Standard & Poor’s did not downgrade the U.S. political system. It did not downgrade the stock market. It downgraded United States Treasury bonds and bills—and did so after Congress had removed whatever tiny chance existed of even a small delay in payments. So it’s instructive that, on the next market day, investors moved massively out of stocks, and into the safety of U.S. Treasury bonds and bills. Rarely has stupidity been so quickly and massively shown up.
Some commentators read the downgrade as a rebuke to the Tea Party, but, in fact, S&P was making good on its threat to act if the deficit deal resolving that drama did not reach the arbitrary threshold of $4 trillion over ten years. It wasn’t the Tea Party’s Kool-Aid they were drinking, but that of the deficit hysterics.
And yet, S&P’s statement (math error and all) was of a piece with mainstream budget projections from CBO and other official sources. These projections all assume steady growth, low inflation, and falling unemployment (in which case, one may ask, what’s the problem exactly?). Yet they also predict much higher interest rates. In these projections, it is mainly the vicious magic of compound interest—debt compounded on top of debt in computer models—that generates the explosive debt dynamic which rationalized the downgrade.
These projections are so bizarre and so inconsistent that they survive only through the willful refusal of those who use them to actually look at them. With low inflation, why on earth would the Federal Reserve jack up interest rates? If it did, mortgages would go even more massively into default, stocks and bonds and real estate would again crash, so the growth rate could never be achieved. Not to mention the fact that actual economic growth rates have been below-track for two years, so that the short-term assumption that a sustainable recovery is underway is obviously and plainly wrong.
None of this matters to the president, nor to majorities in Congress, nor to the pundit brigades. All have embraced the “long-term deficits” which appear in the projections as though they were foreordained history, sufficient to compel action now that will effectively cut Medicare, Medicaid, and Social Security, and curtail federal government investment, regulation, administration, and services to levels not seen since the 1950s.
Exactly what that threat is remains elusive. Foggy rhetoric about “burdens” that will “fall on our children and grandchildren” sets the tone of discussion. The concept of “sustainability” is often invoked, rarely defined, never criticized; things are deemed unsustainable by political consensus, backed by a chorus of repetition from the IMF, headline-seeking academics, think-tankers, and, of course, the ratings agencies.
But there isn’t, in fact, a “long-term deficit problem.” So long as interest rates stay below the growth rate, as they are, debt-to-GDP levels eventually stabilize and even decline. The notion that there is a big problem is pure propaganda based on a pseudo-debate, pitting two viewpoints that nevertheless converge on the practical issue.
On one side are those who profess to abhor all deficits, arguing that the productive private sector will rise up to offset all government cuts. This is an appealing 18th century viewpoint found in Adam Smith, a throwback to the days of peasants and petty craftsmen preyed upon by lords, kings, and tax collectors. The only problem is that things have changed since The Wealth of Nations was published in 1776.
The other force is the political liberals who were desperate to get a short-term stimulus package through Congress two years ago and who were therefore prepared to concede the case for “long-term deficit reduction.” What that case is—crowding out? Inflation? High long-term interest rates?—they rarely, if ever, say, because none of those things is remotely plausible given the 9 percent unemployment, debt-deflation, and rock-bottom long-term interest rates we see now. But having made the concession, mainly for political and rhetorical balance, they are trapped. Paul Krugman is a key example; as recently as August 6, he wrote on his blog:
Notice two things here: First, Krugman doesn’t say what the “bad things” are. Second, he does not mention the interest rate and never discusses what happens to the debt/GDP ratio if rates stay put. (Answer: It stabilizes eventually and nothing else happens, as I have shown in a paper linked here.) And thus he lends his great weight to the pressure that will build, later this year, for the cuts in Social Security, Medicare, and Medicaid that were deferred in August—and which Krugman surely opposes.
The perverse character of the debt deal will now force the Pentagon into the fray on behalf of cutbacks in Social Security, Medicare, and Medicaid. This is true even though the Pentagon sequesters that would occur if Congress does not pass the recommendations of the new “supercommittee” are arguably phony. It seems obvious that both the Republicans and the White House understood this dynamic very well, which is why the defense-spending-cut rabbit came out of the debt-deal hat at the last minute. As usual, the progressives who momentarily thought this was a win for Democrats were duped.
So what is to be done? This is not a moment to describe policies that would, for example, create jobs, build infrastructure, or deal with energy or climate change. Nothing like that can happen now until ideas change. And the first change must be to challenge and reject all the nonsense about long-term budget deficits, national bankruptcy or insolvency, and even “fiscal responsibility” that we are hearing. The entire object of this propaganda campaign is to cripple government—including regulation and the courts—and to roll back Social Security, Medicare, and Medicaid. The defense of those successful, effective—and yes, sustainable—programs just became far more difficult, and perhaps impossible. But it needs to be carried on to the last ditch.
James K. Galbraith is author of The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too.
Quite so. If we had, relative to GDP, a large trade deficit, that would be a problem as we would be consuming more than we are producing. But we have no such trade deficit, and the one we have could be eliminated in a moment if we were willing to manage our trade.
Our current budget deficit is simply the result of the failure to tax, as the budget deficit is a private surplus. For the economy as a whole it nets to zero. We are producing what we are consuming and investing. We could raise the same money with taxes on high-end incomes as these are the only people who can buy Treasuries. Everyone else spends what they earn and then some. There is no economic reason why we must give them ... view full comment
Quite so. If we had, relative to GDP, a large trade deficit, that would be a problem as we would be consuming more than we are producing. But we have no such trade deficit, and the one we have could be eliminated in a moment if we were willing to manage our trade.
Our current budget deficit is simply the result of the failure to tax, as the budget deficit is a private surplus. For the economy as a whole it nets to zero. We are producing what we are consuming and investing. We could raise the same money with taxes on high-end incomes as these are the only people who can buy Treasuries. Everyone else spends what they earn and then some. There is no economic reason why we must give them back a piece of paper when we take their money -- money that was created by government spending else they wouldn't have it. We can just take their money in the form of taxes instead of loans and, poof, deficit be gone. The existence of the budget deficit is, therefore, purely political and can be eliminated the moment we have the political will to do so.
Regarding Medicare, Medicaid, and Social Security, the only important question is what income share we regard as the minimum for working people and retirees. We can permit them anything that we regard as a plausible minimum with plenty left over for everyone else if we do not continue to allow the top 10% to capture an enormous share of after-tax income, vastly larger than in 1980 when supply-side nuttery (then called Reaganomics) first appeared and started to erode our economy.
If I am not mistaken, the long-term deficit problem is real "“ in that health-care costs are soaring while Medicare and Medicaid rolls expand concurrently. What seems to be lost is the fact that these costs would merely be shifted elsewhere if the government cut back, or services withheld. If anything, it is a case for the standardization of payment, a single-payer insurer, or some other government-led reform of the health-care system.
And, as Krugman says, taxes are too low. The Bush tax cuts need to be repealed if people want services. If not, the services need to be cut.
If I am not mistaken, the long-term deficit problem is real "“ in that health-care costs are soaring while Medicare and Medicaid rolls expand concurrently. What seems to be lost is the fact that these costs would merely be shifted elsewhere if the government cut back, or services withheld. If anything, it is a case for the standardization of payment, a single-payer insurer, or some other government-led reform of the health-care system.
And, as Krugman says, taxes are too low. The Bush tax cuts need to be repealed if people want services. If not, the services need to be cut.
Another perverse effect of yesterday's stampede by investors to Treasury notes and bonds (debt) and away from equities is that it adds to the army of politically well-connected money-men who will oppose any expansionary economic policy that might increase the rate of inflation. Think about it: S&P downgrades US debt and investors stampede to buy more US debt (and sell equities), further discouraging the adoption of a more expansionary fiscal policy (which was unlikely anyway) or a more expansionary monetary policy (which was likely until yesterday). I'm reminded of those scenes from Africa in which herds of migrating animals cross the treacherous river, with its fast-moving current and ... view full comment
Another perverse effect of yesterday's stampede by investors to Treasury notes and bonds (debt) and away from equities is that it adds to the army of politically well-connected money-men who will oppose any expansionary economic policy that might increase the rate of inflation. Think about it: S&P downgrades US debt and investors stampede to buy more US debt (and sell equities), further discouraging the adoption of a more expansionary fiscal policy (which was unlikely anyway) or a more expansionary monetary policy (which was likely until yesterday). I'm reminded of those scenes from Africa in which herds of migrating animals cross the treacherous river, with its fast-moving current and crocodiles and other predators, many of whom drown or are eaten by the predators, just to get to the other side.
You are quite right, sp, that rising medical costs are a real problem, but this is distinct from the problem of fiscal deficit. As you yourself point out, if the government sheds Medicare responsibilities, it simply shifts the costs elsewhere, allocated more erratically than they are by taxation, with the result that some, perhaps many, cannot afford them at all. We collectively cannot afford them. Our medical costs are already 17.5% GDP and rising, far above other industrialized nations. France spends 11% of a smaller per capita GDP with universal coverage and medical outcomes as good as ours.
You are quite right, sp, that rising medical costs are a real problem, but this is distinct from the problem of fiscal deficit. As you yourself point out, if the government sheds Medicare responsibilities, it simply shifts the costs elsewhere, allocated more erratically than they are by taxation, with the result that some, perhaps many, cannot afford them at all. We collectively cannot afford them. Our medical costs are already 17.5% GDP and rising, far above other industrialized nations. France spends 11% of a smaller per capita GDP with universal coverage and medical outcomes as good as ours.
So Krugman is just too right wing and concern about the defecit is nothing more than the result of lies ginned up by those with an anti-government agenda.
The entire basis for this utter nonsense is, "So long as interest rates stay below the growth rate, as they are, debt-to-GDP levels eventually stabilize and even decline." This simple little assertion reveals less about our current situation and much more about the mental blocks of those on the economic left.
1.) The statement is only true mathematically if the issuance of new debt also holds as a percentage of GDP. That is a big 'if' that Galbraith, in particular, cannot ignore. For he is calling for more stimulus on top of the $1.5 tr ... view full comment
So Krugman is just too right wing and concern about the defecit is nothing more than the result of lies ginned up by those with an anti-government agenda.
The entire basis for this utter nonsense is, "So long as interest rates stay below the growth rate, as they are, debt-to-GDP levels eventually stabilize and even decline." This simple little assertion reveals less about our current situation and much more about the mental blocks of those on the economic left.
1.) The statement is only true mathematically if the issuance of new debt also holds as a percentage of GDP. That is a big 'if' that Galbraith, in particular, cannot ignore. For he is calling for more stimulus on top of the $1.5 trillion in defecit spending that we don't call "stimulus" because it has become the new baseline.
2.) Even with this qualification, based on the latest data, the observation does not describe the reality. Yields on the 10 and 30 yr notes are 2.4 and 3.7 respectively, whereas GDP growth rates for the past two quarters are 0.4 and 1.3 respectively.
3.) Even with the qualification of the first, and even if growth rates were kinder to Galbraith, well before the debt-to-GDP ratio plateaus, is it that hard to imagine events that would make interests rates spike to much higher levels? But with the much higher debt burden, our economic options, in that eventuality, would be extremely limited.
Is it Galbraith's contention to proceed full steam ahead and if and when evil market forces force the government to enact sudden and massive fiscal contraction, we will at least have clean hands. In effect saying, "we didn't abandon grandma, voracious capitalists did." Let's call this left wing Bachmanism.
Really a lot of argument from assertion, or from reference to hyperlink. It may be true, I don't even know and I'm just starting the morning with a quick TNR read and have to get on to work so I can't examine it all, but to call a spade a spade ...
Much asserted, very little if anything expressly argued by way of direct appeal to evidence and analytics.
Please - point out the counterexample if I'm wrong.
But - having said that - I'll give this much to the author ... one does start to wonder if the combined effect of decades of inflation plus a growing economy has caused the numbers to reach an "inhuman" scale.
What I mean is that - federal budgets of >$3 trillion, GDPs of >$14 trillion, y ... view full comment
Really a lot of argument from assertion, or from reference to hyperlink. It may be true, I don't even know and I'm just starting the morning with a quick TNR read and have to get on to work so I can't examine it all, but to call a spade a spade ...
Much asserted, very little if anything expressly argued by way of direct appeal to evidence and analytics.
Please - point out the counterexample if I'm wrong.
But - having said that - I'll give this much to the author ... one does start to wonder if the combined effect of decades of inflation plus a growing economy has caused the numbers to reach an "inhuman" scale.
What I mean is that - federal budgets of >$3 trillion, GDPs of >$14 trillion, yearly budget deficits >$1 trillion, total debt of $14 trillion ... its hard for people to understand these numbers, they are just too big. Even if total federal debt matches or is less than GDP - a debt, any debt, of over a trillion, that grows by a trillions, yearly - that is simply heart-sinking to a regular person, and we aren't all about to stop being regular people.
Even on a personal level - we don't really think people are doing well unless household income is about $250K/year. People can't understand how they (or others) can be earning $50K/year and it isn't enough - barely enough to bother taxing because at $50K/year - you are SO far down on the relative income scale.
From a strictly psychological standpoint, it seems to make the case for re-monetization, i.e.: issue a new dollar - maybe one worth 4 or 5 of today's dollars - if only to bring our sense of relative numeration down to earth.
Let's try it this way:
We have a $15 trillion GDP. As we have a lot of slack in the economy, this is well below our current output capacity. According to wiki:
The Obama administration's original budget request contained $2.627 trillion in revenues and $3.729 trillion in outlays for 2012. The April 2011 Republican plan contained $2.533 trillion in revenues and $3.529 trillion in outlays.
Note that the Obama budget has a deficit of $1.1 trillion. The Republican budget has a deficit of $1 trillion. Will the Republicans claim that the budget is out of control because we have a deficit of $1 trillion? More than likely.
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