Republicans: What Deficit? We Need to Stop Unions First.

Michael Perelman reports with NPR’s help about how the Republicans shut down the FAA in mid-July for nearly 4 weeks as a favor to Delta Airlines.  Basically, in July the law authorizing the FAA, the agency that supervises airport and airline safety,including flight controllers, expired.  Normally this would be a routine renewal effort.  Even in somewhat testy times with a split Congress, there would normally be an agreement on a stop-gap measure.  Not this year and not with this House.

The FAA was shut down because of a partisan dispute.  The basic issue was supposed to be the Republican demand that the agency save $16 million by ceasing to subsidize 13 airports with relatively little demand.  Yes, the airports were in Democratic strongholds.

NPR’s Brian Naylor reported that the airports were a bargaining chip.  The real issue was the threat that union power posed for Delta.  The National Mediation Board rejected a practice that counted required a union to win more than half the eligible votes rather than half of the votes cast.

Delta, the only non-union airline, got the Republican bill to include language overturning the National Mediation Board decision.  Since the House leadership refused to budge, the FAA shut down, leaving the government unable to collect $30 million per day in taxes.  Patriotically, most of the airlines continued to collect the tax in the form of higher fares.  However, these “job creators” kept the money so that they could help the economy.  Besides, the government could make up the lost taxes with still more tax cuts.

This happened two weeks before the supposed debt-ceiling deadline.  At the time, the Republicans were claiming that the deficit and government spending were out of control, threatened the nation, and had to be reduced.  So what did they do?  Rather than compromise, they decided to stop the government from collecting $30 million in ticket taxes per day!  In addition they put 4,000 government workers out of  a job!  What was worth costing the government so much money and making the deficit so much worse?  They wanted to save $16 million per year by closing 13 airports in Democratic districts.  Oh, and they also wanted to change the rules on unionization to protect big-donor Delta Airlines.  Best government money can buy.

 

There Is An Efffective Way to Reduce Government Deficit: Employment. But They Won’t Take That Route.

In the whole crazy, unnecessary debate over raising the debt-ceiling law, politicians, reporters, and commentators all spoke as if there were only two ways to reduce the government deficits.  Nearly everyone took it as an article of “serious thinking” that to reduce a deficit requires either reducing spending or increasing taxes.  But rather than being evidence of “serious thinking”, such talk is evidence of sloppy, imprecise, and ignorant thinking.  Such talk totally ignores the role of economic growth in determining government budgets and it ignores the role of the government in the economy.  It’s evidence of the government-as-household fallacy, the idea that government is just like a big household and subject to the same constraints as you and I.

There is a way to balance the budget that doesn’t require cutting major spending programs.  And it doesn’t require big tax increases.  It’s called economic growth and putting people back to work.  The major cause of the deficit is because we have very high unemployment.  We have over 9% reported unemployment.  That number rises to approximately 16% if we count all the people working part-time jobs but that desperately want full-time work and more hours.  And finally, both numbers totally ignore the fact that since we fell into this depression in 2007 well over 5% of adult Americans have chosen to drop out of the labor force altogether for now.  If we put those people back to work, they pay taxes. Government revenues will increase even without a tax rate increase.  If we put those people back to work, then government spending on unemployment compensation, Medicaid, welfare, and a host of other safety net programs goes down.  Automatically. Without cutting any programs or harming anyone.

This idea that economic growth and full employment will reduce deficits isn’t some theoretical possibility that only exists in the models of some economists.  We’ve done it before.  Other countries have done it.  In fact, everytime the U.S. has reduced it’s deficit it’s been by increasing employment.  The route to a small deficit or even a balanced budget lies in achieving full employment first, not in contrived artificial balanced budget amendments.

It wasn’t until the debt-ceiling debate was practically finished (for now – it will be back like zombie or vampire) that any in the media took notice that growth and employment is the key.  Last Sunday, July 31, as the President and the Republican Speaker announced their deal to cut spending and raise the debt ceiling, the New York Times finally runs a decent article about how growth is the real answer (bold emphases are mine):

 We wouldn’t need any of that [reduce spending, raise taxes, inflation, or default] if we could restore economic growth. If that happened, Americans would become richer and pay more taxes. Et voilà! — we’d pay down the debt painlessly.

Crazy as that might sound, particularly given Friday’s figures, the possibility isn’t some economic equivalent of that nice big farm where your childhood dog Skip was sent to run free. There are precedents.

Before its economy crashed, Ireland was a star of this sort of debt reduction. In the 1980s, Ireland’s debt dwarfed its economy. Over the next two decades, though, that debt shrank to about a quarter of gross domestic product, largely because the economy went gangbusters.

“Ireland went from being, you know, the emerging market in a European context, to a very dynamic economy,” says Carmen Reinhart, a senior fellow at the Peterson Institute for International Economics and co-author of “This Time Is Different,” a history of debt crises.

The United States has done the same in the past, too. After World War II, gross federal debt reached 122 percent of G.D.P., the highest ratio on record. But over the next 40 years, it fell to about 33 percent. That wasn’t because some blue-ribbon panel prescribed austerity; it was because the American economy became much, much richer.

The same happened during the prosperous 1990s, which began with deficits and ended with surpluses. Former President Bill Clinton is often credited for that turnabout, as he engineered higher tax rates. But most economists attribute the surplus years primarily to extraordinarily rapid growth.

It would be lovely to repeat that experience today, and send our federal debt off to that farm with Skip…

Usually after a recession, growth snaps back quickly and the economy makes up for ground lost — and then some. That’s not the case this time, at least so far. In the 60 years before the Great Recession, the economy expanded at an average annual rate of 3.5 percent. In the second quarter of this year, it grew at less than half of that pace, putting us further and further behind where we would be if the economy were functioning normally.

Unfortunately the article still tries to give the reader the impression that growth/full employment is difficult or unlikely this time.  It tries to give the impression that the growth during the Clinton years was somehow extraordinarily fast.  It was only fast by comparison with either the Bush I, Bush II or the first Reagan terms.  In fact, the growth during the Clinton years was only average at best when compared to what was achieved routinely during 1950-1973 or even during the Carter years.  The article also falsely claims that our “aging population” will require unusually large demands on government resources.  In fact the demands of the aging baby boomers on either Social Security or Medicare aren’t any greater than the resources we devoted to educating those baby boomers in the 1950’s and 1960’s.

Nonetheless, the point of the article is right on:  growth and growth in employment is the way to go if you’re worried about the deficit & debt (which I’m not, but that’s another issue).  The deficit we have is a jobs deficit, not a fiscal or budget deficit.  That’s what we need to worry about.

Washington and the chattering political classes have it wrong.  Their “serious” talk is anything but.

This Is No Movie Folks. It’s Real and It’s Scary.

I don’t enjoy scary movies. Never have.  I also don’t enjoy scary “amusement” park rides.*  I know I’m kind of a fluke in our U.S. culture this way.  I just find that there’s enough excitement, thrills, and fright in the real world if you just open your eyes.

An example of real world things to be scared of is the current debate  childish tantrum in Washington over increasing the debt limit. I’ll admit I haven’t taken it seriously until now.  A couple months ago I called it Kabuki Theatre of the Absurd. The law itself, the debt “ceiling” law, is absurd.  It is also redundant. Raising the debt ceiling should be a like sending a form letter.  Routine. Perfunctory. The law should be simply done away with. If Congress doesn’t want to borrow more money then the time and place to make that point constitutionally is when the budget is adopted.

The Republicans and Tea Party types were unable to accomplish their goals of gutting Social Security, Medicare, and other programs when the budget bill was debated last March-April.  They simply didn’t have the political support and they couldn’t agree on just who to cut.  So instead of doing the constitutional thing and either win more elections and gain seats (they actually lost a special election in May because of their plans to cut Social Security), or waiting until the next budget for next year, they’re trying to accomplish their goals under a subterfuge.  It’s not about the debt. It’s not about the deficit.  If it were about debt, deficits, and “fiscal responsibility”, then closing tax loopholes for high-income folks like hedge fund managers and the commodity speculators that drive up oil prices would be an option.  But the Republicans and Tea Partiers have expressly stated that even closing a tax loophole is unacceptable.  Only spending cuts are acceptable.  So the truth is it’s not about “fiscal responsibility”.  It’s about eliminating government programs that people want as the New York Times explains today (possible paywall on link).

So back to the debate tantrums being thrown in Washington. I still expect there to be a last-minute deal when powerful folks on Wall Street give the call to their friends in D.C. and tell ’em to knock it off and do it. In the meantime, the Republicans, Tea Party types, and Obama administration are playing a game of chicken.  Except that this is a bit different from movie versions of chicken.  Jeff Frankels provides an excellent analysis. The problem is three-fold: it’s not movie fantasy – it’s real, the folks in the Republican car aren’t rational and are fighting among themselves, and when these cars go over the cliff there’s a good chance they take our entire economy with them. Quoting Jeff:

In the 1955 movie Rebel Without a Cause, James Dean and a teenage rival race two cars to the edge of a cliff in a game of chicken.  Both intend to jump out at the last moment.  But the other guy miscalculates, and goes over the cliff with the car.

This is the game that is being played out in Washington this month over the debt ceiling.  The chance is at least 1/4 that the result will be similarly disastrous.

The game is not symmetric.  The Republicans are the ones who are miscalculating.   Evidently they are confident of prevailing:  they rejected the President’s offer, even though he was willing to cut entitlement programs.

The situation is complicated because there are a number of different people crammed into the Republican car.    There is one guy who is obsessed with the theory that, come August 3, the federal government could retain its top credit rating if it continued to service its debt by ceasing payment on its other bills.  But this would mean failing to honor legal obligations that have already been incurred (paying suppliers for paper clips that have already been bought, paying soldiers their wages for last month’s service, sending social security recipients their checks, etc.).  This is like observing that the cliff is not a 90 degree drop-off, but only 110 degrees.   It doesn’t matter: the car would still go crashing into the ocean far below.   The government’s credit would still be downgraded and global investors would still demand higher interest rates to hold US treasuries, probably on a long-term basis.

There are other guys (and gals) in the car who are even more delusional.   They are dead set on a policy of immediately eliminating the budget deficit (e.g., those opposed to raising the debt ceiling no matter what, or those campaigning for a balanced budget amendment), and doing it primarily by cutting nondefense discretionary spending.  This is literally impossible, arithmetically.  But they honestly don’t know this.   It is as if they were insisting that the car can fly.   Sometimes it can be a good bargaining position to adopt a very extreme position.  But if you are demanding that the car flies, you are not going to get your way no matter how determined you are.

It seems likely that the man in the driver’s seat – House Speaker John Boehner – does realize that his fellow passengers don’t have the facts quite right.   But there is also a game of chicken going onwithin the Republican car.  The crazies have said they will oppose in the next Republican primary election any congressman who votes to raise the debt ceiling or to raise tax revenues.   (Yes, they think they would support someone who would eliminate the budget deficit primarily by cutting non-defense discretionary spending; but remember, this is arithmetically impossible.)   The guy who is riding shot-gun in the car – the one who believes the car can fly — is trying to put his foot on top of Boehner’s on the accelerator pedal.

Yes, people who cannot do basic arithmetic are in charge here. And they’re throwing a childish tantrum because they can’t get their way.  Only unlike a child who’s threatening to hurt themselves if they don’t get their way, these folks could potentially take us all down.

The facts are that nobody knows for sure what happens if Congressional Republicans don’t raise the debt ceiling by August 3. But it defies imagination to think it will be smooth sailing. It depends on how the Obama adminstration reacts.  There might be ways around it.  A couple of proposals exist. The government could dispute the constitutionality of the debt ceiling law or it could mint some super-large coins (such as billion-dollar coins) that would only be used as Marshall Auerbach has noted:

Or the President could, as we and others have suggested in the past), simply invoke the 14th amendment and refuse to enforce a statute that he believes violates the Constitution.

Professor Scott Fullwiler has suggested an even more creative way around the debt ceiling: Fullwiler notes that Fed is the monopoly supplier of reserve balances, but that the US Constitution bestows upon the US Treasury the authority to mint coins (particularly platinum coins). Future deficit spending by the federal government could thereby continue to be carried out by minting coins and depositing them in the Treasury’s account at the Fed (for more details see here).

Curiously, the President won’t pursue any of these options.

These options would keep financial markets on an even keel but could provoke a constitutional and legal crisis as the Tea Party types would not doubt file endless lawsuits challenging it.  But thinking about these options is largely academic since Obama shows no inclination to exercise these options or to explain why he doesn’t.   Obama shares responsibility because he’s let the Tea Party types and Republicans take this charade this far.

Let’s consider a more likely intermediate case.  As mentioned in another post, to immediately stop all new borrowing and instantly balance the budget, the government has to cut 40% of it’s spending right now.  The federal government accounts for $3.8 trillion of spending in 2011.  GDP is expected to be in the $15 trillion range.  If the government cuts 40% of that $3.8 trillion instantly, that’s a $1.5 trillion cut in spending. Government spending is part of GDP (despite what far right-wing types believe).  So an instant balancing of the budget on Aug 3 means a 10% cut in GDP.  When the economy collapsed in 2008 it was only approximately a 5% drop in GDP.  So the “intermediate” case of default is an instant recession twice as big as the “Great Recession” of 2008.  Apparently the Republicans and Tea Party types loved 2008-09 and the bailouts so much they want to repeat it and double down.

Now what’s the worse case?  Well add into the scenario a financial crisis to dwarf 2008.  See US bonds are AAA rated because there’s no chance of default.  If there’s a default, or even a slight increase in the possibility of a future default, then pension funds, banks, and central banks around the world no longer have safe, interest bearing assets.  Chaos. Pension funds have to sell bonds.  Bond prices drop. Interest rates rise. Banks lose capital as the bonds fall in value. Nobody knows which banks are worst off.  A mess to make 2008 look simple.  And guess what, we’ll be back to bank bailouts only with even more unemployment.

Why can’t we have grown-ups in Washington?  These kinds of scary scenarios should be fictional and in the movies.  It shouldn’t be national policy to deliberately default and crush the economy just to make some political policy victory that you couldn’t win straight up.

 

* racing cars in real life is different.  😉

How to Tell If the Politician or Reporter Is Ignorant, Foolish, or Has a Hidden Agenda – Part 1

One of the reasons my posts have been scarce* lately is because, frankly, I’m frustrated and nearly speechless at the foolish talk and nonsense that currently passes for news about the economy lately.  In particular, this year the politicians and reporters in Washington have been focused on the federal government deficits and debt.  We are being bombarded by total nonsense from politicians from both parties.  But the news reporting of the debates are even worse.  Unfortunately much of this nonsense is couched in serious tones amidst appeals to emotional triggers with people.  Result: folks are being misled.

So in a public spirited effort to help you sort out just when you’re listening to somebody who isn’t worth listening to, I’m starting a guide to How to tell if the politician or reporter is ignorant, foolish, or has a hidden agenda. This is part 1.

If the politician or reporter says anything about “reducing the government’s debt”, it’s time to stop listening.  They don’t know anything, including basic words in English.  They don’t know the difference between “debt” and “deficit” and the difference is huge.

Debt, in the context of the federal government, refers to the accumulated total of money that has been borrowed in the past by issuing bonds and T-bills.  Sovereign national debt, unlike private debts, do not have to be “paid off” now or ever.  When the bonds come due, the government issues new bonds to replace them.

Deficit, in the context of the federal government, refers to this year’s budget and whether taxes collected are less than the cash expenditures made.  If taxes collected this year are less than expenditures, the government (any sovereign government) can either borrow the difference by issuing new bonds (additional debt) or by creating new money (coins, paper currency, or bank reserves).  In the case of the U.S., the government has totally delegated the money-creation process to The Federal Reserve and promised that it would always borrow to make up the difference between taxes and expenditures.

There’s a relationship between Debt and Deficits.  The Deficit each year (assuming money creation is not used) will lead to more borrowing which will increase the total Debt outstanding.

So back to our politicians and reporters.  As official Washington tries to figure out how to politically raise the debt ceiling law (a foolish piece of legislation, but that’s for another post), reporters and politicians both have been reporting that talks are under way to “reduce the debt“.  NO!  AAAARGGGHHHH!  The debt isn’t going to be reduced, but the deficit might be.  To reduce the the debt, we would have to have a budget surplus, and that ain’t going to happen**.  What they are talking about is how to reduce the annual deficit (a foolish goal that’s doomed to failure, but right now I’m focused on the words).

At times it’s worse.  I’ve actually heard politicians (mostly Republicans) and reporters say on TV that they want to “eliminate the debt”.  Come on folks!  If you hear anybody say that, change the channel immediately.  Shield your children’s ears. A person who talks about “eliminating the debt” can’t even do first grade arithmetic.  The federal government debt is approximately $14 trillion.  The entire GDP of the U.S. is only a little more.  To eliminate the debt, the entire country, all of us, would have to produce and sell everything we’re doing now but then tax 100% of it and not consume a single thing – not even a single bottle of Coke.  

Suppose you went to your medical doctor because you thought you had an eating disorder and wanted to reduce your appetite. If the doctor said her goal was to totally eliminate your entire weight, you’d think her crazy, leave, and find an knowledgeable doctor instead of a quack.  But when politicians and reporters make equally absurd comments, we pay them and give them campaign contributions.

*neo-classical theory says they should be going up in price, but I’m still giving it for free.

** last time we were close to surplus was the last year of the Clinton administration (only time since mid-1950’s).  To have a surplus we would have to have full employment.  Even then, Republicans have shown (2001 and 2002) that they would continue to cut tax rates and tax collections faster and eliminate the surplus, putting us back in a massive deficit.

CEO’s Pay Grows, Average Worker Pay Stagnates

The top end of the income distribution has recovered from any ill effects of the Great Recession, but the average worker has not.  CEO’s in particular saw their compensation increase 27% in 2010, while the workers at the corporations these CEO’s “lead” has barely moved.  Wonkroom notes:

Households across the country are still feeling the effects of the Great Recession, with unemployment falling very slowly, while foreclosuresarestillincreasing, along with poverty rates and oil prices. Family wealth is currently down $12.8 trillion from its 2007 peak.

However, one group of Americans is doing very well — corporate CEOs, whose pay is returning to pre-recession levels:

At a time most employees can barely remember their last substantial raise, median CEO pay jumped 27% in 2010 as the executives’ compensation started working its way back to prerecession levels, a USA TODAY analysis of data from GovernanceMetrics International found. Workers in private industry, meanwhile, saw their compensation grow just 2.1%in the 12 months ended December 2010, says the Bureau of Labor Statistics.

Median CEO pay last year was $9 million, the highest since 2007. The median CEO bonuswas $2.2 million. These gains come as income inequality in the U.S. is already the worst its been since 1928. “We have the recipe for controversy over CEO pay: big increases in CEO pay that show up following run-ups in stock prices coupled with high unemployment rates,” said Kevin Murphy, professor of finance at the University of Southern California…

But raising taxes on millionaires is not, in fact, the same as raising taxes on job creators. According to a recent Wall Street Journal-NBC poll, an overwhelming majority of Americans (81 percent) say that adding a surtax on millionaires is an acceptable way to reduce the budget deficit. …

Rep. Jan Schakowsky (D-IL) recently released a bill that would implement a graduated income tax on millionaires that would raise $78 billion. Allowing the Bush tax cuts to expire for those making more than $1 million could, in one instant, reduce eight percent of the medium-term budget deficit.

If the goal is truly to reduce or eliminate the deficit (a goal I do not share), then restoring taxes on these millionaires and CEO’s must be part of the agenda.  As noted previously, if we simply do nothing and let the existing laws on the books, especially letting the Bush-era preferential tax treatments for the highest bracket taxpayers expire, we can eliminate the primary deficit.

In the past, prior to the Reagan years, we had high marginal  tax rates for the highest income brackets.   For much of the 1950’s and 1960’s and early 1970’s, the highest marginal tax rates were between 70% and often as high as 91%. (source: Tax Foundation) Now this is marginal rates, the rate paid on income above the specified level, not the average paid on all income. Nobody pays the marginal rate on all their income.  At the time, the top bracket started at $200,000 or $250,000 for a married filing jointly return.  Given inflation, these are brackets that would be comparable to a $1,000,000 or so today.  The nation did not suffer for job creation in the 1950’s and 1960’s.  Yet, once we brought the top tax rates down into the 33-36% range during the Reagan years and ever since, we have suffered from low job formation relative to the 1950’s and 1960’s.  Even if we limit ourselves to just the 30 years since Reagan radically reduced the top marginal tax rates, we see that Clinton, who raised the top rate to 39% in 1993 had the best job creation record.  Clearly, low marginal tax rates on CEO’s and millionaires does not help create jobs. But, it does make the government deficit bigger.  Just a little food for thought as you file your taxes this year.

What Budget Crisis? Let’s Do Nothing Now

My Mother was a big advocate of patience. She was the anti-crisis.  In response to any panicked concerns I had about the some “crisis” that was coming, we always counseled “we’ll cross that bridge when we get to it”.  And sure enough, there was usually either no problem eventuallly crossing the bridge or there was no river to cross.  I wish Congress and the President could heed the same counsel.

The last couple weeks have built on the hysterical “budget crisis” talk of the last few months.  Politicians of both parties have trotted out grand “plans” for how to “fix the budget” crisis. Of course, by “budget crisis” they claim to mean the deficits that the government is currently running. Make no mistake, the plans being proposed are radical changes to America’s social structure, safety net, and political economy. The Republicans in the House yesterday voted a budget to phase out Medicare. The cuts both parties are proposing will be drastic.  Education spending will be slashed. Let’s consider another approach though.  Let’s think of it as my Mother’s cross-that-bridge-when-we-get-to-it approach.  The essence of this approach is that if we do nothing at all right now or for the rest  of this decade, the problem will solve itself.  In other words, the current laws on the books will eliminate the problem.

I will explain, but first I want to make a disclaimer.  First, as an economist, I do not buy into the “budget crisis” rhetoric to begin with.  As I’ve tried to explain in other posts about MMT, fiscal policy, and the government budget, I’m not worried about the government’s current deficit at all.  In fact, if anything, I’m concerned that the deficit is too small right now.  The signs are clear that we need more government spending, not less right now.  I likewise do not think eliminating the deficit completely is a worthwhile goal. Such a goal is likely to be harmful.  

But, for the sake of argument and understanding, let’s assume for the moment that we should eliminate the deficit eventually.  What do we need  to do? Cut Medicare and let seniors eat up their entire limited incomes in healthcare costs? Hand Social Security over to Wall Street?  Close all the schools? None of this kind of radical nonsense is necessary. I will let Annie Lowery of Slate Magazine do the explaining with emphasis added by me:

 The overarching principle of the Do-Nothing Plan is this: Leave everything as is. Current law stands, and spending and revenue levels continue according to the Congressional Budget Office’s baseline projections. Everyone walks away. Paul Ryan goes fishing. Sen. Harry Reid kicks back with a ginger ale. The rest of Congress gets back to bickering about mammograms. Miraculously, the budget just balances itself, in about a decade.

I know. Your eyebrows are running for your hairline; your jaw is headed to the floor. You’ve had the bejesus scared out of you by deficit hawks murmuring about bankruptcy and defaults and Chinese bondholders. But don’t take it from me. Take it from the number crunchers at the CBO. Look at the first chart here, and check the “primary deficit” in 2019. The number is positive. The deficit does not exist. There’s a technicality, granted: The primary deficit is the difference between spending and revenue. The total deficit, the number more commonly cited as “the deficit,” includes mandatory interest payments on the country’s debt. Even so, the total fiscal gap is a whisper, not a shout—about 3 percent of GDP, which is what economists say is healthy for an advanced economy.

So how does doing nothing actually return the budget to health? The answer is that doing nothing allows all kinds of fiscal changes that politicians generally abhor to take effect automatically. First, doing nothing means the Bush tax cuts would expire, as scheduled, at the end of next year. That would cause a moderately progressive tax hike, and one that hits most families, including the middle class. The top marginal rate would rise from 35 percent to 39.6 percent, and some tax benefits for investment income would disappear. Additionally, a patch to keep the alternative minimum tax from hitting 20 million or so families would end. Second, the Patient Protection and Affordable Care Act, Obama’s health care law, would proceed without getting repealed or defunded. The CBO believes that the plan would bend health care’s cost curve downward, wrestling the rate of health care inflation back toward the general rate of inflation. Third, doing nothing would mean that Medicare starts paying doctors low, low rates. Congress would not pass anymore of the regular “doc fixes” that keep reimbursements high. Nothing else happens. Almost magically, everything evens out.

These are the CBO’s baseline projections. But, of course, Congress is not likely to let the Bush tax cuts fully expire, or slash doctors’ payments. So the CBO also prepares an “alternative fiscal scenario” that looks more like the path we expect Congress to take. It’s the alternative scenario that has the horror-show deficits. But Congress doesn’t have to act. It just has to do nothing. Or when it does do something, it has to pay for it.

That last bit is important: We want the numbers of the do-nothing path but not necessarily the policies. The fiscal future written in current law is hardly the best of all fiscal futures. For one, health care spending would comprise an enormous portion of overall spending. Right now, the United States spends about $1 in every $6 on health care. In a decade or two, based on the do-nothing plan, it would spend $1 in every $5, then $1 in every $4, and not get better health outcomes, either. Those dollars would be better spent in other industries or on other priorities. Moreover, under the do-nothing plan, the government would tax a much bigger share of GDP than it currently does, and the tax burden on the middle-class would be uncomfortably high.

But the do-nothing plan proves the point that the budget revolution does not need to be particularly revolutionary. Yes, the dollar figures are enormous, so big that it would appear to require “bold” plans that include massive new taxes or cruel new cuts. But, in fact, we don’t really need to end Social Security, sell Alaska, or ship the poor to Canada to get back in the black. We just need to stick to current law—particularly the tax and health care provisions—and then we can tinker our way toward a better, healthier economy.

That is because, by and large, the hard work of fixing the fat part of the the budget has already happened—through health care reform. The Social Security crisis you sometimes hear about is essentially a myth. The trust fund will run out in 2037, “at which point tax income would be sufficient to pay about 75 percent of scheduled benefits through 2084.” Full Social Security solvency would require only about 0.7 percent of GDP, which you can get to by exposing income above $107,000 to the payroll tax. There is no debt crisis, either, as long as the U.S.’s lenders remain confident in the country. The crisis lies in spiraling health care costs. The Obama health care reform bill might not work, but it does contain programs that could turn the tide over time. The big wheels of deficit reduction are already turning—and it might be better for Congress to step back, stick to pay-as-you-go, and let them turn.

Yes. Annie is right. And Mother was right.  If we do nothing, then the deficit disappears because of laws already on the books and what Annie doesn’t mention: regaining full employment.  The sooner we regain full employment, the sooner the deficit disappears, assuming we leave the tax code and Medicare and healthcare and Social Security laws as they are right now.

So why is everyone in D.C. all agitated about the “budget crisis”? Two reasons. First, what they really want to do is to continue to lower tax rates for the very rich and the wealthy. The rich, after all, pay for lavish parties through lobbyists and pay for campaigns.  You and I don’t.  Lowering tax rates for the rich will create larger budget deficits. The Republican/Ryan plan to end Medicare is not a plan to “save” Medicare or to “fix the budget”.  It’s  a plan to cut medical care for seniors so that taxes can be cut on the highest income bracket payers, the rich.  Second, some people, particularly the Republican/Tea Party/Libertarian side of the aisle are actually trying to accomplish an ideological agenda.  They don’t like the welfare state. They are ideologically opposed to government services for anyone other than elites and wealthy. They have no chance of getting political support if they actually tell the truth about their agenda.  So, we have a fake crisis to solve.

U.S. Budget Proposal Analysis Tool (spending)

I missed this when it came out Feb 1, but an alert student pointed me to it.  The NYTimes has an excellent interactive visual breakdown of the U.S. Federal Budget spending.  It very graphically shows where the money goes and how much.

Link: http://www.nytimes.com/interactive/2010/02/01/us/budget.html

A couple of notes.  First, the graphic shows only spending and transfer payments (outlays).  It doesn’t show offsetting receipts. For example, Social Security payments are one of the biggest categories shown. But Social Security doesn’t contribute to the deficit.  Social Security taxes, which aren’t shown, more than exceed payments made.  Similarly, but on much smaller scale, postage sales which help offset cost of the postal system aren’t shown.

Second, it’s tempting to think that programs eliminated would result in a equal deficit reduction. For example, it’s tempting to think that if $400 billion in programs were eliminated then the deficit would drop by $400 billion.  Not so. You have to consider the macro impact on overall GDP and employment of cutting the program.  Cutting $400 billion in programs might (or might not) actually worsen the deficit if the cuts result in net an overall reduction in aggregate demand and employment.  That’s because the resulting drop in tax collections would offset the supposed savings from cutting the spending program.