Easy Way to Fix Obamacare and Cut Deficit

The easy way to fix Obama’s healthcare bill/law and at the same time cut the federal deficit.  Just sayin’…

by Jonathan Zasloff

One can debate the political pros and cons of President Obama’s proposed budget: Jonathan Chait does an excellent job here debating with — himself!  But in fact there is a quite simple way to reduce federal spending by $47 billion a year as a conservative estimate: that old public health care option.

Such things, however, cannot be discussed in polite company, so let’s just reduce Pell Grants, maternal and child health, and food safety inspections instead.  Whew!  Glad we dodged that bullet.

 

Obsessing on Deficit When Unemployment Is 9% Is Silly

From Alan Blinder via Brad deLong (bold emphasis mine):

Alan Blinder: The Economic Silly Season Is Upon Us: Debt ceilings’ and ‘job killing’ spending are two dumb ideas. Obsessing on the deficit while unemployment is at 9% is another:

Our country seems mired deeply in the silly season…. The silliness comes in at least four parts. The first is the debate over raising the national debt ceiling…. The increase in the debt each year is simply the difference between total expenditures and total receipts, both of which come from the annual budget. If Congress wants a smaller national debt, it must either spend less or tax more…. [N]either party can just command the national debt to stop growing. Some people see the debt ceiling as a way to force spending cuts that Congress would otherwise refuse to make. Maybe. But it’s a clumsy and risky way that, among other things, could endanger the credit-worthiness of the United States government if our inability to float new debt made it impossible to raise needed cash. And for what purpose? To accomplish something that Congress has the power to do anyway?

The second element of silliness is the belief that the American public stands solidly behind rapid and large budget cuts. Sure, and they also want better weather…. The public wants smaller deficits, lower taxes and less spending in the abstract. But when it comes to specifics, it finds few spending cuts that it likes….

The necessity to choose among various spending cuts and tax increases brings me to the third element of silliness—the one that seems to afflict only Republicans. How many times have you heard Speaker of the House John Boehner (and others) refer to “job-killing government spending”? That phrase has become an official GOP mantra, on a par with “death taxes” and “death panels”—and it’s just about as truthful…. [T]he government should be a smart steward of the public’s money…. [But] when there is so much unused capacity and so many unemployed people hungry for work, “job-killing government spending” is oxymoronic. Virtually any type of spending, public or private, will create jobs.

The final element of silliness is… the popular notion that we need deficit reduction urgently, right now, even though the unemployment rate is still 9%…. The federal budget deficit is on an irresponsibly unsustainable path…. We need to both restrain spending and raise more revenue—and by large amounts. But not right this minute, because doing either would shrink the economy. Despite recent increases, Treasury borrowing rates remain low. There is no evidence that investors are fleeing the dollar. Our economy is still in desperate need of more demand.

Social Security Under Attack By Media

I will repeat:

  • Social Security is NOT in financial trouble.
  • Social Security does NOT contribute in any way shape or form to the U.S. Federal government’s deficit, now or in the future. It cannot.  If anything, it has enabled a coverup of how big the real deficit has been for years.
  • News media does not critically examine any claims asserted by the big-money folks that want to abolish, cut, or destroy Social Security (see here).

Remapping Debate along with Mark Miller document how the news media mindlessly attacks and asserts that Social Security is a deficit problem even though that claim is false. In the course of explaining, they also do an excellent job of explaining how the trust fund has operated.

Kudos to Mark Miller, a contributor to Reuters’s Prism Money blog, for his post Monday morning calling out NPR, the Associated Press, and NBC’s David Gregory for perpetuating the misleading idea that Social Security is one of the key drivers of the federal deficit.

The experts who study these things believe that, thanks to the trust fund, Social Security has enough money saved up to meet its obligations for about the next 25 years.

Thanks to the energetic efforts of deficit hawks, the notion that Social Security is a leading cause of the deficit has become part of the Beltway consensus. But, as Miller — who’s been pounding this drum for some time — points out, “the consensus is wrong, and so is much of the reporting” on this topic.

Here’s the actual situation: in the early 1980s, when Social Security was facing a short-term financing crisis, a commission chaired by Alan Greenspan recommended a variety of adjustments to the program. Those tweaks, coupled with decent economic growth, resulted in a situation in which over the ensuing decades Social Security collected more money in payroll taxes than it paid out in benefits.

Rather than just put those surplus funds in a bank vault, the trustees who run the Social Security Administration took this money — it’s known as the Social Security Trust Fund — and invested it in bonds issued by the U.S. Treasury. In effect, over the course of nearly 30 years they lent money to the rest of the government. This was good for Social Security, because it made a little extra money on a very safe investment; the U.S. government, after all, doesn’t default on its debt. And it was good — or seemed good, anyway — for the rest of the government, which got in the habit, especially during the 2000s, of paying for new programs and overseas military adventures with borrowed money.

One consequence of this process is that the trust fund grew quite large: it’s now about $2.5 trillion. Another consequence is that the federal tax burden shifted away from income taxes — which are progressive, so that people who earn more money pay a higher rate — toward payroll taxes, where every worker pays a flat rate up to about $106,000 in earnings (amounts above that cap are not subject to the payroll tax, so the more money you earn, the lower your payroll tax rate is).

Today, for a variety of reasons, Social Security’s annual obligations have started to exceed payroll tax collections. (This was entirely expected, though it happened a bit earlier than anticipated thanks to the recession.) In a narrow sense, that’s a “deficit.” But what journalists and politicians usually mean by “deficit spending” is a government borrowing money to pay its bills. Social Security just needs to collect on the loans it has made. And the experts who study these things believe that, thanks to the trust fund, Social Security has enough money saved up to meet its obligations for about the next 25 years. So there is no real “Social Security deficit” over that period.

To the extent that Social Security has anything at all to do with the deficit, it is the fiscal imprudence of past White Houses and Congresses, not America’s commitment to present and future retirees, that is to blame.

What about after that point? Once the trust fund is spent, if there are no other changes to the program Social Security will continue to owe more than it collects. (As Miller notes, the fixes necessary to avoid this situation are modest, and do not have to include benefit cuts.) But even then, the trustees could not borrow money to make up the difference: by law the program, on net, can never have spent more than it has taken in. “As a result,” a recent paper from the Economic Policy Institute stated, “Social Security cannot and would not add to the federal deficit when its trust fund is exhausted.”

So where does all the deficit talk come from? The problem, of course, is that the Treasury does not have the cash on hand to repay what it borrowed from Social Security, and making good on those obligations will require cuts to other areas of the budget, more revenue from income taxes, or further deficit spending. It is this fact that leads many commentators — including some politicians who are generally supportive of Social Security — to link the program to the deficit.

But that problem wasn’t caused by Social Security, which has always operated in long-term balance and, unlike Medicare, faces very modest challenges in the fairly distant future. It was caused by a federal government that, with the exception of a portion of the Clinton years, was unprepared to fully fund federal programs through tax levels sufficient to pay the bills, and instead used borrowed funds to paper over the shortfall. To the extent that Social Security has anything at all to do with the deficit, it is the fiscal imprudence of past White Houses and Congresses, not America’s commitment to present and future retirees, that is to blame.

As Miller notes, this isn’t actually that complicated. But there’s an irony to his latest post correcting the record on this subject coming out Monday morning. That’s because President Obama’s 2012 budget proposal came out at almost exactly the same time, and the flurry of coverage it prompted included many more assertions that Social Security is one of the key drivers of the deficit.

Like this, from MarketWatch:

And some 800-pound gorillas are also missing: reducing funding demands for Social Security, Medicare and Medicaid — the source of huge projected deficits in coming years.

Or this, from Politico:

But, [Hoyer] said, they’ll insist they be coupled with reductions in the Pentagon budget and a serious attempt to rein in spending on Medicare and Social Security, two of the major reasons for the explosion in the deficit that will get worse as the baby boomers retire.

Or this, from The Washington Post:

A senior administration official said Obama’s budget request maps “a sustainable path” that would stabilize government finances in preparation for a broader debate about how to tackle the biggest drivers of future deficits: Social Security and health care for the elderly, as well as a tax code that offers more in breaks and deductions than it collects in revenue.

It looks like Miller will have more fodder for another post soon.

 

There Was No “Stimulus” Spending in Aggregate

One of the claims that Tea Partiers, Republicans, and conservative/neo-liberal economists have been making for some time is that “the stimulus has failed”. They conclude that Keynesian economics and economic policies are failures.  Since, like most claims of Republicans and other politicians, these assertions are usually repeated uncritically by the news media, it’s close to becoming accepted “common wisdom” that the stimulus failed.  It’s not true, though.  What happened is that Keynesian stimulus was never tried.  Yes, U.S. federal government spending temporarily increased for 2 1/2 years.  But the so-called “stimulus” bill of $780 billion passed in Feb 2009 wasn’t all a stimulus spending bill. Much of the money, approx. $380 billion IIRC, was tax cuts.  People didn’t really spend much of those tax cuts because they were paying off debt with the money. That’s not a Keynesian stimulus spending program.  Keynes pointed out that tax cuts are a weaker way of stimulating spending.

But most important is that the additional spending was over 2 1/2 years, and it was only federal spending.  It was completely offset by cuts in spending at the state and local government level.  In aggregate, there was no stimulus spending program. It’s now over anyway.  What people are doing these days is confusing the increased deficit with increased spending, ignoring the fact that the deficit is so big because tax collections are down. Tax collections are down because too many people aren’t working.  And firms won’t hire those people because nobody (including aggregate government) is spending enough.

Paul Krugman notes:

In effect, although without saying so explicitly, the Obama administration has accepted the Republican claim that stimulus failed, and should never be tried again.

What’s extraordinary about all this is that stimulus can’t have failed, because it never happened. Once you take state and local cutbacks into account, there was no surge of government spending. Here’s total (all levels) government spending over the past 10 years:

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Looking at this graph, if you didn’t know there had been a “massive” stimulus, would you even have suspected that there had been any stimulus at all?

I Repeat: Social Security Is *Not* the Problem

I’ve observed it before, but it deserves repeating.  Social Security is NOT the cause of any present or future Federal government deficits. Social Security is NOT financially troubled. Social Security IS financially sound.  To the extent the Federal government has a deficit problem (which in reality is much less than people think, but that’s another topic), it is not due to Social Security. Mark Thoma says it clearly:

Barking Up the Wrong Tree: Social Security is *Not* the Problem

Ss784
[Source: CBO]

Though there seems to be a concerted effort to get people to believe otherwise, Social Security has very little to do with our long-run budget problem.

I think a couple of the comments that Mark received on this post also shed some light on why we’re told we need to cut Social Security:

reason said…

The only people with a serious interest in undermining SS are Wall Street. They should be hung, drawn and quartered. Political reform is desperately needed in America (as is an informed, critical public and more transparence – but one thing at a time).

bakho said in reply to reason

Great Graphic. This graphic should be posted once a week and used as widely as possible to educate the media and the politicians.

SSTF is a huge pot of money. Wall Street salivates at the thought of collecting fees on $Trillions in long term investments.

 

More re: National Debt

Just after I finished my Background Info on National  Debt post, I ran across this from James Galbraith at New Deal 2.0. He does a nice job of pointing out some of the errors of the “oh-my-god-the-deficit-is-going-to-destroy-us-if-we-don’t-cut-grandma’s-social-security” crowd. For  those not aware, Pete Peterson is a billionaire that has spent millions trying to frighten people with the deficit and persuade people to cut government spending benefits to people less fortunate than him. He paid for a substantial portion of the Obama Bi-Partisan Commission on Fiscal Responsibility – the ones who recommended cutting Social Security, a sound healthy program. He has also contracted with Columbia Univ. Teachers College to produce propaganda “educational materials” for elementary school children about the national debt, or at least as Peterson understands the debt. Of course, as we learn from Galbraith, Peterson and his foundation don’t really understand it very well:

Economist James K. Galbraith goes behind the scenes at a Pete Peterson gathering of deficit hawks to see what they have to say.The Fiscal Solutions Tour is the latest Peter G. Peterson Foundation effort to rouse the public against deficits and the national debt — and in particular (though they manage to avoid saying so) to win support for measures that would impose drastic cuts on Social Security and Medicare. It features Robert Bixby of the Concord Coalition, former Comptroller General David Walker and the veteran economist Alice Rivlin, whose recent distinctions include serving on the Bowles-Simpson commission. They came to Austin on February 9 and (partly because Rivlin is an old friend) I went.

Mr. Bixby began by describing the public debt as “the defining issue of our time.” It is, he said, a question of “how big a debt we can have and what can we afford?” He did not explain why this is so. He did not, for instance, attempt to compare the debt to the financial crisis, to joblessness or foreclosures, nor to energy or climate change. Oddly none of those issues were actually mentioned by anyone, all evening long.

A notable feature of Bixby’s presentation were his charts. One of them showed clearly how the public deficit soared at the precise moment that the financial crisis struck in late 2008. The chart also shows how the Clinton surpluses had started to disappear in the recession of 2000. But Mr. Bixby seemed not to have noticed either event. Flashing this chart, he merely commented that “Congress took care” of the budget surplus. Still, the charts did show the facts — and in this respect they were the intellectual highpoint of the occasion.

federal-spending-v-reveunes-chart-500

A David Walker speech is always worth listening to with care, for Mr. Walker is a reliable and thorough enumerator of popular deficit-scare themes. Three of these in particular caught my attention on Friday.

To my surprise, Walker began on a disarming note: he acknowledged that the level of our national debt is not actually high. In relation to GDP, it is only a bit over half of what it was in 1946. And to give more credit, the number Walker used, 63 percent, refers to debt held by the public, which is the correct construct — not the 90+ percent figure for gross debt, commonly seen in press reports and in comparisons with other countries. The relevant number is today below where it was in the mid-1950s, and comparable to the early 1990s.

But Mr. Walker countered that fact with another, which I’d never heard mentioned before: in real terms he said — that is, after adjusting for inflation — per capita national debt is now twice what it was back then.

The problem is that real per capita national debt is a concept with no economic meaning or importance. (No government agency reports it, either.) Even in the private sector, debt levels matter only in relation to income and wealth: richer people can (and do) take on more debt. Real per capita national income is well over three times higher today than it was in 1946 — so how could it possibly matter that the “real per capita national debt” is twice as high?

Next, Mr. Walker made a comparison between the United States and Greece, with the implication being that this country might, some day soon, face that country’s interest costs. But of course this is nonsense. Greece is a small nation that has to borrow in a currency it cannot control. The United States is a large nation that pays up in a money it can print. There is no chance the markets will mistake the US for Greece, and of course they have not done so.

Finally, Mr. Walker warned that “foreign lenders… can’t dump their debt but can curb their appetite” for new US Treasury bonds. This was an oblique reference to the yellow peril. The idea, when you think about it, is that the Chinese central bank will acquire dollars — which it does when China runs an export surplus — and then fail to convert them into Treasury bonds, thereby choosing, voluntarily, to hold dollars in cash, which earns no interest, instead of as Treasury bills, which do. Mr. Walker did not try to explain why this would appeal to the Chinese.

Walker closed by calling for action tied to an increase in the debt ceiling; specifically for a hard cap on the debt-to-GDP ratio with “enforcement mechanisms,” which could include pro rata cuts in Social Security and Medicare benefits and tax surcharges. He did not specify whether the cap should apply to gross federal debt or only to that part of the debt held by the public (a number which the Federal Reserve can change, any time it wants, by buying or selling public debt). When pressed, in the question period, he would not even say what he thought the cap should be.

I waited for Ms. Rivlin to add something sensible. But she did not. Apart from some platitudes — she favors “serious tax reform” and “restructuring Medicare” — her interesting contribution was to restate Mr. Walker’s comment about “foreign lenders,” who might say “we’re not going to lend you any more money.” That this would amount to saying “we’re not going to sell you any more goods” seems — from a question-and-answer and brief exchange afterward — genuinely not to have crossed her mind.

The Fiscal Solutions Tour comes with a nice brochure, and even (in my case) with a flash drive containing Mr. Bixby’s powerpoints. But does Mr. Peterson think he’s getting his money’s worth? The President, in his State of the Union, mostly ignored him. The Bowles-Simpson effort (which he paid for in part) and the closely allied Rivlin-Domenici plan are fading from view. And as the House Republicans forge their own course, demanding radical spending cuts right now — for political rather than economic reasons, which they don’t even bother to explain — the tired and shabby arguments of these old deficit-worriers hardly seem connected, any more, to the battles at hand.

James K. Galbraith is a Vice President of Americans for Democratic Action. He is General Editor of “Galbraith: The Affluent Society and Other Writings, 1952-1967,” just published by Library of America. He teaches at the University of Texas at Austin.

Background Info on U.S. National Debt

This is another post in response to a student request.  Here are some links that provide background information about the U.S. national debt.

First, the definitive sources:

  • for the exact amount of debt by year:  U.S Treasury Direct – Reports: http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm
    • this site also has links, graphs, charts on the makeup of the debt by maturities, interest rates, types of bonds, etc.  Even has detailed info on U.S. Savings Bonds
  • for the official story of how the debt happened, how it was managed throughout U.S. history: U.S. Bureau of Public Debt http://www.publicdebt.treas.gov/history/history.htm – a series of 6 pages, covering the whole history.
  • for some more facts, graphs, and some analysis: see Wikipedia:  http://en.wikipedia.org/wiki/United_States_public_debt
    • Be warned, however, the Wikipedia article repeats a lot of commonly believed, but factually incorrect statements such as “spending must be financed by borrowing” and that “entitlement spending such as Social Security” pose a “risk” – see below.
  • for a decent, factually correct analysis, albeit a politically biased toward progressive policies analysis see:  Z Facts – http://zfacts.com/p/1195.html – several other links and pages explaining some misconceptions

Overall, anybody researching or thinking about the U.S. national debt, should keep in mind that there’s a LOT of nonsense circulating about U.S. government debt. To correct these misconceptions, keep in mind the following:

  • Debt is the accumulation of past deficits, if those deficits were “financed” with borrowing. Deficits are the difference between government money-in and money-out. Money-in is Taxes. Money-out is GovSpending + GovTransfers. If money-out exceeds money-in, you have a deficit.
  • Deficits do not necessarily have to be “financed” by borrowing, but the U.S. government has long voluntarily followed a policy of borrowing each year to cover the deficit, although it doesn’t necessarily do so month-by-month. The alternative to borrowing to “finance” a deficit in a modern system is to issue checks to pay for spending and let the central bank (Federal Reserve) create bank reserves when the checks are cashed.
  • Any analogy between a household’s finances and the national government is false. There is no such valid comparison.
  • As long as a national government issues it’s own currency, that currency is not fixed in value (convertible) to anything else (other currency or gold), and the government borrows in it’s own currency, then it cannot default or go “bankrupt” or “insolvent” unless it voluntarily chooses to do so to screw the bondholders. This applies to US, Australia, Japan, UK, Canada, etc, but not to countries inside the “eurozone” – they don’t have their own currency.
  • National deficits, and hence debt, almost always goes up during a war. Vietnam war was a bit of exception.
  • When comparing debt levels between different years/eras, it is critical to adjust for:
    • inflation – use “real dollars” or “constant x year dollars” if looking at the debt in dollars
    • size of population and the economy. –  The best measure of the relative size of the debt is: debt-to-GDP ratio.
  • Three things that really balloon the size of deficits and hence debt levels:
    • War
    • Depression or recession – since tax receipts are generally based on economic activity (income tax), anything that slows the economy slows tax collection and raises the deficit.
    • Major income tax cut programs when combined with major new spending intiatives.  This was rare in early US history, but big in Reagan years and Bush II years.
  • One thing that really reduces deficits and hence, slows the growth of debt:
    • a growing economy, especially as it nears full employment (explains Clinton years)
  • Government bonds/debt is NOT a “burden” on children or grandchildren.  It does not have to be paid back. If the borrowed money is spent on things that improve or stimulate econonic growth, then the “children” and “grandchildren” inherit a larger, more productive economy that can pay for the debt interest.
  • Government bonds are not really like household debt or corporate debt, or even state-government debt. The best way to think about government bonds is that they are just like currency except they pay interest.
  • It is possible to have too little national debt. Banks in particular need to have a certain amount of government bonds among their “assets” because they provide a liquid asset.  In recent years, the Australian government, when running a series of surpluses was asked by the banking community to issue new bonds anyway.

I have more on the national debt and those promoting the idea that the debt is the number one problem in U.S., on tax cuts, deficits, and debt, and on how the U.S. cannot go “bankrupt”.