Does Anybody Understand Debt?

Does anybody understand debt?  Some – but not many.  Today’s post is less of my normal extended prose and more of an outline.  I’ve been invited to speak at some writing classes here at the college and this is intended to serve as my speaking notes.


Background: What have you heard?

Krugman in New York Times

Harvey in Forbes

Background Info on U.S. National Debt

Brazelton:  The US CANNOT Go Broke


Numbers, Metaphors, and Stories


Get the terms right

Debt, Deficit, and tr/b/m-illions

$1,000,000,000,000

$1,000,000,000

$1,000,000

$1 trillion =  1 million times $1 million

Debt


Deficit

1984-present U.S. Federal Budget


Measuring the Debt

Counting Absolute Dollars of Debt Deceives. It's All Relative.


Three Bad Metaphors


Government is NOT a Household

Government is NOT like a Household!

Econproph: Once Again, Government is Not Like  a Household


 Govt Debt is NOT a Burden on future generations


Private Debt is NOT like Government Debt

Federal Reserve Breakdown of Household Debt

Foreigners Don’t Control


So…

A Sovereign Government Cannot “Go Broke”


Eurozone Countries Can “Go Broke”


Government Debt is Like Money that Pays Interest


But What About Inflation?  Printing money?

Inflation involves real demand vs. real supply, not just $


Test on Debt:  Interest Rates

Rates are historically low and staying low.


Are Gov. Deficits Necessary?

Yes, if you want to save money.

Forever?   Yes.

Econproph: But What About National Debt-to-GDP Ratio? Not a Problem, Really


Are There Limits to Deficits?

Yes, but related to full employment and capacity.


In Practice, Nobody Understands Money.

Well they understand yesterday’s money, not modern money.

That’s why they don’t understand debt.

US Government Bond Market & Interest Rate Watch – No Signs of Worry Over Deficits, Inflation, or Default

Just a quickie to bring your attention to this, yesterday’s close on the U.S. Government bond market as reported by Google Finance. Note the 10 year bond – less than 2%.

Bond Maturity Yield (effective interest rate) change in points(percent)
3 Month 0.01% 0.00 (0.00%)
6 Month 0.04% +0.01 (33.33%)
2 Year 0.19% +0.01 (5.56%)
5 Year 0.86% 0.00 (0.00%)
10 Year 1.99% -0.07 (-3.40%)
30 Year 3.30% -0.11 (-3.23%)

Why does this matter?

There’s two reasons.  First, the politicians and economists who have been opposed to stimulus efforts, either deficit spending increases or monetary stimulus, have been screaming for well over three years now that  these policies were “reckless” and going to lead to inflation.  Some of the more shrill have been seeing “hyperinflation just around the corner”.  They’ve been saying this for a long time but the inflation and hyperinflation simply aren’t happening.  Why?  Well they’ve argued this because they subscribe to economic theories such as quantity theory of money, crowding out, efficient markets, and a whole host of other neo-classical/neo-liberal theories.  These are the same people that claim Keynesian or post-Keynesian or Modern Monetary Theory is totally wrong.  But the data disagree.  These same critics were the ones pushing Washington to cut the budget and not raise the debt-ceiling limit.  They put concerns about the deficit ahead of concerns about jobs or growth rates despite having over 9% unemployment and over 16% slack in the system. They’re wrong. The data and investors in markets are showing them wrong.  Bond buyers aren’t worried about the U.S. becoming another Greece because they know it’s not possible.  Instead the big money is worried about the lack of economic growth and the potential for banking failures in Europe, and that leads them to want to park their money in the safest thing around: U.S. bonds.

The second reason is because these rates are so low, it’s foolish for the government to not borrow more money and invest it in the country’s future. Readers of this blog and my students should know that the U.S. government is not like a household and doesn’t  face the same budget constraints.  But even if you do believe that, why wouldn’t you borrow money at less than 2% and invest it in projects like infrastructure, innovation, and education that bring a rate of return well above that?  There’s no evidence that the private sector is doing any of this investing and the nation has plenty of idle capacity and idle workers that the private sector has shown it won’t hire.  Why shouldn’t a rational government borrow and invest in growing future GDP?  There’s no reason not to as long as you are sincerely committed to economic growth.

If we consider the real rate of interest (the nominal or face rate of interest minus the expected inflation rate) we get pretty much 0%.  The money is being offered to the government essentially for free, yet opponents of stimulus don’t want to borrow it. Proof of this is that TIPS bonds, which are a variety of U.S. government bond where the interest payments and principle is indexed for inflation, are trading with a negative interest rate these days.  The ironic part is that the very people opposed to government borrowing in this environment are often the same people who claim government should act more like a business.  Any rational business that had profitable investment opportunities and also had access to borrow at essentially 0% would rush to say “where do I sign to borrow?”

A Look at Government Spending Trends. Not What the Deficit-Fearers Claim. It’s Really A Jobs Deficit.

Rebecca Wilder at AngryBearBlog.com explains why the current deficit hysteria that has gripped Washington is misplaced (and offers some great graphs of historical spending patterns).  A little terminology for some readers.  “cyclically endogenous” means the cause of the spending/revenue is not from some budget decision of this year’s Congress or President, but rather that the spending or revenue amount is the result of whatever the GDP and the economy did.  If GDP goes down and that causes some spending to go up, for example unemployment compensation, then that’s cyclically endogenous. (The bold emphasis is mine. You can click on graphs to enlarge them)

Readers here will know more about the US federal government income statement than I. However, given the near ubiquitous deficit hysteria, I wanted to illustrate the truth about the budget deficit. …

First things first, the fiscal deficit – receipts minus net outlays as a % of GDP – is big [by historical comparison]. In June 2011, the 12-month rolling sum of net receipts (the budget deficit) was roughly 8.5% of a rolling average of GDP. This is down from its 10.6% peak in February 2010, but the level of deficit spending clearly makes some nervous.

Why should they be nervous about the ‘level’ of the deficit? I don’t know, since recent ‘excess’ deficits are cyclically endogenous. The chart below illustrates the spending and tax receipt components of the US Treasury’s net borrowing (see Table 9 of the Monthly Treasury Statement). Weak tax receipts and big spending are driving the federal deficits (spending, as we will see below, has surged on items directly related to the business cycle).


In June, the 12-month rolling sum of tax receipts – mostly corporate and individual income taxes and social insurance and retirement receipts – was 15.6%, which is up from its 14.5% cyclical low in January 2010. On the spending side, net outlays in June 2010 were a large 24.2% of GDP and down just slightly from the 25.3% peak in February 2010.

Deficit hysteria should be more appropriately placed as “lack of jobs and tax receipts hysteria”. At this point, the budget could just as easily worsen as it could improve, given the fragile state of the US economy (see Tim Duy’s recent post at Economist’s View).

Why the wrong hysteria?

Reason 1. Taxes. Some would love to increase taxes – but the fact of the matter is, that tax receipts remain well below their long-term average of 18% of GDP. Tax receipts will not improve without new jobs since individual income taxes account for near 50% of total receipts.

Reason 2. The spending has been on cyclical items.

The best time to ‘worry’ about government spending is NOT when the economy is barely moving.

The chart below illustrates the big ticket items of the monthly outlays – roughly 87% of total outlays. The broad spending components are listed in Table 9 of theMonthly Treasury Statement. The long-term average shares of total spending are indicated in the legend.


The items health, medicare, and income security (inc security) are all above their respective long-term averages. But spending on income security outlays is the only spending component to have broken its trend, i.e., surge. According to the GAO’s budget glossary (link here, .pdf), this item includes the following cyclical spending:

Support payments (including associated administrative expenses) to persons for whom no current service is rendered. Includes retirement, disability, unemployment, welfare, and similar programs, except for Social Security and income security for veterans, which are in other functions. Also includes the Food Stamp, Special Milk, and Child Nutrition programs (whether the benefits are in cash or in kind); both federal and trust fund unemployment compensation and workers’ compensation; public assistance cash payments; benefits to the elderly and to coal miners; and low- and moderate-income housing benefits.

It’s spending on unemployment and food stamps that’s driving spending at the margin.

The same deal exists with the ‘smaller ticket items’. Of these <5% of total spending items, energy, environment, and veterans have arguably broken trend. I would surmise that some of the ‘veterans’ spending is tied to the business cycle, given the timing of the surge.

OK – so deficit hysteria is about, but it’s misplaced. One could argue for more, not less, spending to get the jobs growth, hence tax receipts, up.

We Have A Debt-Ceiling Deal. The Economy Loses.

Earlier this week the absurd and totally unnecessary debate in Washington over raising the national debt-ceiling came to an agreement, both houses of Congress passed it, and the President signed it.  Earlier this week I gave this metaphor for the deal, wondering why we need enemies with “friends” like our representatives in Washington.  Now that I’ve had a little more time to reflect, read some more on the details, comment on radio & TV about it, I think I was too easy on it.  It’s worse than it first appears.

This deal doesn’t “guarantee” that the U.S. government will reduce it’s deficit and maintain “solvency” (a non-concept for a sovereign country with a central bank).  Instead, this deal is more likely to guarantee that our economic non-recovery does, indeed, become at least a lost decade, if not a depression.  Right now I want to look at the economic impact of the deal.  In another post I’ll look at another casualty of the deal and the probably political-economy impact.

So what does the deal do specifically?  Well the details are fairly complex, even by Washington standards.  Right now the debt ceiling rises by $400 billion – enough to last for probably 3-4 months.  No real cuts will happen for maybe 60 more days.  Then starting in October 2011, which is the start of the government’s fiscal year 2012 budget (see here for definition of fiscal year), the action begins. Caps on spending start.  There are no tax or revenue changes in the deal.  It starts modestly with only $21 billion in spending cuts in 2012, although many of those cuts will be felt painfully by many citizens.  Students in graduate school in particular will feel the pinch in their pocket. Then in the remaining 9 years of the deal, there will be at least another $896 billion in reduced spending, amounting to about $100 billion less spending per year than currently planned.

This total of $917 billion in reduced spending is only the start though.  Congress is going to appoint a “special joint committee” of 12 members to recommend and additional $1.2-1.5 trillion in either spending cuts or tax revenue increases over the next 10 years.  (if you believe that committee with half Republicans will allow any revenue increases, I have a bridge in Brooklyn for sale).  If Congress doesn’t adopt those cuts, then Medicare payments, defense spending, and other discretionary spending would automatically by cut across the board. Either way spending gets cut another $1.2 trillion for the years 2013-2022.

This deal is supposed to raise the debt ceiling enough to get us through the end  of 2012 and the presidential election before the debt ceiling has to be raised again, sparing us this debate.  Don’t bet the your house on that though because House Republicans are betting they can keep this debate alive through then.  Basically Congress has created an elaborate mechanism in this law that increases the debt ceiling in several steps between now and the end of 2012.  But the way it’s done is that the debt ceiling keeps going up unless Congress votes to stop it (which the President would then veto).  It’s  a way for Republicans to keep talking about the debt and deficit, to keep recording “votes” against it, but all the time knowing that the debt ceiling will rise because it has to.  Pure politics at the expense of the country.

Right now the economy has over 9% unemployment.  Inflation is so low that deflation is actually the threat. The economy has effectively stalled or at least reached “stall speed”, threatening another double-dip recession.  This is not the time to be cutting spending.  To the degree spending cuts are necessary, they should happen when the economy is at or nearing full employment, not now.  At this time the economy needs all the spending it can find whether it’s from consumers, firms, or government.  And right now, firms and consumers are pulling back and keeping their wallets closed.  The government needs to step up and fill the gap.

So bottom-line, what should we expect?  I’ve seen several estimates from folks with more sophisticated econometric models than I can access.  My own back-of-the-envelope calculations and intuition say the drag on the economy is significant.  In 2012, this deal is probably going to take up to another 0.4 percentage points off of GDP growth.  The real damage starts in 2013 with a reduction closer to 1%.  Remember we’ve only grown at 0.8% rate so far in the first half of 2011, so 2012 will be close to zero growth and 2013 will likely be negative unless some other source of growth and spending can be found.  Looking around, it’s hard to imagine where that could be.  Instead I see nothing but possible negative risks: Europe imploding in a currency and austerity crisis, China having to pull back to slow their inflation, the housing mess in the U.S. is still bad, U.S. banks aren’t as healthy as they claim.

The estimates I’ve seen are similar.  Economic Policy Institute says the debt ceiling deal with cost us 1.8 million jobs in 2012 alone. The same article reports:

Top economists and CEO’s have also weighed in against the deal and said that GOP concessions to the Tea Party will cost our economy dearly. Pimco CEO Mohamed El-Erian warned that the deal will lead to less growth, more unemployment, and more inequality. Nobel Prize-winning economist Paul Krugman called the plan “a disaster” and “an abject surrender” that will “depress the economy even further.”

The Center for American Progress’s Michael Ettlinger and Michael Linden argue that while the deal “goes straight in the wrong direction,” Congress can redeem itself by using the so-called “super committee” mandated by the bill to focus on job creation. The committee, made up of six Republicans and six Democrats, is tasked with finding an additional $1.5 trillion of deficit reduction over the next 10 years, and must report a plan by Thanksgiving.

It’s noteworthy that J.P.Morgan Chase Bank’s research department, as representative of Wall Street as any, says that overall with this deal, government budget policy in 2012 subtract at least 1.5% points from GDP growth rate in 2012.  Since  it takes at least 2% growth in GDP to keep unemployment stable and we haven’t even had a single quarter of growth at more than a 4% rate since the end of 2006, things look grim for employment.

The cutters and austerians have won.  They will make a wasteland of the economy in the name of fighting the deficit.

Debt Ceiling: Kabuki Theater of the Absurd

Tuesday evening the House of Representatives voted on whether to raise the so-called “debt ceiling”.  It was pure charade.  No, it’s worse. It’s kabuki theater of the absurd.  First off, the House Republican leadership knows it’s only for show.  The reality is that Congress will vote to raise the limit later this summer.  They have no choice.  The whole concept of the debt ceiling is absurd and likely unconstitutional. Let’s see the news itself, this taken from ABC News:

The House of Representatives rejected an increase to the statutory debt limit in a move chastised by Democrats as “a political charade,” “political cover” and “political theatre.”

The measure, which failed by a vote of 97-318 with seven members voting present, stated that “the Congress finds that the President’s budget proposal, Budget of the United States Government, Fiscal Year 2012, necessitates an increase in the statutory debt limit of $2,406,000,000,000,” and would have raised the debt limit to $16.7 trillion.

All 236 Republicans voted against the increase – joined by 82 Democrats. 97 Democrats voted yes for a debt limit increase, while 7 Democrats voted present.

The bill required a two-thirds majority to pass.

Why was it a charade? Because the Republican leadership designed it to be a fake.  This from Time mazazine’s website (bold emphasis is mine) just before the vote:

Not be a spoiler, but Tuesday evening’s House vote to increase the federal borrowing limit by $2.4 trillion without preconditional spending cuts will fail. It was designed that way by the Republican leadership: They used a procedural trick to require a 2/3 majority for passage and told every member of their caucus to vote against it. The idea, they say, was to prove to the world (and congressional Democrats) that raising the debt ceiling won’t happen without a package of accompanying spending cuts.

Mission accomplished: President Obama has been admitting as much for weeks and House Democratic Whip Steny Hoyer on Tuesday recommended that Democrats join Republicans in voting down the “clean” debt limit measure. “My advice to them would be not to play this political charade,” he said. Of course, the failed vote is the charade. Time to play spoiler again: Congress will raise the debt ceiling by the end of the summer. Tuesday’s failed vote only serves to provide political cover for members of Congress who will eventually back the incredibly unpopular increase in borrowing capacity.

Now supposedly Wall Street and the financial markets understand that Congress isn’t really serious about intentionally defaulting on U.S. bonds.  The New York Times in it’s report on the vote:

“Wall Street is in on the joke,” said R. Bruce Josten, executive vice president of the U.S. Chamber of Commerce.

So the whole point is so that members of Congress can claim on the campaign trail that they voted against the debt ceiling increase when in fact they are also going to vote for it later this summer.  Absurd.  Pure theater. It’s all political pretend.

Beyond the politics, though, the economics is even more absurd.  First, the concept of a “debt ceiling”, a law that saws the government cannot borrow more than say $x dollars is absurd.  How much the government needs (or chooses) to borrow is basically already decided by legislation already passed that goes by the name “budget”.  Congress voted a budget not two months ago that requires, under current rules, more borrowing.  Now Republicans are claiming they don’t want to borrow the money they already committed themselves to borrow.  Got that? So are you following so far?  The House Republican leadership schedules a vote that it knows must fail (that’s why the special 2/3 requirement).  Why? So it can tell one thing to voters on the campaign trail while letting Wall Street “in on the joke”.  We have the best government Wall Street can buy.

But it’s doubly worse than just the lies they’re presenting to voters.  It’s all over what should be a non-issue.  Normally, I don’t like analogies between government and a household because such analogies don’t usually hold up very well.  Government, unlike a household, is not inherently budget-constrained.  But let’s try a simple analogy anyway.  Suppose you put together a budget for your household.  You project or know that you are going to earn $1000 per month.  So income is $1000.  Then you decide that you need to spend $1500 per month in outlays.  You have no savings. You are going to have deficit of $500 per month.  No problem, you have a credit card.  You can borrow to finance the deficit*.  Let’s suppose your credit card account has no credit limit.  The bank is saying you can borrow as much as you like.  In fact, the bank right now is telling you that you are such a good credit risk that you only have to pay 3% interest rates.  Under this scenario there’s no problem, right?  You need the extra $500, you borrow it.  The credit card balance goes up.  But there’s no limit to how high it can go.  That would be the government’s ordinary, constitutionally-mandated budget making process.

But sometime ago Congress decided to add another wrinkle.  It passed a “debt ceiling” law.  Supposedly this is another law, that independent of whatever the budget says, will limit how much total debt the government can have outstanding at one time.  Using our analogy, this is like the head of your household saying that they refuse to borrow more than $x on the credit card, regardless of what they previously said was their budget.  So two months ago, Congress passed the budget with a deficit.  It told the government to buy lots of things and not to collect very much taxes.  Now Congress wants to say they won’t pay.  Huh?  In the private world, this is called an unnecessary, voluntary default.

Yes, that’s what this vote says.  The Republican leadership has just told the world that they actually want the U.S. to default on bonds now!  There’s no economic reason why we need to default.  The financial markets are saying they actually want to lend money to the U.S. at record low interest rates.  The financial markets have long been saying they have no fears about the ability of the U.S. to pay in the future.  No matter. The House Republicans want to default just for the heck of it.  Well, actually it’s not for the heck of it.  They are holding the entire U.S. budget hostage, including payments to seniors, soldiers, and Medicare, because they want to change the future of Medicare and Social Security.  They want to end to programs and privatize everything for the benefit of Wall Street.  Such an agenda is hugely unpopular, so the Republicans can’t do it directly.  Instead they have to create a fake crisis about the public debt, hold a fake vote, and threaten national insolvency to get their way in cutting Medicare and Social Security.

*The whole issue is even more absurd when we consider how my analogy breaks down.  The analogy breaks down because the government doesn’t have to borrow to finance a deficit – it can just spend the money by creating new “high-powered money” which are also called bank reserves.  When the government spends, it just writes a check off the Federal Reserve bank.  It doesn’t have to have “money” in the checking account first.  When The Fed “cashes” the check, it pays your commercial bank with “bank reserves”.  Bank reserves aren’t really “money” in the public’s hands yet, but they can be thought of as “potential money”.  Unlike the primitive days of a century ago, there’s no artificial limit on how much can be spent.  There’s no gold standard.  (that’s a good thing!).

I do believe this is all theater of the absurb.  But it’s dangerous theater. I still believe that when the time comes this summer, Wall Street will call the political leaders and tell them enough’s enough, raise the limit and avoid default.  A default is much too dangerous to contemplate.  A default by the U.S. could bring economic disaster globally.  There’s always the possibility that these folks in Washington dig in their heels and let their egos get the best of them.  They don’t understand what they’re playing with, but that’s never stopped them before.
In the meantime, we’re treated to the spectacle of House Republicans claiming they would prefer the U.S. default now because they’re afraid that without big emergency spending cuts the government will end up defaulting at some point in the future.  Default now to avoid default in the future.  Yeah, I call that absurd.

Social Security Facts

From Ezra Klein via Mark Thoma of Economists View:

Ezra Klein on Social Security:

1) Over the next 75 years, Social Security’s shortfall is equal to about 0.7 percent of GDP. Source (PDF).

2) For the average 65-year-old retiring in 2010, Social Security replaced about 40 percent of working-age earnings. That “replacement rate” is scheduled to fall to 31 percent in the coming decades. Source.

3) Social Security’s replacement rate puts it 26th among 30 Organization for Economic Cooperation and Development nations for workers with average earnings. Source.

4) Without Social Security, 45 percent of seniors would be under the poverty line. With Social Security, 10 percent of seniors are under the poverty line. Source.

5) People can start receiving Social Security benefits at age 62. But the longer they wait, up until age 70, the larger their checks. Waiting to 66 means checks that are 33 percent larger. Waiting to 70 means checks that are 76 percent larger. But most people start claiming benefits at 62, and 95 percent start by 66. Source.

6) Raising the retirement age by one year amounts to roughly a 6.66 percent cut in benefits. Source.

7) In 1935, a white male at age 60 could expect to live to 75. Today, a white male at age 60 can expect to live to 80. Source.

8) In 1972, a 60-year-old male worker in the bottom half of the income distribution had a life expectancy of 78 years. Today, it’s around 80 years. Male workers in the top half of the income distribution, by contrast, have gone from 79 years to 85 years. Source.

Among his comments, my preferred solution:

Social Security’s 75-year shortfall is manageable. In fact, it’d be almost completely erased by applying the payroll tax to income over $106,000. Source (PDF).

I would add another fact to the list:  There is no shortfall in Social Security under the expected scenario for at least 27 years.  All of the minute 0.7 percent of GDP shortfall happens after 2038 at the earliest. This means Social Security actually reduces the government net deficit for the next 27 years.

Unfortunately Washington D.C. is a fact-free zone.

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.