(Counter removed by Rdan due to loading time issues)
by Bruce Webb
A bipartisan group of Senators is making a push to tie an increase in the debt ceiling to establishment of a Commission whose focus in on reducing the growth of entitlements. Now clearly Medicare spending growth at its current rate is not sustainable, which fact makes the current full-throated defense of that spending by Republicans fairly ironic, but something should be done and in fact is being done via the current HCR proposals. But pointing to the Debt Clock is not a good reason to slash away at Medicare or Social Security, because those slashes actually make that Clock run the wrong way by increasing and not decreasing Public Debt.
Why cutting spending increases debt explained under the fold.
When the Peter G Peterson people claim that Social Security and Medicare are in crisis they tend to use Unfunded Liability over the Infinite Future Horizon as the measure and so produce figures like $105 trillion. Which they then divide by current population to produce a debt per person figure as in every man, woman and child owes $33,000 or whatever. But this is to confuse two very different things. Because at the bound Unfunded Liability and Public Debt move in opposite directions.
In FY 2000, the last full FY of the Clinton Administration, the United States ran a Unified Budget surplus of $235 billion. Hurrah! But the Public Debt Clock showed an increase in debt of $18 billion. Oh noes! Why the disconnect? Because Trust Fund surpluses score as debt for the purpose of total Public Debt. If we go to the Treasury’s Debt to the Penny web application and insert a starting point of Sept 30, 1999 and an end date of Sept 29, 2000 we see that on the first day of that Fiscal Year Debt held by the Public, which included the Chinese Central Bank was $3.636 trillion. By the final day that was down to $3.405 trillion. This was unequivocal good news, not only did the US open up that much more borrowing room for FY 2001, it also cut $10 billion a year off of projected debt service going forward. But if we shift our eyes two columns to the right we see that total Public Debt went up from $5.656 trillion to $5.674 trillion. And the reason is simple, investing Social Security surpluses in Special Treasuries adds to Intragovernmental Holdings which with Debt Held by the Public makes up Public Debt.
All of which leads to some paradoxical results. Currently Social Security is running a moderate but shrinking cash surplus from excess FICA collections plus tax on benefits. That cash surplus (which CBO calls ‘Primary surplus’) plus the amount of accrued interest makes up the total Social Security Surplus which is then combined with a General Fund surplus/deficit to create a Unified Budget surplus/deficit, making large SS cash surpluses a good thing. On the other hand each of those dollars gets converted to an interest earning Treasury so adding a dollar to total Public Debt plus some 3-5% compounded interest so ticking the Debt Clock up. Under current revenue and spending models the Primary Surplus is set to dwindle and then disappear in 2017 at which point the Trust Fund would have to start taking a portion of its accrued interest in cash rather than Special Treasuries and so causing the rate of increase in Public Debt due to Social Security to slow down. Some six years later those same projections show that paying full scheduled benefits will require all accrued interest which so caps the Trust Fund balance and so the maximum amount of Public Debt due to Social Security. In succeeding years this draw down extends to TF principal and so starts reducing Public Debt until sometime after 2039 the Trust Fund is exhausted and no longer contributing to Public Debt at all.
But what happens if we convene an Entitlements Commission and simply adjusted the scheduled benefit so that current year tax revenues met current year outlays? Well two things. One unfunded liability goes to zero. Two Public Debt skyrockets at whatever rate the compounded interest mounts up. So when Senators point to the Debt Clock and proclaim that $12 trillion in Public Debt is a reason to cut Social Security they are wittingly or not confusing Unfunded Liability and Public Debt which for Social Security move in opposite directions.
There are reasons to fix Social Security by putting it on a glide path to Long Term Actuarial Balance, which is to say a system whose overall financing pays 100% of whatever scheduled benefits may be while maintaining a minimum of 1 year in projected reserves in each of the next 75 years, and in principle this could be done with minor tweaks on either the revenue or benefit side. Coberly has long proposed fixing it on the revenue side and so ran the numbers for what we call the Northwest Plan http://spreadsheets.google.com/pub?key=r49_nOHQG4QdHuwcbMGmP0Q, I following Professor Rosser have been willing to entertain the risk of small benefit cuts because we believe that the current economic model of Intermediate Cost is too pessimistic, but either way the argument doesn’t turn on specific figures on the Debt Clock which for the purposes of this discussion are irrelevant.
Under the Northwest Plan the Social Security Trust Funds will have a combined balance of $33 trillion in 2085 which will score as such on the Debt Clock. And servicing the Trust Funds will require some transfers from the General Fund to keep that balance from compounding out of control, a transfer that will grow every year, but on balance by a more or less steady share of national income growth. Leaving Social Security with an Unfunded Liability of $0.
I don’t know if every Senator pushing for an Entitlements Commission understands that at the bound Public Debt and Unfunded Liability move in opposite directions, that solutions aimed at the latter actually potentially exacerbate the former but certainly you would expect that a former Comptroller General of the United States would understand the budgeting mechanism. For him to point at the Debt Clock as a reason to move on Social Security is just special pleading and playing games with with incommensurate numbers. What we have is two big numbers that in different ways represent some sort of forwarded shifted liability. Which doesn’t mean we can wander from one to the other at will.
BTW the same argument holds to a limited degree for Medicare Part A (though not B & D). Any act which extends the life of the HI Trust Fund equally serves to increase Public Debt relative to the baseline over that period. Kind of a “No good deed goes unpunished” deal.
I’ve noticed the issue of Obama blaming his predecessor for the poor economy has become a bit of a minor cause on the right. So I was curious as to whether there was precedent for this kind of thing. For how long can a president blame his predecessor for economic problems? I’m guessing, based on this press conference on January 12, 2009, one can go at least until the week before one leaves office.
In terms of the economy, look,
I inherited a recession; I am ending on a recession. In the meantime there were 52 months of uninterrupted job growth. And I defended tax cuts when I campaigned. I helped implement tax cuts when I was President, and I will defend them after my Presidency as the right course of action. And there’s a fundamental philosophical debate about tax cuts. Who best can spend your money, the Government or you? And I have always sided with the people on that issue.
Now, obviously, these are very difficult economic times. When people analyze the situation, there will be–
this problem started before my Presidency; it obviously took place during my Presidency. The question facing a President is not when the problem started, but what did you do about it when you recognized the problem?
(cactus here: bolding mine)
But a word of warning to Obama… just because GW did it doesn’t mean its a good idea. We, the people expect performance.
China exported its way to a $2 trillion dollar fortress of F/X reserves ($USD mostly), while the US borrowed its way into a hole deep enough to spark a vast global recession. Who’s to blame?
Given the symbiotic relationship in the chart above, it’s hard to blame any one individual, group, or even country. But blame we do. Martin Wolf, at the Financial Times, wrote an interesting article about the need for a “co-operative adjustment” of global current account deficits and surpluses. He argues the following:
China’s exchange rate regime and structural policies are, indeed, of concern to the world. So, too, are the policies of other significant powers. What would happen if the deficit countries did slash spending relative to incomes while their trading partners were determined to sustain their own excess of output over incomes and export the difference? Answer: a depression. What would happen if deficit countries sustained domestic demand with massive and open-ended fiscal deficits? Answer: a wave of fiscal crises.
It sounds so imminent: re-balance now, or else. Sure the tides of portfolio flows must change; structural current account imbalances are now proven to cause economic catastrophe, as illustrated by the 2-yr case study of late. But it’s not going to happen over night. It takes a long time for re-balancing of any kind to fully pass through. Just look at Japan in the 1990’s.
The chart above illustrates the debt bubbles in the US financial crisis and in 1990’s Japan. In Japan, the households didn’t accumulate as much debt relative to the non-financial business sector; however, both sectors dropped leverage. And notice, that it took about a decade for households and firms to do so.
What’s overly obvious is that the Chinese will not be bullied into revaluing the yuan just because the US says so. And also evident is that there is a (very lengthy) de-leveraging process underway in key economies. By default, the debt-reducing developed world will force the Chinese to focus policy more inward (domestic demand) and less outward (export demand), as US consumers drop debt levels. But sit back and relax, it’s gonna be a while.
by Bruce Webb
In recent weeks there has been some furor over the new push to tie an increase in the debt ceiling to the establishment of a new Deficit Commission based on proposals but forth on the Senate side in Conrad-Gregg or on the House side in Cooper-Wolf. Ezra Klein today tells us (rather scornfully) that really we have nothing to worry about because would just be The Little Commission that Couldn’t. Well Ezra got pawned. Below the fold is my comment to his post.
Ezra you have been pwned a little bit here.
The original Conrad-Gregg proposal had 16 members, 8 R’s and 8 D’s with two D slots allocated to the Administration meaning an 8 to 6 Congressional split between R and D. And in practical terms there would be no way to keep Conrad of Conrad-Gregg and Cooper of Cooper-Wolf off the Commission. If we assume that Republican leadership would name 8 members hostile to Medicare and particularly Social Security, then add in the votes of Conrad and Gregg for ‘reform’ then the Commission starts off with 10 votes for that and with Administration buy-in would have its 12 vote super-majority on the way in the door. You can see a description of the original version here right from Conrad’s office:
http://budget.senate.gov/democratic/documents/2007/bipartisantaskforcehearingrel102307.pdf “Senators Conrad and Gregg introduced the Bipartisan Task Force for Responsible Fiscal
Action Act (S. 2063) on September 18. The bill would establish a 16-member task force comprised of eight Democrats and eight Republicans, designated by Congressional leaders and the President. Fourteen members of the task force would be current Members of Congress, and the remaining two members would be from the current Administration.”
The new proposal by adding two members would change the dynamic a little if they are both congressional democrats thus restoring and 8 to 8 R to D balance among Congressional members but makes the numbers not shift much. Assuming that Conrad and Cooper are two of those eight and Admin buy in progressives dems would have to hold 5 out of the 6 remaining Dems to block action. And given the state of the Senate you know that at least one of the three spots under Reid’s effective control will go to another Conservadem (and Baucus would be a natural choice) giving reformers at least 13 of their needed 14 votes, and if Reid bends and adds a centrist perhaps 14. Even if by some miracle Reid preserves two spots for liberal to progressive members, blocking action would mean Pelosi needing to having to name three defenders of Social Security while blocking any additional Blue Dog or centrist Budget Hawk. Probably not possible and even if it happens leaves progressives staring at a 13 to 5 split and the labels ‘obstructionist’ and ‘denier’. If under that pressure one of the 5 remaining Dems cracks the proposal goes on a fast track basis to Congress where that same dynamic repeats. Having explicitly admitted that there is an ‘entitlements crisis’ by allowing the Commission to be established in the first place Democrats would be stuck in a lose/lose position, allow the bill’s recommendations to be adopted (and no amendments are allowed) or block it and be revealed as feckless tax and spend ostriches with heads firmly stuck in the sand.
Going to 18 members seemingly eliminates the clear imbalance of the original proposal but does not in practice allow the non-Blue Dog democrats anymore than a figleaf of cover.
Update: Baucus comes out strong against Conrad-Gregg, though mostly it seems because he doesn’t want to have his Committee bypassed. http://thecaucus.blogs.nytimes.com/2009/12/10/baucus-dont-outsource-my-committee/
This doesn’t change the dynamic much, you could substitute Lincoln or Nelson for Baucus and have the same outcome outlined above.
by Martin Ford
Job Automation, Purchasing Power and Consumer Spending
I’ve had several recent posts here arguing that automation technology is likely to depress wages and lead to significant structural unemployment in the coming years. One of the most common criticisms of my argument is that I am “not thinking like an economist” and that I’m viewing things in terms of dollars, rather than in terms of purchasing power.
Here’s part of a comment that James D. Miller, an economics professor at Smith College, made on my econfuture blog:
Non-economists (even when they are very smart and well-studied) get in trouble when they consider trade issues in terms of dollars (“everyone could work for a dollar an hour?”) It’s better to think of wages in terms of what you could buy. In a world with hyper-productive robots you could buy lots of stuff if you could work at a task for say 1,000 hours that saved a robot 10 seconds of time.
So the basic idea here is that although automation may result in very low wages in dollar terms (as well as high unemployment, since we do still have a minimum wage), things won’t be so bad because the efficiency of production will increase dramatically and everything will be really cheap.
To see the problem with this, view this graph at Visual Economics showing how consumers spend their incomes. The graph makes it immediately clear that consumers spend the lion’s share on their incomes on things like housing, insurance, health care, transportation and food.
“Hyper-productive robots” are not going to lower anyone’s mortgage principle, and interest rates surely cannot go much lower. Nor can rents adjust too far downward without threatening the landlord’s mortgage. The same is true of insurance. The reality is that the most of the average consumer’s budget is based primarily on asset (and debt) values—and not directly on how efficient the economy is at producing goods and services. Food and energy prices are likewise unlikely to adjust downward. Expenditure categories that might see falling prices as automation progresses, such as apparel, entertainment and miscellaneous represent a tiny fraction of the average budget, and in many cases prices have already been minimized by globalization.
The only way to have expenditures fall in line with wages so that consumers could maintain their standard of living would be to have asset and debt values collapse. And that, of course, would be catastrophic for the financial system. Asset values in the United States reflect the basic assumption that we are going to continue to have a vibrant mass-market economy and a first-world living standard. You cannot have third-world wages with first-world asset values. That is the reason that countries like Thailand prohibit foreigners from buying property and driving values beyond the reach of their population.
As wages fall and unemployment rises, the average consumer is going to be squeezed by the fixed costs that cannot adjust downward. Mortgage defaults would soar and discretionary consumer spending is likely to plummet.
A recent article in U.S. News noted that spending is already heavily concentrated among high income consumers:
The top 10 percent of earners account for 22 percent of all spending, for instance, according to Moody’s Economy.com. The top 25 percent of all earners account for 45 percent of spending. The bottom 50 percent of earners, by contrast, spend just 29 percent of all the money in the consumer economy.
As job automation (and globalization) drives down wages and creates structural unemployment, these numbers will become even more concentrated. At what point does this become unsustainable? In an environment with extreme financial stress due to loan defaults and falling asset values, can the wealthy few really drive consumer spending indefinitely? Recent history shows very clearly that when fear is pervasive, rich people stop buying as well. So where will consumer spending come from?
Martin Ford is the author of The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future and has a blog at econfuture.wordpress.com
Not only did the U.S. Treasury just sell $29 Billion worth of four-week bills at par (i.e., they got $29 Billion for them, and will return $29 Billion on 29 December), but the bid to cover ratio was over 5:1 (pdf link; had $154B in bids for $29B in securities).
This is down 0.06% from last week’s auction (pdf again).
Remember the argument that we shouldn’t tax people because they’ll just move elsewhere?
The British government appears not to believe it.
Will the Geithner/Summers axis continue lying that “we can’t do that”? Since it really is a Windfall Profit, taxing it seems a reasonable idea. And now we won’t even be able to pretend that workers will just “move to the U.K.”
NYT headline: Audit Finds TARP Program Effective.
Paragraph six of the same article:
The Treasury’s lack of clarity about the program’s goals, the oversight panel said, made it hard to assess its overall effectiveness. Mr. Geithner is scheduled to testify on Thursday in his quarterly appearance before the five-member panel. [emphasis mine]
Clearly. one of the people to take the buyout was a headline writer who reads the articles first.
by Linda Beale
(cross posted at ataxingmatter)
One can question the timing of implementation, but can one argue against the financing? …Rdan
Since Bush invaded Afghanistan in 2001 (and then, Iraq), we have been paying for war as an afterthought. In the Bush era attempt to treat war as something that happened “over there” and didn’t disrupt the credit-fed consumer binging happening “over here,” there were no pics, no war bonds, and certainly no war taxes to pay for it. Instead, we actually cut taxes year after year after year, reducing government revenues at a time when we were passing supplemental appropriations year after year after year to pay for the war. With reduced taxes and increased military spending, that meant we borrowed to pay for the war of choice that Bush led us into.
In most wars, this country’s citizens and leaders have been somewhat wiser on the fiscal score. In the past, we generally raised taxes to pay for the huge expenditures that war necessitates–for caring for soldiers overseas and after they come home, for tanks and trucks and planes and drones and all the guns and missiles, not to mention warships and fuel, the construction of bases and building of roads and provision of power and all the other expenses of going to war (including, increasingly under Bush, the privatization of the military and the much higher costs of contracted mercenaries compared to Army soldiers and of Halliburton cafeterias that, in quite a few cases, didn’t serve the food they charged the US for).
[O]ne thing literally everyone agrees Vietnam showed, from flaiming liberals to fire-breathing neocons, is that it’s a very bad idea to get involved in a long, grueling, expensive war without explaining to the American people how much they will have to sacrifice, and securing their support.” The Economist, David Obey’s war tax (Nov. 27, 2009).
David Obey, chair of the House Appropriations Committee, introduced on Nov. 19–with 10 Dems as co-sponsors–the “Share the Sacrifice Act of 2010” to do just. See Pincus, If It is to be fought, it ought to be paid for, Wash. Post, Dec. 1, 2009. How? by adding a graduated surtax, in 2011, to the income tax for those earning more than $30,000 a year. The rate would be 1% on incomes up to $150,000 and more above that–generally, a few hundred dollars, with the rate on higher incomes set to generate enough revenues to pay for the prior year’s cost of being at war, with returning GIs and families of those killed in combat exempt. And the surtax could be delayed (from 2011 to 2012) if the economy is weak.
The article notes an irony that has been mentioned also in the context of the health care reform debate about paying for government action. IN health care, many of those (especially republicans) who argue that “oh no, we can’t do this to fix the health care system, it costs too much and will create deficits” are the same ones who supported the series of Bush tax cuts that led to huge deficits, and their argument was “deficits don’t matter.” In the war tax debate, many of those most eager for further commitment to Afghanistan are unwilling to support taxes to pay for the conflict rather than living on borrowed money. (Or, they’d probably be willing to cut various “entitlements” for the vulnerable amongst us, even while extending even more “entitlements” to corporate taxpayers those who own significant financial assets in the way of further tax cuts.) Note the article quotes Lindsey Graham as saying spending has been out of control “since the administration came into power.” Funny–the spending that has happened was necessitated by the economic mess left by the Bush Administration, that fought wars and INCREASED SPENDING while cutting taxes. Was it spending out of control? or was it spending while going on a multi-year tax cut binge that was out of control? I’d say the latter.
If you want the right’s take on this, read Amy Ridenour–a self-admitted Rush Limbaugh enthusiast. She thinks Rush’s “logic” is fine. By the way, his argument translates to: we’re in debt [implying it’s all Obama’s fault and not because of the Bush screwups of the economy and the huge amount of borrowing already committed under Bush] so this argument about paying for the war is silly when we already have so much debt; and/or yeah, well, just cut the spending on all those silly programs that progressives have put in place since Roosevelt (Rush calls it the “Fair Deal, New Deal, Rotten Deal, Raw Deal and Great Society”)–ie, the programs (subtracting out Rush’s trash talk) that we as a people have decided over many decades to use to support the vulnerable and improve opportunities for decent living standards for all. And like many right-wingers, Ms. Ridenour claims that her goal is supporting “principles of a free market, individual liberty and personal responsibility, combined with a commitment to a strong national defense.” Amy, how do not paying for the wars we CHOOSE to wage add up to either “personal responsibility” or “commitment to a strong national defense” or even “free market”–since there is no such thing as a “free” market without the stability, institutional structure, and legal forms provided by a stable and functioning government?
At any rate, mainstream commentators seem to think the bill wouldn’t pass, which means that they seem to think that it won’t get substantial Republican support, which the Rush-Ridenour excerpt surely suggests is correct. See David Obey’s war tax, Economist (Nov. 27, 2009). Those very people who are gung ho for war (“commitment to strong national defense”) and gung ho for not having deficits aren’t likely, that is, to vote to pay for the war in which they are so gung ho for others to fight. As the Economist article hints, how better to support the troops than paying for their fight?