Guest Post: The RJS Aggregator – Government deficits and MMT
Introduction: Here’s another timely compilation of economic commentary by Rj from the Global Glass Onion. His thread highlights a recent interchange between straight Keynesian economists, Paul Krugman, for example, and Modern Monetary Theorists (MMT), like Jamie Galbraith, Bill Mitchell, Randy Wray, and Warren Mosler.
I’ll add just one link to The RJS Aggregator today. At his Benzinga column , Randy Wray describes the monetary mechanics of MMT, which is the cornerstone of several theories (like how government deficits drive down short rates through reserve creation). Rebecca Wilder
Guest Post: RJs Analysis: The debate about government deficits – MMT
by RJ
The Austerity Delusion, by Paul Krugman – “Portugal’s government has just fallen in a dispute over austerity proposals. Irish bond yields have topped 10 percent for the first time. And the British government has just marked its economic forecast down and its deficit forecast up.What do these events have in common? They’re all evidence that slashing spending in the face of high unemployment is a mistake. Austerity advocates predicted that spending cuts would bring quick dividends in the form of rising confidence, and that there would be few, if any, adverse effects on growth and jobs; but they were wrong.It’s too bad, then, that these days you’re not considered serious in Washington unless you profess allegiance to the same doctrine that’s failing so dismally in Europe.Why not slash deficits immediately? Because tax increases and cuts in government spending would depress economies further, worsening unemployment. And cutting spending in a deeply depressed economy is largely self-defeating; any savings achieved at the front end are partly offset by lower revenue, as the economy shrinks.”(Read more after the jump!)
Krugman Is Wrong: The United States Could Not End Up Like Greece – Dean Baker – “I have to disagree with Paul Krugman this morning. In an otherwise excellent column criticizing the drive to austerity in the United States and elsewhere, Krugman comments: “But couldn’t America still end up like Greece? Yes, of course. If investors decide that we’re a banana republic whose politicians can’t or won’t come to grips with long-term problems, they will indeed stop buying our debt.” Actually this is not right for the simple reason that the United States has its own currency. This is important because even in the worst case scenario, where the deficit in United States spirals out of control, the crisis would not take the form of the crisis in Greece. Greece is like the state of Ohio. If Ohio has to borrow, it has no choice but to persuade investors to buy its debt. However, because the United States has its own currency it would always have the option to buy its own debt.”
Deficits and the Printing Press – Paul Krugman – “Right now, deficits don’t matter — a point borne out by all the evidence. But there’s a school of thought — the modern monetary theory people — who say that deficits never matter, as long as you have your own currency. I wish I could agree with that view — and it’s not a fight I especially want, since the clear and present policy danger is from the deficit peacocks of the right. But for the record, it’s just not right. Suppose that we eventually go back to a situation in which interest rates are positive, so that monetary base and T-bills are once again imperfect substitutes; also, we’re close enough to full employment that rapid economic expansion will once again lead to inflation. Suppose, now, that we were to find ourselves back in that situation with the government still running deficits of more than $1 trillion a year, say around $100 billion a month. And now suppose that for whatever reason, we’re suddenly faced with a strike of bond buyers — nobody is willing to buy U.S. debt except at exorbitant rates. So then what? The Fed could directly finance the government by buying debt, or it could launder the process by having banks buy debt and then sell that debt via open-market operations; either way, the government would in effect be financing itself through creation of base money. So we’re talking about a monetary base that rises 12 percent a month, or about 400 percent a year. Does this mean 400 percent inflation? No, it means more — because people would find ways to avoid holding green pieces of paper, raising prices still further.”
Krugman, Galbraith, and others debate MMT – “Paul Krugman slugs it out with our colleague Jamie Galbraith and many other “modern monetary theory” partisans at Krugman’s New York Times blog website. Jamie’s most recent retort is at the top of this page of the blog site. Many of the points raised in the discussion there are central to our work here at the Levy Institute and to the views of Galbraith and others in our macro research group”.
A Further Note On Deficits and the Printing Press – Paul Krugman – “A followup on my printing press post: I think one way to clarify my difference with, say, Jamie Galbraith is this: imagine that at some future date, say in 2017, we’re more or less at full employment and have a federal deficit equal to 6 percent of GDP. Does it matter whether the United States can still sell bonds on international markets? As I understand the MMT position, it is that the only thing we need to consider is whether the deficit creates excess demand to such an extent to be inflationary. The perceived future solvency of the government is not an issue. I disagree.”
Paul Takes Another Swipe at MMT – The Modern Monetary Theory (MMT) approach to economics must be starting to make some waves, because today, Paul Krugman, followed his earlier attack on it and his debate with Jamie Galbraith and others last summer, with another swing at MMT. The debate last summer was an extensive one at Paul’s blog site at the New York Times, and, in addition, there were a number of posts at other sites replying to Paul. The debate was a classic in the developing conflict of views between the “deficit doves” (represented by Paul) and the “deficit owls” (represented by Jamie Galbraith and other MMT writers). Given the earlier debate, you’d expect that Paul’s second try at MMT would reflect a bit of learning on his part, and also a characterization of the views of MMT practitioners that is a little more fair than he provided in his first attempt. This post will analyze Paul’s new attack and assess how much he’s learned. But first, I’ll review the earlier debate.
The Euro Straitjacket – Paul Krugman – I think Dean Baker and I are converging on deficits and independent currencies. He asserts that having your own currency makes a big difference — you can still end up like Zimbabwe, but not like Greece right now. I’m fine with that. Specifically, the reason Greece (and Ireland, and Portugal, and to some extent Spain) are in so much trouble is that by adopting the euro they’ve left themselves with no good way out of the aftereffects of the pre-2008 bubble. To regain competitiveness, they need massive deflation; but that deflation, in addition to involving an extended period of very high unemployment, worsens the real burden of their outstanding debt. Countries that still have their own currencies don’t face the same problems. I like to use this picture, showing deficits and debt as of the end of 2010: Source.
Dear Paul Krugman, You Do Not Understand MMT – Paul Krugman is out with another misrepresentation of MMT. For some reason, he has come to the false conclusion that MMTers believe deficits don’t matter. He says:“Right now, deficits don’t matter — a point borne out by all the evidence. But there’s a school of thought — the modern monetary theory people — who say that deficits never matter, as long as you have your own currency. But for the record, it’s just not right.”This is an absurd misrepresentation of the MMT position and proves that he has not taken the time to fully understand MMT. In my treatise on the subject I specifically say this is not the case:“Some people claim that MMTers say deficits don’t matter. That is a vast misrepresentation of MMT. No MMTer would ever say such a thing. Deficits most certainly do matter. Maintaining the correct level of deficit spending is, in many ways, a balancing act performed by the government. It is best to think of the government’s maintenance of the deficit like a thermostat for the economy.
The MMT solvency constraint – Steve Randy Waldman – “It is good to see Paul Krugman prominently discussing “modern monetary theory”, although I don’t think his characterization is quite fair. I am an MMT dilettante, so I’ll apologize in advance for my own mischaracterizations. But I think the MMT view of stabilization policy can be summed up pretty quickly: …I think this is a clever and coherent view of the world. I do not fully subscribe to it — in my next post, I’ll offer point-by-point critiques. But first, let’s see where I think Paul Krugman is a bit off in his characterization: A 6 percent deficit would, under normal conditions, be very expansionary; but it could be offset with tight monetary policy, so that it need not be inflationary. But if the U.S. government has lost access to the bond market, the Fed can’t pursue a tight-money policy — on the contrary, it has to increase the monetary base fast enough to finance the revenue hole. And so a deficit that would be manageable with capital-market access becomes disastrous without.“
More on Modern Monetary Theory – “I view this debate as another round of “deficits don’t matter,” which was the hue and cry from both the left and the right a decade or so back as we were digging the hole we’re now in. Let me say at the outset that I sympathize with the goals of Jamie Galbraith and others who would like to see the Fed finance Great Depression-type jobs programs, education, and other investments in human and physical capital. It is what the country needs.However, I view the problem not as insufficient aggregate demand but as our broken social contract, our broken government, our broken American dream. Printing more money will just go into the pockets of the plutocracy if the banking bailouts and the Stimulus are any indication. MMT is a joke in the present monetary historical context.”
Paul Krugman gets it wrong…. Again. – I’d say the deficit debates were heating up again, but I don’t think they’ve let up since before last year’s Peterson Foundation Fiscal Summit (orthodoxy for neoliberal deficit hawks) and the grass roots Fiscal Sustainability Teach-In and Counter-Conference, both held on April 28, 2010. The Teach-In provided an important corrective, known as Modern Monetary Theory (MMT), to the false narratives of both deficit hawks and deficit doves. Yesterday, Paul Krugman’s blog post Deficits and the Printing Press (Somewhat Wonkish), once again showed his ignorance of MMT, and in the process misinformed his readers (my emphasis): Right now, deficits don’t matter.. But there’s a school of thought — the modern monetary theory people — who say that deficits never matter, as long as you have your own currency. I wish I could agree with that view. But for the record, it’s just not right. The bolded statement, as I’ll show below, is completely false.
James-Galbraith-responds-to-
billy blog » Letter to Paul Krugman – “Dear Paul..We are both academics and have been trained to PhD level in economics. We should therefore understand the difference between good scholarship and bad scholarship whether the final outcome is a peer-reviewed journal article, published book or Op-Ed piece for a popular media publication (such as the New York Times). Examples of poor scholarship:
- 1. Representing an argument by relying on statements by critics of the argument as a reliable construction of the argument.
- 2. Creating a stylisation of an argument that is could not be constructed from a thorough reading of the primary sources in the field. This is the, straw person tactic.
- 3. Presenting analytical arguments to support an attack on a school of thought which are erroneous.
- 4. Making stuff up – this embraces the previous three examples. I refer to your two articles in the New York Times:
- (a) Deficits and the Printing Press (Somewhat Wonkish) – March 25, 2011 and then what seems to be a qualifying article –
- (b) A Further Note On Deficits and the Printing Press – March 26, 2011.”
Paul Doubles Down On Ignorance, Misconstrual, and Vague Scenarios – “After the scorching he received in many of the comments on his printing press post Paul Krugman decided to dig his MMT blogging hole even deeper. He says: “. . . I think one way to clarify my difference with, say, Jamie Galbraith is this: imagine that at some future date, say in 2017, we’re more or less at full employment and have a federal deficit equal to 6 percent of GDP. Does it matter whether the United States can still sell bonds on international markets? The most important thing to note about this scenario illustrates Paul’s penchant for simplistic examples that mean nothing without further context. There are many ways in which Paul’s scenario can be fulfilled, and they would make a big difference in the reactions of the bond markets, even if the Government chose not to manage bond interest rates to drive them down to zero. For example, let’s say that the world still desires to send the United States more goods and services than it receives from us, about 3% of US GDP more, and let’s also say that the US private sector wants to run a surplus of 3% of GDP; then the Government will be running a deficit of 6% because its deficit must equal the sum of the absolute value of the negative current account balance, and the private sector savings surplus. In that realization of Paul’s scenario, would the US have any trouble selling bonds? It’s very doubtful, since what would those who exported to us do with USD they received in payment for their goods and services, except to buy our bonds?”
If you like large error bounds – “And lousy correlation coefficients, then the Modern Money Theorists are right. We can regulate money with printing and taxes. Unfortunately, 90% of the economy has much better estimates of taxes and printing then the MMT folks. The economy figures this stuff out before taxes go haywire. The economy is much more accurate about itself than Martin Wolf, Paul Krugman or the MMTs. If you want to be a good economist, I suggest you would have at least the same accuracy as the economy. How can we have an economic theory that depends on economic agents reading our columns? I get that entanglement is part of economics, the same as in physics. But it is too far fetched to go from a NYT op ed to the demand for eggs. The economy lives on information, suggest the economists keep up.”
US Employment and Wages, Modern Monetary Theory, Trade, and Financial Reform – Jesse – “On another note, there is renewed discussion of ‘Modern Monetary Theory,’ and some have asked me again to address this, as I have done previously. I have only this to add. I see no inherent problem with the direct issuance of non-debt backed currency as there is sufficient evidence that it can ‘work.’ Indeed, my own Jacksonian bias toward central banking would suggest that.I think the notion that the Fed is some objective judge of what is best for the public welfare without effective oversight or restraint is anti-democratic and probably un-Constitutional, at least in spirit, as it has been implemented. And this notion that the FED and the discipline of the interest markets could reliably emulate an external restraint on excessive money creation is deeply flawed.The problem becomes then how to implement a fiat currency without the discipline of issuing debt through private markets. This is the important point that most MMT adherents seem to ignore, but it is their greatest area of strength.”
What’s the difference between government bonds and bank notes? – Ed Harrison – “In light of a recent post by Randy Wray, I’d love to have some readers here answer my question. The Treasury doesn’t have to issue [government] bonds at all. In fact, since the Treasury does control the electronic printing press, it could legitimately buy stuff with money it prints out of thin air. Sounds a bit like counterfeiting, doesn’t it? But, let’s step back for a second: what is the functional difference for the federal government between Treasury securities and bank notes? Both are liabilities of the federal government. But liabilities of what? The only obligation they enforce on the government is the promise to repay with more paper (or electronic bank credits, if you will). For all intents and purposes, bank notes, reserve deposits, and Treasury securities are fungible: they are obligations to be repaid in the same fiat currency.”
Krugman:
“Deficits don’t matter” .. “We need another $1T stimulus” .. “Social Security is solvent” .. “monetizing debt won’t cause inflation” ..
How does what he says, still get taken seriously.. and at what point do even sane liberals stop listening to him ?
As far as I can tell, all of your statements above (which you apparently are attributing to Paul Krugman, though I doubt he ever said exactly those things) are true.
And I am a sane liberal.
Show me how you think Social Security is insolvent. References to republican talking points don’t count.
No talking points needed.. just the SS Administration, and the CBO, and simple math..
SS outlays are now exceeding it’s revenues.. and the trust fund has long since been spent.
Here:
http://www.angrybearblog.com/2011/03/why-we-dont-need-to-repay-social.html#more
Anything either of would argue, is most likely in this discussion…
No you fool, the Trust Fund has not been spent. The Trust Fund represents the FICA revenues that had been lent to the Treasury Dept over the years and that Treasury borrowing is represented by the Treasury Notes issued to the Trust Fund as an accounting mechanism to delineate the amount of Social Security funds, FICA
revenues, that have been used for other government purposes. It is well established in the legislation which governs the SS system.
You were not supposed to fall back on political talking points and claimed that you weren’t doing so, but sure enough there you are spouting documented bullshit with public relations tripe.
It’s not talking points.. spent money is spent money… not one penny of those bonds can be put to use.. without the general-fund FIRST paying them back… in real terms TODAY, the trust-fund might as well not exist.. no difference between deficit spending to pay them back.. or the same deficit spending to just pay for SS obligations (above revenue) straight out of the general fund.
The accounting mechanism was to allow the politicians to spend the trust-fund money… caint unspend it…
We went over this per that link… plenty of name-calling there.. and anything either of us would argue is already in there..
Well stated (and linked) in that discussion; is the CBO / SS Adm .. pointing out clearly; that the trust-fund bonds are an effective “wash” (their words, not talking points).
As for tripe ?
“FICA revenues, that have been used for other government purposes“
That’s an awfully tripey way to say .. “spent”
Whichever theoretic persuasion, ‘structural adjustment’ is unlikely to have positive outcome –
From 1982 right up to the economy’s collapse in late 1994, the Mexican government implemented virtually all of the adjustment policies promoted by the World Bank and the IMF: reductions in public expenditures (including social services); elimination and/or targeting of subsidies; tax reform; restriction of credit; privatization of most state enterprises; trade liberalization; devaluation; removal of barriers to foreign investment; and “competitive” wages. Privatization and deregulation contributed to a steep concentration of income and wealth, a trend that ran counter to the imperative of creating a strong domestic market as a factor in ensuring sustained economic growth. In what analysts term a “trickle up” process, there was, in Mexico, a massive transfer of resources from the salaried population to owners of capital, and from public control to a few private hands.
Robinson Rojas Archive
http://www.google.co.uk/custom?domains=www.rrojasdatabank.info%3Bwww.purochile.rrojasdatabank.info&q=structural+adjustments&sa=Search&sitesearch=www.rrojasdatabank.info&client=pub-8393813525429736&forid=1&ie=ISO-8859-1&oe=ISO-8859-1&safe=active&cof=GALT%3A%23008000%3BGL%3A1%3BDIV%3A%23336699%3BVLC%3A663399%3BAH%3Acenter%3BBGC%3AFFFFFF%3BLBGC%3A336699%3BALC%3A0000FF%3BLC%3A0000FF%3BT%3A000000%3BGFNT%3A0000FF%3BGIMP%3A0000FF%3BLH%3A38%3BLW%3A241%3BL%3Ahttp%3A%2F%2Fwww.rrojasdatabank.info%2Farcheng.gif%3BS%3Ahttp%3A%2F%2F%3BFORID%3A1&hl=en
RweTHEREyet: “without the general-fund FIRST paying them back… in real terms TODAY, the trust-fund might as well not exist.. “
So your position is that the gov’t cannot be trusted to pay its obligations. And yet you do not vigorously call for the gov’t to do so.
Perhaps you are not an American, but are critical of the U.S. OK, you are entitled to your opinion. But if you are an American, why would you want the gov’t to be irresponsible?
What is so difficult to understand. The Treasury, as directed by congressional legislation, issues Treasury Notes for the amount of FICA revenues in excess of benefit requirements each year. Yes, the Treasury uses those borrowed funds in the same way that it uses the funds it receives when you, China, Japan or JP Morgan Bank buy T-Bills. Do you hold any ten, twenty or thirty year notes? Now that the Treasury has spent that money is it no longer indebted to you for the interest and principal value of those notes? Treasury Notes held by the Trust Fund are no different and are the product of legislative action.
You’re being dishonest in your description of the SS Trust Fund. Try facts rather than BS.
juan: “Whichever theoretic persuasion, ‘structural adjustment’ is unlikely to have positive outcome”
Then how is it an adjustment?
Min: So your position is that the gov’t cannot be trusted to pay its obligations. And yet you do not vigorously call for the gov’t to do so.
I absolutely trust the government to honor those bonds, and fully expect them to… I’m just acknowledging that honoring them or, or paying for the SS shortfall directly from the general fund, is one-in-the-same… Since that money has long-since been spent.
This isn’t my opinion.. it’s actuary fact. The first shortfall is coming this year (~$40B).. You tell me where that 40B will from ? How does the SS trust-fund get money in exchange for those bonds ? The politicians SPENT that money.. we can’t sell back a section of highway, or extract it from a federal employees pension.. That payback has to come out of TODAY’S budget.. added expense to a budget already in deficit, means more deficit.
Dishonest in what way ? What have I said that is untrue ?
Here’s a quote from the CBO itself :
When a trust fund receives payroll taxes or other income that is not needed to pay benefits immediately, the Treasury credits the fund and uses the excess cash to reduce the amount of new federal borrowing that is needed to finance the governmentwide deficit. That is, if other tax and spending policies are unchanged, the government borrows less from the public than it would in the absence of those excess funds. The reverse is the case when revenues for a trust fund program fall short of expenses. Thus, the balances of trust funds are not a measure of resources available to pay future obligations for the respective programs; those resources will need to come from federal revenues or additional borrowing in the years those obligations are due.
http://www.cbo.gov/ftpdocs/108xx/doc10871/AppendixD.shtml
See ? It aint hard to understand.. As SS is now paying out more than it takes in.. the act of casshing in those bonds is an expense TODAY… that surplus has long-since been SPENT.. it’s gone.. outhere, is no more.. We can’t pay SS recipients with chunks a roads, or out of federal employee salaries… we have to pay them out of general fund.. and since it’s running a $1.6T.. we have to BORROW to cover it.
You’re asserting that we coulda spent the trust-fund money.. AND honor the bonds put in its place without consequence.
RweTHEREyet that CBO statement about the trust funds is true and applies equally to the “$100” printed on my US Savings Bond: it is “. . . not a measure of resources available to pay future obligations . . . those resources will need to come from federal revenues or additional borrowing in the years those obligations are due.”
What point are you trying to make at this posting? I have that US savings bond, savings and checking accounts, and stock. All of my money was spent by the government, banks, and corporations. None necessarily can pay me back in the future without getting more money somehow. Are they all insolvent? Was my money not supposed to be spent by them? Can I retire or not? You’re scaring me–I’d dismiss the fear if I thought you were repeating a political talking point meant to unsettle me. I have no reason to doubt your sincerity, so are you sure you haven’t been misled by fear-mongering pols taking true statements out of their proper context?
PJR: Are they all insolvent?
This is not a question of the government’s (or a company’s) solvency.. it’s a question of SS solvency. .. and a recognition (by the CBO, not me), that those bonds are an effective wash.. that’s all there is to it. That SS money has long since been spent, and now the SS obligations have to come out of TODAY’s spending.. nothing diabolical, or misleading about facing that.
Your $100 savings bond might as well be a trust-fund bond; in that yes, the government promises to pay you back whatever it was that you spent, plus interest. Now.. when you go to cash it in .. the government has part with X dollars. If you had a $40,000,000,000 bond, they’d have to come up with $40,000,000,000. Where does that money come from ?
As for stock.. they are an explicit claim to partial ownership in a company.. if the compnay goes belly-up.. those stocks are worthless.. apples and oranges.
As for money in a bank ? The bank is just a conduit. They’re daily expenses aside.. they take the money you lent them, and lend it to others. They aren’t just “spending” it. A better comparison would be if one department of the bank sold bonds to another department.. put those bonds in your savings account, and then spent your savings on daily expenses. When you went to get your money, they don’t have investments against the bonds now making up your account.. they SPENT it, and will have to take real money out of their budget, to reconcile your account. That’s the difference. The feds SPENT the SS money.. and making good on trust-funds takes real money out of today’s budget.
Your retirement account is another good example. Let’s say you have $10,000 in an IRA. Your daughter wants an expensive wedding. You borrow against the IRA to pay for the wedding. THat IRA balance is now a lien on you. You aint getting a penny out of it, until you put a penny back into it,, make sense ?
Re-read the CBO link I posted.. it’s pretty straight-forward. No fear-mongering.. just the reality we face..
Let me simplify it… Nobody is saying that SS checks won’t be issued. The discussion is now, as we’re trying to get the federal deficit under control, that SS obligations are gonna be a big part of deficit spending.
The argument that tries to circumvent that reality, is rooted in SS’s self-sufficiency… ala “SS doesn’t add to the deficit” .. which is silly.
You could, in all good faith, hold up the statement from Your afformentioned IRA showing a $10,000 balance.
Trouble is (when trying to use that IRA to fund retirement), that balance is a “bond” that YOU have to repay.
So.. it’s not an argument about whether or not SS obligations will be met.. it’s an acknowledgment that since the trust fund has been spent.. meeting them, is deficit spending today.
The Trust Fund reesources have not been spent. They have been invested in Treasury notes. The government has used that invested money, as it does all other moneys invested in T-Bills, to cover its current costs. That did not reduce the deficit one dollar, so much as it simply created additional debt to cover the general budget hort fall. You can parse the terms in any way that you care to, but the facts remain. The Treasury issues notes in exchange for borrowed funds. The Trust Fund is one of the investors in that exchange. It is not a spender of those funds until it needs to cash its Treasury debt in order to pay benefits.
The effort to make it seem as though the SS beneficiaries created the budget deficinecies is an extention of the deception. Or maybe its the primary intent of the deception. “It’s their fault so they don’t deserve to receive their benefits as was originally scheduled.” “We spent their money so now its time for them to take a greater share of the responsibilithy for that expenditure.” The logic is ass backwards and intended to deceive.
The SS benificiaries (me included) are not to blame.. It was the politicians who spent the money.
It cannot be spelled out any clearer, than that CBO document …
Thus, the balances of trust funds are not a measure of resources available to pay future obligations for the respective programs; those resources will need to come from federal revenues or additional borrowing in the years those obligations are due.
No matter how much you protest, or slander me in protest.. this year’s bugdet (if they ever pass one) WILL include $40B to cover the SS un-funded liability.. and the ensuing budgets for the foresee-able future WILL include hundreds of billions to cover SS un-funded liabilites.. it will happen as surely as the sun rising every morning; right before our eyes.. documentable fact, Jack (couldn’t resist)
Now.. believe whatever you need to believe.. or go email the CBO and argue with them.. this circular debate is tiring.
Believe there was a shortfall last year between the total collected in the normal course of business and the total disbursed in the normal course of business . The overall Trust Fund earns interest and that interest income last year exceeded the shortfall: thus the total Trust Fund Balance INCREASED year over year (even after paying for the shortfall) – {earlier discussion thread here at AB} The net assets of the Trust Funds will continue to earn interest in this year. If there is a shortfall – which you indicate there will be – the total interest earned on the Trust Fund Assets will cover it – and it is expected that the net Trust Fund Assets will be larger at the end of this year than they were last year.
Jim, paying SS benefits from the SSTF non-transferable treasuries, whether they represent interest or FICA revenues, still adds to the deficit when those treasuries are redeemed through borrowing from the public. Today, nearly all of that redemption is borrowed,
The SSA OASDI combined trust funds ran a fiscal year net cashflow shortfall of $37 billion in 2010 according to CBO and $36.799 billion according to SSA.
OASDI net cashflow shortfalls are now projected for all fiscal years going forward according to supplemental data provided in CBO’s preliminary analysis of the FY2012 Federal Budget. The OASDI net cashflow shortfalls from 2010-2020 are projected to be $489 billion and $607 billion thorugh 2021 according to CBO.
Here are the SSA OASDI fiscal year net cashflow projections identified in CBO’s preliminary analysis of the FY2012 Federal Budget. All quantities are expressed as billions of dollars.
SSA OASDI net cashflow shortfalls: 2010 -37 (actual), 2011 -45, 2012 -30, 2013 -27, 2014 -29, 2015 -29, 2016 -32, 2017 -27, 2018 -58, 2019 -77, 2020 -98, and 2021 -118.
The U.S. Treasury identified the SSA OASDI net cashflow shortfall of $36.8 billion as part of the $1,294.1 billion Federal deficit for fiscal year 2010. See Table 1 of the supplemental information of the U.S. Treasury Financial Report of the United States Government for verification.
Those who want to dispute any of the U.S. Treasury statements and Table 1 from the supplemental information of the 2010 Financial Report of the United States Government should contact the U.S. Department of the Treasury.
Last year’s SSA annual report identified projections for OASDI net cashflow positions in Table VI.F9 – OASDI and HI Annual Income Excluding Interest, Cost, and Balance. This table will be updated in the next SSA annual report. The Balance figures for OASDI represent the projected net cashflow positions.
Comparison of the supplemental data on mandatory spending provided by CBO is worthwhile if one is interested in noting the impact of the latest recession and other factors in making such projections. All of the previous years’ supplement data projections can be accessed here. To save time, here are the direct data links which indicate SSA OASDI primary surplus figures (net cashflow) for Mar 2011, Jan 2011, Mar 2010, Jan 2010, Aug 2009, Mar 2009, Jan 2009, Mar 2008,
RweTHEREyet,
The SSA OASDI combined trust funds ran a fiscal year net cashflow shortfall of $37 billion in 2010 according to CBO and $36.799 billion according to SSA.
More details downthread.
Jack just laid it all out for you. If you are a little too dense to get it that is really just too bad. The fact is that the debt that you are freaking out about is not different than the debt owed the holder of any other t-bills. You say the ‘politicians spent the money’ of course they did. They spent they money they borrowed that is represented by all of the other T-bills that the treasury department holds. But there is no talk about not paying them back when their investors decide to cash them in. Why is it that all of a sudden when we decide that we need to cash in our trust fund the trust fund that has been planned for for thirty years, suddenly these and only these t-bills aren’t any good? Well, bullshit. These are no different than any other t-bills, the t-bills that the Chinese, the Japanese, the Germans, or The Koch Brothers have purchased. The whole point of the trust fund was to be there for those t-bills to be there at this time precisely when the outlay exceeded the input. While the demographic bulge of the baby boomers is moving through the system. Christ, get a clue. Don’t fall for the scam.
Jack didn’t lay out all of it.
Jack, like many others, failed to state that Debt Held by the Public and Net Interest payments rise substantially over the remainder of this decade and soar thereafter. Instead, Jack conveniently ignored these well known Budget projections and the implications that such hold for the Federal Budget absent major changes in revenues, existing Federal programs’ projected outlays, and future borrowing needs of the General Fund.
What unfolds during 2020-2030 is a major issue of concern. Net mandatory obligations of the General Fund and interest payments on Debt Held by the Public rise to such levels that discretionary funding for all other programs is likely to be crushed. The reasons are obvious.
Apparently, you’re not grasping the scale of this fiscal problem.
The U.S. Treasury identified the scale of the problem in Chart J located here.
The GAO identified the scale of the problem in Figure 4 located here.
The primary issue isn’t the operation of the three Social Security programs or necessary redemption of securities and related interest reflected in the OASDI combined trust funds. The focus isn’t nearly that narrow as some would pretend it is.
The primary issue is the operation of the entire U.S. Government in the outyears and how such missions and activities will be financed in light of the growing share of Federal Budget outlays that Net Interest payments and Net Mandatory obligations will represent.
Try to catch up.
SW:
“But there is no talk about not paying them back when their investors decide to cash them in. Why is it that all of a sudden when we decide that we need to cash in our trust fund the trust fund that has been planned for for thirty years, suddenly these and only these t-bills aren’t any good? Well, bullshit.”
Nobody is supposing that the bonds aren’t any good.. I’d buy them from the trust-fund without hesitation knowing full well I could cash them in.. the trust-fund could use my money to pay SS obligations, but when I cashed them in, the feds would have to come up with the money..I’d just be a middle-man to the deficit spending. We’re just facing the fact that honoring them requires deficit spending today… that fiscally, it wouldn’t make a bit of difference if the trust-fund vanished into thin air. Any money accessed from the trust-fund, has to be paid INTO it first.
You aren’t seeing the forest from the trees. It’s the lender/lendee relationship. The federal government is BOTH in this case. It wasn’t seeking outside cash to meet immediate expenses.. it just used this “mechanism” to justify spending tax dollars ALREADY COLLECTED on programs other than what those tax-dollars were intended for. Had they just left that trust-fund money in the static, non-interest bearing account into which they’re collected.. losing ground to inflation.. that principle would still be there, and could be put to use covering at least part of the SS un-funded liabilities, with NO HIT on general fund spending.
Now.. from the trust-fund’s point of view, it’s all good. But you have to ask.. if it was about “investing” the trust-fund.. they could have bought state/municipal bonds, or even just stuck it in pass-book savings, or CDs, so when the time came to access that cash, it wouldn’t requuire NEW federal spending (or in the case of a government $14,000,000,000,000 in debt, deficit spending).
Put bluntly.. the politicians saw a pile of money they could spend.. and found a way to spend it. Now, the bill is coming due.. it has put SS spending on today’s budget..it’s really that simple.
“What unfolds during 2020-2030 is a major issue of concern. Net mandatory obligations of the General Fund and interest payments on Debt Held by the Public rise to such levels that discretionary funding for all other programs is likely to be crushed. The reasons are obvious.”
Only if you rely on hugely unrealistic assumptions about the budget and the economy.
Thank you. Guess in my convoluted thought process – SSTF non-tranferable treasuries are Federal Debt – payment of interest on Federal Debt would take precedence and would be paid from collected revenues NOT from borrowed funds.
Is there is an initiation ritual for interns at, say, AEI or Heritage that requires them to go onto various blogs and repeat their discredited talking points? To use feet of column space to keep catapulting the propaganda?
Jim whether direct(paid as first priority out of exiting revenues) or indirect (crowding out other spending) redemption is the same process ending up in borrowing. My point is and has been, when you hear that SS does not add to the deficit, was true until last year. Throwing in interest, or payment priority schemes ore even SSTF treasury redemption schemes all end, today, in adding to the deficit.
ED, then provide your own estimates of the budget and economy. then contrast them agains the CBO and Prez “O’s” estimates. Where do we stand with your new numbers? Otherwise all you are doing is the normal carping without the work.
CBO and the Prez have been discredited? Where? When?
I think projections more than a decade out *have* to be nonsense. So much can and will change between now and 2020-2030 that even realistic projections – those that assume the insane projected deficits will have an effect on nominal GDP, et cetera – are probably worse than useless.
But on the subject of social security…I’m relatively sanguine due to two things:
1) The cost of social security will rise by a few percentage points of GDP (barring a disaster that wrecks GDP). Funding this without runaway inflation will require a relatively modest tax increase.
2) A majority of self-described Tea Party activists favor raising taxes rather than cutting social security benefits. Assuming nearly all of those left of the American center support the same thing, raising the revenue needed to support social security is basically a political inevitability.
Okay, I might be too optimistic. The John Q. Public might literally be nuts enough to thrash the discretionary budget rather than, say, expanding the SS tax to income levels that he’ll never personally attain, but I have to believe that he’ll support that rather than stopping road repairs and meat inspection.
MG – “What unfolds during 2020-2030 is a major issue of concern. Net mandatory obligations of the General Fund and interest payments on Debt Held by the Public rise to such levels that discretionary funding for all other programs is likely to be crushed. The reasons are obvious.”
Ed – “Only if you rely on hugely unrealistic assumptions about the budget and the economy.”
Fine, Ed. Show the readers of AB some realistic assumptions and projections for the Federal Budget and the U.S. economy.
You’re saying that the Federal Budget projections by OMB, CBO, U.S. Treasury, GAO, and private organizations such as CBPP are all wrong. What all of these organizations have stated is that the current fiscal path is not sustainable. Their projection models indicate the same.
Do you dispute the levels of growth projected for Debt Held by the Public and related Net Interest costs? Those levels are projected based on existing Debt Held by the Public, projected future Federal Budget deficits, and relatively little growth in interest rates.
Do you dispute the level of growth projected for GDP?
Do you dispute the projected levels of growth in Net Mandatory expenditures? If so, you’re challenging projections for mandatory expenditures that attempt to hold down the growth in all mandatory programs other than Social Security, Medicare, and Medicaid.
Do you dispute the projected levels of minimum growth in discretionary spending?
OMB, Treasury, CBO, GAO, and CBPP have incorporated conservative estimates of expenditure growth in their projection models. The same approach applies to projected interest rates.
If all of these budget assumptions are “hugely unrealistic” according to you, then show us some realistic assumptions for the same budget items referenced above.
RweTHEREyet you correctly identify the “primary issue” as the overall federal deficit, especially in the context of overall public debt levels. The issue raised originally on this thread, and somehow lost, was the Krugman claim that social security is solvent–a different, and not the primary, issue. Neither issue is clarified one bit by talking about how the trust fund money has been spent–this would have happened even if we ran overall budget surpluses for the past decade. In that scenario we would have spent the excess social security receipts to pay down public debt, which would have been a smart thing to do while building a large debt to the SSTF. The need to draw on general revenues to service debt to the SSTF always has been true–it will be more painful that it should be because we didn’t pay down public debt when we were able to do it, i.e. we were not smart. I don’t think there’s much disagreement on basic facts regarding the primary issue. (The smaller issue–Krugman’s claim–can only be addressed by looking at the SSTF as a separate budget, which legally it is; as such, it is solvent and estimated to remain solvent until the late-2030s.)
“You’re saying that the Federal Budget projections by OMB, CBO, U.S. Treasury, GAO, and private organizations such as CBPP are all wrong.”
I will outsource the reply to James Galbraith discussing CBO forecasts at the Deficit Commission:
“3. Future Deficit Projections are Generally Based on Forecasts which Begin by Assuming Full Recovery, but this Assumption is Highly Unrealistic.
Unlike the present deficits, expected future deficits are not usually considered to be due to continued recession and high unemployment. To understand how the discussion of future deficits is being framed, it is necessary to grasp the work of the principal forecasting authority, the Congressional Budget Office. CBO’s projections proceed in two steps. First, they wipe out the current deficits, over a very short time horizon, by assuming a full economic recovery. Second, they create an entirely new source of future deficits, essentially out of whole cloth. The critical near-term assumption in the CBO baseline concerns employment. CBO claims to expect a relatively rapid return, over five years, to high levels of employment, and the baseline incorporates a correspondingly high rate of real growth in the early recovery from the great crisis. If this were to happen, then tax revenues would recover, and ordinarily the projected deficits would disappear. This is what did happen under full employment in the late 1990s.
But under present financial conditions this scenario of a rapid return to high employment is highly unrealistic. It can only happen if the credit system finances economic growth, which implies a rising level of private (household and company) debt relative to GDP. And that clearly is not going to happen. On the contrary, de-leveraging in the private sector is sure to remain the rule for a long time, as mortgages and other debts default or are paid down, and as many households remain effectively insolvent due to their mortgage debt.
With high unemployment, high public deficits are inevitable. The only choice is between an active deficit, incurred by putting people to work or otherwise serving national needs — such as providing a decent retirement and health care to the aged — and a passive deficit, incurred because at high unemployment tax revenues necessarily fail to cover public spending. Cutting public spending or raising taxes, now or in the future, by any amount, cannot reduce a deficit due to high unemployment. The only fiscal effect is to convert an active deficit into a passive one — with disastrous economic and social effects.
4. Having Cured the Deficits with an Unrealistic Forecast, CBO Recreates them with Another, Very Different, but Equally Unrealistic Forecast.
In the CBO models, high future deficits and rising debt relative to GDP are expected. But the source is not a weak economy. It is a set of assumptions describing an economy after full recovery from the present crisis. In the CBO forecasts, big future deficits arise from a combination of (a) rapidly rising health care costs and (b) rising short-term interest rates, in the context of (c) a rapid return to high employment and (d) continued low overall inflation. This combination produces, mechanically, a very large net interest payout and a rapidly rising public debt in relation to a slowly rising nominal GDP.
Even if CBO were right about recovery, which it is not, this projection is internally inconsistent and wholly implausible. It isn’t going to happen. Low overall inflation (at two percent) is inconsistent with the projected rise of short-term interest rates to nearly five percent. Why would the central bank carry out such a policy when no threat of inflation […]
RweTHEREyet: “I absolutely trust the government to honor those bonds, and fully expect them to… I’m just acknowledging that honoring them or, or paying for the SS shortfall directly from the general fund, is one-in-the-same… Since that money has long-since been spent.”
Thanks for the clarification. 🙂 That’s not what it sounded like you were saying, particularly when you use the word, “spent”.
For myself, I never expected that the money in the Social Security Trust Fund would remain idle. And, considering that it is mainly for people’s retirements, putting it into gov’t bonds makes a great deal of sense to me. Very conservative, but isn’t conservative what we want? Suppose that the funds fluctuated with the stock market. That could upset a lot of citizens. And, of course, we could hardly expect the gov’t, as the seller of the bonds, not to spend the proceeds, right?
Ed,
Galbraith’s remarks do not help your position as he is saying that the CBO Federal Budget forecasts are too optimistic. Galbraith’s assessment implies that the projected Federal Budget deficits will be larger than those projected by CBO. This line of thinking increases the scale of the problem facing the U.S. economy and fiscal year Federal Budgets.
Jamie Galbraith has been frequently critical of the optimistic assumptions applied in CBO forecast models. I share his concerns but cite CBO fiscal reports with the understanding that such projections may be more optimistic than should be the case. Jamie Galbraith’s 30 June 2010 statement to the National Commission on Fiscal Responsibility and Reform was covered by AB last year.
The OMB, CBO, Treasury, and GAO forecasts are reasonably conservative with regard to presentations concerning Debt Held by the Public, Net Interest payments, and Mandatory outlays. If you noted the Treasury and GAO charts I referenced and linked to upthread, it is clear that reducing the projections by half still leaves an unsustainable path going forward. There is no point in pretending that the fiscal problem is sustainable because it is not. This is a very serious problem.
Those who readily dismiss concerns about Federal deficits, Federal Debt Held by the Public, Net Interest costs, and growth in Mandatory outlays aren’t anchored in reality in my opinion. Some of these individuals are part of the same crowd who promoted major income tax reductions, production offshoring, the resultant loss of job skills, and the loss of over 40,000 production plants during the early to mid portion of the past decade. This crowd cuts across political ideologies as many leftist economists, for example, cheered on the production offshoring initiatives. I view it all as part of the ignorant LaLaLand thinking that is gutting major portions of the U.S. economy.
To your question: I have read many of the current MMT articles and blog posts. I am not sold on some of the MMT thinking.
RweTHEREyet: “So.. it’s not an argument about whether or not SS obligations will be met.. it’s an acknowledgment that since the trust fund has been spent.. meeting them, is deficit spending today.”
So what? Who cares? There is no problem with the Social Security Trust Fund, as you admit. Pretending that there is is fear mongering.
@MG
I have a perhaps different take on long term economic projections. GIGO! GIGO! GIGO!
That is a bit overstated. 😉 My main point, which I repeat once more, is that these projections have no error estimates. As we have seen recently, economic estimates for as short as 2 years in the future have sizable percentage errors. If these projections had realistic error estimates, they would be seen to be nonsense, as Ed says.
Not that we should not be thinking ahead. If medical costs continue to rise as they have for 20 of the last 30 years, then we are headed for trouble. So we should address that issue. That is quite different from taking such projections as prophecy.
Min says: “So what? Who cares? There is no problem with the Social Security Trust Fund, as you admit. Pretending that there is is fear mongering.”
Who? Probably ~1/2 the voting population of the US. The problem with the SSTF is that redeeming their treasuries is adding to the very same deficit. Pretending that deficit spending is not a potential problem and that the SSTF will be fine when the deficit tipping point occurs is just pure denial.
So which deficit spending problem is probably the easiest to fix? SS. Adding another 2-3 or more decades of safe life to the SS program without having to redeem the SSTF treasuries can be done today with some minor tinkering around the edges. Waiting and hoping we don’t reach that deficit tipping point while focusing on fighting those minor fixes to SS and not addressing the bigger deficit issue is a foolishly dangerous strategy.
Min,
Applying reasonable error rates will not change the trend line.
The scale of the Federal debt, primarily Debt Held by the Public and Net Interest costs to the General Fund, is so large that overcoming the problem without major changes in revenues and expenditures is impossible. Add in what I call Net Mandatory expenditures that must be funded by the General Fund and the fiscal course is very obvious. Discretionary spending will be gutted and/or additional debt financing in the form of publicly held debt – marketable U.S. Government securities – will occur.
You should take at the GAO chart, Figure 4, that I linked upthread.
I don’t care how much dancing is undertaken to mask over the fiscal problem as that is not going to cut it any longer. The con game is over.
Congress is well aware of the scale of the problem. The long term fiscal picture is an economic disaster waiting to unfold. The only question is whether Congress will turn the economic ship in time to avoid serious consequences.
We’re well beyond the point of seasoned financial experts wondering if Federal debt accumulation at current levels is a problem. The scale of the Federal fiscal problem should be obvious to the majority of people who read about such matters when the Net Interest payments jump to a high percentage of Federal outlays during the 2020-2030 period. Beyond that basic point, one major spike in interest rates will wreck a group of near term fiscal year Federal Budgets when it happens.
Medical costs and the Federal share of such are only part of the fiscal problem. The Federal publicly held debt load and Net Interest payments are a very large part of the problem after 2020. The Net Interest payment obligations are larger than the projected Net Mandatory outlays of Medicare or Medicaid in the decade following 2020. That is to say, Net Interest costs will exceed projected Medicare or Medicaid demands on the General Fund.
doppich, is correct… we don’t need to have this debate.. over and over..
It’s simple.. The SS Adm knows it, the CBO knows it.. congress knew it when they did it, and everyone honest about it, knows what it means today..
Money collected in the name of SS was spent elsewhere.. and the bill has come due. Meeting SS obligations is now becoming a CURRENT budget expense. When that expense looks to be hundreds of billions, it has to be considered as we address the deficit. The big ‘O’ appointed a commsion so-named.
We can treat each other with sarcasm, and even get vulgar… you’all can stomp your feet and declare how nice the emperor’s clothes look…
Mean time.. in the real world.. if we do nothjing… we’re gonna start adding significant amounts of money to the public debt, to keep a program afloat that has already had MORE than enough tax-money extracted from us, in its name. A head in the sand aint gonna relieve you of your share in that NEW borrowing.
Min,
“is that these projections have no error estimates. As we have seen recently, economic estimates for as short as 2 years in the future have sizable percentage errors. If these projections had realistic error estimates, they would be seen to be nonsense.”
Fine, but why are you expecting the type of growth that we haven’t seen since the Fifties? Why would you think that without any evidence to support that position? We actually have had some reasonable growth, but that’s only getting back closer to the trend line, we aren’t getting the type pf growth we need to solve our fiscal problems.
Doppich,
“repeat their discredited talking points”
Which discredited Talking Points?
“keep catapulting the propaganda”
What propoganda are you refering to?
“keep a program afloat that has already had MORE than enough tax-money extracted from us, in its name”
Now you’re veering off to an ideological screed. Mopey was put aside by workers and their employers in order to provide a minimal retirement safety net for those workers. Excess funds, those over and above what had and ans been necessary to pay current benefits, was sequestered in a Trust Fund for future need and those funds invested in America. Very patriotic. Now pay back’s a bitch. Tell the Chinese that their T-Bills are just a bunch=h of IOUs. I can’t wait for the answer to that bullshit. There is plenty of untaxed wealth in this country. That’s the 800 lbs gorilla that no one in our government is willing to approach. Untaxed and huge. Those who have enjoyed the tax holiday over this past decade have better representation than does the working population. That’s where the money is and that’s the only way to balance the budget. Ask those who have enjoyed the holiday to get on board and start supporting the government that has made their fortunes possible.
@CoRev
I take it that you admit that the gov’t will meet its Social Security obligations. If so, that means that Social Security is nothing special, as the gov’t meets all of its obligations. If the gov’t deficit is X% of gov’t spending, then it makes sense to say that X% of gov’t spending on defense is deficit spending, X% of Congressional salaries are deficit spending, X% of Social Security spending is deficit spending, etc., etc., etc.
Now, there is more than one way to look at things. For instance, the intervention in Libya is exceptional, so we might argue that all of the spending on that is deficit spending. But nothing about the fact that the Social Security Trust Fund contains gov’t bonds makes it special with regard to the deficit. If a sizable number of Americans think that it does, that is the result of fear mongering.
Yerom: “Fine, but why are you expecting the type of growth that we haven’t seen since the Fifties? Why would you think that without any evidence to support that position?”
You are confusing me with somebody else. I think that the most likely scenario for the near future is like Japan’s Lost Decade or America’s Long Depression of the late 19th century.
MG: “I don’t care how much dancing is undertaken to mask over the fiscal problem as that is not going to cut it any longer. The con game is over.”
You mean the supposed con game of the last 175 years? Even when we had money backed by gold or silver we ran deficits more often than not, and the debt grew and grew.
Or do you mean the con game of Reagan and Bush II, of tax cuts for the wealthy, while the disparity of incomes and wealth grew and grew?
What’s ideological about reminding people that we’ve all, already paid, more than enough in FICA taxes to fund SS ?
Anyway.. I think you’re starting to understand the difference between a bond issued to a second party, and a bond issued by one entity, to itself … these discussions often reach the point where the argu-er on your side, starts propsing solutions to a problem they’ve been denying, exists.
Who pays (or doesn’t pay) taxes, and at what rate, is a whole, new topic. I’d hope to apply common sense when it comes to balancing the budget.. ala.. the place to start is looking at a federal government that is budgeting itself more than $35,000 per household averaging $60,000 of income.. or more specifically.. the feds are spending MORE than $10,000 for EVERY man, woman, child and infant in this country. A level of taxation needed to cover that, cannot happen in a free society. (and that’s JUST the federal government)..
Min, said: “ But nothing about the fact that the Social Security Trust Fund contains gov’t bonds makes it special with regard to the deficit. If a sizable number of Americans think that it does, that is the result of fear mongering.”
What I find funny about this statement is that no one has made it. From the fiscal conservative view point it appears that it is a Dem talking point, but arguing over it is a non-issue. There is no sizable number of Americans, that I know of, that believe the statement. So, the only fear mongering appears to be that a sizable number, outside the left, believe it.
It appears that many of the arguments over the SSTF and the deficit center on Dem talking points that have never been raised in reality. Today should be interesting when we find what is actually in the Republican budget proposal. From early reports it will not include any changes in SS. That should take it off the table as a budget issue and show how much of the discussions have actually been just Dem politics/talking points.
Moi: “ But nothing about the fact that the Social Security Trust Fund contains gov’t bonds makes it special with regard to the deficit. If a sizable number of Americans think that it does, that is the result of fear mongering.”
CoRev: “What I find funny about this statement is that no one has made it.”
Well, it certainly sounds like what RweTHEREyet was saying, about how the SSTF money has already been spent. And that to pay off the gov’t bonds that are in it will require deficit spending. With the implication that that is a problem.
I will be happy for any clarification about the point of such statements. Thanks. 🙂
You understand it pretty well.. no need for me to clarify. SS un-funded liabilites are real expenses out of today’s, and future budgets.
Now.. as for CoRev’s statement.. I hate to speak for him, but I’ll take a stab..
If he means it’s “off the table”, budget-wise; that’s in light of a proposals to cut upwards of SIX TRILLION in spending over the next decade (if we’re talking about the same budget proposal). It has nothing to do with the fact that SS un-funded liabilities require NEW borrowing today… and into the future (sans balanced budget) … It’s not any sort of statement that makes the SS un-funded liabilty problem less of a problem.. it only UNDERLINES how huge the deficit problem might be… And I’ll bet dollars-to-donuts that you’ll find the budget cuts needed to leave SS un-touched will be even more objectionable than the stuff like raising the retirement age, or reducing benifit payments.
We’ll have to see the proposal..
Min, I think the discussion centers upon the use of “special” with regard to the deficit. I think a better term is “changed” with regard to the deficit. For decades there has been an SS surplus that, along with other TF surpluses, actually reduced the budget deficit. Last year it went negative adding to the deficit. Special? Not really, changed impact? Certainly.
CoRev: “For decades there has been an SS surplus that, along with other TF surpluses, actually reduced the budget deficit. Last year it went negative adding to the deficit. Special? Not really, changed impact? Certainly.”
Expected, certainly. Planned for by Greenspan, et al., when they set up the current arrangement. What’s the problem?
But that has nothing to do with the scare tactic of claiming that all of the money in the trust fund has already been spent. (Sure, you can say that the money was lent, and that the borrower has spent it. But that is not the impression given by the original bald statement, which is that there is nothing there, or that there is some danger that the loans will not be repaid. Why even makes such statements if you do not mean to scare people?)
OTOH, if the discussion had simply been about that fact that Social Security paid out more than it brought in for the first time in decades, that raises a concern that people may have. That is different from scare tactics. 🙂
Min: ” But that is not the impression given by the original bald statement, which is that there is nothing there, or that there is some danger that the loans will not be repaid. Why even makes such statements if you do not mean to scare people?) “
Well.. (as dictated by common sense, and backed up by the CBO and the SS Adm).. that it wouldn’t make a bit of difference if the TF bonds just evaporated tomorrow (not a reference to their value, but merely the result of the lender and lendee being the same entity).. it SHOULD scare people. Those scared people are the ones who will be responsible for servicing the NEW, deficit spending.. or swallowing SS benifit reductions. I think it would be irresponsible to pat them on the head, and tell them all is well.
“Galbraith’s remarks do not help your position as he is saying that the CBO Federal Budget forecasts are too optimistic.”
They sort of do – they suggest that interest payments on the debt will not have exploded because the CBO’s combination of low inflation, high interest rates and full employment will not have occurred. I mentioned above why I think that fixing social security by raising taxes is a political inevitability – I’d fold the assumption that this won’t happen into “unrealistic assumptions about the budget and the economy.”
Medicare is, of course, the lion’s share of the guessed-at future deficit. But the idea that we’ll be deficit spending these huge percentages of GDP on bypasses and colostomy bags and very expensive nail trimmings for the elderly with no apparent effect on inflation or other economic fundamentals is wacky – something has to give.
Is my assumption that the political process change these programs less realistic than assuming we will do nothing, and that enormous perennial deficits along with…low inflation are our fate? Is my assumption that the political process will change these programs less realistic than the suggestion that interest payments and mandatory spending will crush the discretionary budget – that people will apparently opt for no roads and meat inspection rather than tax increases or qualitative changes to entitlements?
“these discussions often reach the point where the argu-er on your side, starts propsing solutions to a problem they’ve been denying, exists.” RWTY
No sir. No one has been denying that the general budget is heavily indebted and building upon that debt still. If any one has been deceptive in their presentation of the issue it has been those who have been suggesting that the FICA revenues have been “reducing” the budget deficits. You don’t reduce a deficit with debt. You only delay the funding of the budget. Matters are made yet more distorted when the claim is that repayment of the original debt, in this argument that is the Special Treasury notes held as the SS Trust Fund, is now adding to the deficit. That is only the case if the original debt is refinanced rather than paid in current funds.
“Who pays (or doesn’t pay) taxes, and at what rate, is a whole, new topic.” RWTY
No, certainly not a new topic, but one that has been kept off the table in an effort to shift responsibility for the deficit levels of the general budget. The tax holiday enjoyed by the top one or two percent of income earners and wealth holders is a primary cause of the current deficit problem. The wars in the middle east are also significant contributors to that deficiency and increasing debt. What seems to be the aim of our elected representatives, Democrats and Republicans alike, is to deflect attention from the excessive fealty demonstrated by the political class to the wealthiest Americans. Of course there is considerable over lap of those two groups.
“But you have to ask.. if it was about “investing” the trust-fund.. they could have bought state/municipal bonds,”
But that’s…exactly the same as buying Treasurys.
It doesn’t really make much of a difference how future social security expenditures are financed. If the trust fund had, say, bought corporate bonds, it would be relying on the future productivity of the American economy. Under the current regime, the trust fund went to finance government expenditures – paying the salaries of government employees and contractors, who in turn spent or invested that income, spurring growth. It’s *still* simply relying on the future productivity of the American economy. The only difference is that Treasurys don’t clearly delineate which economic actors will be footing the bill.
@RweTHEREyet
You want to scare or warn people, OK. But the fact that the Social Security Trust Fund money has been lent, and then spent, is not something to scare them with.
I like to think that my post is a good addtion to this lineup.
http://traderscrucible.com/2011/03/29/solvency-and-value-insolvency-and-debasement/
thanks for that, TC!
Jack,
The tax holiday enjoyed by the top one or two percent of income earners and wealth holders is a primary cause of the current deficit problem.
The top 1% of taxpayers paid 38% of the Federal Income taxes, the top 5% paid 59% of the taxes (2008).
In 1999, the top 1% paid 36% and the top 5% paid 55% of the taxes.
So 5% (not even including the non taxpayers) are supporting 60% of the government, and this percentage has stayed fairly consistent. How much more is “fair” to you?
http://www.ntu.org/tax-basics/who-pays-income-taxes.html
Correction Sammy. Income taxes cover about 25 percent of government spending, so the top 5 percent of AGI cover about 15 percent (.6 x .25) of the government with those income taxes. It was 25.5 percent (.5545 x .46) in 1999 when we balanced the budget.
Ed,
I don’t agree with all of Galbraith’s assertions, though I give him credit for pointing out CBO’s optimistic assumptions about unemployment. Moreover, Galbraith did not discuss the potential problems associated with the Fed’s OE2 purchases of marketable Treasury securities or the declining level of marketable purchases by major buyers such as China and Japan. Bear in mind that his statement was provided in June 2010.
CBO has not projected a large spike in interest rates, rather the projections are well within the range projected by OMB and bond market analysts. Meanwhile, we are already seeing leading edge evidence that inflation may become a concern.
Galbraith’s assumptions are based on continued high umemployment and larger than projected deficits, which in turn will drive up Net Interest payments. The Net Interest payments will continue to grow substantially based on the current and projected deficits. The projected deficits can only be offset by increased revenues, program reductions or eliminations, and/or a remarkable collapse in interest rates (which is highly unlikely).
You stated, “Medicare is, of course, the lion’s share of the guessed-at future deficit.” Sorry, but I disagree with that line of thinking. Net Interest payments will represent larger outlays than Medicare or Medicaid in the next decade and beyond absent any major changes in revenues or program outlays. Medicaid costs will surpass Medicare costs to the General Fund within a decade, by the way. The growth in Net Interest costs based on projected growth in Debt Held by the Public is such that Net Interest may exceed Medicare and Medicaid costs to the General Fund sometime before 2035. That illustrates the scale of the fiscal problem related to publicly held debt accumulation.
I agree that something has to give. We still don’t know what the Congress will do in order to address the medium or long term fiscal problems. Yes, we can expect that some Federal Budget corrective changes will occur, but we don’t know if such changes will be sufficient in addressing the unsustainable fiscal situation going forward, particularly during the period 2020-2030, for starters.
PJR – “Correction Sammy. Income taxes cover about 25 percent of government spending, so the top 5 percent of AGI cover about 15 percent (.6 x .25) of the government with those income taxes. It was 25.5 percent (.5545 x .46) in 1999 when we balanced the budget.”
Here are the percentage share of revenue receipts represented by individual income taxes according to OMB:
1999 48.1%
2000 49.6%
2001 49.9%
2002 46.3%
2003 44.5%
2004 43.0%
2005 43.1%
2006 43.4%
2007 45.3%
2008 45.4%
2009 43.5%
2010 41.5%
2011 estimate 44.0%
2012 estimate 43.4%
2013 estimate 44.8%
2014 estimate 45.3%
2015 estimate 46.0%
2016 estimate 46.8%
The revenue figures provided by OMB exclude Debt Held by the Public financing.
Sources:
OMB Historical Tables
OMB Table 2.2—Percentage Composition of Receipts by Source: 1934–2016
OMB Table 2.5—Composition of “Other Receipts”: 1940–2016
Jack – Monday, April 4, 9:28:01 PM – “There is plenty of untaxed wealth in this country. That’s the 800 lbs gorilla that no one in our government is willing to approach. Untaxed and huge. Those who have enjoyed the tax holiday over this past decade have better representation than does the working population. That’s where the money is and that’s the only way to balance the budget. Ask those who have enjoyed the holiday to get on board and start supporting the government that has made their fortunes possible.”
Jack – Tuesday, April 5, 1:34:21 PM – “The tax holiday enjoyed by the top one or two percent of income earners and wealth holders is a primary cause of the current deficit problem.”
I am surprised that you’re still trying to make this case considering the documented taxation analysis and Federal Budget fiscal year deficits projections.
I believe that I understand the emotions and frustration involved, but the math doesn’t work. The effort to eliminate the fiscal year deficits will require much more than focusing solely on upper income earners.
Eliminating the Bush era tax cuts for only the upper income earners will not offset any of the projected deficits. Not even close. The Federal Budget fiscal year deficits for 2010-2020 after recovering the upper income tax cuts would be $10.35 trillion.
Here are the tax estimates from the U.S. Treasury and projected Federal Budget fiscal year deficits from CBO:
Revenues Recovered by Eliminating Only 2001 and 2003 Upper Income Tax Cuts:
2010 $1.3 billion, 2011 $33.5 billion, 2012 $40.9 billion, 2013 $49.7 billion, 2014 $59.8 billion, 2015 $67.9 billion, 2016 $73.8 billion, 2017 $79.6 billion, 2018 $85.4 billion, 2019 $91.1 billion, 2020 $96.8 billion, and 2010-2020 $679.6 billion.
Federal Budget Fiscal Year Deficits:
2010 Actual -$1,294 billion, 2011 -$1,425 billion, 2012 -$1,164 billion, 2013 -$901 billion, 2014 -$764 billion, 2015 -$748 billion, 2016 -$841 billion, 2017 -$870 billion, 2018 -$902 billion, 2019 -$1,021 billion, 2020 -$1,101 billion, 2021 -$1,158 billion, and 2010-2020 $11,031 billion.
Sources:
Tax Policy Center – Department of the Treasury Revenue Estimates
General Explanations of the Administration’s Fiscal Year 2011 Revenue Proposals, United States Department of the Treasury, Appendix Table A
CBO Preliminary Analysis of the President’s Budget for 2012
TC,
That’s a good post. I have added your blog to my personal links.
Ed – “It doesn’t really make much of a difference how future social security expenditures are financed. …It’s *still* simply relying on the future productivity of the American economy.”
Of course it makes a difference. If the SSA had legal authority to buy open market assets as opposed to only being in a mandatory position to purchase nonmarketable U.S. Treasuries, the redemptions would – as you say – be provided by other economic actors. Instead, the SSA OASDI combined trust funds’ assets represent future claims on the U.S. Treasury’s General Fund. That situation, in turn, creates conditions whereby additional revenues may be required, other Federal programs may be reduced, and/or further publicly held debt financing may occur in order to provide such redemptions.
The SSA will redeem roughly $3 trillion of its Intergovernmental Holdings during the period 2020-2030. There is no question in my mind that the redemptions will be provided, but the necessary actions will most assuredly have an impact on the fiscal year Federal Budgets during that period.
Had the SSA been provided the authority to purchase foreign equities and bonds, the economic actors footing the SSA bill might not been limited to American economic sources. Instead, the U.S. Government is now relying on foreign interests to purchase roughly half of the marketable Government securities offered on the market. So, in a sense, the SSA is relying partially on foreign financing for redemption of its Intergovernmental Holdings. That, in turn, shifts some of the productivity burden you discussed.
Thanks! Trying to get the truth out there. We can make better decisions with accurate information – I hope. This post was a great summary of the Paul Krugman misunderstanding. I’d seen it said that PK deliberately misunderstood the debate to get MMT into the spotlight, but that doesn’t seem to be the case to me.
The bottom line: We can’t go broke, but the currency can lose value.
MG
How strange is your reply to my suggestion that deficits can be reduced by increasing revenue. You state that it is authoritatively reported that elimination of significant tax preferences for the wealthiest earners is not sufficient. It is not clear if your analysis includes revision to the estate tax and capital gains tax. It uses the more general term of income tax. Suppose for the moment that your thesis is correct, so what? I have not suggested that returning to a more balanced tax policy would wipe out the deficit. That will require even more than the elimination of war spending. How many great empires have been done in by the cost of expansive wars? Corporate governmental support of varying manner needs also to be addressed.
Again, assuming that you analysis is correct, you have only established that returning to a saner tax policy is only the beginning for those who are focused on the “horrors” of the deficit. I use a sarcastic tone because I am yet to hear any meaningful deficit reduction scenarios from those adherents to a bgalanced budget. Look at the idiotic Ryan plan for Medicare. The man is either disingenuous in the extreme, or he is an ignorant fool with no place on a budget committee. Look at every other plan to reduce the deficit, both Republican and Administration. Where is the meat? How does a Congress continue a tax holiday in October of 2010 and then cry deficit in March/April 2011? How so those elected representatives continue to spend heavily on war and cry deficit?
There is a lack of internal validity demonstrated by a lack of consistency in the ideological content of their rhetoric. Too many of their budget cuts are focused on merely political targets. None are targeted on the real imbalance, tax cuts for the wealthy and the cost of war. Target there and I would praise the effort.
The rise of corporate and individual wealth has been enormous during the past decade, as has the cost of war.
Jack,
Click on the first embedded link that I posted above. A breakdown by tax element is provided.
The capital gains and dividend rates were included for upper income earners. The estate tax rate was not included as it applies to all income earners. You will find it listed in the first of the two analyses.
I support repealing ALL of the 2001 and 2003 tax reductions for everyone. That’s would capture roughly $3.675 trillion over ten years according to the Department of the Treasury. Those increased revenues are identified in the first breakdown under the
embedded link.
As we know, there are many ways to reduce Federal expenditures and improve general revenues. CBO released a report titled Reducing the Deficit: Spending and Revenue Options on March 10. CBO identifies 105 options for reducing federal spending and increasing revenues. The CBO report includes 32 options for reducing Mandatory spending, 38 options for reducing Discretionary spending, and 35 options for increasing Federal revenues. Six additional options are identified which will increase Federal spending. Each option is supported by a detailed explanation.
I believe that the CBO recommendations are a pretty good start. And, yes, I would support further reductions to the Department of Defense and other national security spending.
Link: Reducing the Deficit: Spending and Revenue Options
All of your numbers are correct Sammy but you are using percentage of revenue as your measure of percentage of government supported. My numbers define the total size of government as the total cost of government. Different denominators. Thus, it’s true that the top 1% provide 38% of income tax revenue, but that supports less than 10 percent of government spending today. The other 90-plus percent is supported by other taxes and borrowing.
Jack said in ignorance: “How does a Congress continue a tax holiday in October of 2010 and then cry deficit in March/April 2011?” That’s two different Congresses, Jack. The first was totally Democratic dominated in the House and Senate, and the second included a Republican House.
Why even mention it? Because the first, Democratic Congress, was the one who passed the “tax holiday”, over spent us into this huge deficit, and punted on the 2011 budget. The 2nd is the one trying to do something about the budget deficit, and trying to correct the prior Congress’s over spending.
One day Jack, even you will do the math totaling up the actual amounts you constantly recommend as solutions to the deficit. Maybe, and I have my doubts here, you too will realize just how significant is today’s problem. If that should occur, then maybe, repeat my doubts here, you will realize the immensity of the potential danger we are facing with the debt on interest payments. finally, if all that happens, you too will realize the craziness involved in focusing on SS as the budget/deficit issue.
“if all that happens, you too will realize the craziness involved in focusing on SS as the budget/deficit issue.” CoRev
Yet another very strange statement. Who is it that is focused on including SS in the debate over the budget deficit? Is this yet another instance of historical, recent as it is, revisionism? I’m focused on restoration of balanced tax policy and an end to unjustifiable war spending. I would also include corporate taxation and corporate welfare as productive areas of discussion relative to the deficit. And general military spending is long over due for a cost analysis. I am very well satisfied to take Social Security out of the budget deficit discussion. I’m glad that you finally see it that way.