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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 →

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

3:06 pm in Uncategorized by letsgetitdone

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(Cross-posted from New Economic Perspectives.)

The Five Worst Reasons Why the National Debt Should Matter To You: Part Two, the Record Since 1930

1:25 pm in Uncategorized by letsgetitdone

In Part One, of a critique of the most important of “Fix the Debt’s” reasons for “Why the National Debt Should Matter To You,” I asserted that high debt levels haven’t caused high unemployment in the United States, and that, if anything causation was in the other direction. I didn’t want to disturb the flow of the argument there with a relatively lengthy survey of some of the numbers in the historical record since the 1930s. But let’s test the idea that High debt causes fewer jobs and lower wages in the United States by looking at that record now.

Hoover, FDR, and Truman

During the early 1930s, in the presidency of Herbert Hoover, unemployment spiked up first; then the deficits, funded by debt issuance, followed. In fiscal 1933, which began in July 1932, unemployment peaked at 24.9%, while the debt-to-GDP ratio reached 39.1%, up from a low of 14.9% in 1929.

During FDR’s first two terms, the increases in the debt-to-GDP ratio level off. But, unemployment declines steadily to 9.9% in 1941, with an exception coming in 1938, the year following his misguided attempt to cut the debt. During WW II, the public debt skyrockets, but unemployment declines to a historically low level of 1.2%, another contradiction to the idea that high debt levels cause fewer jobs and lower wages.

Nor are the Truman Administrations any kinder to this first “fix the debt” myth. During these eight years the debt-to-GDP ratio declines steadily from 112.7% to 60.2% with one exception in fiscal 1949. Meanwhile, unemployment rises until driven down by Korean War spending beginning in Fiscal 1951.

Eisenhower and Kennedy-Johnson

How about the Eisenhower and Kennedy-Johnson Administrations? Again, all the evidence contradicts the “Fix the Debt” myth. Levels of the debt-to-GDP ratio continue to fall while unemployment rates vary cyclically, but generally average a full point higher than in the Truman Administration, and more than three points higher than at the height of wartime full employment. In short, decreasing levels of the debt-to-GDP ratio do not appear to cause more jobs and higher wages than the higher debt-to-GDP ratio levels during WWII and the Truman period.

In 1969, the debt-to-GDP ratio falls to 28.5%, a drop of nearly 3 points from the year before. The budget surplus is 0.3% up from a deficit of -2.9 in 1968. Unemployment is down to 3.5%, a low water mark for the Kennedy-Johnson period. But in FY 1970, unemployment spikes up to 4.9% and continues “high” for the rest of the Nixon-Ford Administration, reaching 8.5% in FY 1975, even as the level of the debt-to-GDP ratio declines to 24.6% in 1974, and then goes up to 28.1% in 1976 before resuming its downward track for a few years.

Nixon – Ford and Carter

The Nixon-Ford Administration, marks a break in the currency system, since in August of 1971 Nixon withdrew from the Bretton-Woods agreement and both ended the convertibility of dollars to gold on the international exchange, and allowed the value of the dollar to float freely on the international exchanges. Since then, the US has had a fiat currency system, rather than a commodity-based system. However, the US has continued to act domestically as if it was still on the gold standard, continuing to issue public debt even though the rationale for borrowing back money created under its authority, and which can be created in unlimited amounts, at will, is based on the idea of a Government Budgetary Constraint (GBC) that no longer exists; and also on the need to “sterilize” excess reserves produced by deficit spending, because these are falsely assumed to be more inflationary than new securities would be.

In spite of the change in the currency system, and the change in political party control of the White House, the Carter Administration was not able to break the pattern of economic stagnation that characterized the Nixon-Ford Administrations, probably because it received bad advice from economists, who did not understand the significance of the shift to a fiat currency system. The general levels of unemployment remained similar over the two administrations.

The mean annual employment rate during the Nixon – Ford period is 6.3%. During the Carter Administration, it increases to 6.65%. We’ve already seen that the decline in the debt-to-GDP ratio reached 24.6% and then increased slightly. The Carter Administration began to reduce it again, but never reached the Nixon low point, and ended at 26.3%.

There’s no noticeable relation here between high debt levels and unemployment. The debt-to-GDP ratio hit a low level and was varying slightly higher than that level after 1974 through 1981. Unemployment, on the other hand, varied cyclically, but was trending upward, with apparently no direct relationship to high debt levels.


The Reagan-Bush years are remembered as prosperous years. But the mean unemployment rate was 7.1%, a half point higher than under Carter and 0.8% higher than in the Nixon-Ford years, and the period ended at 6.9%. So, many people weren’t prospering.

On the other hand, the Reagan-Bush years saw a substantial rise in the debt-to-GDP ratio which increased from 26.3% at the end of Carter’s Administration’s to 49.5% at the end of Bush 41′s. A level that high had last occurred 35 years before in 1958, during a period when unemployment had averaged 4.9%. Comparing the two, note 1) the level is nowhere near the historic high of 112.7% and 2) the level of the ratio is apparently compatible with both relatively low and relatively high unemployment levels, again refuting the idea that “high debt levels = fewer jobs and lower wages.”

Clinton and Goldilocks

The period of the Clinton Administration has been characterized as the period of “the Goldilocks Economy,” and is also considered by many as a time of “fiscal responsibility.” The economy grew at the most rapid rate since the 1960s, but did so in the presence of trade deficits, and decreasing budget deficits, finally ending in Government surpluses.

With GDP growing rapidly and public debt growing slowly, and actually shrinking through four consecutive years, of surpluses, the debt-to-GDP ratio fell throughout the period FY 1994 – 2001, declining from 49.5% to 32.5% in 2001. This happened simultaneously with steadily declining unemployment rates, reaching 4.0% in 2000, before increasing again to 4.7% in 2001, when a new recession, in reaction to the surpluses and the credit bubble of the 1990s began to bite. The unemployment rate over the whole goldilocks period averages 4.93%, the lowest average since the Kennedy-Johnson and Eisenhower Administrations.

Why isn’t the Clinton Administration a confirmation of the claim that high debt causes fewer jobs and lower wages? Well first, the data show the debt-to-GDP ratio falling, along with unemployment, not the ratio rising while unemployment increases. But even if one wants to claim that a falling debt-to-GDP ratio increases employment and wage levels, the data show unemployment falling much faster than the debt-to-GDP ratio, which doesn’t begin declining appreciably until the unemployment rate has declined from 6.9% in 1993 to 4.9% in 1997.

Also, when unemployment rises again in 2001 to 4.7% from 4.0%, the fall in the debt-to-GDP ratio continues, suggesting a lag relationship between unemployment and a falling debt-to-GDP ratio. What would explain this? The answer is the automatic stabilizers. When people go back to work, they cease to draw as much, or at all on the safety net, and they also pay taxes. So, tax revenues increase, government deficits decrease, and GDP increases, meaning that the debt-to-GDP ratio falls.

But a mystery remains, why did the goldilocks economy appear? Why did it create an apparently strong recovery with decreasing unemployment and higher wages, without the assistance of large government deficits, and with the disadvantage of increasingly substantial trade deficits. The answer is that the goldilocks economy was driven by the Fed’s decision to maintain low interest rates, and easy bank credit, and by the increasing willingness of the private sector to run a deficit, and run down its net financial assets, accommodating the Government’s desire to run a surplus.

The private sector balance went into deficit in 1997 when the Government’s deficit declined to -0.3%. Then the four years of Government surplus: 1998, 1999, 2000, and 2001, were all years of aggregate private sector deficit in which the private sector, looked at as an aggregate, lost net financial assets. While this was going on, the “dot com” bubble was bursting and the economy fell into recession, accompanied by the increase in the unemployment rate in 2001, followed by the increase in the debt-to-GDP ratio, as the automatic stabilizers, along with the beginning of post 9/11 homeland security deficit spending, kicked in with a return to deficits in 2002.

So, it turns out that the primary causal factor in the Goldilocks economy and its increasingly low unemployment rate wasn’t deficit reduction, as claimed by many Clinton partisans, and debt hawks, but the credit bubble blown by the Federal Reserve, the banks, Wall Street, and an increasingly optimistic private sector. The economy boomed in spite of deficit reduction, and was itself the primary cause of deficit reduction, and not vice versa. This is another refutation of the narrative behind the theory that high debt levels cause high unemployment and low wages, because the boom was due to a credit bubble that drained net financial assets from the private sector and then burst at the end of the period.

Later, the blowing of another bubble under Bush 43, restored a modicum of prosperity, but only increased the chances for a more serious crash in 2008. Had the expansion of the 1990s been based on much larger government deficits, the recession at the end of the Clinton-Gore period would have been avoided, because the expansion would have been based on a permanent transfer of new net financial assets to the private sector, and not on bubble-generated paper assets that are gone with the wind when the inevitable collapse of a credit bubble occurs.

Bush 43

That brings us to the Bush 43 Administration. In 2002, the Government went back to deficit spending. But the Government deficit was small enough that, given the size of the demand leakage due to the trade deficit, it kept the private sector in deficit. Deficit spending increased in 2003, along with war spending, but since the trade deficit was rising to 5% it wasn’t large enough at – 3.4% to compensate for the trade deficit. Over the next two years, the private sector balance varied around zero, sometimes in deficit, sometimes showing a small surplus.

But beginning in 2005, as the trade deficit rose eventually to 6%, and the Government deficit again was lowered first to -2.6, and then to -1.9 and -1.2% in 2007, the private sector was again in substantial deficit for three consecutive years. Altogether, beginning in 1997 under Clinton and ending in 2007 under Bush, the private sector went through 11 years without ever having a substantial private sector surplus, and for 6 of those years the private sector lost more than 2 – 4 % of GDP in net financial assets, because private sector activity was funded by private sector credit bubbles rather than by government deficits that were high enough to compensate for the Trade deficit.

In other words Government deficit spending wasn’t too high under the Bush 43 Administration, as we hear in conventional economic and political analysis. But rather, it was far too low to sustain a decent level of economic activity without relying on the credit bubble-fueled housing bubble that burst in 2007, and led to the crash of 2008.

No wonder the Bush 43 period had the highest average unemployment rate (5.83%) since the Bush 41 Administration (6.7%). Neither Government deficit spending, nor the private credit bubble were large enough to drive unemployment down to the levels seen in the Clinton period, and unemployment was mostly over 5% hitting 5.8% in 2008, and then in the transition 2009 fiscal year, between the Bush 43 and Obama Administrations, rising to 9.3%. Meanwhile, the debt-to-GDP ratio slowly rose nearly 4% from 32.5% between 2001 and 2007, and then jumped sharply to 40.5% in 2008 and to 54.0% in 2009, as unemployment was rising and safety net spending accelerated.

So, during Bush 43, we see a sharp rise in the debt-to-GDP ratio in 2008 and 2009. But, it’s not this rise in debt levels that causes unemployment, because the sharp increases in unemployment were a result of the financial crash caused by the lengthy attempt over two administrations to fuel economic expansion through increasing private sector debt facilitated by the Fed, the banks, and Wall Street. That attempt led us back to the boom-bust cycles that were prevalent prior to the New Deal and the reform of the banking system — reforms that were largely repealed in the Clinton and Bush Administrations.

The sudden growth in debt in 2008 and 2009 appeared because the rise in unemployment caused by the Great Crash, led to increases in Federal deficit spending resulting from the automatic stabilizers, and the beginning of the economic stimulus provided by the American Recovery and Re-investment Act of 2009. So, once again, job loss came first, and was then followed by higher debt levels, rather than vice versa, another contradiction with the theory that high debt levels cause higher unemployment and lower wages.

The Obama Administration

From 2009 until the present, the results of the sharp spike in the unemployment rate on the debt-to-GDP ratio are apparent. The ratio has increased by nearly 20 points in 2010, 2011, and 2012 to 72.6%, while the unemployment rate has declined from 9.3% to the present 7.4%. So, increases in the debt-to-GDP ratio are inversely correlated with the unemployment rate, yet another contradiction of the austerian theory. Meanwhile, the reduction in unemployment and the increase in both GDP and tax revenues is driving the 2013 deficit toward 4% of GDP, down from 10.1% in 2009.

This result, while touted as good news by the Obama Administration, and nearly everyone else in sight, resulting in a veritable Versailles happy dance, is bad for the economy. While the trade deficit is down to close to 2.5% now, a projected Government deficit of 4% for 2013 is too small to provide for more than a 1.5% of GDP surplus in private sector net financial assets. Most of this is likely to go to continue to repair private sector balance sheets that were damaged so much during the 11 year debt binge over the Clinton and Bush Administrations.

That means there won’t be new private sector financial assets sufficient to support increasing aggregate demand. And this, in turn means that the economy will continue to stagnate or heal only very slowly, or perhaps even turn back to recession, provided there’s no substantial private sector credit expansion to fuel demand. But, so far at least, one can’t see such an expansion getting under way, and without it there’s no substitute for the Government deficit spending that the Administration and Congress are so intent on reducing.

Where’s the Evidence?

It’s astonishing how people just make up stories to support policies they favor. Even though I have the background to use rigorous modeling or statistical analysis methods, and have used them many times in past years, my look at the record hasn’t involved them, because, this is, after all, a blog post meant to be read more widely than a statistical study, and I think the raw numbers since 1930 continuously and conclusively refute the causal theory advanced by the “Fix the Debt” group that high debt or debt-to-GDP levels increase unemployment rates.

Falsification of any theory can never be certain, but the evidence in this case never contradicts the idea that high unemployment comes first, and high debt levels come afterward as an effect of high unemployment, assuming, of course, that deficit spending is accompanied by debt issuance. Given the data, I think one has to reasonably conclude that High debt levels ≠ fewer jobs and lower wages, as the “Fix the Debt” group claims.

If the “Fix the Debt” group disagrees, and thinks that I’ve interpreted the data incorrectly, or that more rigorous analysis expanding the set of variables and using more sophisticated techniques shows that the evidence doesn’t refute their theory, then I challenge them or others in the Peter G. Peterson Foundation-funded network of organizations to produce such an analysis. Until they do, I think we have to continue to ask “Where’s the evidence”?

And we also have to ask whether a theory amounting to no more than a plausible narrative about what causes unemployment, contradicted by many other plausible causal narratives can serve as the basis for a Federal fiscal policy of deficit reduction that will hurt many millions of American citizens for generations? I think not! I think the very idea is ludicrous, and that it’s time to laugh the “Fix the Debt” campaign off the public stage.

In Part Three, I’ll cover the other four “worst reasons” why the national debt should matter.

Data Sources:

Budget deficits/surpluses, 1940 – 2018.

Unemployment rates, annual averages, 1923 -1942.

Unemployment rates, annual averages, 1940 – 2008.

Unemployment Rates, annual averages, 1947 – 2012.

Sectoral Financial Balances.

(Cross-posted from New Economic Perspectives.)

The Five Worst Reasons Why the National Debt Should Matter To You: Part One, High Debt Levels and Jobs

10:34 am in Uncategorized by letsgetitdone

Your Social Security, My Pocket

I came across a post from the “Fix the Debt” campaign last month called “The Top Five Worst Reasons Why the National Debt Should Matter to You.” It’s a post full of debt/deficit lies that cry out for correction. That’s what I’ll provide in this series.

1. High debt levels = fewer jobs and lower wages

In times of fiscal and economic uncertainty, consumers and businesses reduce investment and delay projects because investment is costly to reverse. Higher government borrowing can also drive up interest rates once the economy recovers, reducing the access and affordability of funds for consumers and businesses to borrow and invest in new ventures and ideas. This can hold back the economy, resulting in fewer jobs and lower wages down the road.

Response: What’s with the colloquial use of the ‘equals sign’ in this statement? Is the “Fix the Debt” campaign trying to say that there’s an identity between high debt levels and fewer jobs/lower wages? Is it trying to say that fewer jobs/lower wages cause high debt? Are they trying to say that there’s mutual causation between the two over time? Or are they trying to say something more complex than these things?

The summary statement after the headline indicates that the “equals” is an ambiguous way of making the straightforward claim that high debt levels trigger a causal chain ending with fewer jobs and lower wages. Here are two ways of addressing this claim: is it true, or even likely, given the data; and even if it is true, then so what?

Addressing “truth” first, it’s not! There’s plenty of evidence (See Part Two) refuting the idea that high public debt levels cause fewer jobs and lower wages in nations like the United States that use a non-convertible fiat currency, a floating exchange rate, and have no debts in currencies they do not issue.

In fact, even before 1971, when the United States closed the gold window allowing convertibility to gold on international exchanges and arrived at our current fiat currency system, the data still refute this claimed identity and suggest, that, if anything, the causation is reversed. In Part Two I’ve added a historical addendum dating from 1930 to the present showing that the evidence refutes this theory about the causes of higher unemployment.

Read it and see what’s happened for yourself; but the upshot is that this theory is pure fiction. Its narrative hasn’t happened once in the United States since 1930.

Now, on to “so what.” Let’s, for the sake of argument, say that high debt or debt-to-GDP levels did cause high unemployment, and that Government debt is a problem. The “Fix the Debt” campaign wants to respond to this by cutting Government deficit spending, raising taxes and following a long-term deficit reduction program featuring cuts to social safety net programs.

But why follow that unnecessarily painful economy-contracting, middle-class depriving strategy? The United States is a fiat currency sovereign. It doesn’t have to borrow back its own currency and reserves from people who are holding those.

It doesn’t have to sell any more debt instruments, providing unearned profits primarily to wealthy individuals and foreign nations. Congress can either provide the Treasury Department with the authority to create whatever money it needs to repay the debt as it falls due and to perform whatever deficit spending chooses to appropriate; or the Executive branch can use existing Platinum Coin Seigniorage (PCS) authority to fill the public purse with all the dollar reserves needed to do both of these things.

I’ve outlined how this works in numerous posts at this site and others, also in my kindle e-book. The process is very straightforward, will not cause inflation, and is legal under current law. So, if the “Fix the Debt” campaign is really worried about high unemployment and fixing the debt, then I challenge “Fix the Debt” to support my petition for the President to order the Secretary to mint a $60 T platinum coin immediately to accomplish this without in any way compromising the safety net or hurting the economy.

I don’t think “Fix the Debt” will support this proposal however. The reason why is that “Fix the Debt” is a front group for a very long-term effort by Peter G. Peterson to gut the social safety net and privatize Social Security. Peterson and the various front groups he funds through the Peter G. Peterson Foundation aren’t really interested in fixing the debt. They understand that the public debt is no danger to a fiat sovereign like the US, and doesn’t cause high unemployment.

What they are really interested in is persuading the public that patriotism demands crippling the safety net in the name of fiscal responsibility. If they were not, and they really think that “teh debt” is a cause of high unemployment, then they would join me in supporting one of the two proposals I advanced earlier for “Fixing the Debt.” Read the rest of this entry →

Randy’s Terrific Rant

11:57 pm in Uncategorized by letsgetitdone

Professor L. Randall Wray of the Department of Economics, University of Missouri, Kansas City is one of the leaders of the Modern Monetary Theory (MMT) approach to economics. His blogs are very clearly and simply written, well-organized, thorough, and generally fairly dispassionate. But the recent attack of the right on Fannie and Freddy really blew his gasket, and he responded with a really passionate rant against all the present attempts by the righties to impoverish the middle class, the old, the young, and generally everyone else except the rich in a post entitled: “The Wingnuts Go After Fannie and Freddy.”

Among other things Randy says:

Give me a break. These are the same bozos that are promoting home foreclosure and happily cheering the biggest transfer of wealth to Wall Street that the US has ever seen. Without Fannie and Freddie there would be no home financing or refinancing going on right now. Oh, right, free markets did such a good job with the subprime mortgage market, creating a global financial crisis that rivals the Great Crash of 1929. Hey, lets reward them by getting government out of the mortgage markets so that Pete Peterson can run the whole shebang for the benefit of Wall Street. That, of course, is the real goal. Wall Street wants to get back to predatory lending as quickly as possible, and hates the competition from a newly missioned Fannie and Freddie—which have turned away from the practices that assisted rapacious private lenders from 2004 to 2008. Better close them down.


How about a reality check? Fannie and Freddie made no subprime loans. Indeed, they originated no loans at all. Yes, they offered insurance on privately originated mortgages, and yes, they lowered their standards. This has been carefully studied, and all analysts have reached the conclusion that Fannie and Freddie got into trouble because they catered to "free" market demands that they either insure the kinds of toxic mortgages markets wanted to provide or that they become irrelevant. The free markets wanted to do Liar loans and NINJA loans, making loans that borrowers could never service. The old fuddy duddies Fannie and Freddie would never have agreed to guarantee this trash, so they were partially privatized, with big gun, high paid CEOs hired. And just like magic, they started behaving like a Goldman or a Countrywide—maximizing CEO pay while damning the firms. Yes, that is the free market solution and my colleague Bill Black calls it control fraud. Fannie became a control fraud, just like all the big boy private financial institutions. Peterson’s solution? Promote control frauds by freeing markets.


Make no mistake. The wingnuts are likely to win these battles. President Obama will not put up a fight. Social Security is a done deal. It is going to be "reformed". That is, it will be handed over to Pete Peterson, who will manage it right down the rat hole where all the private pensions are going. Wall Street will gamble away all the funds, whilst enriching itself with management fees. And Fannie and Freddie will be shut down so that Wall Street will have free reign in the housing market. Homeownership rates will plummet. Predatory mortgages will be the rule. Wealth will trickle up. Democratic Party coffers will be replenished.

But that’s not the best of it. Click on the link. Read the rest of it and note the fix we’re in. Then realize that nothing’s going to get us out of this fix in the long run except an equalizer that can neutralize the power of money in politics. The equalizer is described here, and here. Help us get it started!

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

Which Party Poses the Real Risk to Social Security’s Future?

8:42 pm in Uncategorized by letsgetitdone


Marshall Auerback

Hint: it’s not Republicans.

Social Security remains one of the greatest achievements of the Democratic Party since its creation 75 years ago. Although Republicans have historically fulminated against the program (Ronald Reagan once likened it as something akin to “socialism”), they have actually made little headway in touching this sacred “third rail” in American politics. President Bush pushed for partial privatization of the program in 2005, but the proposal gained no policy traction (even within his own party) because Social Security continues to be hugely popular with American voters. It’s a universal program that benefits all Americans, not a government handout to a few privileged corporations.

Which is why it’s odd that Democrats seem almost embarrassed to continue to champion the legacy of FDR. The party frets about long-term deficits and the corresponding need to “save” Social Security from imminent bankruptcy and, in doing so, opens the gate to radical cuts in entitlements that will do nothing but further destroy incomes and perpetuate our current economic malaise. It is true that some Republicans have signed on to the idea of privatization, notably a proposal championed by Rep. Paul D. Ryan (Wis.), the senior Republican on the House Budget Committee. But only a handful of GOP lawmakers have actively embraced the measure and, in the aftermath of the worst shock to the financial system since the Great Depression, many Republican lawmakers would just as soon see the idea forgotten.

So why don’t the Democrats leave well enough alone? Why bother even setting up “bipartisan commissions” to discuss the issue of Social Security? At the risk of sounding like one of those ungrateful members of the “Professional Left”, whom Robert Gibbs recently decried, I note that it was President Obama who most recently re-opened this issue by setting up a commission on reducing long term budget deficits and dealing with the long term issue of entitlements, including Social Security. In the Commission’s remit, nothing is off the table, including Social Security and Medicare. (Of course, given that one of the members is a director of Honeywell, it’s hard to envisage any suggestions of defense cuts). I also note that according to the Washington Post, “Democrats said Simpson and Bowles are uniquely equipped to blaze a path out of the fiscal wilderness — and to forge bipartisan consensus on a plan likely to require painful tax increases as well as program cuts.” No mention of Republicans getting on board. This is self-immolation, plain and simple. And Obama wonders why voters remain unhappy?

Now that the President has opened this Pandora’s Box, it is hard for him credibly to make the case, as he attempted to do in last Saturday’s weekly radio address, that “some Republican leaders in Congress want to privatize Social Security.” In fact, it is an idea enthusiastically embraced by a number of Wall Street Democrats who are funded with huge campaign contributions from Wall Street itself. (Candidate Obama received more money from Wall Street in 2008 than Hillary Clinton.) These contributors would be the Rubinites who for decades have played a huge role in allowing for greater financial leverage ratios, riskier banking practices, greater opacity, less oversight and regulation, consolidation of power in ‘too big to fail’ financial institutions that operated across the financial services spectrum (combining commercial banking, investment banking and insurance) and greater risk. Privatization of Social Security represents the last of the low hanging fruits for Wall Street. Who better to provide this to our captains of the financial services industry than their major political benefactors in the Democratic Party?

The issue of privatization is germane when one considers the members of the Commission approved by the President. There are questions of possible conflicts of interest. As James Galbraith has noted, the Commission has accepted support from Peter G. Peterson, a man who has been one of the leading campaigners to cut Social Security and Medicare. It is co-chaired by Erskine Bowles, a current Director at North Carolina Life Insurance Co (annuity products are a competitor to Social Security and would almost certainly be beneficiaries of the partial privatization). Mr. Bowles’ wife, Crandall Close Bowles, is on the Board of JP Morgan, and she is also on the “Business Council,” a 27 member group whose members include Dick Fuld, Jeff Immelt, Jamie Dimon and a plethora of other Wall Streeters.

At the very least, these kinds of ties raise questions in regard to proposals for dealing with Social Security. Many members of the Commission stand to become clear direct and indirect beneficiaries of the privatization that the President is now warning against. It’s disappointing that these ties have not been fully explored by the press, and it is extraordinary that the President would exhibit such political tone deafness in making these kinds of appointments. It tends to undercut the message of his last radio address.

I’ll leave aside the nonsensical arguments in regard to Social Security’s “solvency,” because Professor Stephanie Kelton has dealt with them conclusively here. The only point I would add is in regard to the alleged issue of deficit spending today burdening our grandchildren. In reality, we will be leaving our grandchildren with government bonds that are net financial assets and wealth for them. As Randy Wray and Yeva Nersisyan have recently argued, even if government decides to raise taxes in, say, 2050 to retire the bonds (for whatever reason), the extra taxes are matched by payments made directly to bondholders in 2050. We can question the wisdom of whether it is right to make this political argument in favor of bond holders over tax payers. But it is a decision to be made at that time (not before) by future generations as to whether they should raise taxes by an amount equal to those interest payments, or by a greater amount to equal retirement of debt.

In the meantime, President Obama’s approval ratings continue to plummet. His scaremongering has little credibility, given the disparity between his rhetoric and his actual policies. At the risk of further upsetting Robert Gibbs, we’ll try to explain why Obama isn’t finding stronger support from his base despite having passed, for instance, a health care bill, a fiscal stimulus bill and a financial regulation bill. For a start, follow the money: with the President and leading Democrats having taken the most campaign dollars from corporate interests those bills purport to challenge, and having gutted the most progressive elements in the bills themselves (see Matt Taibbi’s latest as a perfect illustration of the phenomenon), it is clear that those signature pieces of legislation do not fundamentally challenge the structure of power at a time when that’s what Americans most want. The only “change” most Americans might experience is a reduction in their Social Security benefits from a President currently presiding over one of the most regressive wealth transfers in history. They’ll be receiving nothing but pocket change if a serious attack on entitlements is legitimized by this commission. A scaremongering radio address doesn’t do a whole lot to change that or to alter the country’s current economic trajectory. To paraphrase one of his leading political opponents, Mr. Obama would do well stop practicing the cynical “politics as usual” that his Presidency was supposed to “refudiate”.

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.

(Cross-posted from New Deal 2.0).

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).

The Procrustean Democracy of AmericaSpeaks: Part Seven (Conclusion)

11:49 pm in Uncategorized by letsgetitdone

In my last post, I continued my analysis of the June 26th AmericaSpeaks Community Conversation event I attended in Falls Church, VA, focusing on Step Five in the decision process used in the meeting. In that post I presented the specific option choice frameworks AmericaSpeaks presented to participants in the categories of Non-Defense and Defense spending, and revenue raising, and also analyzed the biases inherent in the way they were structured. In this post, I’ll wind up this analysis of the AmericaSpeaks event, the materials provided to participants, and the biases in their process as I saw them.

Remaining Step 5 Process

For the deficit reduction workbook options exercise, the community conversation group split into two groups. One much smaller group of perhaps 25% of the attendees, listened to the web-streamed introduction to the exercise. They then, filled out their worksheets selecting options and left perhaps 15 minutes to a half hour before the rest of us. Since they weren’t included in the larger discussion, I cannot report on the views of the individuals in this group at all. Most of the other participants, including my daughter and I, gathered around a very large table with one of the two facilitators, and without much introduction, got right to the task of making our choices of options for reducing expenditures and raising revenues. After we made our choices, the facilitator asked us to report them, and moved around the table receiving reports form everyone. Once again, I tried to introduce the option of ceasing to issue debt and saving nearly all of the projected interest costs by 2025. This option wasn’t recorded in any notes, nor was it presented to the group for serious discussion. One woman talked about wanting to cut defense spending by much more than the 15% allowed in the worksheet and also talked about much more progressive taxation than represented in the options work sheet. She claimed she could save much more than the target amount of $1.2 Trillion, but as far as I could see her proposals were not noted for reporting to AmericaSpeaks either.

Two people in the group were very aggressive in both their spending cuts and their revenue raising. They believed that deficits must be stopped and that the Government’s budget, like any household budget, must be balanced. The lack of discussion prevented them from hearing any criticisms of the idea that the Government is like a household. Most people in the group however, seemed to concentrate their savings on having FICA extended to 90% of earnings. Four or five people favored raising the age for full Social Security eligibility to 69, and some favored raising FICA rates to 14.4% by 2025. A majority were for cutting Defense Spending by 10%, and also for cutting Medicare and Medicaid by 5% by 2025. Two or three were for tax reform and saving as much as $642 Billion that way, a small minority of the group. New taxes were somewhat popular, but not the Value-Added Tax (VAT) which had only one or two supporters. In contrast, a securities transaction tax had majority support, and a carbon tax had appreciable table support, but seemed short of 50% of the people at the table. In all, the majority of people around the table favored a broad combination of cuts and taxes to raise revenues, but the average view seemed quite a bit short of the 1.2 Trillion target and clustered at around $900 Billion. This number has to be viewed as a loose estimate, because I was not in as good a position as the facilitators to get a clear figure of total savings from everyone in the panel. I did have the impression however, that there was not a lot of enthusiasm for Social Security and Medicare cuts, but that people would grudgingly select these options if they believed in the idea that there really was a deficit crisis.

The process leading to the many judgments made by participants about options and the above results was, in my community conversation, remarkably devoid of discussion. Once our facilitator, very briefly, introduced the exercise, we made our judgments and then reported on them to the group. There was hardly any discussion of what people reported. Everyone gave reasons for some of their judgments, but there wasn’t time to discuss them, since the big table had about 18 -19 people, and there was only about an hour for the whole options workbook activity, and everyone had to report on their choices and reasons during that time.

When the reporting period was over, the facilitator provided a narrative of what the participants, taken as a whole, thought about spending cuts and revenue measures. But there was no time for discussion of this narrative either.

This part of the process brought us to 3 PM and it was nearly time to adjourn the meeting. The facilitators then ended the meeting with step 6, which, once again, is:

Conduct End of Day Survey and close the meeting.

In our case, this survey was very truncated compared to the exercises outlined in the worksheets, another casualty of the abbreviated process. It became a request for the participants to record the most important message they wanted to send to AmericaSpeaks. There were diverse messages expressed. To the extent there was a common message, a number of people expressed the view that they thought it was important that those who were most responsible for creating the economic disaster resulting in our economic mess, should be the ones to pay for it, and there was support for taxes that would recoup money lost to bailing out the banks and the financial industry. Finally, the facilitators thanked everyone for participating and called the end of the meeting. Then people took another 15 minutes to discuss the activities among themselves, to socialize a bit and to help the primary facilitator clean up the room we were using, and carry her materials outside the building.

The List of Biases

In my analysis of the various steps in the AmericaSpeaks process, along with the materials they used to direct and guide participants through the process, I focused on the various places where bias could be found and on identifying these biases. Altogether, I found 32 instances of bias distributed across every major step in the event process. I think it’s important that all of the biases I found be available in one place. So I’ve listed and summarized them below. For a full description of the biases see the previous posts in this series.

1. The very selection of the problem, along with the characterization that we face a deficit crisis, indicates a bias. The US is in the midst of its most severe recession since the Great Depression, and a recession that we were far from out of on the date of the meeting. It’s clear that “the deficit problem” has been imposed by AmericaSpeaks, and was not selected as the problem that most merited examination based on a national poll.

2. The group attending the meeting was biased demographically, and also was characterized by disproportionate representation of professionals and highly educated participants. In addition, the meeting was truncated to 3.5 hours, leaving no time to question the problem frame of the meeting and reduce its bias toward deficit reduction.

3. An opening discussion questioning the problem frame of the meeting and the facilitator’s reaction to it, showed that the facilitator intended to drive the group according to the pre-planned agenda and orientation to provide information that would be structured in the way that AmericaSpeaks wanted. Not only was the topic pre-selected to fit the preferences of AmericaSpeaks, but participants in the event would not be allowed to revise it in any serious way to fit their needs, and they would also be run through an agenda of exercises, designed to produce results within a certain range, and in a compressed time.

4. A biased event narrative was created focused on the deficit crisis as a very serious problem demanding action to avoid fiscal disaster in the long term, along with a failure to consider alternative views that there is no crisis at all, or that deficits don’t matter at all in nations having non-convertible currencies owing no debts in foreign currencies, because they have no solvency risk. This bias was reinforced by a slick Federal Budget 101 booklet and web streamed introductions and speeches.

5. AmericaSpeaks used an extension of CBO projections of the fiscal and economic future without questioning, or developing, alternatives to these that better reflect historical growth rates in the United States, and without considering that economic projections like CBO’s even a few years out, and certainly 15 – 35 years out, are frequently subject to massive errors. The bias towards CBO-based projections is a big factor in supporting the case that there is a deficit problem. Alternative projections, depending on assumed growth rates might well project surpluses, rather than severe deficits, debts, and debt-to-GDP ratios. In focusing on CBO-based projections alone, AmericaSpeaks is telling people only one fairy tale, the one, among a very large number, that will scare the pants off them.

6. AmericaSpeaks commits to the view that growth in the national debt, if not controlled, risks that one day ”lenders” (the bond market) will be unwilling to lend US Dollars to the United States, or failing that would require higher interest rates from the Government. This ignores the alternative view that 1) the US doesn’t have to borrow money in the bond market and 2) the US can structure its debt issuance so that interest rates can be driven down to zero. The bias is not a matter of its accepting the bond market risk view and presenting it to participants, but its failure to present the alternative suggesting that there’s no solvency or sustainability problem, and also that there’s no interest problem, since interest costs could be going down to near zero very soon, if the Government chooses not to issue debt after spending.

7. There’s also bias in making the assumption that the national debt is the sum of deficits and surpluses since the founding of the country. This equates debts and total deficits, and conflates Government spending with Government debt issuance. They’re not the same, so total deficits may not equal total debts. If the Government stops issuing debt, but keeps on deficit spending, total debts and total deficits will vary greatly. Neglecting to inform participants of this possibility biased the decision process since participants were led to accept the AmericaSpeaks view that spending must be accompanied by debt, which, of course, probably led them to suggest cuts in Government spending, they otherwise would have not have suggested.

8. The constant emphasis on the desirability of balancing the budget, if possible, and achieving surpluses is another instance of bias. In the absence of inflation, surpluses are bad, not good, for the American Economy. The historical record shows that they always precede serious recessions or even depressions. By not considering the view that surpluses may be bad for the economy, and not educating the participants about this view, and by also constantly driving home the message that surpluses are good and deficits, while they may be necessary during recessions, are somehow negative and less than moral, AmericaSpeaks introduced still more bias into the the Town Meetings and Community Conversations. The ratings made by people in the various meetings might have been very different, if they had been informed about the historical correlation between surpluses and recessions or depressions.

9. Presenting rising health care costs as just due to the aging of the American population, with the implication being that we ought to control these costs by cutting Medicare and Medicaid is another instance of biasing the process. What about considering other factors in rising health care costs over time? How much are rising costs due to health insurance company behavior and provider behavior? Both insurance costs and provider costs are far lower in other wealthy nations than they are in the United States. So why didn’t AmericaSpeaks discuss these factors and their role in rising costs? Is it because they’re trying to suggest solutions that ask working Americans to sacrifice, but not insurance companies or providers?

10. AmericaSpeaks tells us that the corporate bailouts were one-time events and will have no impact on future deficits. But clearly this view neglects the cumulative political effects of the bailouts. The bailouts have created a moral hazard and an expectation that the Government will bail out companies that are “too big to fail.” Why isn’t this recognized as a cumulative effect? Was this an attempt by AmericaSpeaks to persuade people that corporate bailouts aren’t so bad because, according to AmericaSpeaks, they have little to do with long-term fiscal problems, and, consequently, participants should not select workbook options that increased corporate taxes too much?

11. The assumption that we can’t grow our way out of the deficit crisis, assuming also that there is a crisis, is an indicator of bias because it wasn’t accompanied by presenting the possibility of a return to growth patterns of earlier decades, which would produce much more tax revenue and either end high deficits, or cut into them deeply enough that “the problem” could be solved with savings in interest costs produced from new debt issuance policies. Did AmericaSpeaks push the “we can’t grow our way out of it” view on participants because of its bias against the possibility than restoring very active Government intervention in the economy could raise growth rates enough to eliminate or partly eliminate the perceived deficit problem?

12. There’s more bias in the framing of a pre-survey suggesting that deficits could only be cut by raising taxes or cutting spending. Neither increasing economic growth and reaching full employment, nor ceasing to issue debt after Government spending, were included among the six propositions provided in the pre-survey.

13. In a question about sources of deficits, failing to mention continuing to issue debt instruments following Government spending, continuing foreign wars, and recurring recessions or depressions, is another instance of bias. And, in asking that question the way they did, implying that corporate bailouts don’t create a moral hazard that can increase deficits in the future, is yet another.

14. Asking people to “share your greatest hope for the future of the country that your children, grandchildren and future generations will inherit,” without making clear that the idea that our children will have to pay down the national debt is a highly controversial statement which many economists think is not true.

15. Asking a question to get people to think about projecting the future in the context of their feelings about the present, without asking them to exchange views about why they felt one way or another about the recovery and its importance relative to deficit spending, and whether there is a deficit spending problem or not, is another instance of clear bias in framing the decision process.

16. Asking the question: ”What are the core values that should guide decisions about our country’s fiscal future?” and then structuring the reply by imposing three value dichotomies imposing a conservative values framing in order to maintain the bias in the proceedings toward deficit reduction and self-sacrifice, is another very obvious way of directing the process to create the desired outcome.

17. The failure of AmericaSpeaks to include growth-oriented policies in the options workbook, such as a full employment-oriented Federal Job Guarantee (FJG) policy option, due to denial of the possibility that the US could possibly grow its way out of its deficits, reinforces the framing that deficit reduction is necessary.

18. AmericaSpeaks’s selection of the year 2025 as the target year for deficit reductions realizing $1.2 Trillion in Federal budgetary savings when projections of conditions 15 years out are known to be entirely unreliable suggest bias in design of the process. And failure to provide several equally likely alternative projections embodying other than the pessimistic growth scenario based on extension of CBO projections through 2020, confirms that bias.

19. Perhaps the most important aspect of bias in the AmericaSpeaks options workbook and ensuing discussion, and in the whole design of the decision process, was excluding the topic of whether an activity aimed at choosing revenue raising or spending cut options for the purpose of reducing the deficit is a legitimate exercise at all. In not asking this question, AmericaSpeaks implicitly takes a policy position. It is saying that an important aspect of Government activity must always be to manage the deficit, the national debt, and the debt-to-GDP ratio and that this is the meaning of fiscal sustainability and fiscal responsibility.

There is a counter to that policy position. It is that for a government that is sovereign in its own non-convertible fiat currency, in the sense that it has the constitutional authority to issue an unlimited amount of it without the need for any commodity backing and also that it has no external debt in foreign currencies, there is no solvency risk from the simple fact of Government expenditures. And also no Governmental Budgetary Constraints (GBCs) that are not self-imposed — beyond constraints that arise from the effects of Government Spending such as employment levels, economic growth, price stability, environmental and climatological outcomes, national security outcomes, education outcomes, etc. The deficit, national debt, and debt-to-GDP ratio are not important in themselves, and should not viewed as policy concerns or policy targets. They are not indicators of anything that ought to be managed, or constrained, or otherwise influenced. They are a distraction from the real issues, the real outcomes of Government spending such as those listed above.

This policy position was not considered in the supposedly neutral, non-partisan, and unbiased decision process run by AmericaSpeaks. Had it been, the option conversation wouldn’t have been about options for reducing the deficit in 2025. Instead it would have been about options for creating a new economy by 2025, and options for creating greater equality of opportunity in American society, or options about creating a new energy foundation for our economy. In other words, it would have been an entirely different conversation.

20. Participants are constrained by the options workbook from considering options relating to either premium support or single-payer approaches to health care reform. In particular, the single payer approach is the most important one, since there is much survey evidence suggesting that 2/3 of the population prefers Medicare for All to any other approach. The excuse given for this is that America doesn’t seem ready to support fundamental reform including single-payer. However, the exercise asks the participants to suggest options that would save $1.2 Trillion by 2025. So what is politically feasible right now in 2010 isn’t really relevant to this task. The mood of the nation could easily change by 2011, 2012, or by 2014, and certainly by 2020, in ample time to save substantial Federal expenditures on Health Care through single-payer. By constraining participants from considering single-payer options, AmericaSpeaks hews to the orientation of the President’s Fiscal Commission and their narrow and false notion of fiscal responsibility.

21. Due to very limited information provided about the impact of health spending cut options, participants are largely flying blind in selecting options, and when they are further constrained by the workbook about selecting other options whose consequences they may understand much better, the exercise in selecting options departs even farther from either objectivity or reasonableness.

22. A major assumption underlying the workbook structure is the view that Government can only pay its Social Security obligations by bringing in more revenue, reducing benefits, or borrowing more, and adding to the debt, and these are the only ways for Social Security to avoid insolvency, so that’s why hard choices have to be made by the participants in the workbook exercise and by the US Government itself. The only problem with this argument is that Government doesn’t have to either raise more revenue, or reduce benefits, or borrow to pay its Social Security obligations. It can just spend, and even though this will increase the deficit, it won’t increase the national debt, unless it insists on continuing its practice of issuing debt after it spends money. However, this alternative view of how Government can spend was never presented to the participants in the community conversations or the meetings in 19 cities. So no one had an alternative view of how to meet Social Security obligations other than by raising revenue through taxation, cutting spending, or borrowing. As a result they entered the process of selecting options relevant to the future of Social Security with a limited and biased perspective.

23. The option, “create personal savings accounts within the system,” was included among the revenue options relating to Social Security. According to the scorecard distributed at all the meetings, the potential deficit reduction attached to this proposal by 2025 is negative $61 Billion. That is, it adds to the deficit, a very clear indication of bias in the decision process. Peter G. Peterson whose foundation is a major supporter of AmericaSpeaks has advocated privatization of Social Security for many years. What can this option be except a concession to a funder’s pet notions, and a concession that is totally inconsistent with the avowed purpose of cutting deficits in this exercise?

24. Together the Social Security options in the workbook add up to a projected total of $92 Billion in savings by 2025. Considering that the projection of GDP for that year is $27.3 Trillion, the savings are less than 0.3 of one percent of GDP, and only 1.3% of the projected Federal Budget for that year. The question is: why bother? Why get people angry for such a small saving, especially since the Government has no solvency risk in continuing to pay all benefits at the present level forever? Surely, including Social Security in this scorecard is nothing but an ideological bias of right-wing funders who have always been against that program.

25. A conservative bias is also visible in the option calling for raising the limit on taxable earnings to 90% of all such earnings. On its face that seems like a concession to progressivism, but there are two glaring questions about this. First, why are any taxable earnings exempt from FICA taxes? If the deficit problems are so serious, then why have any exemptions? And secondly, why not make FICA contributions progressive? If we’re really so much in need of revenue because Social Security is becoming insolvent then why shouldn’t everyone pay their fair share according to their income as in progressive taxation? I’m not so much advocating these options as asking why they’re not among those considered. They’re obvious options, and the decision to exclude them suggests ideological bias in the process.

26. The option to increase spending across all Non-Defense categories, and to do so on a detailed scorecard was not provided to participants. It was assumed that the task was to cut spending in Other Non-Defense areas. The counter assumption that much heavier spending is needed in these areas was not represented. Why not? Republicans and Blue Dog Democrats have been starving non-defense Federal programs since the days of Jimmy Carter to pay for tax cuts and, more recently, expensive wars, so these programs have been short-changed in every category, and there is also a need for new programs, not even conceived here.

27. There’s a not so subtle bias against the sub-categories within the Non-Defense category, relative to the other major categories, because it’s assumed for example that Health Care, Social Security, and Defense, are important enough to get their own category, while, for example, Energy, the Administration of Justice, and Education are not.

28. The options workbook presents a choice framework that is far too narrow to accommodate the possibilities inherent in reality. It has the kind of conservative bias we saw in economic projections prior to 2008 which could not envision the existence of a housing bubble and the possibility of a crash of the global economy. The thinking underlying the AmericaSpeaks options framework, which it imposed on participants is completely devoid of Black Swan considerations, and hedges to guard against Black Swans. To take account of these in Defense Spending, their framework had to be much broader and participants had to be allowed a much greater range of choices with respect to the defense budget and both increases and deeper cuts had to be allowed.

29. The way AmericaSpeaks channels its bias into the options decision process is through its selection, or lack of selection of options for decision, and also through its wording of options. Here, the most obvious bias is in the exclusion of options for decreasing taxes. This would not necessarily lead to declining revenue, because in the past it has often led to the opposite result. In addition, however, the assumption being made is clearly that the Government needs to collect revenue from citizens in order to fund its spending, and that the more revenue it collects the more it will reduce both the size of the deficit and the growth in the national debt. I’ve already pointed out that deficit increases are not the same as debt increases, and that they need not be accompanied by debt issuance. Also, however, the US Government has no need to collect revenue from its citizens to fund its spending, since the Government can just spend and in the process create money. So, participants in the AmericaSpeaks process should not have had their choices framed as either raising taxes or making no changes. They also should have been given options about how they might have cut taxes if they preferred to do that.

30. Why aren’t there options for creating new tax brackets? Setting the top two brackets at $209,250 and $373,650, is a vast concession to wealthy people, which is way, way, outdated given the recent size of incomes we’ve seen produced in various industries. Specifically, why aren’t $500K, $1,000,00, $2,500,000, $5,000,000, and $10,000,000 and over tax brackets, with marginal tax rates set at 45%, 50%, 55%, 60%, and 65% respectively, specified as options for people to select? Also, why were the options for raising personal income taxes phrased as percent increases from present levels? Was it because a 20% increase over present taxes sounds like a much larger increase than an increase from 35% to 42% in marginal tax rate? Earlier when talking about increases in the payroll tax rate, the increase was expressed as 12.4% to 14.4% and not as 16% increase. Was AmericaSpeaks trying to make the proposed income tax rate rise seem large and the Social Security tax rise seem small?

31. The option selection seems arbitrary and biased toward reducing marginal tax rates, something more well-off people would dearly love to do. Also, what is the basis for selecting VAT, Carbon, and Securities Transaction taxes for the new tax category? Why not other taxes? Why a 0.5% tax on securities transactions? Why not a 1.0% tax, or even a 1.5% tax? Is it because larger tax rates would place too much of a burden on well-off traders like Peter G. Peterson?

32. Since the treatment of options in my community conversation was limited to an hour and roughly 18 people were involved, there was no time for any meaningful discussion of the views of participants. Since any criticisms of the structure or introduction of new options was dependent on this discussion, its brief duration biased the process against introducing new options, or even making people think very deeply about their own choices of options. This bias in the process is certainly reflected in a bias in the results, which were constrained by the choices in the workbook and scorecard-like worksheet


Let’s recall what AmericaSpeaks claims about itself and its orientation to its processes and events.

AmericaSpeaks takes pride in its reputation as an honest and neutral advocate for public participation. We play a unique role in the policymaking process by serving as a non-partisan convener of forums that provide the public with an opportunity to make decisions about important issues without fear of manipulation or bias. Our ability to help citizens and elected officials come together around tough public issues is dependent on our commitment to maintaining this neutral role. . . .

AmericaSpeaks does not take positions on policy issues. AmericaSpeaks strives to ensure that only balanced and neutral facts are used to inform discussions on policy issues. We stand by these basic principles that protect the integrity of our process and the faith that participants and decision-makers place in our work.”

AmericaSpeaks raises the issues of its honesty and neutrality in advocacy, its use of “balanced and neutral facts,” and “the integrity of our process.” My attempt to analyze its biases in this series is an attempt to evaluate these claims.

I think the list of biases shows that AmericaSpeaks was neither neutral nor honest in the design of its process for its “Our Budget, Our Economy” event. With one exception, which itself reflected ideological bias, it seems that whenever AmericaSpeaks had a choice about how to introduce a segment of the event, to create a video, to structure a set of options, to construct an instrument, or to facilitate a discussion, it chose to do so in such a way that the process would be constrained and and the participants directed toward making choices to either cut Government spending, or raise taxes. In addition, a very important area for possible deficit cutting, namely interest costs, was completely left out of account by AmericaSpeaks, and within each area, options for choice that would have been uncomfortable for certain interests including one of its prominent funders, simply never appeared. The list of biases covers nearly every part of the AmericaSpeaks process; there was no part of the process that was free of bias. There was no part of the process that was neutral and honest.

In addition, AmericaSpeaks, rather than using “balanced and neutral” facts, in fact used very few facts, and instead relied on projections about a future it developed from CBO projections that are both, based on past performance, subject to the likelihood of severe errors, and also very biased in a pessimistic direction when it comes to projecting economic growth and tax revenues, and therefore likely deficits or surpluses. AmericaSpeaks’s projections are little better than a gloomy fairy tale, that will never have any chance of coming true unless the United States makes the mistake of implementing the austerity programs that the funders and allies of AmericaSpeaks favor.

AmericaSpeaks and its allies are bent on creating a self-fulfilling prophecy of slow growth, austerity, and unmanageable deficits of their own making, and they’re not using “balanced and neutral facts” as their way of making that happen. We’ve been seeing over the past decade that organizations claiming to be “fair and balanced” in the stories they tell, are often exactly the opposite. And like Fox News, AmericaSpeaks, is doing exactly the opposite of what it claims to be doing.

It doesn’t have a neutral and honest process, and opinion generating instruments, and it doesn’t provide “balanced and neutral facts” to its participants. Instead, it designed and implemented the “Our Budget, Our Economy” event to so all it could to elicit results that would support the case for deficit reduction. The event was not a process of free democratic interaction, but a procrustean bed that tried to compress participants into a deficit terrorist mold and manipulate them into regurgitating deficit terrorist talking points.

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