July 21, 2012
The fiscal cliff and rationality
What should happen, what could happen, and what will happen?
Let's begin by acknowledging the obvious: the United States faces a very significant long-run issue of fiscal solvency. The graph below, taken from a recent analysis by the Congressional Budget Office, plots projected federal expenditures as a percentage of GDP under two scenarios:
The extended baseline scenario, which reflects the assumption that current laws generally remain unchanged; that assumption implies that lawmakers will allow changes that are scheduled under current law to occur, forgoing adjustments routinely made in the past that have boosted deficits.
The extended alternative fiscal scenario, which incorporates the assumptions that certain policies that have been in place for a number of years will be continued and that some provisions of law that might be difficult to sustain for a long period will be modified, thus maintaining what some analysts might consider "current policies," as opposed to current laws.
Obviously any such projections are problematic. Nobody knows with any confidence what U.S. GDP is going to be in 2037. But the basic feature of the CBO's "alternative" scenario seems indisputable-- if historical policies remain in effect for the next 15 years we are going to be in real trouble. There is no ambiguity about the fact that medical expenditures have been rising much faster than other categories, and that the American population is going to continue to age. The historical combination of existing tax rates and the rising federal role in health care is unquestionably unsustainable.
Although I emphatically agree that America needs to make changes today that change the fundamentals of those long-term trends, I do not think it is necessary to do so with immediate tax increases or spending cuts. As Karl Smith observes, with the current negative real yields on government debt, the government is actually making a profit by running a budget deficit, as long as the government's borrowing cost remains as low as it is at the moment. Granted, we've seen some of the European countries move from that situation to one of needing to pay very high interest costs very quickly in response to rapid shifts in investor sentiment. The U.S. would face an enormous problem if the same kind of debt flight were to hit our Treasury auction. That's one of the reasons why I think it's extremely important to put in place today policies that permanently change the long-term fundamentals, but whose fiscal bite increases only gradually over time. Examples include the recommendations of the Debt Reduction Task Force, phasing out the Bush tax cuts, raising the retirement age, means-testing Social Security and Medicare, and gradually raising Medicare copays.
However, the "extended baseline scenario" in the CBO graph above is a far cry from any of those ideas. Existing law tries to make the transition all at once with very significant tax increases and spending cuts. These are scheduled to be implemented at the end of this year, a situation that some refer to as "America's fiscal cliff." The tax increases and spending cuts described in the table below sum to over $600 B in fiscal year 2013, a figure that represents about 4% of total GDP.
How big an effect this would have on the economy depends on the fiscal multiplier. Does a $100 B decrease in government spending reduce GDP by more that $100 B (multiplier greater than 1) or less than $100 B (multiplier less than 1)? I personally find the empirical evidence that the multiplier is substantially greater than 1 to be less persuasive than do some of my colleagues. But even if the multiplier were significantly less than 1, a 4% hit to government spending and consumer purchasing power, in an economy that is struggling to keep the growth rate above 2%, would be enough by itself to put the U.S. economy into recession.
A separate issue is the debt ceiling. One of the peculiar embarrassments of the U.S. legislative tradition is that even if Congress arrives at a consensus about how much taxes and spending are appropriate for 2013, it will need separate legislation to authorize the government to borrow the amount that the tax and spending legislation would require. If the government lacks the separate authority to carry out routine fiscal operations, the consequences could be quite disastrous.
So that's what I think should happen and what existing law says could happen. What do I expect is actually going to happen? I propose that the key question to focus on is this: in whose interest would it be to see the U.S. go off the fiscal cliff into recession?
The clear answer is: no one's. Democrats don't want to see that happen, nor do Republicans. The logical thing to expect is therefore that somehow they'll figure out a way to modify existing law before January 1, postponing the lion's share of the tax increases and spending cuts for at least another year.
Granted, the specifics of how a compromise will be reached are unclear. And sometimes those playing too close to a cliff find themselves inadvertently falling off. Moreover, even if this all gets favorably resolved in time, the uncertainty itself can be an adverse shock to the economy. I believe that last summer's debt-ceiling debacle did exert a measurable drag on the U.S. economy.
Although the risks are real, the rational thing to expect is that the actual fiscal contraction next year will be significantly more modest than what is implied by existing law. But the cumbersome process of getting to that outcome will once again exact its own unique toll.
Posted by James Hamilton at July 21, 2012 01:21 PMdigg this | reddit
JDH raising the retirement age, means-testing Social Security
If you read the report carefully it's clear that the commission did not believe fixing Social Security had much effect on the long run debt. The commission took it upon itself to include some ideas on Social Security because they thought it was important to maintain the long run solvency of the program, not because they thought their proposed changes did much of anything to the debt problem. There may well be excellent reasons for tinkering with Social Security, but Social Security's solvency is irrelevant to the national debt. When all of the FICA Trust Fund bonds are consumed, then Social Security outflows will equal inflows; i.e., it will be a pure PAYGO system. We probably want to fix that problem, but fixing Social Security doesn't affect the national debt problem. Now Medicare is a different story entirely. You can't fix the debt problem without fixing Medicare, and you can't fix Medicare without fixing healthcare in general.
As a political issue I think the debt commision made a strategic mistake in trying to bring Social Security into their plan. Raising the retirement age was the hottest single issue in their plan, but yet didn't really do much at all to fix the long run debt problem. They created enemies for no good purpose.
Posted by: 2slugbaits at July 21, 2012 02:18 PM
Tell me who will win the elections Senate, and House too, and I can tell you how it will work out. Until then, it is all speculation.
Posted by: Walter Sobchak at July 21, 2012 02:35 PM
The CBO projected that the surpluses Clinton left for Bush were enough to pay off the entire US debt by the time that the Social Security/Medicare trust funds would have to be amortized for beneficiary payments, all without having to raise taxes to pay for the amortization of those trust funds. These “surpluses” were made up entirely of excess payroll taxes building up the trust funds. Bush took those excess payroll tax receipts and gave them “back” as income tax reductions, heavily weighted to the wealthy–who didn’t create those surpluses in the first place. By doing this, Bush guaranteed that taxes would have to be raised in order to amortize the trust funds. The failure to do so simply permits the Republicons to steal the money contributed by workers for their retirement. Everything about not raising taxes or limiting expenses, is about stealing our money.
Posted by: bmz at July 21, 2012 07:40 PM
bmz defines stealing as: "These “surpluses” were made up entirely of excess payroll taxes building up the trust funds. Bush took those excess payroll tax receipts and gave them “back” as income tax reductions, heavily weighted to the wealthy–who didn’t create those surpluses in the first place." And therein is the fundamental political difference between the two parties.
Conservatives believe taking more than is needed is stealing. Liberals believe it depends on the fairness of and need where that excess (stolen revenue in a conservative definition) is spent. Bush gave back those excess collection to whose who actually paid taxes. Did liberals wanted it to be spent on those who did not pay taxes?
This statement from bmz needs some defining: "The failure to do so simply permits the Republicons to steal the money contributed by workers for their retirement." It was a Democrat, LBJ, who started the accounting that allowed for the SS excess funds to be included in total budget calculations, and thereby muddying the deficit issue. It was another Democrat, Obama, who reduced the FICA revenues, and thereby shortening the time frame when the FICA bonds would be expended.
Collection of the excess SS revenues added to the total debt, as they were converted to bonds. LBJ budget actions saw that they were not calculated as part of the annual deficit. His budget action resulted in SS bonds reducing the amount needed to be borrowed from the public FOR THAT YEAR. Redeeming of those bonds is deficit category change adding to the "Debt held by the public". If there is an interest cost difference when they are redeemed it will either add or deduct from the total debt.
Posted by: CoRev at July 22, 2012 05:26 AM
Here's another piece of information not often referenced by liberals/democrats: "According to the Congressional Budget Office, in FY 2009 40% of federal government spending was funded by debt, compared to 15% in 2008 and 6% in 2007."
Blame Bush for that deficit spending status.
Posted by: CoRev at July 22, 2012 06:25 AM
"...in whose interest would it be to see the U.S. go off the fiscal cliff into recession?"
I'm not sure the answer is, "no one's". A game theoretic equilibrium might well involve leaving both players worse off.
Posted by: David Pearson at July 22, 2012 06:57 AM
CoRev First, please note that most of the FY2009 budget was developed under Bush 43. FY2009 started on 1 Oct 2008. Obama didn't take office until 20 Jan 2009. Obama added roughly $300B to what was mainly a Bush budget. Second, the economy was in a very deep recession in 2009. The economy was not in recession in throughout all of FY2007 and most of FY2008. Instead of blaming Obama for a large deficit in FY2009 you should be asking why Bush ran any deficit at all during FY2007. Why wasn't Bush running a large surplus then? Third, in a few weeks many community colleges will be open for fall semester registration. Sign up for a macro course.
It was a Democrat, LBJ, who started the accounting that allowed for the SS excess funds to be included in total budget calculations, and thereby muddying the deficit issue.
It only appeared muddy to those who don't understand basic macro. If you're interested in knowing the macroeconomic effect of the budget on the economy, then the unified budget is the correct variable. That determines how much the federal government has to borrow from the public. If you're interested in knowing the sources of surplus or deficit and the long run trajectory of the total debt, then you need to decompose things into on-budget and off-budget categories.
Conservatives believe taking more than is needed is stealing.
The reason SS was running large surpluses is because noted far lefty liberals like Alan Greenspan and Ronald Reagan pushed through what was then (1982) the largest tax hike in history. Since Reagan increased the FICA tax more than was needed to meet SS outflows, are you saying that Reagan was a thief?
Bush 43 used the SS surplus to justify cuts in income taxes...particularly income tax cuts for those at the very top. Bush also said (i.e., he lied) that even with his tax cuts the budget would still be running a surplus. Remember those four $1 bills he used to hold up in his 2000 campaign trail speeches? What happened to those surpluses? You might be able to give Bush a pass on the FY2002 deficit because of the recession, but most of Bush's presidency saw years of expansion and something approaching full employment. So why wasn't Bush running a surplus throughout most of his presidency? And why did Bush keep saying that the day of reckoning for SS wasn't the day the SS Trust Fund couldn't meet all of its promised benefits, but the day the Trust Fund had to start cashing in those Trust Fund bonds? Why is that? It's because the GOP thought they could get away without every having to make good on those debts to the Trust Fund.
Bush gave back those excess collection to whose who actually paid taxes.
What excesses? The on-budget account was running a deficit. And unless the government runs a primary surplus at some point in time the debt will always increase. Why do you seem to think the government can run primary deficits forever and never have to run a primary surplus? Apparently you've bought into the Grover Norquist argument that running a surplus is theft. Please, sign up for that Macro 101 course.
Posted by: 2slugbaits at July 22, 2012 07:29 AM
JDH: "...we've seen some of the European countries move from that situation to one of needing to pay very high interest costs very quickly in response to rapid shifts in investor sentiment..."
I think before this happens here, it will happen in Japan. And it won't take a major shift in sentiment, just a let up in the temporary flight to safety due to Euro, and a simply shift in the supply-demand curve as the domestic owners of debt cash in.
Posted by: Bob_in_MA at July 22, 2012 09:49 AM
CoRev: Collection of the excess SS revenues added to the total debt, as they were converted to bonds.
This is why it is pointless to discuss budget issues with conservatives. They are numerically illiterate -- in their minds saving more money causes debt.
Posted by: Joseph at July 22, 2012 10:07 AM
When all of the FICA Trust Fund bonds are consumed, then Social Security outflows will equal inflows; i.e., it will be a pure PAYGO system.
Accurate description is the basis of constructive dialog.
Before Social Security became a political football, the true nature of the trust funds was explained in this article published in 1961.
"The securities held by the trust funds are not IOU's issued to the government to itself. The trust funds are lenders and the U.S. Treasury is the borrower. When the trust funds lend money to the U.S. Treasury, the Treasury uses this money just as it uses the money borrowed from private lender[s], to help pay the expenses of the government."
It goes on to say that the government must repay the borrowing with interest, and indeed there is an entry in the trust fund accounting showing accrued interest from the Treasury. But the key point is italicized; every penny of the SS Trust Fund not used for the immediate cash needs of the program (benefits and administrative costs) was spent when it was taken in by the Treasury. The Trust Fund is noting more than federal IOUs and the IOUs have mounted over time like every other category of federal debt.
Thus anyone referring to a difference between now, when the Social Security Trust Fund still has a positive balance, and later, when it runs dry, is not describing the situation accurately.
If tomorrow the government decided to pay everything it owed the SS Trust Fund, it would have to sell debt to the public equal to the principal and accrued interest. However under current law it would not be allowed to do that. The law creating Social Security explicitly stated that the first priority for investing any surplus was Treasury debt. The only way the government could invest it elsewhere would be if the SS Trust Fund surplus were greater than the national debt. The law didn't force us to run a deficit but it made it passng easy for the government to spend enough on other programs to run a current deficiit that could absorb the trust fund surplus. Washington politicians proved themselves up to the task and then some.
Since the Social Security Trust Fund consists of nothing more than federal debt, every time it is "drawn down" to make up for the current Social Security deficit. all that is happening is that the amount the Treasury says it owes the Fund is decreased. In order to "pay back the fund" the Treasury sells debt to the public. This is the same as paying back your left pocket by borrowing from your right pocket, or in concrete terms, doing a balance transfer from one credit card to the other. This does not change the total debt outstanding.
Continuing the credit card analogy, this works as long as the credit card companies think that the total balance on all of your cards is reasonable. If for any reason they decide that your debt load is too great, then it does not matter which card holds the balance. They will cut your access to credit and raise your interest rate on the debt you currently hold. Similarly if the investing public loses its appetite for Treasury debt it doesn't matter which of the government's internal accounts show a surplus. The only thing that matters is the consolidated balance, reflected in debt held by the public.
Posted by: colonelmoore at July 22, 2012 12:01 PM
When GWBush announced tax cuts, I thought it made sense as a stimulus because the economy was slow after the internet bubble popped. There are 3 problems with that:
1. They didn't stimulate worth squat. Anemic job growth similar or worse than today.
2. They were renewed, which had 2 effects: they became fiscally irresponsible and they became fodder for political stupidity over "tax cuts" and "tax increases." The fiscal irresponsibility came in 2 waves, first accelerating the rate decreases and then renewing the reductions.
3. I didn't foresee that we'd be involved in 2 very expensive wars in which we quixotically would engage in "nation building" while "spreading democracy" in areas of the world the most inhospitable to modernity let alone our values. I'd say the rate cut acceleration and their renewal was a way of buying off national support for the war by pushing the cost into the future. That is why the national debt doubled in 7 years of GWBush (meaning before the crash).
As for now, we're becoming more irrational as a society, so I predict nothing good. If I were the GOP, I'd want to lose this election because implementing anything like the policies they have voted for en masse in the House will cause the kind of disaster we've been waiting for. The deficit and the debt will explode and that might actually bring down the dollar. They're better off being in opposition and leaving the mess to the Democrats to fix. If they actually take power, they will destroy themselves as a party.
Posted by: jonathan at July 22, 2012 12:15 PM
If the government were to decide to pay its debt to the trust fund in cash, that would be illegal, as the law creating Social Security required the surplus to be invested in Treasurys. Thus it could hold cash.
Posted by: colonelmoore at July 22, 2012 12:53 PM
colonelmoore Thus anyone referring to a difference between now, when the Social Security Trust Fund still has a positive balance, and later, when it runs dry, is not describing the situation accurately.
I'm not sure what you mean here. You need to clarify. If nothing is done to "fix" Social Security (and here I'm simply accepting at face value the Trustee's report), then sometime in the next 25-30 years (give or take), the Trust Fund bonds accumulated since 1983 will be exhausted and outflows will equal inflows. Those outflows will be ~75% of promised benefits. That is not a good thing, but the fact that the Trust Fund bonds will be exhausted does not affect the fiscal problem. It just means benefits will fall. It does not mean the deficit increases. Now if Congress changes the rules and decides that retirees will get promised benefits even if Trust Fund bonds are exhausted, then that is a completely different case. That would increase the deficit. But that is not current law.
Also, the Trust Fund was never intended to run a permanent surplus. The point of the surplus was to temporarily increase national saving (i.e., private saving + public saving) in order to later finance some of the demographic realities around mid-century. The temporary surplus was supposed to increase national saving such that it would increase future worker productivity, and the Trust Fund bonds would be paid down out of that higher labor productivity. Yes, future workers would get stuck with higher income taxes to pay down the Trust Fund debts, but they would also have higher earnings due to the high national saving during the period of FICA surpluses. The surplus represented a productivity endowment provided to future workers in order to finance the retirements of today's workers. That was the theory. What Bush did was to effectively break the connection between increased national saving and higher future labor earnings.
BTW, I believe that the debt commission's assumptions about increasing longevity are highly dubious. The current cohort of young workers may very well have shorter life expectancies than their parents. That's what a lifetime of sedentary lifestyles and fast food washed down with high fructose sugar will get you.
Posted by: 2slugbaits at July 22, 2012 01:13 PM
Social Security's solvency is irrelevant to the national debt. When all of the FICA Trust Fund bonds are consumed, then Social Security outflows will equal inflows; i.e., it will be a pure PAYGO system.
Only if benefits are slashed by about 25%, amounting to about 1.5% of GDP. That's the long-term funding gap between promised benefits and expected payroll tax revenue. Adding 1.5% of GDP to the national debt each year is non-trivial.
And this starts before the trust fund is exhausted, since to get funds to redeem the trust fund bonds held by the govt, debt in the same amount must be sold to the public (absent new revenue in that amount).
The Social Security Trustees put the underfunding of promised benefits relative to expected future payroll taxes at $20.5 trillion at present value -- *more* than 100% of which is for current participants, and will have to be raised in time to cover them, as future participants are projected to pay $1 trillion more in taxes than they receive in benefits (thus taking an outright loss on their contributions, compared to the big above-market gains on contributions received by past participants that made the program so popular among them ... but that's another story.) That $20.5 trillion doesn't include the $2.5 trillion needed to be raised to finance trust fund operations, so that makes $23 trillion total.
Of course, the same logic can be applied to Medicare's solvency. When the Medicare trust fund is exhausted -- now projected for 2024, well before the exhaustion of the Social Security trust fund -- Medicare spending is to be slashed under current law, just as Social Security spending is to be slashed when the Social Security trust fund is exhausted. Much of the Medicare problem is solved right there!
*If* one really expects benefits to be slashed when the trust fund is exhausted. For either program.
Posted by: Jim Glass at July 22, 2012 01:32 PM
From the point of view of policymakers there is a big problem with cutting health spending by making the health industry less profitable: the health (and finance) sectors have been the major net creators of new jobs for 10-20 years, precisely because they are inefficient and parasitical.
Every $100,000 wasted on private healthcare insurance overheads, a politicians sees a job created for a manager of a team of health insurance bureaucrats.
For policymakers the question is: if the USA managed to cut in half the percentage of GDP that goes to health care, to canadian/european levels, where would all the unemployed go? We are talking about 5% of the total workforce, all well paid people voting conservative.
And what about political donations? Who would replace the CEOs, companies, doctors, donating generously to campaigns that promise to protect their generous incomes?
Posted by: Blissex at July 22, 2012 01:45 PM
2slugbaits: I'm not sure what you mean here. You need to clarify. If nothing is done to "fix" Social Security (and here I'm simply accepting at face value the Trustee's report), then sometime in the next 25-30 years (give or take), the Trust Fund bonds accumulated since 1983 will be exhausted and outflows will equal inflows.
I understand that the law is set up to allow Social Security to continue to take in less money than it pays out until the internal acccount of the government shows the trust fund has run out. But lots of laws are written that mean little in the world of accounting. In a holding company, one subsidiary company can make a loan to another subsidiary out of its surplus earnings. But when the holding company does its consolidated accounting, the loan is a wash. What matters is what the consolidated account shows.
Because the law required Social Security surplus funds to be invested in Treasury bills as the first priority, it gave license to the government to run enough of a deficit to make sure that the government could borrow from Social Security. Thus all of that money was spent as it came in.
When we raised FICA taxes in the 1980s, politicians did what comes naturally. So while on paper Social Security has a surplus, it is not a cash surplus. It is a bunch of IOUs. The cash was spent.
I get that from an internal accounting point of view drawing down the trust fund does not increase the deficit. But internal bookkeeping is far different from consolidated bookkeeping. When someone gets a Social Security check today, it is not fully paid for out of current FICA revenues. The difference is paid for by Treasury "paying back" the trust fund some of the money it borrowed.
Since the law does not require the government to raise taxes or cut spending when this happens, everything proceeds on autopilot. When the Treasury transfers money from the general account to the Trust Fund account, it still has to cover other outlays. It does this by selling Treasury debt. The result is an increase in the deficit.
This is happening today. As long as investors see the US as the best bet in a bad neighborhood the pain is not immediate. But I have little doubt that before the "trust fund runs out," investors who see the general fund, the Medicare Trust Fund, the Highway Trust Fund and the Social Security Trust fund all running red ink will be far less sanguine. I do not presume to read Prof. Hamilton's mind but I believe he would agree.
By the way, my credit card balance transfer analogy to the Social Security Trust Fund is still incorrect. The correct model is a person who has a direct deposit bank account and a credit card account. Every month he uses all of his remaining chacking account balance to pay off part of his credit card balance.
Posted by: colonelmoore at July 22, 2012 01:59 PM
"Fiscal solvency"? We face no issue of fiscal solvency, at all. We print the money, remember?
As you note, the price of debt may get higher, or we might not want to generate the inflation consequent to excess borrowing (At other times, not now). but outright insolvency? That is can only be caused by political idiocy, (i.e tea party), not by any financial pressure.
These pressures will all work themselves out over time. If the economy is booming and inflation threatens, it is alot easier to lower borrowing and raise taxes. Right now, however, it is truly a disservice to be scare-mongering about "insolvency" when it isn't an issue at all, and is part of natural financial cycles. How about addressing a real problem??
Posted by: Burk at July 22, 2012 02:10 PM
In their draft report the debt commission had a footnote in which they admitted that "fixing" SS didn't do much one way or the other in terms of resolving the long run debt problem. They allude to that point in the final report, but they were less candid. I can imagine why. They simply decided it would be a good idea to go outside their portfolio and recommend a fix to SS.
to the big above-market gains on contributions received by past participants
Hmmmm...in the past conservatives always argued that Social Security gave below market gains and that was always one of the arguments (first surfaced in the 1980s) for privatizing Social Security. Now it seems that the problem is SS benefits are too generous. A position for all seasons.
It is true that absent a "fix" future retirees will only get about 75% of promised benefits, but even at that the benefits they receive will still exceed today's real benefits. Debating how much tomorrow's workers should owe tomorrow's retirees is a fair and important policy debate; but that same debate applies beyond SS. Even if today's retirees elect to save more and provide for more of their retirement through their personal investments, that doesn't change the basic problem. Tomorrow's retirees will disinvest in order to consume their desired share of GDP. The manner in which retirement is financed doesn't change the basic economic problem.
Just as in the past, the crux of the matter is a compact between generations. Today's workers agree to save and invest so that tomorrow's workers will be able to support tomorrow's retirees. The FICA surplus was supposed to finance productive investment, not tax cuts for the rich. Those productive investments were supposed to increase returns to labor, not capital. We don't apply the FICA tax to capital. Bush pissed away the surplus on tax cuts and stupid wars.
The most irresponsible generation has to be those recently retired...say within the last 10 years. They took big returns from SS and then captured a lot of the benefits from the Bush tax cuts. And then they voted Tea Party in 2010 in order to prevent income tax hikes during their lifetimes. Irresponsible.
Posted by: 2slugbaits at July 22, 2012 02:21 PM
Also, the Trust Fund was never intended to run a permanent surplus. The point of the surplus was to temporarily increase national saving (i.e., private saving + public saving) in order to later finance some of the demographic realities around mid-century...
This is false. The trust fund was never "intended" at all. It appeared by accident.
The universal and constantly repeated belief that the trust fund was created by the Greenspan Commission reforms to save the SS surplus to pre-fund benefits for the boomer generation is the greatest myth, urban legend, in American politics.
Here’s Robert Myers, SSA’s long-time chief actuary and Executive Director of the Greenspan Commission on this subject, in the SSA.gov oral history section...
~~ quote ~~
Q. As we look at it today, some people rationalize the [trust fund] financing by saying that it’s a way of partially having the baby boomers pay for their own retirement in advance. You’re telling me now this was not the rationale. Nobody made that argument or adopted that rationale?
Myers: That’s correct. The statement you made is widely quoted, it is widely used, but it just isn’t true.
It didn’t happen that way, it was mostly happenstance that the Commission adopted this approach to financing Social Security ... The main thing that was talked about was how do we fix up the short-range problem. Are you sure we aren’t going to have another crisis in 2 or 4 years?...
~~ end quote~~
The 1983 Commission never even *thought* of using the Trust Fund to finance benefits, the idea never entered their heads. It was never discussed by them -- or by the Congress that enacted the reform law -- at all.
The intention of the Commission was to keep Social Security paygo, with no significant accumulations, following the same policy that had been followed since the 1939 amendments (which destroyed FDR's own model of a pre-funded Social Security program).
The historical reality is that the politicians had gone through the painful trauma of increasing payroll taxes repeatedly during the stagnation-economy 1970s to keep Social Security solvent, and now in 1982 (with the big recession) it was bust again. All they wanted to do was make extremely sure that the tax increase they put in then was high enough so they wouldn’t have to go through this tax increase political hell again on their watch. The overwhelming motive of Congress in enacting the reform was that the payroll tax be high enough so that SS could cover its expenses during the next several years -- the 1980s -- in the face of "pessimistic" economic conditions.
Then in 1983 the Reagan boom economy years started and payroll taxes exceeded all expectations. Myers relates how Pat Moynihan (a senior Democratic member of the Commission and Senate Finance Committee chairman), when the surplus first started accumulating as a surprise, initially was exultant saying "We can use it to pay down the national debt!", then after thinking about it took on a shocked look, and said "Oh, no, we'll just spend it all!".
After that Moynihan repeatedly introduced legislation to reduce the payroll tax to eliminate the surplus and return Social Security to the paygo model that had been followed since 1939 -- as the Greenspan Commission intended -- but Congress never went along because, as he had predicted, it wanted to spend it all.
For anyone who wants to defend the myth, urban legend, that the Greenspan Commission reforms intentionally created the surplus to pre-fund benefits into the mid part of this century, here is a simple challenge for you to meet:
Go to the SSA.gov web site, look up the formal report and all the analysis of the Greenspan Commission (it's all there) and find *one word* describing an intention to create a surplus to pre-fund benefits. That should be easy, if the belief is true instead of a myth.
But reality is this: The 1983 reform increased the tax rate to fund SS on a paygo basis just as always before, even in the face of a continuing very bad economy, and then due to the big upswing in the economy the tax produced far more revenue than expected, and Congress spent it all. Period. There was never any intent in 1983 to create any pre-funding method to "save" a surplus to fund future benefits. That is just a story that was made up after the fact to justify what Congress was doing, as it kept spending the money.
It's truly amazing how successful the people who benefited from spending all the surplus money have been at a convincing near everybody that the story is true.
Posted by: Jim Glass at July 22, 2012 02:33 PM
If nothing is done to "fix" Social Security ... the Trust Fund bonds accumulated since 1983 will be exhausted and outflows will equal inflows. Those outflows will be ~75% of promised benefits. That is not a good thing, but the fact that the Trust Fund bonds will be exhausted does not affect the fiscal problem. It just means benefits will fall. It does not mean the deficit increases.
Do you say the same for Medicare -- that when the Medicare trust fund is exhausted circa 2024 Medicare benefits will be slashed under current law, so to that extent the Medicare funding problem is exaggerated?
It does not mean the deficit increases?
Do you actually expect Medicare benefits to be slashed when the Medicare trust fund is exhausted, circa 2024?
Posted by: Jim Glass at July 22, 2012 02:45 PM
If the US is facing a serious long-run solvency issue – as it assuredly is – has this caused you to question your faith in Keynesian deficit spending which is precisely what has gotten us here? You segue to an observation by Karl Smith and argue that since the government is profiting from low yields we can go slow on cutting the deficit. Smith’s observation is an object lesson on how not-to-think. It wraps an admonishment to do something for a nonsensical reason in an appeal that doing that thing is otherwise perfectly sensible on its face. At today’s record low rates Smith argues, the government should be swapping out of variable into fixed rate debt. This in itself is eminently sensible. But it is mere packaging. His core argument is that the government should forego (indeed cut) taxes to increase the debt (at a time where we face serious long-run solvency!) because not doing so at today’s negative real rate of interest foregoes the opportunity profit of a valuable interest rate swap. Implicit in this is the subtle mischief that: if a little is good, let’s do more.
Cutting tax rates to grow the economy and thereby increase tax revenues out of growth may well be (and I believe is) the right thing to do. I am not implying we are over the hump on the Laffer curve, but am saying the fundament of fundaments is growing the economy. Whereas, cutting taxes to increase the debt to be able to “profit” from doing interest rate swaps is as subject to reductio ad absurdum as believing Karl’s brother-in-law stands on the horizon just before dawn each morning and lights a lamp to bring on the day.
Professor Hamilton you nod to Smith, saying: “with the current negative real yields on government debt, the government is actually making a profit by running a budget deficit, as long as the government’s borrowing cost remains as low as it is at the moment.” Then you undercut that nod by pointing out the risk of capital flight from the US at some future date, recommending instead policies that permanently change the fundamentals and phase in slowly so their fiscal bite increases only gradually over time.
Now here is my point. Keynesianism is its own reductio ad absurdum. The untenable conclusion being the solvency and growth issues we now face. I do not mean to throw the baby out with the bathwater. No matter how horrendous the level of debt, the multiplier may be infinite if at the margin it saves the system. However when the debt is manageable, even in times of recession the multiplier almost surely is less than one. It may even be less than zero if unintended consequences are accounted for. And when debt is too great – as is the case today for advanced economies after decades of deficit spending – the multiplier is quite probably less than zero. If long-run solvency is the issue, how can that not be the case? Every empirical study that addresses debt finds that beyond the 90% debt-to-GDP threshold, growth slows on the order of a percentage point. The issue is Janus-headed: debt and growth. We need to conceptualize a policy mix that reduces debt in a way that optimally revives the economy over the long run so that ensuing debt-ratio reduction becomes self-sustaining.
Posted by: JBH at July 22, 2012 03:17 PM
2slugs, you again are spouting your usual Bush-hate BS. You asked: "What excesses?" The Clinton excess, which was the subject to which I responded. Please don't bother yourself with reading the comments before emoting.
Whenever I see someone resorting to the "on/off" budget discussion I know they are blowing political smoke. Every month the OMB puts out its budget report, and in it is the total revenues versus outlays. It tracks "on/off" budget totals, but when we discuss the monthly DEFICIT, it is a simple math problem. Total in versus total out. As I said your normal BS.
Joseph, obviously you do not know how is calculated and of what the debt consists. You are ignorant on this subject.
Posted by: CoRev at July 22, 2012 03:29 PM
Jim Glass Marty Feldstein was Reagan's chief economic adviser at the time and he was actively involved in the SS reform. He saw it as a matter of prefunding.
Posted by: 2slugbaits at July 22, 2012 04:23 PM
Jim Glass Do you say the same for Medicare
Most of Medicare is a very different program and is structured very different from Social Security. The on-budget deficit is driven by Parts B & D. I can easily see where the Part A covered by the Trust Fund might very well be cut. It probably should be cut. But as I said before, you can't fix Medicare unless or until you fix healthcare in general.
If your argument is that by mid-century the geezers will run the economy and the political institutions, then it probably doesn't matter what we do or don't do about the debt today. The point of a plan is to establish some kind of commitment to future actions.
And just to be clear, I actually agree with most of the debt commission's report. My only gripe is that they should have left the Social Security issue to another commission specifically charged with fixing (or not fixing) the Trust Fund. They wasted a lot of political capital on a side issue that just isn't relevant to the long run debt problem.
Posted by: 2slugbaits at July 22, 2012 04:40 PM
JBH Keynesian deficit spending which is precisely what has gotten us here?
I'd like to see that Keynesian textbook that says government should always and everywhere run a deficit. Check Menzie's post from a few weeks ago where he talks about how a true Keynesian runs a surplus during full employment and a deficit during a recession. And very few Keynesians would even recommend large fiscal deficits during a recessions. For the last 40 years there has been near universal consensus among Keynesians that monetary policy should be the policy tool of first choice, not fiscal policy. It's only because we're at the zero bound that fiscal policy should be considered. And wasn't it Cheney who said that deficits don't matter? Is Cheney your idea of a Keynesian?
the multiplier is quite probably less than zero.
Can you show us the algebra describing how that might happen?
Would you think it a bad idea if the government borrowed at negative interest rates in order to rebuild roads, bridges, water supply systems, electricity grids, worn out military equipment, rehire teachers, fund basic research, hire more cops, etc.? Is there any interest rate low enough to justify government spending on those kinds of projects? Or do you believe government should forego infrastructure investment at negative rates and wait until rates turn positive?
CoRev I see. So Clinton was running reckless surpluses to pay down the deficits of th 1980s. That bad old Clinton went and raised your taxes when he should have run big deficits during an expansion. Right. Please take that macro course. It might help you understand when you should look at the unified deficit and when you should look at the on-budget and off-budget categories.
Posted by: 2slugbaits at July 22, 2012 05:00 PM
Thanks to the posters above for bringing some facts to the discussion to contrast the revisionivst historian. Historically, progressives have introduced these huge entitlement programs, but failed to establish realistic cost estimates and funding mechanisms. Obamacare is the most recent and in 10-20 years it will become apparent that the costs were low-balled and the revenues exaggerated. At that point, the blame game will begin and progressives will identify conservatives as the problem, rather than own up to the fact that they created flawed policy in the first place.
Posted by: tj at July 22, 2012 05:59 PM
2slugs: "It might help you understand when you should look at the unified deficit and when you should look at the on-budget and off-budget categories." Doubling down on the political BS I see.
Those who buy US bonds could care less whether they are going to "on/off" budget expenditures. Simple math 2slugs. Do the simple math. OPM does.
Posted by: CoRev at July 22, 2012 07:24 PM
tj: Re: "Historically, progressives have introduced these huge entitlement programs, but failed to establish realistic cost estimates and funding mechanisms.". What about that Medicare Part D? [a] And (off of entitlements) what about that $50 billion Iraq adventure? I just gotta laugh and laugh and laugh.
Posted by: Menzie Chinn at July 22, 2012 07:52 PM
2slugbaits, I am wondering if I explained above the mechanism by which current outlays for Social Security are running up the deficit.
To recap, not all of the SS outlays are covered by payroll taxes. If someone gets a check from SS for $1,000 and only $900 is covered by payroll taxes, Treasury pays back the SS Trust Fund $100. But since total federal revenue is less than total outlays, Treasury has to get that money from somewhere. It gets it by selling $100 of federal IOUs, which adds $100 to the deficit and debt.
When one looks only at the Social Security Trust Rund it looks like all the government did was pay back money owed Social Security. But in the total picture a Social Security outlay resulted in an increase in debt owed to the public. This is happening today.
Is there anything unclear about the above?
Posted by: colonelmoore at July 22, 2012 10:31 PM
Adds $100 to the yearly deficit - yes
Adds to the debt - not necessarily. If $100 of SS trust fund bonds @4% are retired as $100 of public debt @2% is sold, the deficit is reduced a tiny bit don't you think?
Right now, only if you don't intend to honor the bonds sold to trust funds can you consider the transaction an increase in debt.
Posted by: Anna at July 23, 2012 05:18 AM
colonelmoore, you are essentially correct, but what happens is when Treasury writes a SS check it pulls it from the receipts (present FICA revenues and past SS bonds). The SS bonds are already counted as Federal debt, but are in the Intergovernmental category. When the convert these bonds they change category status from intergovernmental to held by the public. No change in total. If there is a difference in interest rates for the bonds that is the only amount that is added/subtracted to the debt.
Posted by: CoRev at July 23, 2012 05:23 AM
"If it were done when 'tis done, then 'twere well It were done quickly"
GNE/CNI Vs. Total Public Debt:
GNE = Global Net Oil Exports*
CNI = Chindia's Combined Net Oil Imports
Total Global Public debt increased at about 8.5%/year from 2005 to 2011.
In 2002, there were 11 barrels of GNE for every barrel that Chindia net imported.
In 2005, there were 8.9 barrels of GNE for every barrel that Chindia net imported.
In 2011, there were 5.3 barrels of GNE for every barrel that Chindia net imported.
At the 2005 to 2011 rate decline in the GNE/CNI ratio (8.6%/year), the ratio would be down to 1.0 in 2030.
In other words, at the current rate of decline in the GNE/CNI ratio, in 18 years China & India alone would be consuming 100% of GNE. Of course, I don't think this will actually happen, but it's important to note that the rate of decline in the ratio accelerated from 2008 to 2011, versus 2005 to 2008.
There are signs of (relative) weakness in both China and India; however, there are also indications that China's domestic oil production may be peaking, which would increase the demand for imports.
In any case, this trend would make, and in my opinion has made, debt service, shall we say, "Somewhat difficult." Note that global annual (Brent) crude oil prices have doubled twice over this time frame, from $25 in 2002 to $55 in 2005 and then from $55 in 2005 to $111 in 2011 (with a year over year decline in 2009).
In my opinion, most oil importing OECD countries around the world, in a determined effort to deny the reality of resource limits, have gone massively into debt in an attempt to keep their economies going, waiting for what they believe will be an inevitable decline in oil prices, as a result of the inevitable resumption of the robust increases in global oil supplies that we have seen in previous decades.
A recent article in the WSJ (behind paywall):
In European Crisis, Iceland Emerges as an Island of Recovery
VESTMANNAEYJAR, Iceland—Three and a half years after Iceland collapsed in a heap, Dadi Palsson's fish-processing plant has the air of a surprising economic recovery. Mr. Palsson arrived at 4 a.m. on a recent workday. Twelve tons of cod were coming in. Soon, his workers would bone, slice and pack the fish for loading onto towering container ships headed abroad.
In 2008, Iceland was the first casualty of the financial crisis that has since primed the euro zone for another economic disaster: Greece is edging toward a cataclysmic exit from the euro, Spain is racked by a teetering banking system, and German politicians are squabbling over how to hold it all together. But Iceland is growing. Unemployment has eased. Emigration has slowed.
Iceland has a significant advantage over stressed euro-zone countries—a currency that could be devalued. That has turned its trade deficit into a surplus and smoothed its recovery . . . .
unlike Ireland, for example, Iceland let its banks fail and made foreign creditors, not Icelandic taxpayers, largely responsible for covering losses."
It occurs to me that if most oil
importing OECD countries are following Iceland's path, just at different rates, perhaps the following quote is relevant:
“If it were done when 'tis done, then 'twere well
It were done quickly”
*Top 33 net oil exporters in 2005, total petroleum liquids, BP Data + Minor EIA data
Posted by: Jeffrey J. Brown at July 23, 2012 06:16 AM
Howard Dean was on CNBC this morning saying that not only are we going to go over the cliff, but it was the best outcome!
Posted by: Buzzcut at July 23, 2012 06:34 AM
Ummm, in my comment above change: "the deficit is reduced a tiny bit don't you think?" to "the debt is reduced a tiny bit don't you think?"
Posted by: Anna at July 23, 2012 06:42 AM
...it is pointless to discuss budget issues with conservatives. They are numerically illiterate -- in their minds saving more money causes debt.
I think you are a little confused. Have you not heard of the Paradox of Thrift? Perhaps you should check it out because what you are describing is Keynes.
Posted by: Ricardo at July 23, 2012 07:34 AM
"The...belief that the trust fund was created...to pre-fund benefits for the boomer generation is the greatest myth, urban legend, in American politics."
You know that to be true how, exactly? I mean, from a guy who later repeats the myth of the "Reagan boom", the claim that some myth other than the "Reagan boom" is the greatest US political myth raises credibilty issues. Heck, pick any other part of the Reagan myth and compare it to anything about Social Security - like the fact that it "won't be there" for coming generations, when the Trustee's estimate is that it will pay a higher benefit, in real terms, after the Trust Fund is gone than it does now. What measure do you used to know that your pet "myth" is bigger than our other political whoppers?
Credibility is a funny thing. Discussions like this one often involve different sides asserting vastly different "facts" that readers are never going to get around to checking. Claiming that your pet peeve is a greater myth - however one might go about measuring myths - than the claim that tax cuts are always good for the economy and that regulation is always bad for growth or that Republicans are better economic managers or more fiscally responsible, well, you just lose credibility that way.
Without going to look up who said what, because I don't really care, the fact remains that a surplus has been run by Social Security and a pile of assets was accumulated and that pile of assets comes in handy to fund retirement benefits. The intent of Greenspan or Moynihan or whoever doesn't change that. Discussing who SAID what tends to distract from the later reality of who DID what to squander the Clinton surplus. Given that the Trust is required to purchase Treasury securities, the Social Security surplus would necessarily end up being spent through the generel fund. That should not be controversial. The only controversial point would then be what to do once the surplus from Social Security ended up available to the general fund. Bush promised (in belated reaction to the same promise by Gore) that he would not "spend" the suprlus. What the heck either of them meant by that I can't say, but Bush ended up President and cut taxes massively, and that makes paying money back to the Social Security Trust more problematic than it would otherwise have been.
What people intended in 1983 in no way changes the effect of subsequent fiscal policies - huge tax cuts under Bush making all aspects of fiscal policy more difficult today. If his tax cuts had produced growth similar to the growth seen after his raised taxes, that would have mitigated the problem.
Posted by: Anonymous at July 23, 2012 08:40 AM
CoRev, thanks. I should have said public debt. Debt to the public is a bigger issue than intergovernmental debt. What Treasury owes SS is an accounting entry that nets out to zero in the government's consolidated account. The only cash involved was the cash the government took in and spent at the time. Then the government provided an IOU to the SSTF.
The SSTF is an infinitely forbearing creditor because by law it must keep rolling over that debt to Treasury until SS runs a current deficit and an actual outlay occurs. That's the first time that any cash changes hands. The beneficiary gets cash, not an intergovernmental IOU, and the government has to entice someone else to give it real cash. This is a real debt to a real member of the public which at maturity requires the government to pay cash.
Anna and CoRev, there is this illusion that the government is paying interest on the bonds it sells to the SSTF. But the definition of a payment is when someone gives someone cash for something. Yes there are intergovernmental accounts showing such credits but Treasury does not pay the SSTF cash. One part of the government shows interest payable and the other shows interest receivable of an equal amount.
It is quite the same as if I tell my wife who files taxes jointly with me that I will lend her $100 at 4% interest. The IRS does not care. The credit bureaus don't care. That's because if she repays me with interest it doesn't changed our consolidated financial position at all. If she repays the principal and not the interest, same thing. And if she doesn't repay me at all I have not put myself at any financial risk. I lost the principal and interest that she owed me but she was able to write off an equal amount, thus reducing her debt. The net is the same as if I never loaned her a penny.
In the case of the interest paid to the SSTF, which causes the government's debt to SS to rise, no one looks at that as a risk because SS outlays are not tied in any way to revenue. What people care about is that yearly benefits are projected to rise even as yearly payroll taxes decline. The difference is what forces the government to increase borrowing from innvestors.
When the government has to borrow from the public at 2% to cover the shortfall, that 2% is due and payable on the date of maturity. At that point the interest stops being an accounting wash and starts being real money.
Here is a test of the reality of the interest owed to the SSTF by Treasury. If tomorrow the law were rewritten to wipe out this bookkeeping entry nothing would change other than that two opposing accounting entries would go to zero. One measure of the national debt would decrease but nothing else would change. The same amount of Treasury debt would be sold to cover the ongoing shortfall in SS. Benefits paid would remain unchanged. So it is a mere bookkeeping entry and nothing else, meant to silence those who say that SS is not a good investment. But beneficiaries don't see that interest in their bank accounts so it is meaningless.
The purpose of my bringing this topic up is that we must agree on certain basic facts before we can have a meaningful discussion. A lot of discussion about Social Security is fraught with misconceptions around the nature of the trust fund. Our creditors are not interested in the balance in the trust fund or how much interest is being paid because it is all meaningless. They care about the daily shortfall in payroll taxes that is adding to the public debt.
Posted by: colonelmoore at July 23, 2012 08:47 AM
Prof Chin, I'm still chuckling with you, except the precipice is so close that it's not truly funny. I still looking to see which pocket the missing $59b associated with the two Bush wars came from or more precisely which criminals should be indicted.
May I suggest another important point? "Obamacare" is so far removed from Obama's original proposal that it is just a typical mishmash of his cave-in to GOP vested interests. I am an Obama supporter, but too bad it is mislabeled.
Also, no one has adequately responded to Prof Hamilton's concern about debt flight from T-bills. The issue is far more complex than SS which is a non-starter and Medicare which does need to be addressed and must be part of the next administration's true health care reform agenda.
Posted by: ab at July 23, 2012 09:14 AM
Is there really any fiscal control over debt at all? What makes the baseline unrealistic is monetary policy. Their failure to loosen more means they are choosing higher debt to the possibility of higher inflation. If you believe monetary policy has the last word, fiscal policy is irrelevant to debt.
Posted by: Lord at July 23, 2012 09:25 AM
Ricardo said: "I think you are a little confused. Have you not heard of the Paradox of Thrift? Perhaps you should check it out because what you are describing is Keynes."
CoRev was not talking about the Paradox of Thrift, which is a special case that applies only to extreme situations where everyone tries to deleverage at the same time. No, CoRev was making the nonsensical claim that the 30 years surplus in Social Security revenue was responsible for increasing debt. By this same argument, if Social Security had instead run a deficit for 30 years, presumably this would have decreased the debt!?
Perhaps you should let CoRev explain himself, since he did not make a Paradox of Thrift argument. CoRev's argument is that we should never run a budget surplus because that simply causes more debt. I am unclear how CoRev resolves his basic complaint about the size of the debt with his beliefs about the harm of running surpluses.
Posted by: Joseph at July 23, 2012 11:00 AM
Are you calling George Bush a fiscal conservative? LOL. You have spent countless posts arguing that he is the opposite.
Bush was a bit of a political mutt, part Progressive when it comes to spending and part Republican when it comes to cutting taxes. The worst of both 'breeds'.
Posted by: tj at July 23, 2012 11:56 AM
Colonelmoore, I agree with you. As I said earlier the "on/off" budget issue is and has always been a political statement. Otherwise we are discussing an accounting artifact, even though, folks like 2slugs think it has a deeper meaning. Y'ano that ole macro issue.
Posted by: CoRev at July 23, 2012 12:27 PM
China's oil demand declines.
That's not good.
Posted by: Steven Kopits at July 23, 2012 01:43 PM
colonelmoore To recap, not all of the SS outlays are covered by payroll taxes.
Yes, I know that. The difference is supposed to be covered by the imputed interest on the Trustee Bonds. That interest is supposed to capture the productivity gains to labor that accrue via forced saving in the form of a FICA tax. I haven't checked for awhile, but I believe the imputed interest rate is something like 5% right now. You could argue that it's too high, but then again only a few years ago you could have argued that it was too low.
The purpose of my bringing this topic up is that we must agree on certain basic facts before we can have a meaningful discussion. A lot of discussion about Social Security is fraught with misconceptions around the nature of the trust fund.
I don't think you understand the economics underlying either a PAYGO system or a pre-funded retirement system. Returns to labor pay for Social Security retirement benefits. More exactly, it's wage returns (as opposed to other compensation). The wage fund can increase either because of more workers or because workers become more productive and earn a higher marginal product. The classic work on this goes back to Paul Samuelson...it's been ages since I read it, but I think he wrote it in the 1950s. If demographics aren't working for you, then you need to put all your eggs in the labor productivity basket. That's the idea behind pre-funding Social Security. It was supposed to represent "forced savings" that would have the exact opposite effect of crowding out private invesment. Because the Trust Fund bought US Treasuries this effectively left more investment for the private sector. Without the FICA tax the deficit and debt would be larger and would crowd out private sector investment. That's the theory. And the imputed interest on those bonds is not just some government fakery...it is supposed to represent the productivity gains that accrue to labor. Or more precisely, it represents the future labor force's greater earning capacity that can than be taxed through general revenues to pay retiree benefits. Future workers might gripe, but without the FICA taxes on the previous generational cohort later cohorts would have lower wages. That's the theory and it's a good theory. But it blows up when reckless policies decide to use the FICA surplus to fund lower on-budget taxes rather than apply it to national savings.
Posted by: 2slugbaits at July 23, 2012 02:05 PM
CoRev As I said earlier the "on/off" budget issue is and has always been a political statement. Otherwise we are discussing an accounting artifact, even though
I see. So in your household you only look at the bottom line results of a unified budget. You don't seem to think it's important to see which expenses are increasing and which expenses are decreasing as long as the household unified budget works out. If your wife tells you that you're spending too much money on golf, I suppose your reply is that she should just spend less at the grocery store and the unified budget will be fine. That's nuts.
Joseph No, CoRev was making the nonsensical claim that the 30 years surplus in Social Security revenue was responsible for increasing debt.
Apparently it never occured to CoRev that the same is true for every financial transaction. At the macro level every liability is exactly matched by an asset. Every dollar borrowed has a counterpart in a dollar saved. To turn CoRev's logic around, apparently if I go borrow $100M today that shouldn't worry anyone because that $100M asset on the lenders' books is exactly offset by my IOU to payback that $100M in the future. Afterall, that's no different from arguing that the SSTF bonds are cancelled out by future on-budget taxes. CoRev doesn't have a head for economics. He doesn't understand that the FICA surplus represents forced savings and earns a real return.
Posted by: 2slugbaits at July 23, 2012 02:18 PM
By the way, I don't want my last reply to distract from the main point that Progressives ruined the U.S. federal budget by increasing entitlement dollars. Of course, they feign shock and outrage when their projected costs and revenues differ from reality.
I agree that the poor, the elderly, the disadvantaged need support from the rest of society, but solutions requires focused and responsible legislation, which seems to be a rare commodity.
Posted by: tj at July 23, 2012 02:59 PM
tj, spot on comment. You must have hit a nerve for Menzie to respond with straw men. Even if you think Bush needlessly wasted $50B on a fool's errand, it pales compared to the $800B wasted by O's stimulus for donors program. Part D was a fool's errand to convince the public that republicans don't want children and the elderly to starve and die. Eighty years of progressive education and entitlement programs have probably made that impossible.
I think Menzie is having a hard time coming to grips with the fact that O is not the intellectual heavyweight gifted to manage the economy and calm the oceans he was portrayed but, rather is a comical sixties throwback hippie ,not completely unlike Charles Manson, convinced the marxist revolution is near and can be hastened with the right policies and class warfare rhetoric. Just another failed demagogue in a long line throughout history.
Posted by: Hitchhiker at July 23, 2012 03:45 PM
tj You used to argue that liberals and progressives wanted to tax everything in sight. Now you're arguing that lefties ruined the federal budget with unfinanced entitlement spending. Which is it? Do liberals tax too much or too little? You seem confused.
But maybe it's time to point out that it was Dick Cheney who said Reagan proved that deficits don't matter...remember? Did you ever read Marty Feldstein's mea culpa regarding the GOP's responsibility for the reckless deficits under Reagan? And it was Bush 43 who decided to fight two wars without raising taxes. And it was Bush 43 who pushed through some godawful unfunded prescription drug benefit bill. And it was Bush 43 who turned a surplus into a yawning deficit during a long period of economic expansion.
Since you don't seem to actually understand what liberals and progressives actually believe, let me help you out. First, we don't believe in running large structural deficits. Second, we do believe in something that you would consider large government...structurally I'm talking somewhere around 23%-24% of GDP. As population becomes more dense the need for government regulation and public goods increases. But we also believe that taxes should be raised to match that higher level of government spending. We also believe that normal garden variety recessions should be fought using (primarily) monetary tools, but when you're at the zero bound you have to use fiscal tools and run large countercyclical deficits.
Now what part of that do you not understand? What part do you disagree with?
Posted by: 2slugbaits at July 23, 2012 04:28 PM
Hitchhiker, I liked your comment so stole and modified it: must have hit a nerve for 2slugs to respond with straw men.
Using raving generalities to define a specific line item in the budget report? Tsk, tsk. Looks like 2slugs is lost again in the Clinton era. ;-)
Posted by: CoRev at July 23, 2012 05:01 PM
Perhaps your posts would be more clear if you did not lump all conservatives together. Once again this aggregate thinking is Keynesian. I do not consider myself conservative, but neither would I say all conservatives "are numerically illiterate."
You can make broad claims about Keynesians because if you do not agree with his General Theory you are in error to call yourself a Keynesian.
I too disagree with CoRev's statement but your statement, "...in their minds saving more money causes debt," is a Keynesian concept and is not what CoRev was saying.
I would say that when the government runs a surplus, in whatever form Social Security or other, production is hindered. The government does not produce so it can only get the "surplus" that it hoards from the producers. Keynes' concept of hoarding to create a surplus is perhaps his most harmful proposal.
Posted by: Ricardo at July 24, 2012 05:52 AM
No where in your rambling post did you defend the underfunded entitlement state created by Progressives. Utopians are naive, they think government can solve every social problem.
Posted by: tj at July 24, 2012 06:04 AM
Summary of the discussion so far:
2Slugs: Patient explanation of mainstream economic theory and facts.
tj & CoRev & Co: Marxists! Hippies! Gummint! Convoluted, confused pseudo-economics conned from Republican speeches!
2slugs, you are performing a real service with your lucid, calm, and concise explanations of reality. It helps those of us who like to think to keep our thoughts in order. But don't imagine that you are communicating with these other guys. You can't persuade them. We just have to defeat them, time and time again, like we did at Appomatox. With enough sound political beatings, they won't shut up but their pernicious errors will fade into deserved obscurity, for a time. I am not as good as you are at explanations, so I will just continue to contribute what I can to my Democratic congressional candidate and the Obama campaign.
Posted by: Stratocaster at July 24, 2012 07:32 AM
My version of the "Cliff" metaphor, from two years ago follows.
The OECD “Thelma & Louise” Race to the Edge of the Cliff
“Thelma and Louise” is an American movie that ends with the two main characters committing suicide by driving off the edge of a cliff. I’ve often thought that this cinematic moment is an appropriate symbol for the actions of many developed OECD countries that are in effect borrowing money to maintain or increase current consumption. The central problem with this approach is that as my frequent co-author, Samuel Foucher, and I have repeatedly discussed, the supply of global net oil exports has been flat to declining since 2005, with “Chindia” so far consuming an ever greater share of what is (net) exported globally. Chindia’s combined net oil imports, as a percentage of global net exports, rose from 11.2% in 2005 to 17.6% in 2010.
At precisely the point in time that developed countries should be taking steps to discourage consumption, many OECD countries, especially the US, are doing the exact opposite, by effectively encouraging consumption. Therefore, the actions by many OECD countries aimed at encouraging consumption in the face of declining available global net oil exports can be seen as the OECD “Thelma & Louise” Race to the Edge of the Cliff.
I suppose that the “winner” could be viewed as the first country that can no longer borrow enough money, at affordable rates, to maintain their current lifestyle. So, based on this metric, Greece would appear to be currently in the lead, with many other countries not far behind them.
Posted by: Jeffrey J. Brown at July 24, 2012 08:37 AM
Greece in a Great Depression:
Spain’s Death Spiral:
It was after the Crash of '08 that investors turned forensic. Not all euro borrowers were the same, they discovered. And so rates began to diverge; lenders simply began to demand a higher yield to compensate them for the added risk they had been taking.
Predictably, the poorer countries in the Eurozone -- mainly the "Club Med" members of the Southern and historically non-Protestant tier -- couldn't afford higher rates. The more they would have had to pay in interest, the greater their budget deficits. The greater the deficits, the greater the risk of default. The greater the default risk, the more investors would demand for that risk. And thus: the death spiral.
Greece was the case in point. Poor Greece now has to pay nearly 25 percent to borrow for 10 years were it not for the solvent members of the Eurozone -- led, most conspicuously, by Germany -- lending them money at low, non-market rates to save the system and Europe's own banks, which loaned to Greece at low rates in the salad days. In return, of course, Greece has had to cut its expenses to slash its deficit. More cuts have been promised Monday morning. How else could it ever pay back its creditors?
Sadly, however -- but also predictably -- the more Greece cuts, the more its economy shrinks, meaning that its tax base shrivels, meaning the greater its deficit, meaning the greater the risk of default. Death spiral (see above).
One way out: default on your debts, quit the eurozone and start over in your own currency. That's what many of our Making Sen$e Greece experts have predicted for a few years. There's been little talk of it with regard to Spain. Until now.
That's because a Spanish default and/or euro exit would be dangerously momentous events. Spain is the world's 12th largest economy. Greece, by contrast is 38th, just two notches above Vietnam. If a Greek default is a big deal because banks that hold Greek debt would lose so much money, think of the havoc that a Spanish default represents.
Posted by: Jeffrey J. Brown at July 24, 2012 08:45 AM
Re: Consumers in food and/or energy (net) exporting countries versus consumers in food and/or energy (net) exporting countries, and consumers in developed versus developing countries:
The world is closer to a food crisis than most people realise
Welcome to the new geopolitics of food scarcity. As food supplies tighten, we are moving into a new food era, one in which it is every country for itself.>>
As I have occasionally opined, some consumers, to borrow a phase from “Animal Farm,” are more equal than others.
I estimate that there are about 157 (net) oil importing countries in the world. I estimate that about one-half of the total post-2005 supply of Available CNE (Cumulative Net Exports) may have already been consumed.
Available CNE = The total estimated post-2005 supply of CNE that will be available to importers other than China & India.
Posted by: Jeffrey J. Brown at July 24, 2012 09:11 AM
"As population becomes more dense the need for government regulation and public goods increases."
That's a very insightful statement. The libs do count on a dumb electorate.
Posted by: November2012stimulus at July 24, 2012 10:28 AM
Here's another piece of information not often referenced by liberals/democrats: "According to the Congressional Budget Office, in FY 2009 40% of federal government spending was funded by debt, compared to 15% in 2008 and 6% in 2007."
Blame Bush for that deficit spending status.
Actually, the FY2009 budget and spending bills are set in 2008 and signed by the then President: Bush.
Posted by: larrym at July 25, 2012 06:59 AM
LarryM and 2slugs the blame Bush crowd prefer to ignore the obvious. So, let me explain that obvious point. The trend was to a balanced budget. That trend was interrupted by a very inconvenient recession.
Compare that to St Clinton and we see the difference. Clinton had eight years without entering into a recession. Bush had eight years with two recessions. Luck? Some say so.
Those who blame the recessions on Bush policies are desperately seeking a story different from history, moreover, ignoring the past 3+ years is an even worse exercise in attempting to rewrite history.
Posted by: CoRev at July 28, 2012 06:29 AM
CoRev The trend was to a balanced budget.
Ugh. You've jumped the shark here. You might want to try and distinguish cycles from trends. One quick way to look at trends is to compare trough-to-trough or peak-to-peak. Comparing trough-to-peak is all about cycles. Learning this distinction might help you better understand the climate change data as well. Anyway, if you compare the budget in 2000 (at a cycle peak) with the budget in 2007 (the peak of the Bush cycle) there is no way that you could conclude that the trend was towards a balanced budget. And CBO certainly wasn't projecting a budget that was structurally balanced. In fact, even the Clinton surpluses were only temporary when CBO looked out over the long run. The tax cuts, unfunded Medicare provisions and the long run costs of two wars really killed any chance of structural balance.
Those who blame the recessions on Bush policies are desperately seeking a story different from history
Why the plural "recessions"? No one is blaming Bush for the first recession. He was only in office for 6 weeks when that recession hit. I blame Bush for gutting the financial regulation agencies that might have avoided the financial recession in 2008. I also blame Bush for running structural deficits during an expansion when we should have been running surpluses. Those deficits gave this country a lot less fiscal space to maneuver when we needed it.
Posted by: 2slugbaits at July 28, 2012 03:28 PM