored" each rating scale. The dichotomies were: 1) Taking care of current generations/taking care of future generations; 2) Share the burden of reducing the deficit equally/Place a greater burden for reducing the deficit on those more capable; and 3) The nation’s responsibility to take care of the most vulnerable citizens/individual responsibility to take care of self. There was no opportunity for participants to add other values. We were oriented to think in terms of these value dichotomies and these alone. Discussion was restricted to sharing one’s views in one or two sentences, because of the need to move on. Most participants provided ratings that were somewhere in the middle of the scales, midway between the anchors of each dichotomy. The group leaned a bit more heavily toward taking care of future generations, but it wasn’t clear that the participants accepted that dichotomy, because some thought that making sure that this generation creates real national wealth (not financial assets) is the best way to serve future generations. They also leaned slightly in the direction placing a greater burden on those more capable of handling it; and they also leaned slightly more towards taking care of self.

A bias in the values instrument is readily apparent. How did AmericaSpeaks select only these three values? Why didn’t they ask about the dichotomy “share the burden equally/place a greater burden on those who did most to cause the recession and who have benefited most from Government bailouts”, for example. Why didn’t they ask about the dichotomy “the Government doing all that can be done to end the recession and under- and unemployment/doing all it can to balance the budget regardless of whether or not it is likely to deepen the recession”? Or why didn’t they ask about "joining together to ensure equality of opportunity/allowing to America to continue to evolve toward a more economically unequal society"? In short, why orient people by presenting conservative rather than progressive value dichotomies to the participants and preventing them from adding any? Clearly, the reason is to maintain the bias in the proceedings toward deficit reduction and self-sacrifice.

Once the values work was done we listened to the results web-streamed from the national meeting, and then heard our own facilitator summarize the results in our own meeting. The next step was to move on to the options workbook, presenting "tough choices". At this point, our facilitator polled the group to see if everyone wanted to watch presenters at the national meeting present the choices in the options workbook before we did our work on them. About 20% of the group favored watching the presentation, while the rest thought that since we were already at about 2 PM and had to leave at 3 PM, we didn’t have the time to listen to any more “propaganda,” as one participant termed it, from AmericaSpeaks. Our facilitator then had the group split into two with one table watching the presentation, and a second much larger group going right to making their choices of what things to cut using the options workbook. At this point, we need to discuss the options workbook with an eye toward its framing and the biases there. So this seems like a good place to stop. In Part Four, I’ll discuss the tough choices exercise using the options workbook, and wind up this series.

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

The Deficit Crisis Is a Fantasy

8:23 pm in Uncategorized by letsgetitdone

After going to one of the AmericaSpeaks community conversations Saturday, I’m even more confident that the deficit crisis being promoted by the Peter G. Peterson Foundation, AmericaSpeaks, the National Commission on Fiscal Responsibility and Reform, and the Obama Administration, as well of much the world’s global elite is a fantasy. There is no truth to it, and it is a dangerous fantasy, because if one believes it, then that can be a self-fulfilling prophecy. The austerity they recommend for the long-term can make the slow growth and difficult times they project come true. It can catch us all in a nightmare of their making. The “reasoning” behind their fantasy is simple enough. It is:

1. Long-term projections, like the CBO’s and others that project further than 2020 based on the CBO’s projections show that the national debt is going to grow rapidly in the coming years, and that we cannot “grow our way” out of the debt as we did during earlier periods.

2. Due to the increasing debt, Federal interest costs will be increasing dramatically.

3. This will create other effects, such as driving interest rates up more generally including consumer interest rates. Increasingly heavy Federal borrowing will also “suck up private sector capital” and hurt investment in new innovation increasing productivity.

4. Over the long term, rising debt, interest rates, and sharply rising interest costs, both for the Government and for consumers, and “crowding out” of private capital, represent a problem of the highest importance that threatens to harm our economy and lower our living standards.

5. So, America must immediately take the measures needed to solve this deficit problem after recovery from the present recession.

And there are at least four reasons why this line of reasoning is a fantasy.

First, the Government can deficit spend without issuing debt instruments (“look Ma, no more rising national debt”) or committing to paying interest costs. It has the constitutional authority to spend money without offsetting its expenditure by issuing an equivalent amount of debt. The more it chooses to do that, the more it creates an oversupply of reserves in the reserve funds market, and the more it does that, the more competitive forces in that market will drive short-term interest rates on reserve funds toward zero. If the Government further decides to cease offering longer-term debt instruments, and to offer overnight debt only, it would decrease its annual interest costs to very near zero. So, there need be no rising national debt, nor rising Federal interest costs, nor rising business or consumer interest costs, nor sucking up private capital for investment. The whole deficit terrorist nightmare can go away. The Government can start refusing to issue debt now, and persist in that policy for as long as it wishes. Why doesn’t it do that?

If it did, then, for example, the roughly $31.15 Trillion National Debt projected by AmericaSpeaks in 2025, which is 114% of their projected GDP for that year, would be reduced by roughly $11.6 Trillion to 19.6 Trillion, or about 71.6% of GDP, hardly alarming even by the standards of deficit terrorism. In 2025 alone, this would reduce projected Government expenditures by $1.49 Trillion, or about 60.5% of the projected deficit for 2025.

Second, the deficit terrorist projections of GDP growth are way out of line with historical averages, and that is why they think we cannot grow our way out of hard times. In effect, they are projections from the Bush and recent Obama Presidencies. If one computes 10 year growth ratios of GDP unadjusted for inflation, the historical growth ratio norm (average) is roughly 2.0. In contrast, the very conservative CBO projection from 2010 – 2020, is 1.54, just a bit higher than the 1.50 of the decade now ending. If the Government were to forget neo-liberalism, and follow continuously aggressive stimulative policies of the kind opposed by the deficit hawks, and proposed by Modern Monetary Theory, the growth ratio is very likely to return to the historical norm, since other than in the 1930 – 40 decade, the only time it dipped below 1.69 was during the current decade. Since deficits depend on tax revenue, and tax revenue, in turn, is closely related to GDP, the conservative GDP projections of the CBO and the deficit terrorists, more generally drive up the deficit numbers, and by depressing the GDP numbers also drive up the public-debt-to-GDP ratio – a double whammy supporting their fantasy that there’s s deficit/debt/debt-to-GDP ratio “problem.”

Here’s the huge difference it makes if we assume a return to something like the historical norm, while also assuming that the Government ends debt issuance this year. a) The US incurs much smaller deficits than CBO projects from now through 2014. b) In 2015 the US gets its first surplus since 2001. c) The projection then shows rapidly increasing surpluses from 2015 until 2025. d) The total accumulated surpluses are $10.1 Trillion, and this exceeds the $7.5 Trillion public debt recorded by the end of 2009.

In short, if we quit using debt instruments and used deficit spending to drive growth up to historically normal levels, then according to this alternative projection, we’d have one big surplus crisis and not a deficit crisis at all. In fact, another way to look at this is that if we did these two things, and spent the whole $10.1 Trillion surplus, plus what the deficit hawks projected, the US Government would be able to spend $80 Trillion between now and 2025, and would still have a public debt of only $7.5 trillion, which would then be about 17.8% of GDP, and if we were willing to tolerate a debt-to-GDP ratio of 40%, the Government could spend $89.4 Trillion over the 15 year period, an average of about $5.96 Trillion, per year, a level of expenditure (not including interest costs) greater than that projected in 2025 by AmericaSpeaks, and more than $2.5 Trillion or 75% greater than the Government is on track to spend this fiscal year.

Third, of course, we cannot project either the surplus problem I projected, or the problem the deficit terrorists project. Both are fantasies; just dreamland. Economists and financial experts can’t project accurately even five years out, much less 10 or 15 years out. They cannot project even a few years out. In 2000, they were talking about surpluses as far as the eye could see. In 2006, very few recognized the problem of the housing bubble or projected the crash of 2008 and the Great Recession. Now, they are projecting slow growth over the next 15 years. Why should anyone be foolish enough to base significant public decisions on their medium and long-term projections? Why should anyone make decisions implementing long-term plans to cut any public programs that are of benefit to Americans over a period of 10-15 years, when the projections showing the need for cuts are so much like a fairy tale.

As for my own projection, of a surplus problem, that is very unlikely to happen because we know that surpluses are historically unsustainable, which is why they are a problem. Whenever, the US has experienced a few years of surplus they have been followed by either a recession or a depression. This isn’t just an empirical fact, Modern Monetary Theory indicates that surpluses in the Government sector are equivalent to deficits in private sector savings. That is, when the Government runs a surplus, it removes financial assets from the private sector, unless foreign sector exports, balance off that surplus, not a possibility anytime soon for the US. So, the longer the US runs a surplus, MMT says that the greater is the chance it will have a recession, and that the "automatic stabilizers" in the safety net will kick in and turn the surplus into a deficit. So, my projection above can’t come true. Nevertheless, it still presents a useful narrative, because it shows that even if the Government were to spend nearly $20 Trillion more than CBO/AmericaSpeaks, projects it will spend through 2025, then the result, in terms of their beloved debt-to-GDP ratio would be quite acceptable.

Fourth, the plans of the deficit terrorists to get everyone committed to a course of deficit reduction over the next 15 years are reminiscent of the kinds of five year plans that we became familiar with in the first half of the 20th century in planned economies. There too, people tried to set targets for the economy and plans to implement those targets that proved incapable of coping with political, social, and also economic realities. These plans were too rigid to adjust to circumstances. The deficit terrorists ask people to formulate plans committing to cuts to be implemented over the long term in most areas of Government expenditure without reference to the consequences of making those cuts, or to the conditions we have no way of projecting which will obtain when the planned cuts are to implemented. What if the planned cuts aren’t small enough, because a program has become obsolete? What if expansion is needed in certain areas and not cuts?

Of course, the deficit terrorists will respond by saying that everything can be adjusted if conditions require and that their plans are not intended to be a strait-jacket, but only a guide to let us arrive at fiscal sustainability over a long period of time. But the questions we must ask are: 1) why “fiscal sustainability” and fiscal responsibility should be measured by national debts, deficits, and debt-to-GDP ratios? Those are just abstractions; they do not measure real wealth or Government solvency. Governments with currency control in their own fiat monetary systems, cannot become insolvent. They have no solvency risk. So these numbers don’t signify fiscal sustainability or responsibility. Rather, they are a lot of sound and fury signifying nothing and distracting us from the real things we ought to be doing.

For 2) what are the real consequences if the Federal Government evaluates what it is doing according to its impact on these numbers and acts accordingly? Unfortunately, we are already seeing these consequences and they are not pretty. They are failure to meet our unemployment problems, failure to meet our pressing need to repair our infrastructure, or to solve our energy problems, failure to extend the social safety net to those in need, failure to educate our young, failure to rebuild the energy foundations of our economy, taking Medicare for All off the table on grounds that it could cost more than $1 Trillion over a 10 year period and would contribute to an increase in the deficit and the national debt: failure, failure, failure, and more failure; and the destruction of real wealth as our country declines into insignificance. What’s fiscally sustainable and responsible about that?

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

The Mythological Narrative of AmericaSpeaks: Part One

8:25 pm in Uncategorized by letsgetitdone

The deficit terrorists ask us to believe that the US has a deficit/national debt problem, to believe in their projections about the future, and to make certain hard choices involving spending cuts and tax increases because we believe in the likelihood of their projections coming true if we don’t act to prevent them. Tomorrow, AmericaSpeaks, an organization claiming unbiased neutrality on deficit issues, but funded by the Peter G. Peterson and other Foundations who share the Peterson view that US deficits and the National Debt are something to worry about, will convene some 19 Town Meetings, and more than 40 smaller “community conversations,” all tied together through web streaming, to elicit citizen views on “this problem.” Prior to the meetings, I thought it would be worthwhile to review their argument, as reflected in the video below, about why they think we have a problem.

Their argument begins by noting that the maximum public debt-to-GDP ratio in the history of the United States is 108.6% recorded in 1946, just after World War II. They assert that most economists think that it is dangerous to sustain that level of debt continuously. They then note that because of recent economic events we’ve had an alarming rise in this number from roughly 40% to a projected 64% by the end of 2010, and that projections show that we will get to the 100% ratio figure by the end of the decade. After that they define the problem as:

”Debt is projected to grow dramatically unless we do something. . . . We can do something if we come together and make good decisions. . . . We can start finding agreement about steps to reduce our deficit.”

They then claim:

”Publicly held debt = accumulation of each year’s budget deficits.”

”A deficit occurs in any year when government spending > than tax revenue."

AmericaSpeaks does NOT say we should implement steps reducing our deficit now. And they assume that we ought to wait until the recession is over, when we can follow through for plans to achieve “sustainability,” we are formulating now. They also think that Government often has to borrow money to invest in future needs, and that “temporary deficit spending on things like building new highways and tax cuts” is playing an important role in recovery.

”But, over the long term, rising debt threatens to harm our economy and lower our living standards.”

The video goes on to argue that since Federal interest costs will be increasing dramatically, that will create other effects, such as driving up all interest rates, including consumer interest rates. It also suggests that increasingly heavy Federal borrowing will also “suck up private sector capital” and hurt investment in new innovation increasing productivity. So, rising interest rates, and sharply rising interest costs, both for the Government and for consumers, and “crowding out” of private capital, are the reasons why AmericaSpeaks is asserting that deficits/debts represent a long-term problem of the highest importance that America must develop plans for now, and solve after recovery from the present recession.

Time to examine the AmericaSpeaks argument up to this point.

First, while a deficit does occur in each year that Government spending exceeds tax revenues, by definition, it’s not true that the publicly held national debt is the accumulation of each year’s deficits. That simple statement, conceals a giant assumption. The assumption is that to make up for the gap between tax revenues and Government spending, the Government must and will issue debt instruments for sale to investors (lenders) and commit to paying interest costs. However, the Government has the constitutional authority to spend money without offsetting its expenditure by issuing an equivalent amount of debt. Furthermore, the more the Government chooses to do that, the more it will create an oversupply of reserves in the reserve funds market, and the more it does that, the more competitive forces in that market will drive the short term interest rates on reserve funds toward zero. If the Government further decides to cease offering longer-term instruments, and to offer overnight debt only, it would decrease its annual interest costs to very near zero.

Second, of course, if federal interest costs and rates don’t rise, or perhaps even decline, then they, at least, won’t be driving up anyone else’s interest rates either. Nor will Federal borrowing suck up private capital, and undermine investment, innovation, and increasing productivity, since if the Government spends without issuing debt on a dollar for dollar basis, it won’t be borrowing nearly as much money proportionately as it has in the past or is doing now.

So, in short, the AmericaSpeaks argument that there is a long-term problem with running deficits due to increasing debt, increasing interest rates and costs, and “crowding out” of private capital is dependent on the Government’s allowing the markets to determine the interest rates on its debt instruments rather than the Government to manage those rates to drive them down near zero. So, apparently, there’s no problem here beyond just a need for the Federal Government to end welfare for rich investors, and foreign Governments, who want to maintain the interest income they enjoy from Federal Debt instruments. Also, there’s no need for an exercise which will ask Americans to put on their green eyeshades and work their way through various options designed to either raise Government revenues or lower Government spending in an effort to stabilize our debt-to-GDP ratios either in the short or long-term.

There is however, a real problem. And that problem is the effort of a group of Foundations to focus the attention of Americans on a fantasy problem using a mythological narrative that has little basis in fact, rather than on real national problems such as creating full employment, ending the recession, reconstructing the energy foundations of our economy, our increasingly broken infrastructure and educational system, our manufacturing capability, and our environmental and climatological problems. Perhaps also, these Foundations might, one day, even address the problem of excessive influence in Government by corporate entities at the expense of working people. But I suppose that such real problems are above the pay grade of the these illustrious and tax-exempt institutions.

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

Part of the Problem

9:10 pm in Business, Financial Crisis by letsgetitdone


Warren Mosler and Joseph M. Firestone

Paul Krugman agrees that “We’re Not Greece.” But he only appears to have a glimmer of an understanding of the most important reason why this is so. We hope this commentary on his op-ed piece improves his understanding, and that of other deficit doves who appear to disagree with the deficit terrorists, but who in the end share their false basic assumptions about deficits, national debts, fiscal responsibility, and fiscal sustainability.

It’s an ill wind that blows nobody good, and the crisis in Greece is making some people — people who opposed health care reform and are itching for an excuse to dismantle Social Security — very, very happy. Everywhere you look there are editorials and commentaries, some posing as objective reporting, asserting that Greece today will be America tomorrow unless we abandon all that nonsense about taking care of those in need.

True. One of us just finished a week in D.C. fighting back against the bipartisan move to cut Social Security. And both of us are part of a coordinated effort to generate a counter-narrative to the Administration’s and the Peter G. Peterson Foundation’s austerity message.

The truth, however, is that America isn’t Greece — and, in any case, the message from Greece isn’t what these people would have you believe.

So, how do America and Greece compare?

Both nations have lately been running large budget deficits, roughly comparable as a percentage of G.D.P. Markets, however, treat them very differently: The interest rate on Greek government bonds is more than twice the rate on U.S. bonds, because investors see a high risk that Greece will eventually default on its debt, while seeing virtually no risk that America will do the same. Why?

One answer is that we have a much lower level of debt — the amount we already owe, as opposed to new borrowing — relative to G.D.P.

The level of the GDP to Debt ratio has nothing, by itself, to do with interest rates. Japan’s debt is near triple ours, and their 10 year rates are about 1.3% for example. So, Krugman’s assumption that the debt-to-GDP ratio is causing high interest rates for Greece and his implication that it would cause such rates for us is refuted by the Japanese case.

True, our debt should have been even lower. We’d be better positioned to deal with the current emergency if so much money hadn’t been squandered on tax cuts for the rich and an unfunded war.

Not true. with U.S. Govt spending not operationally constrained by available revenues the way Greece’s is, we are always able to spend (or cut taxes) however much we want to, because all U.S. Government spending is operationally nothing more than the Fed using its computer to credit member bank accounts — what can be called ‘the creation of new dollars.’ That is, the U.S. can always (and necessarily does) create more dollars when and if needed. whether we spend or not is a political decision without external financial constraints. In other words, even if we hadn’t had tax cuts for the rich and unfunded wars, we’d still be in the same position as we are now to deal with our emergency. That position is that we have a Government that is sovereign in its own currency and can always pay for whatever it needs to pay for. We have no greater solvency risk due to foolish spending than wise spending. In any case the ability of the U.S. government to make payment in dollars is limited only by political will, not by variations in financial ability to pay at different times.

But we still entered the crisis in much better shape than the Greeks.

Yes, because we are the issuer of the Dollar and Greece is not the issuer of the Euro. Greece is like a U.S. state in that regard. And so is every other Eurozone member, including the so-called fiscally strong members such as Germany and France.

Even more important, however, is the fact that we have a clear path to economic recovery, while Greece doesn’t.

We have that clear path for the same reason. We can manage our aggregate demand because our fiscal policy is not operationally constrained by revenue the way Greece’s is. We can sustain full employment. We can adjust policy to facilitate greater aggregate demand, and we can do other things we need to do, as well, because we have no solvency risk; we are not dependent on borrowing to be able to spend, and WE cannot run out of money.

The U.S. economy has been growing since last summer, thanks to fiscal stimulus. , ,

Yes, mostly the automatic stabilizers with some help from the proactive measures congress has taken, however misguided and inadequate they may have been to restore full employment.

. . . and expansionary policies by the Federal Reserve.

We don’t agree with the idea that the Federal Reserve’s policies have had a major impact on the return to economic growth, but that’s another story.

I wish that growth were faster; still, it’s finally producing job gains — and it’s also showing up in revenues.

True. however the output gap — the gap between potential and actual output, which is evidenced by unemployment remains tragically and destructively wide.

Right now we’re on track to match Congressional Budget Office projections of a substantial rise in tax receipts. Put those projections together with the Obama Administration’s policies, and they imply a sharp fall in the budget deficit over the next few years.

Yes, with our only hope for lower unemployment being an increase in private sector debt that exceeds the fall in the Government’s deficit. Not our first choice for mending what ails us, and also an unlikely event. So we may be looking at years of high unemployment and many ruined lives, unless the Government once again recognizes that it its responsibility to sustain full employment through fiscal adjustment.

Greece, on the other hand, is caught in a trap. During the good years, when capital was flooding in, Greek costs and prices got far out of line with the rest of Europe. If Greece still had its own currency, it could restore competitiveness through devaluation.

Krugman should have said it this way — ‘if Greece had its own currency and was running its deficits in that currency, market forces would have caused its currency to depreciate.’ With floating exchange rates, market forces adjust currencies on a continuous basis to reflect ‘indifference levels.’

But since it doesn’t, and since leaving the Euro is still considered unthinkable, Greece faces years of grinding deflation and low or zero economic growth. So the only way to reduce deficits is through savage budget cuts, and investors are skeptical about whether those cuts will actually happen.

True. And worse, the proactive cuts and tax hikes can slow the economy to the point that the deficit doesn’t come down, and might even increase, making matters even worse.

It’s worth noting, by the way, that Britain — which is in worse fiscal shape than we are, but which, unlike Greece, hasn’t adopted the Euro — remains able to borrow at fairly low interest rates. Having your own currency, it seems, makes a big difference.

It is all the difference.

And it’s hard to see why that isn’t obvious. In nations like the US, UK, Japan, etc. etc. each with their own non-convertible currency and floating exchange rates, interest rates are necessarily set by the central bank, and not by markets. The reason is that the Government makes payments and collects taxes in its own currency through its payment system operated by its own central bank. Member banks and foreign governments have accounts at the central bank called ‘reserve accounts.’ these reserve accounts, in aggregate, can get dollars only from the government, and, in the case of excess balances, the government alone can set the interest rate. Likewise, if there is a shortage of balances, they can only come from the government. Therefore, it is necessarily up to the government to set the rate at which member banks can borrow from the Fed as well as the rate earned on excess balances.

In fact, the FOMC (Federal Open Market Committee) announces its target interest rate by voice vote at its regular meetings. and U.S. Treasury Securities, which are also accounts at the federal reserve bank, thereby function to provide interest bearing alternatives to reserve balances and are used by the Fed to achieve the target interest rate set by the FOMC. So, the level of short-term interest rates is determined by political decisions and not as Krugman implies by the market. And Government securities function to support interest rates and not to fund expenditures.

In short, we’re not Greece. We may currently be running deficits of comparable size, but our economic position — and, as a result, our fiscal outlook — is vastly better.

This is the wrong reason why “we’re not Greece.” The right reason is that we are the issuer of our own currency, the Dollar, while Greece is the user of the Euro and not the issuer.

That said, we do have a long-run budget problem. But what’s the root of that problem? “We demand more than we’re willing to pay for,” is the usual line. Yet that line is deeply misleading.

First of all, who is this “we” of whom people speak? Bear in mind that the drive to cut taxes largely benefited a small minority of Americans: 39 percent of the benefits of making the Bush tax cuts permanent would go to the richest 1 percent of the population.

Tax cuts for the richest Americans, certainly weren’t our first choice of which tax to cut to support the private sector. We’d have cut FICA taxes and had a payroll tax holiday; and one of us, Warren Mosler, continues to propose that in a vigorous way.

And bear in mind, also, that taxes have lagged behind spending, partly, thanks to a deliberate political strategy of “starve the beast”: conservatives have deliberately deprived the government of revenue in an attempt to force the spending cuts they now insist are necessary.

And liberals and progressives have artificially constrained their policy proposals, and failed to pursue effective but nominally costly solutions to problems, because they hold the misguided neo-liberal notion that spending is operationally constrained by revenues, and fail to understand that the ‘right sized’ deficit is the one that coincides with full employment and desired price stability.

Meanwhile, when you look under the hood of those troubling long-run budget projections, you discover that they’re not driven by some generalized problem of overspending. Instead, they largely reflect just one thing: . .

An understanding of national income account and monetary operations shows deficits are driven by non-Government sector ‘savings desires’ and Government’s willingness to compensate for those savings desires with greater levels of spending or lower taxes, and it is proactive attempts to increase deficits beyond savings desires that results in inflation.

In addition, however, “troubling” deficit projections such as the CBO’s are driven by assumptions of historically low growth rates for the next decade. If economic growth more closely approaches historical norms since 1940, then CBO’s deficit projection melts away. But, the very likely error in CBO and other projections by deficit terrorist budget analysts is entirely beside the point, anyway, because the real question is why Krugman refers to such budget projections as “troubling?” Even if CBO’s projections were correct, there would be no threat to U.S. fiscal solvency, or to real fiscal sustainability relating to the Government’s ability to spend to achieve public purposes. So, these budget projections are “troubling” only to Krugman, other deficit doves like him, and also deficit hawks, who don’t understand that there is no solvency risk for the U.S. Government in continuing budget deficits.

. . . the assumption that health care costs will rise in the future as they have in the past. This tells us that the key to our fiscal future is improving the efficiency of our health care system — which is, you may recall, something the Obama administration has been trying to do, even as many of the same people now warning about the evils of deficits cried “Death panels!”

Krugman has the wrong causation, since he seems to think that rising health care costs if not cut, will be the cause of future Government solvency and financial problems he associates with Government deficits. And, make no mistake, what he calls our ‘fiscal future’ is the size of future deficits. But they will always reflect future ‘savings desires,’ and the extent to which savings behavior reduces aggregate demand. If demand is too low, deficits will be driven higher by automatic stabilizers, regardless of whether health care costs have been cut. In fact, if we proactively cut Government spending of any kind to make the amount of it smaller than the level we need to compensate for the loss of demand to savings desires, the evidence of this will always be unemployment.

So while cutting health care costs is certainly a ‘good thing,’ as long as the quality of health care improves, when the time comes, future deficits need to reflect future (net) savings desires, if they are to keep us fully employed. So, if health care costs are cut, other Government spending may have to increase, and/or taxes cut, to achieve the required level of deficits to compensate for savings desires so we can sustain full employment.

So here’s the reality:

That is, Paul Krugman’s mistaken, political reality.

America’s fiscal outlook over the next few years isn’t bad. We do have a serious long-run budget problem, . . .

Unfortunately, this kind of talk makes him part of the problem, not part of the solution, since he doesn’t understand that fiscal responsibility and fiscal sustainability are unrelated to budget deficits because these carry no solvency risk for the United States.

. . . which will have to be resolved with a combination of health care reform and other measures, probably including a moderate rise in taxes.

Wonderful, with a screaming shortfall in aggregate demand as evidenced by tragic levels of unemployment, the celebrity voice from the left is calling for spending cuts and tax hikes not to cool an over-heating economy, but to reduce non-government savings of financial assets and make the unemployment problem worse. (The Government deficit = non — Government savings of financial assets, to the penny, as a matter of national income accounting, etc)

But we should ignore those who pretend to be concerned with fiscal responsibility, but whose real goal is to dismantle the welfare state — and are trying to use crises elsewhere to frighten us into giving them what they want.

While we tend to agree with that statement, unfortunately it is made in the context of one of the current iterations of the ‘deficit dove’ position.

It does not cut it.

It is part of the problem, not part of the solution.

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

A Fiscal Sustainability “Teach-in” Counter-Conference?

5:12 pm in Uncategorized by letsgetitdone

On April 28, 2010, the Peter G. Peterson Foundation is sponsoring a “Fiscal Summit” in Washington, DC. The purpose of the Conference, which is scheduled for the day after the first meeting of the President’s recently constituted National Commission on Fiscal Responsibility and Reform (btw, where the Conference is happening is a mystery not cleared up on the PGPF web site) is:

”. . . to further a national dialogue on solving America’s fiscal challenges through several moderated discussions with leaders on the issue from across the political spectrum. In addition to President Bill Clinton, who will be interviewed by George Stephanopoulos, we will hear from a range of experts, including Paul Volcker and Alan Greenspan, Former Chairmen of the Federal Reserve; Bob Rubin, Former Secretary of the Treasury; Alice Rivlin, former OMB Director and Member, National Commission on Fiscal Responsibility and Reform; Senator Judd Gregg (R-NH), Member, National Commission on Fiscal Responsibility and Reform; John Podesta, President and CEO of the Center for American Progress; John Castellani, President of Business Roundtable, and others."

Robert Kuttner’s comment on the Conference is very apropos:

”This is billed as a "national dialogue on solving America’s fiscal challenges," but spare me. This is a propaganda event. For the most part, the featured speakers follow the Peterson line. John Podesta, the closest thing to a liberal playing a headliner role, accepts that there is a serious deficit problem, but would entertain a value-added tax as part of the remedy. But the speakers’ list is clearly stacked and there is no one to Podesta’s left.”

And for good measure, the left-right paradigm is not even very applicable here at all, because everyone listed above whether “liberal” or conservative, shares the neo-liberal assumption that Government spending in the United States is operationally constrained by the ability to tax or to borrow money from non-Government sources. Given this false assumption, all the participants in this so-called “national dialogue” will share the assumption that fiscal sustainability has something to with Government deficits, debts, and the ratio of debt held by the public to GDP. There will be disagreements among them about how long the Government has over time to bring deficits down, or to moderate the trend toward increasing debt, or about what a “responsible” ratio of debt held by the public to GDP ought to be. But none will entertain or discuss the idea that deficits, debts, and debt to GDP ratios are inappropriate tests of fiscal sustainability, irrelevant measures of the degree of fiscal challenges we face, and, in fact, nothing more than a by-product of the real fiscal challenges facing us, namely achieving renewed economic growth and full employment.So, this Conference will take “off the table” any ideas about what fiscal sustainability, that don’t center around Ben Bernanke’s neo-liberal definition of the idea as:

“… as achieving a stable ratio of government debt and interest payments to gross domestic product, and setting tax rates at levels that don’t impede economic growth."

It will also, by virtue of this definition “take off the table” any “solutions” that address other goals than the ones mentioned in Bernanke’s very limited idea of fiscal sustainability, and, also, it will begin to set up a public debate over public sustainability analogous to the one we’ve just been through on health care, a debate that constrains and leaves out the best alternative solutions to the fiscal sustainability problem, because these solutions are literally “unthinkable” in the neo-liberal paradigm of economics.

The Fiscal Summit Conference is meant to call attention to and magnify the significance of the first meeting of the President’s National Commission on Fiscal Responsibility and Reform, and to propagandize the line of thinking and the course of action that the Peterson Foundation thinks the Commission should take. The Peterson Foundation, in other words, means to create a reality in which the President’s Commission would become popularly known as “The Steal Our Retirement Commission.” We need to do what we can to stop that. It will be a long fight, and it will dog our efforts at progressive change, because everything we want to do will be subject to the false tests of “fiscal responsibility,” and “fiscal sustainability” put forward by the deficit hawks, unless we can carry out a campaign of our own that persuades the public of our view that the neo-liberals idea of fiscal sustainability are a fantasy, and that if we continue to give them credence, they will only exacerbate our economic situation ad create a dark future for our children and grandchildren.

I know that time is short between now and April 28th. But nevertheless, I propose that we organize a counter Fiscal Summit "Teach-in" Conference in Washington DC, on that day. Such a "teach-in," depending on how many people we could get to attend, could steal media attention from the Peterson-sponsored event, and introduce an opposing narrative to the ones coming out of the deficit hawk events on the 27th and 28th. To have such a Conference would take money. Speaker expenses would have to paid, as would hotel expenses if it were possible to get a hotel site at this late date. On the other hand, it would not be hard to think of high-level speakers for such a Summit. Here’s my list of speakers who could do a really good job delivering a Modern Monetary Theory counter to the neo-liberal paradigm: L. Randall Wray, William K. Black, James K. Galbraith, Warren Mosler, Marshall Auerback, Bill Mitchell, Rob Parenteau, Yeva Nersisyan, Scott Fullwiler, and some other very good top-level participants who would question the neo-liberal paradigm to at least some degree are: Yves Smith, Simon Johnson, Joseph Stiglitz, Robert Johnson, Robert Reich, Robert Kuttner, and Dean Baker. Finally, someone who ought to be invited, since he’s expressed frequent and very explicit criticism of the neo-liberal paradigm is George Soros. It would be valuable to get him into direct discussions with others on the relationships between hedge fund traders and nations with unencumbered fiat monetary systems

Who should hold this counter-conference? I propose that Firedog Lake, The Huffington Post, New Deal 2.0, and The American Prospect jointly sponsor and provide financial backing for this Conference. If the Conference could be planned and implemented over the next three weeks, it could go a long way toward beginning to blunt the impact of the Peterson Foundation Event and the first meeting of the President’s Commission. We need to blunt that impact if we expect to have any material success in getting progressive legislation on a host of issues in the coming decade. “We must make this commission politically radioactive.”

(Also posted at the Alllifeisproblemsolving blog and where there may be more comments)