Relevant and even prescient commentary on news, politics and the economy.

‘Deficit Debate Driven by the Wealthy’

And another view on the upcoming election deals we need to worry about in addition to party agendas and deals. Doubling down on upward distribution of wealth remains the name of this game…it is hard enough to debate real budget issues without this party going on:

Deficit debate driven by the wealthy, by Michael Hiltzik, Commentary, LA Times: …The fiscal cliff is supposedly what lurks at the end of this year, when billions of dollars in tax cuts expire and government spending cuts mandated by the big deficit deal in 2011 kick in. According to the bipartisan Congressional Budget Office, the combination of a steep increase in the tax bite and a steep reduction in spending across the board could cut economic growth in 2013 to 0.5% from a projected 4.4%… The CBO says that by any traditional reckoning, that would mean recession.

Yet there’s still reason for most Americans to fear the deal-making aimed at avoiding the fiscal cliff. For one thing, the debate seems increasingly to be driven by the wealthy, who can be trusted to protect their own prerogatives while declaring everyone else’s to be wasteful. Just two weeks ago, a squadron of CEOs and bankers, including Dimon and hedge fund billionaire Pete Peterson, lined up behind a campaign to impose adult supervision on our squabbling Congress.

Their working brief is a document grandiosely entitled “The Moment of Truth.”It’s a deficit-reduction plan cooked up by former Sen. Alan Simpson (R-Wyo.) and Erskine Bowles, an ex-investment banker claiming Democratic Party cred from his nearly two-year stint as chief of staff in the Clinton White House. …

In any environment of serious debate, Simpson-Bowles would be dismissed out of hand. … “The Moment of Truth” bills itself as a roadmap to deficit reduction, but it’s really a guide to cutting services and benefits for the working and middle class while raising revenues only modestly, if that. …

Tags: , , Comments Off on ‘Deficit Debate Driven by the Wealthy’ | |

‘The One-Sided Deficit Debate’

Via Economist View comes James Kwak at Baseline Scenario on the early deal made on the the ‘fiscal cliff’:

‘The One-Sided Deficit Debate’

James Kwak is pessimistic about the deficit debate:

What’s more, the “consensus” of the self-styled “centrists” is what now makes the Bush tax cuts of 2001 and 2003 seem positively reasonable. With Simpson-Bowles and Domenici-Rivlin both calling for tax rates below those established in 2001, George W. Bush now looks like a moderate; even many Democrats now endorse the Bush tax cuts for families making up to $250,000 per year, which is still a lot of money (for most people, at least).

But some of the blame for this state of affairs must rest with Democrats, liberals, and their usual mouthpieces as well. For over a year now, the refrain of the left-leaning intellectual class has been that the only thing that matters is increasing growth and reducing unemployment, and any discussion of deficits and the national debt plays into the hands of the Republicans. It may be true that jobs should be the top priority right now, but the fact remains that many Americans think that deficits matter (and most of those left-leaning intellectuals would concede that they matter in the long term). Those Americans are currently getting a menu of proposals with Simpson-Bowles in the right, Paul Ryan and Mitt Romney on the far right, and Fox News on the extreme right. There is no explanation of how to deal with our long-term debt problem in a way that preserves government services and social insurance programs and protects the poor and the middle class.

Tags: , , Comments (1) | |

Tax cuts and deficit commissions

by Linda Beale

Tax cuts and deficit commissions
crossposted with Ataxingmatter

The game continues, as Republicans hold out for tax cuts for the wealthy (who are garnering increasing amounts of the total income) and various “deficit commissions” put out austerity plans that all call for cutting Social Security benefits and Medicare benefits.

Alice Rivlin, who spoke here at my campus some time ago, seemed clearly to have cutting Social Security and Medicare in mind even then.  See Alice Rivlin on Financial Reform and Deficits, ataxingmatter.  She is now “trying to stir a debate” about a national sales tax, according to Bloomberg.  Przybyla, Rivlin Proposes 6.5% National Sales Tax as Part of Deficit-Reduction Plan, Nov. 17, 2010.  See also Jackie Calmes, New Deficit Reduction Plan from Bipartisan Group, NY Times, Nov. 17, 2010.

Now Rivlin is one of those Clintonites who is a right-center Democrat and, like so many of the Clinton and Obama advisers, close to the banking elite as a former Federal Reserve vice chairperson.  She claims her plan would be good for the country, but it isn’t so clear to me.  Growth for growth’s sake, we learn, doesn’t work very well.  Tax cuts for businesses don’t necessarily translate into US economic growth–they may just lead to higher executive compensation and bigger buybacks of shares for shareholders.  Tax cuts for the wealthy don’t lead to more jobs:  the claim that “small businesses” are helped when their owners aren’t forced to pay the piddling (for them) additional taxes that would be due if the Bush cuts for the wealthiest were not renewed is a farce–there are very few businesses that even fall into the wealthy owner category, and those businesses aren’t likely to invest a penny more in jobs just because their owners get even wealthier with bigger tax cuts.

The Rivlin plan is a combination of significant tax cuts (lowering corporate rates, even though corporations’ effective tax rates are already at the international norm and perhaps lower if all is taken into account), freezing domestic spending (even though the unemployed, underemployed and vulnerable elderly and poor will need more support, not less, and even though infrastructure projects require additional funding and everything from education to food and drug inspection to disease control are already short-staffed); limit federal spending on health care for the elderly while raising Medicare premiums, eliminate most deductions and credits, cut the Social Security benefits (changing the cost-of-living adjustments and reducing growth in benefits for the top 25% of beneficiaries), give a one-year Social Security payroll tax holiday (aimed, I wager, to make Social Security look like it is insolvent and therefore in need of cuts and privatization), and add a national sales tax of 6.5% (terribly regressive).

The claim is that this combination of tax and spending cuts with the sales tax will increase economic growth and therefore create jobs.  I’m not convinced.

Even Bloomberg’s reporter recognizes that the real purpose of these sorts of trial balloons is to “paint[] an even starker picture of the measures needed to tame the debt” and thereby “sell unpopular remedies”.    Aha.  The real purpose for Rivlin’s new visibility is as the “bad cop” of the bad cop-good cop act that has as its goal to sell Americans on the need to end Social Security as we know it, to cut back on our societal commitment to provide decent medical care to the aged, and to carry out even more tax cuts for the benefit of our growing oligarchic class.  Yet the Social Security funds–paid in by workers and their employers–have been used to reduce the federal operating deficit for years, a process that was carred to extremes under Bush to fund the Bush tax cuts and the Iraq and Afghanistan wars.

Federal deficit and Soc Sec Surpluses.OMB. 2010-11-09-Screenshot20101109at5_12_30PM
Source: OMB via Huffington Post

Why doesn’t Rivlin just support changing the current funding mechanism for Social Security so that it will be a tax on 100% of wages and on capital gains, as is Medicare?  Why not support nonrenewal of the tax cuts for the wealthiest Americans?  Why not support continued tightening of the corporate tax code, including restrictions on tax-free reorganizations that permit US multinationals to grow bigger and richer and more powerful (and too big to fail)?  Why not recognize that the deficit isn’t nearly as bad a problem as the increase in inequality in our country and the potential for an oligarchic takeover of our society?

Aren’t jobs the real need, whether or not we do something now or later to limit the deficit?  Shouldn’t we spend money to create jobs, if we have to?  Infrastructure and education are two public goods that the government can fund while at the same time creating jobs.  We can worry about the deficit later.  Or we can just decide not to renew any of the Bush tax cuts.  Nobody was clamoring for tax cuts when the Republicans pushed the first through in 2001, so let them go and we’ll all be back more or less where we were then.  We’ll manage.   If you don’t think so, look at this Tax Policy Center (Urban Institute/Brookings Institution) analysis of the impact of the expiration of the 2001-2003 Tax Cuts.  Extending the cuts would result in an average effective tax rate reduction for all taxpayers of 2.7 percentage points (“current policy”) compared with letting them expire (“current law”).  Renewing the cuts gives the biggest cuts, both in dollar and percentage points, to the highest income taxpayers.

Tax Policy Center Bush Cuts by Quintile

Tax policy center bush cuts by quintile top 20

If raising taxes on the rich is not possible politically now and raising taxes on the middle class possibly hard on the recovery, then at least do nothing other than extend them for a year or two while the country gets back on its feet.  And then let them go, along with a repeal of the preferential rate for capital gains and the extension of Social Security to full income.  Problem solved, and people put back to work.

Meanwhile, the Republicans are intent on letting the deficit go wherever so long as they can get the tax cuts they want most–for the wealthiest taxpayers amongst us. See, e.g., MichaelTomasky’s Blog, Tax Battle Lines Drawn (Nov. 17, 2010).   Camp, Republican from Michigan, says the GOP would be “foolish” to go along with any idea to renew tax cuts for 80% of Americans without giving a tax break to the wealthy at the same time.  Everybody knows that the GOP wants to make those Bush tax cuts that were designed to expire into permanent reductions in tax revenues.  See e.g. (but note my “caution” below),  Will Obama Extend the Bush Tax Cuts?, Human Events (Nov. 16, 2010) (indicating that “Republicans said they are still determined to make all of the Bush tax cuts permanent, rejecting White House overtures to decouple the top rates for a shorter extension”).  And the biggest beneficiaries are the GOP’s primary backers–the wealthy and big business–not the jobless.  See, e.g., “GOP to Jobless: Drop Dead“, Washington Post (Nov. 16, 2010).

(CAUTION–the “human events” blog just cited is a right-wing propaganda sheet scattered with contextually faulty or otherwise typically misleading statements , such as claiming that the scheduled expiration of the Bush cuts “could plunge the economy into another recession” or quoting Michael Steele in saying that the Republicans are fighting to “permanently stop the Democrats’ tax hikes” –even though, of course, the scheduled expiration of the Bush tax cuts was designed by the Republicans as a way to fool the people about the actual multi-trillion-dollar cost and if the expiration of the Bush cuts according to schedule is a tax hike (which I’d dispute), it is a Republican one and not a Democratic one).

Polls fairly consistently show that Americans think at least the cuts for the wealthy should expire and possibly the cuts for all of us.   A recent poll shows that about a third of Americans think we shouldn’t renew any of the tax cuts, and another third think that at least we shouldn’t renew the tax cuts on the wealthy–that means that there’s a 2-1 vote against renewing the tax cuts for the wealthy.   See Steinhauser, Do Americans Want to Extend Tax Cuts for the Wealthy?, CNN Politics, Sept. 14, 2010.  As noted in that article, another poll  (Gallup/USA Today)showed 44% want to roll back the cuts for wealthy Americans and 15% want the cuts to expire for everybody (including wealthy Americans), so also a 2-1 vote against renewing tax cuts for the wealthy.

And rightly so.  Because there is no way that renewing the tax cuts will be a significant stimulus to the economy nor any way that failure to renew them will hurt “small businesses”.  See, e.g., Fisher, The Economics of Extending Bush’s Tax Cuts.  On the other hand, not renewing the cuts for the wealthy would do wonders for the economy–it would give us about $800 billion over ten years, “enough to pay for all veterans’ hospitals, doctors, and the rest of the Veterans Affairs health system, plus the United States Coast Guard, plus the Food and Drug Administration, plus the operation and maintenance of every single national park for the entire 10-year period–with more than $100 billion left over.” Id (quoting Michael linden at the Center for American Progress).

Tags: , , Comments (42) | |

SSA Scoring of Rivlin-Domenici

by Bruce Webb

Well it is out and I have a copy. And no doubt in short order it will be up at the following web-page: but as of 10:43 AM PST it wasn’t. Because just like the SSA score of the Chairmen’s proposal there is a lag between release and web publication.

I’ll extract some tables and publish them in a future post but the results are very similar to the Simpson-Bowles Plan with the bottom line being a 75 year improvement in actuarial balance of 2.48% in the face of a current imbalance of 2.01%, that is there is a certain amount of over-kill if the problem is considered simply as one of solvency. For now I will leave you with this simple graphic from the score.

Tags: , Comments (22) | |

Social Security: Deficit, Debt and how CBO Scoring Screws the Catfood Comm

by Bruce Webb

In response to my Pelosi Rule post of yesterday commenter Darms plays Devil’s Advocate in asking the following shrewd question.

Bruce, Since the commision may be looking for a mechanism to delay redemption of those SS trust fund bonds and I’ve read that some of these bonds are routinely redeemed & renewed each year, would that not provide those on the commission with an excuse to cut SS funding now even though the actual problem is not until 2030 or beyond? In contrast to your thesis above? Possible quote come December – “Yes, we know the problem w/SS funding won’t be upon us for decades but we have to defund SS now as paying off this year’s (& next thru 2015’s) maturing SS trust fund bonds is pushing this deficit to unmanageable levels!!! You lame ducks have to support this NNOOOWWWWW!!!!! Thanx Nancy!”

Well the answer is that “They will try, unfortunately budget scoring rules totally undercut their argument”.

To see why this should be we need to revisit the concepts of ‘debt’ and ‘deficit’ as they relate to Social Security reporting and CBO deficit scoring, the numbers just don’t move in the way you think they would. Discussion under the fold.

We start with the Social Security Trust Funds (there are two, more on that later). Currently the combined OASDI Trust Fund holds $2.5 trillion in Special Treasuries. These make up the majority of the $4.5 trillion in ‘Intragovernmental Holdings’ which in turn are scored as a portion of total ‘Public Debt’. The latter needs to be distinguished from ‘Debt Held by the Public’ which is all Treasury debt held by entities other than the Treasury itself. The balances of Debt Held by the Public, Intragovernmental Holdings, and total Public Debt can be checked at the Treasury’s handy Debt to the Penny web application: . As of close of business Thurs these were $8.6 tn, $4.5 tn for a total of $13.1 tn. So for this purpose the Trust Fund Balances for Treasury score as part of Public Debt.

But seen from the perspective of CBO and OMB those balances are simply the sum of a set of SURPLUSES since 1983, in each of those years the increase in Trust Fund assets, scoring as a debt to Treasury, scores for budget purposes as a REDUCTION to the deficit.

Back to the Trust Funds. Contrary to the belief of some the Special Treasuries in the Trust Funds have specific rates and maturities, if the funds they represent are not needed to meet cost they are rolled over. Since neither the maturing bond nor its replacement actually has to be financed out of the public market, principal redemption results in no change to either debt or deficit. Interest is a little different. Interest accruing to the current TF balances that is not needed to meet current cost is credited to the TF in the form of new Special Treasuries. These add to Intragovernmental Holdings and so are scored as in increase in Public Debt to Treasury.

But the Treasury Secretary is also ex officio the Managing Trustee of Social Security, and while he is wearing that hat that same increase in debt scores as an increase in assets to Social Security, and in an odd twist score the same way at CBO, interest on the TF is added to any cash surpluses from taxation to make up total Social Security ‘surplus’ which is then deducted from any General Fund deficits to generate the top level number we generally recognize as ‘the deficit’ (as in Obama is on track for a $1.5 tn deficit in 2010).

Lets pause for a second, because this is totally counter-intuitive. How can interest transformed into Special Treasuries but not actually financed from public markets ever be considered an offset from real world cash deficits? What happens if Social Security goes cash flow negative as revenue from taxes dips below total costs and a portion of interest has to be paid from the General Fund in cash? Are you telling me that the remaining interest STILL counts as surplus for the top line deficit number!??

Yep. And we won’t even get into how it is treated by OMB for Budget purposes.

Which gets us most of the way towards answering Darms Devil’s Advocacy. First if Social Security is in overall surplus, meaning all income INCLUDING interest is in excess of costs, there is no effect on either debt or deficit to roll over TF principal, that is a wash. In this scenario any excess interest scores as new debt to the Bureau of Public Debt but as a surplus to both Social Security AND CBO, it serves to reduce deficits and not increase them.

Although combined Social Security projects to be in a state of ‘surplus/primary deficit’ in 2010 and 2011 with receipts from taxation failing to meet cost and a portion of TF interest having to be paid in cash, it will still be showing up in CBO scoring as a surplus on the top line number. And it is actually projected to return to ‘surplus/primary surplus’ from 2012 to 2017. Meaning that in 2015 Social Security will neither in accounting terms or in actual cash flow be contributing to the deficit at all, in fact it will still be offsetting it.

Now in theory the Commission could act to increase this offset by slashing current benefits between now and 2015, that would serve to boost TF balances and yearly surpluses, that is increasing debt while cutting deficits, but there are no proposals on the table to actually do so, even Alan Simpson, currently taking the hardest public line would exempt workers 60 and older from any near term benefit cuts, meaning no savings until at least 2017, and most other proposals out there would not effect at least initial benefits for workers 55 and older (viz Ryan Roadmap) meaning no top line savings until 2022.

The Commission can enact changes to Social Security benefit ratios that limit its share of GDP and also the dollar amount of its so-called ‘unfunded liability’ over the 75 year window. What they can’t do is make changes that will help them achieve their mandate of reducing the deficit to 3% of GDP by 2015, at least under CBO scoring rules.

Tags: , Comments (40) | |

Why the Pelosi Rule MAY not be a sell-out on Social Security

by Bruce Webb

There is a huge disturbance in the Force, at least as sensed by the Jedi of FireDogLake, Democratic Underground, AMERICAblog, and OpenLeft, which is to say among the Obama-skeptics of the Left. The substance is this, in a last minute move prior to adjournment Nancy Pelosi pushed through the rule for handling the recommendations of the Obama Deficit Commission, and on the surface they mirror that of Cooper-Wolff or its Senate counterpart Conrad-Gregg, that any recommendations coming out of the Deficit Commission has to be voted up or down without amendments. The actual language is here:

“Commits the House to vote on any Senate-passed recommendations of the bipartisan Fiscal Commission and that net savings from any Commission recommendations will go to deficit reduction.”

Meaning on the FDL reading that any Commission proposal focusing heavily on Social Security benefit cuts can simply sail through with Republican and Blue Dog support. Simple sell-out right? Well maybe. But whatever the intent of the players, including Pelosi, the effect might be much different. Because despite strong and deliberate similarities the Obama Deficit Commission is NOT the same as either Cooper-Wolff or Conrad-Gregg. Argument below the fold.

The entire Peter G Peterson backed argument as manifested in both Cooper-Wolff and Conrad-Gregg is that the major threat to the economy going forward is long-term deficits, that the major cause of those deficits are projected to be entitlements, and that the only solution is major cuts to those benefits. In this vision the disease and the medicine are determined beforehand and the whole purpose of the Commissions is to give bi-partisan cover backed up by a requirement that any proposal coming out of such a Commission is subject to an non-amendable up or down vote. And if this vision was still controlling the entire debate then this would look like total surrender by Pelosi. But I argue that it isn’t, that the Obama Commission was formally given a much different mission, and one that in the end conflicts and subverts that of PGP.

The main impetus for the Obama Commission was not the structural long-term deficits seen as the result of ‘unsustainable’ entitlements, instead it was the very large, as in more than a trillion a year, deficits starting with FY 2009 as a result of the worldwide economic crisis, that is the crisis is not defined as intergenerational but instead in the here and now with the main expressed fear is that without action the Invisible Bond Vigilantes and the Chinese Central Bank will stop buying our debt. Well I’ll leave that bigger argument to Prof K, the result was that the Obama Commission was given a specific charter, that of getting the deficit down to 3% of GDP by 2015. And the problem in a nutshell is that you can’t get there via benefit cuts to Social Security, one because Social Security is not actually projected to contribute to the deficit over that time period and two because even the most draconian proposals don’t start operating by then.

It has been an accepted principle since the Leninist Strategy of 1983 that benefit cuts shouldn’t come at the expense of people in or nearing retirement, a principle that was also the first one listed by Bush’s CSSS (Commission to Strengthen Social Security) in 2001, and followed by the various proposals fronted by Alan Simpson, the Ryan Roadmap, and even Michelle Bachmann. Each would give varying periods of grace ranging from seven years (Simpson) to not effecting people over 55 (Ryan Roadmap) to as much as 20 years. But what all share in common is that none of them show any savings under CBO scoring prior to the mandated target of 2015, they simply CAN’T bend the short term deficit path.

It is not clear that any of PGP, the Obama Commission, or Speaker Pelosi quite get this because the whole argument has been framed in terms set by the Social Security and Medicare Trustees where the score is generally expressed over the 75 year actuarial window, or since 2003 over the Infinite Future Horizon. Under those long-term scoring windows new revenues or benefit cuts get scored in the current year even if the actual incidence of the tax increase or benefit cut doesn’t occur for years or even decades. Well all of that is fine in its own place but it doesn’t cut any ice when it comes to projected deficits in 2015, when CBO scores whatever recommendations come out of the Commission, 2015 won’t (or shouldn’t) get credit for savings that won’t be seen until 2030 and later. Now the argument can and will be made that future cuts add current confidence to those nervous (but as yet invisible) Bond Vigilantes, but at most the real effects in 2015 could only be seen in lower interest rates, and those rates are rock bottom now.

How does this play out in practice? Assume the worst, that the real intent of the Catfood Commission is to slash entitlements and particularly Social Security, the question is whether they can present a package that does that yet doesn’t do anything for 2015’s bottom line? Can they get away with putting forth a ‘deficit reduction’ proposal that under CBO scoring doesn’t actually lower the deficit by 2015 or within the standard 10 year scoring window? Well I don’t see that they can, not without revealing their true colors. And this is where the Pelosi Rule might actually work to protect Social Security.

Cooper-Wolf and Conrad-Gregg were both to be established pretty much openly as ‘Entitlements Commissions’ along the lines of the 1994 Kerrey-Danforth ‘Entitlement and Tax Reform Commission’ , a package entirely focused on entitlements would not only not be surprising but expected giving the framing. But the Obama Commission has a different framing, that of near term deficits, requiring a different approach, the Commission has to at least present some measures that will actually address their charter of reducing the 2015 deficit. Which means revenue enhancements and spending restraint OUTSIDE of Social Security. (Or just biting the bullet and cutting current SS benefits, something most concede would be political suicide). Now the examples of the Stimulus and HCR Bills tells us how this could work, the Commission introduces a balanced proposal of short and long term revenue increases and cuts with a focus on both 2015 and 2083 and that proposal gets whittled down bit by bit ostensibly to gain the votes of Conservadems and Blue Dogs, but really just to eliminate any tax increases or defense cuts leaving only entitlement ‘reform’ intact. The Pelosi Rule, by intent or not, prevents that whittling process.

Seen in this light Pelosi would be simply calling the Blue Dogs bluff, is it really about deficit reduction? or about slicing away at the social safety net?

I don’t believe the Commission can get away with a package that only slashes future entitlement payments but does nothing about near term deficits, it would just be too raw in light of their mandate. Yet the more cover they add in the way of truly bi-partisan measures to increase revenue and cut discretionary spending, including military, the more support will bleed from Conservadems and Blue Dogs, to say nothing of Republicans, while Progressives are not going to jump on board an entitlements cut only program. Where they might have gotten away with a straight out Entitlements Commission whose focus was on 75 year and Infinite Future savings, they are handcuffed by a 2015 target and attendant CBO scoring.

My opinion anyway. For anyone else, well that is what comments are for.

Tags: , , Comments (32) | |

Professor Jamie Galbraith’s testimony to Deficit Commission

Hat tip reader 1Watt,Hermit Democratic Underground and New Deal 2.0. Testimony is public domain…here it is in entirety.

Statement to the Commission on Deficit Reduction
James K. Galbraith, Lloyd M. Bentsen, jr., Chair in Government/Business
Relations, Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin
June 30, 2010

Mr. Chairmen, members of the commission, thank you for inviting this statement.

I am a professional economist, but I have served in a political role, as Executive Director of the Joint Economic Committee of the United States Congress. I am offering this statement on behalf of Americans for Democratic Action, an organization co-founded in 1949 by (among others) Eleanor Roosevelt, John Kenneth Galbraith, Arthur M. Schlesinger, jr., and Ronald Reagan. Accordingly I would like to begin with a political comment.

1. Clouds Over the Work of the Commission.

Your proceedings are clouded by illegitimacy. In this respect, there are four major issues.

First, most of your meetings are secret, apart from two open sessions before this one, which were plainly for show. There is no justification for secret meetings on deficit reduction. No secrets of any kind are involved. Nothing you say will affect financial markets. Congress long ago — in 1975 — reformed its procedures to hold far more sensitive and complicated meetings, notably legislative markups, in the broad light of day.

Secrecy breeds suspicion: first, that your discussions are at a level of discourse so low that you feel it would be embarrassing to disclose them. Second, that some members of the commission are proceeding from fixed, predetermined agendas. Third, that the purpose of the secrecy is to defer public discussion of cuts in Social Security and Medicare until after the 2010 elections. You could easily dispel these suspicions by publishing video transcripts of all of your meetings on the Internet, and by holding all future meetings in public. Please do so.

Second, there is a question of leadership. A bipartisan commission should approach its task in a judicious, open-minded and dispassionate way. For this, the attitude and temperament of the leadership are critical.

I first met Senator Simpson when we were both on Capitol Hill; at Harvard he became friends with my late parents. He is admirably frank in his views. But Senator Simpson has plainly shown that he lacks the temperament to do a fair and impartial job on this commission. This is very clear from the abusive response he made recently to Alex Lawson of Social Security Works, who was asking important questions about the substance of the commission’s work, as well as calling attention to the illegitimate secrecy under which you are operating.

A general cannot speak of the President with contempt. Likewise the leader of a commission intended to sway the public cannot display contempt for the public. With due respect, Senator Simpson’s conduct fails that test.

Third, most members of the Commission are political leaders, not economists. With all respect for Alice Rivlin, with just one economist on board you are denied access to the professional arguments surrounding this highly controversial issue. In general, it is impossible to have a fair discussion of any important question when the professional participants in that discussion have been picked, in advance, to represent a single point of view.

Conflicts of interest constitute the fourth major problem. The fact that the Commission has accepted support from Peter G. Peterson, a man who has for decades conducted a relentless campaign to cut Social Security and Medicare, raises the most serious questions. Quite apart from the merits of Mr. Peterson’s arguments, this act must be condemned. A Commission serving public purpose cannot accept funds or other help from a private party with a strong interest in the outcome of that Commission’s work. Your having done so is a disgrace.

In my view you also should not have accepted help from the Economic Policy Institute, even though EPI’s positions on the merits are substantially closer to mine.

Let me now turn to the economic questions. A first economic question is, what caused the deficits and rising public debt? The answer comes in two parts: present deficits and projected future deficits.

2. Current Deficits and Rising Debt were Caused by the Financial Crisis.

Overwhelmingly, the present deficits are caused by the financial crisis. The financial crisis, the fall in asset (especially housing) values, and withdrawal of bank lending to business and households has meant a sharp decline in economic activity, and therefore a sharp decrease in tax revenues and an increase in automatic payments for unemployment insurance and the like. According to a new IMF staff analysis, fully half of the large increase in budget deficits in major economies around the world is due to collapsing tax revenues, and a further large share to low (often negative) growth in relation to interest payments on existing debt. Less than ten percent is due to increased discretionary public expenditure, as in stimulus packages.

This point is important because it shows that the claim that deficits have resulted from “overspending” is false, both in the United States and abroad.

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 justifies it? But the assumed rise in interest rates drives the projected debt-to-GDP dynamic.

Similarly, the rise in projected interest payments is inconsistent with low nominal inflation. Interest payments rising to over 20 percent of GDP by mid-century would constitute new federal spending similar in scale to the mobilization for World War II. Obviously this cannot happen with two percent inflation. And although a higher inflation rate is undesirable, arithmetically it means a lower debt-to-GDP ratio.

Finally, rapidly rising health care costs and low overall inflation are mutually consistent only if all prices except health care are rising at less than that low overall inflation rate — including energy and food prices in a time of increasing scarcity. This too is extremely unlikely. Either overall health care costs will decelerate (relieving the so-called Medicare funding problem) or the overall inflation rate will accelerate — reducing the debt-to-GDP ratio.

In sum: the economic forecasts on which you are being asked to develop a credible plan for reducing deficits over the medium term are a mess. The unemployment and growth forecasts are implausibly optimistic, while the inflation and interest rates projections are implausibly pessimistic and mutually inconsistent.

Good policy cannot be based on bad forecasts. As a first step in your work — long overdue — the Commission should require the development of internally consistent, and factually plausible, economic forecasts on which to base future deficit and debt projections.

5. The Only Way to Reduce Public Deficits is to Restore Private Credit.

The conclusion to draw from the above argument is that large deficits going forward are likely to have the same source as they do right now: stubbornly high unemployment.

The only way to reduce a deficit caused by unemployment is to reduce unemployment. And this must be done with a substantial component of private financing, which is to say by bank credit, if the public deficit is going to be reduced. This is a fact of accounting. It is not a matter of theory or ideology; it is merely a fact. The only way to grow out of our deficit is to cure the financial crisis.

To cure the financial crisis would require two comprehensive measures. The first is debt restructuring for the entire household sector, to restore private borrowing power. The second is a reconstruction of the banking system, effectively purging the toxic assets from bank balance sheets and also reforming the bank personnel and compensation and other practices that produced the financial crisis in the first place. To repeat: this is the only way to generate deficit-reducing, privately-funded growth and employment.

As a former top adviser in the Clinton White House, co-chairman Bowles no doubt knows that privately-funded economic growth produced the boom years of the late 1990s and the associated surplus in the federal budget. He must also know that the practices of banks and investment banks with which they were closely associated worked to destroy the financial system a decade later. But I would wager that the Commission has spent no time, so far, on a discussion of the relationship between deficit reduction and financial reform.

To be clear: unemployment can be cured without private-sector financing, if public deficits are large enough — as was done during World War II. But if the objective is to reduce public deficits, for whatever reason, then a large contribution from private credit is essential.

One more time: without private credit, deficit reduction plans through fiscal austerity, now or in the future, will fail. They cannot succeed. If at the time the cuts take effect the economy is still relying on public expenditure to fund economic activity, then reducing expenditure (or increasing taxes) will simply reduce GDP and the deficits will not go away.

Further, if the finances of the private sector could be fixed, then an austerity program would be entirely unnecessary to reduce public debt. The entire national experience from 1946 to 1980, when public debt fell from 121 to about 33 percent of GDP and again from 1994 to 2000, proves this. In those years the debt-to-GDP ratio fell mainly because of creditdriven economic growth — certainly not because of public-sector austerity programs. And this is why the deficits returned, in 1980-2 and in 2000, once the credit markets froze up and the private economy entered recession.

Thus until the private financial sector is fully reformed — or supplemented by parallel financing institutions as was done in the New Deal — high deficits and a high public-debt-to-GDP ratio are inevitable. In the limit, if there is no private financial recovery, debt-to-GDP will converge to some steady-state value, probably near 100 percent – a normal number in some countries – and at that point the public deficit will be the sole engine of new economic growth going forward. Only when the private sector steps up, will the debt-to-GDP ratio begin to decline.

For this reason, a Commission report focused on “entitlement reform” rather than “financial reform” would be entirely beside the point. Entitlement cuts, no matter how severe, cannot and will not achieve deficit reduction. They cannot “meaningfully improve the long-term fiscal outlook,” as required by your charter. All they will accomplish is to impoverish vulnerable Americans, impairing the functioning of the private economy and the taxing capacity of the government.

6. Social Security and Medicare “Solvency” is not part of the Commission’s Mandate.

I note from Chairman Simpson’s conversation with Alex Lawson that the Commission has taken up the questions of the alleged “insolvency” of the Social Security system and of Medicare. If true, this is far outside any mandate of the Commission. Your mandate is strictly limited to matters relating to the deficit, debt-to-GDP ratio and fiscal stability of the U.S. Government as a whole. Social Security and Medicare are part of the government as a whole, so it is within your mandate to discuss those programs — but only in that context.

To make recommendations about the matching of benefits to payroll taxes — now or in the future — would be totally inappropriate. Within your mandate, the levels of payroll taxes and of Social Security benefits are relevant only insofar as they influence the current and future fiscal position of the government as a whole. Their relationship to each other is not relevant. You are not a “Social Security Commission” and there is no provision in your Charter for a separate discussion of the alleged financial condition of either program taken on its own. Such discussions, if they are occurring, should be subjected to a point of order.

The usual “solvency” arguments directed at the Social Security system and at Medicare as separate entities are in any event complete nonsense. These programs are just programs, like any others, in the Federal Budget, and the Social Security and Medicare “systems” are thus fully solvent so long as the Federal Government is. Further, as explained below, under our monetary arrangements there is no “solvency” issue for the federal government as a whole. The federal government is “solvent” so long as U.S. banks are required to accept US. Government checks — which is to say so long as there is a Federal authority in the Republic. This point has been demonstrated repeatedly in times of stress, notably during the Civil War and World War II.

7. As a Transfer Program, Social Security is Also Irrelevant to Deficit Economics.

Political discussions of “long-term fiscal sustainability” — including in the Charter for this Commission — make an economic error when they loosely use the word “entitlements” and suggest that supposed economic dangers of federal deficits (for instance, rising real interest rates) can be reduced by “entitlement reform.” As a matter of economics, this is not true.

“Government Spending” — as any textbook will verify — is a component of GDP only insofar as the spending is directly on purchases of goods and services. That alone is what economists mean by the phrase “government spending.” GDP is the final consumption of produced goods and services, and government is one of the major consuming sectors; the others being private business (investment) and households (consumption).

Social Security is a transfer program. It is not a spending program. A dollar “spent” on Social Security does not directly increase GDP. It merely reallocates a dollar from one potential final consumer (a taxpayer) to another (a retiree, a disabled person or a survivor). It also reallocates resources within both communities (taxpayers and beneficiaries). Specifically, benefits flow to the elderly and to survivors who do not have families that might otherwise support them, and costs are imposed on working people and other taxpayers who do not have dependents in their own families. Both types of transfer are fair and effective, greatly increasing security and reducing poverty — which is why Social Security and Medicare are such successful programs.

Transfers of this kind are also indefinitely sustainable — in fact there can intrinsically be no problem of sustainability with transfer programs. Apart from their effect on individual security, a true transfer program uses (by definition) no net economic resources. The only potential macroeconomic danger from “excessive” transfers is that the transfer function may be badly managed, leading to excessive total demand and to inflation. But there is no risk of this so long as the financial crisis remains uncured. Under present conditions Social Security and Medicare are bulwarks for stabilizing a total demand that would otherwise be highly deficient.

Similarly, cutting Social Security benefits, in particular, merely transfers real resources away from the elderly and toward taxpayers, and away from the poor toward those less poor. One can favor or oppose such a move on its own merits as social policy – but one cannot argue that it would save real resources that are otherwise being “consumed” by the government sector.

The conclusion to be drawn is that Social Security should in any event be off the agenda of your Commission, as it is a transfer program and not a program of public spending in the economic sense. In particular it does not use capital resources and will not drive up interest rates. This is true whether the “Social Security System” is in internal balance or not.

8. Markets are not calling for Deficit Reduction; Now or Later.

Let me turn next to a larger economic question. Do deficit projections matter? Are they important? Was the President well-advised to frame the mandate of the Commission as he did?

What, in short, are the economic consequences of a high public deficit and a rising debt-to-GDP ratio, and what (if any) benefits are to be expected from creating an expectation that deficits will come down and that the debt-to-GDP ratio will fall?

The idea that US economic policy should aim for a path of reduced deficits in the future, is shared by liberals and conservatives, and it is, from a political standpoint, a very powerful idea. The Commission’s charter takes for granted that this goal is desirable. It specifies that your objective is to achieve a balanced “primary budget” — net of interest payments, by 2015.

Yet your charter does say why this is an appropriate goal. It cites no study to which one might refer. It does not explain why 2015 is the right target date, as opposed to (say) 2025 or even 2050. It does not spell out the economic consequences — if any — of failing to meet the stated objective.

Does the requirement make economic sense? I shall tackle that question in two parts. The first accepts the view most people hold of the fiscal and financial world. The second reflects, from an operational standpoint, how that world actually works in practice.

Most informed laymen believe that the Federal government must borrow in order to spend. They believe that the interest rate on Treasury securities is set in a market for government bonds. The markets impose discipline on the government. Thus their idea is that “fiscal responsibility” will produce low long-term interest rates and tolerable borrowing conditions for the federal government, while “irresponsibility” will be punished by higher, and eventually intolerable, debt service costs.

Accepting this view for the moment, what does the present level of long-term interest rates tell us? As I write, thirty year Treasury bonds are yielding just over four percent — or just a little more than half their yield a decade back. On the argument just given, this must be an extraordinary success of virtuous policy. It seems that Wall Street has made a strong vote of confidence in the fiscal probity of our current policies. This vote is unqualified, backed by money, contingent on nothing. It therefore represents a categorical rejection, by Wall Street itself, of the CBO’s doomsday scenarios and all other deficit-scare stories.

On this theory, it follows that the mandate to reduce the primary deficit to zero by 2015 is unnecessary. Such an action can hardly reduce interest rates — neither short nor long-term — which are already historically low.

But wait a minute, some may say. Yes interest rates are low at the moment. But bond markets are fickle, they can turn on a dime. And what then?

Yes, it is possible that interest rates could rise. But the problem with this argument is that it takes us away from the premise of rationality. If bond markets are fickle and arbitrary, who is to say what they will do in response to any particular policy? In the face of irrational markets, the sensible policy is to borrow heavily for so long as they are offering a good deal. One may say that all good things end, and perhaps they will. But if markets are irrational, then by construction you cannot prevent this by “good behavior.”

The conclusion from this section is that one cannot logically argue that markets insist on deficit reduction. Either the markets are rationally unworried about deficits, or they are acting irrationally right now, in which case they can hardly “insist” on anything.

9. In Reality, the US Government Spends First & Borrows Later; Public Spending Creates a Demand for Treasuries in the Private Sector.

As noted, the above argument is based on the common belief that the government must borrow in order to spend, and thus that the government faces “funding risks” in private markets. Such risks exist, of course, for private individuals, for companies, for state and local governments, and for national governments such as Greece that have ceded monetary sovereignty to a central bank. But the situation of the United States government is quite different.

The U.S. government spends (and the Federal Reserve lends) in a very simple way. It does so by writing checks — in fact simply by marking up numbers in a computer. Those numbers then appear in the bank accounts of the payees, who may be government employees, private contractors, or the recipients of federal transfer programs.

The effect of government check-writing is to create a deposit in the banking system. This is a “free reserve.” Banks of course prefer to earn interest on their reserves. Thus they demand a US Treasury bond, which pays more interest without incurring any form of credit or default risk. (This is like moving a deposit from a checking to a savings account.) The Treasury can meet that demand, or not, at its option — it can permit, or not permit, the stock of US Treasury bonds in circulation to increase.

So long as U.S. banks are required to accept U.S. government checks — which is to say so long as the Republic exists — then the government can and does spend without borrowing, if it chooses to do so. And if it chooses to issue Treasuries to meet the demand, it can do that as well. There is never a shortfall of demand for Treasury bonds; Treasury auctions do not fail.

In the real world, the government creates demand for bonds by spending above the level drained by taxation from the system. The extent to which those bonds are held locally, or abroad (another common source of worry) depends on the US current account deficit. This also has nothing to do with approval or disapproval by foreign bankers, central bankers, or their governments of American deficit policy. A foreign country cannot acquire a US Treasury bond unless someone outside the United States has acquired dollars to pay for them, which is generally done by running a trade surplus with the United States. And when foreigners do acquire those dollars, then like domestic banks they prefer to earn interest, which is why they buy Treasury bonds.

Insolvency, bankruptcy, or even higher real interest rates are not among the actual risks to this system. The actual risks in this system are (to a minor degree) inflation, and to a larger degree, depreciation of the dollar. However at the moment there is wide agreement that a lower dollar would be a good thing — against the Chinese RMB and now also the euro. So it is difficult to believe that the goal of deficit reduction per se serves any coherent, or presently desirable,
economic objective.

We can conclude that there is actually no economic justification for the target of reducing the primary deficit to zero by 2015 or any other date. The right economic objectives are to meet real problems, not those conjured from thin air by economists. Bringing about a rapid end to unemployment, caring properly for an aging population, cleaning up the Gulf of Mexico, coping with our energy insecurity and with climate change are all far more important objectives than reducing a projection of future budget deficits.

10. The Best Place in History (for this Commission) Would be No Place At All.

Most people assume that “bipartisan commissions” are designed to fail: they are given thorny (or even impossible) issues and told to make recommendations which Congress is free to ignore or reject. In many cases — yours is no exception — the goal is to defer recognition of the difficulties for as long as possible.

You are plainly not equipped by disposition or resources to take on the true cause of deficits now and in the future: the financial crisis. Recommendations based on CBO’s unrealistic budget and economic outlooks are destined to collapse in failure. Specifically, if cuts are proposed and enacted in Social Security and Medicare, they will hurt millions, weaken the economy, and the deficits will not decline. It’s a lose-lose proposition, with no gainers except a few predatory funds, insurance companies and such who would profit, for some time, from a chaotic private marketplace.

Thus the interesting twist in your situation is that the Republic would be better served by advancing no proposals at all.

Tags: , , Comments (18) | |

Catfood Commission Update: Simpson on a Hot Tin Roof

by Bruce Webb

Those of us who follow the Obama Deficit Commission and its seeming hyper-focus on cutting Social Security were heartened last week by what turned into a veritable de-pantsing of Commission co-Chairman Alan Simpson in the course of an 8 minute video interview outside the (closed) doors of the Commission by Social Security Works Communications Director Alex Lawson. Alex’s video went viral and then some. Anyway you can read and hear my new buddy Alex speaking for himself:

Plus Jane Hamsher and Firedoglake have been live streaming Alex’s and SSW’s film with the latest installment here: Livestreaming the Closed Door Fiscal Commission Pt. 5. Not real lively on a minute to minute basis, unless you are a big fan of tall polished wood doors, but I thought this little note from Jane was interesting.

[Ed. Note: After Alex’s encounter with Alan Simpson, the committee has apparently moved the meeting location without notice. Alex is trying to find out where it is being held.]

Well it looks like somebody struck a nerve. Congrats to Alex and to his bosses at SSW, Nancy Altman and Eric Kingson (plus Policy Director Lori Hanson), who along with Roger Hickey and his people at CAF are keeping the heat beating on that tin roof.

So to those who have been wondering when someone, anyone besides Baker and Krugman were going to call out the Social Security ‘Reformers’ the answer is “right now”.

P.S. the original revised release date for the Annual Report of the Trustees of Social Security was for next Wednesday June 30th. There are rumors that that date might slip for reasons unstated (the Report by law is due April 1), but when it does come out you can fully expect Social Security Bears Bruce and Dale to come out of our caves and bring you the numbers, plus in due course an updated Northwest Plan for a Real Social Security Fix.

Tags: , Comments (10) | |