Congressional Progressives: Make 'Em End Debt Issuance!
There's a flood of reaction out there among Progressives and other Democrats criticizing the recent “tax deal” on grounds that President Obama was rolled again and got far too little for his agreement to extend the Bush Tax Cuts for the wealthy, and agree to Estate tax rates of 35%. I share that opinion. But since a) the Democrats have steadfastly refused to use the constitutional option to get rid of the filibuster, b) the Republicans in the Senate will certainly prevent any legislation from being passed this month without a tax cut deal, and c) the unlikelihood that a Republican House will pass an extension of the middle class tax cuts without also passing the tax cuts for the wealthy, the Democrats still need a deal this month if they want to get unemployment insurance extended and other legislation passed.
So what should they to do? Well, for starters, the House and Senate Democrats could send the Republicans and the President back to the negotiating table with some instructions about what else they want in order to make a deal. The most important price they can make them pay in return for the tax cuts for the wealthy they want so much is an end to debt issuance. Why is an end to debt issuance so important? Here's why:
Almost everyone, in talking about our so-called fiscal crisis, says that the Government can only fund its spending by either taxing to raise revenue or borrowing to fund deficit spending, and that if too much is borrowed too fast, so that the debt-to-GDP ratio grows too rapidly, this will result in the bond markets losing confidence in the Government's ability to repay its debt, which, in turn, will cause these markets to demand higher interest rates on Treasury Securities, increasing the cost of interest on the debt over time, until, eventually, the interest payments on Federal Debt are so high that they squeeze out other Federal expenditures and programs leave no space for spending we need to do to solve vital problems.
The concern about the bond markets and the pressure on the dollar they can bring to bear is so great that some think that President Obama's primary reason for creating the National Commission on Fiscal Responsibility and Reform was to try to get a long-term deficit reduction plan through Congress in order to convince them that the United States is serious about bringing its debt problems under control.
There are many things wrong with this reasoning I've just laid out about deficits, debts, and the bond markets, and in past months I've blogged about its various flaws. But let's put that aside for this post. Let's assume that the narrative is correct. If so, then the problem of rising interest costs is caused not simply by deficit spending, but by our need to borrow "to fund it."
If we didn't need to do that anymore, then we'd be able to avoid increasing the national debt, and the debt-to-GDP ratio, we wouldn't have to raise the debt limit, and, eventually, there'd be no Federal Debt and no interest costs at all, since we'd be gradually paying down the Federal debt as it came due. And soon people would stop talking about the debts we are leaving to our grandchildren, and the money we are borrowing from China and others “whose values are not our own.” By 2025, the date when current projections suggest that our debt-to-GDP ratio will reach 120%, we'd actually have a debt-to-GDP ratio of nearly zero, because we'd have nearly paid off the national debt.
So, the simplest and most direct solution to the so-called “fiscal crisis” is simply not to issue any more debt when the Federal Government deficit spends. Why can't the Government do that now? The answer is that when the nation went off the Gold Standard in 1971 and adopted its fiat currency system, Congress didn't repeal its mandate, very appropriate when our currency was convertible to Gold on demand, in least in theory, requiring that the Government back all its deficit spending with already existing borrowed dollars whose convertibility was covered by our holdings of Gold.
The mandate to borrow funds, however, has no useful function today, and the interest income it provides for mostly wealthy investors and foreign Governments who buy Treasury Securities is simply a form of welfare for the rich. Any positive effects it produces are vastly outweighed by the bad effects of having to cope politically and economically with the concerns of people who believe that the increases in the debt, and the debt-to-GDP ratio give us a fiscal sustainability problem whose priority outweighs everything else. So, let's make the “hysterical” deficit hawks like Alan Simpson and Erskine Bowles, and occasionally, the President, and the “responsible” doves like Paul Krugman, Brad DeLong, Jeff Madrick, and occasionally, the President, happy and remove all their debt, and debt ratio worries with the following solution. Why even Ed Schultz would have to stop talking about the need for "sacrifice" so that we can avoid borrowing hundreds of Billions from the Chinese in order to “finance” the “tax cuts for the rich.”
Congress: repeal the mandate forcing the Government to issue debt instruments on a dollar for dollar basis with deficit spending. The mandate has no useful function now, other than to provide welfare for the rich and foreign nations, which isn't useful for most of us. If Progressives can make a deal including repeal of the mandate, on the other hand, Congress will:
-- cease to provide that welfare,
-- gradually pay off the $13.8 Trillion Federal debt entirely,
-- have rapidly decreasing Federal interest costs over the next decade until they entirely disappear,
-- have no further need to take difficult votes about increasing the Federal debt limit,
-- have no further need to worry about borrowing money from the Chinese, or the oil rich states, or the Japanese, that our grandchildren will one day have to re-pay,
-- have no further need to worry about what the bond markets think or are going to do, or
-- to worry about our debt or deficit spending being “fiscally unsustainable” when we want the Government to spend money to sustain the unemployed, help us end unemployment altogether, fulfill American needs for new infrastructure, develop a re-invented first class educational system, and provide Medicare for All, among our other needs.
C'mon Progressives, if you can get this repeal measure into the tax deal, you can solve the fiscal responsibility and reform/fiscal sustainability problem very, very easily, and also quit having to worry about those difficult votes on increasing the debt limit. All you have to do is get rid of that mandate to issue debt, and the whole political/economic mess these deficit reduction Commissions and interest groups are bent on making making goes away.
You won't have to worry about raising the Social Security Retirement age and getting young people angry at you, or having to cope with millions of angry Seniors because you're committing to cut their Medicare, or get people frosted because you're going to cut the heart out of a program they really, really like. You know that neither progressives, nor really anyone else in Congress wants to take that vote that the President, Bowles and Simpson, Alice Rivlin, and Pete Peterson are setting you up for, sometime during 2011.
So don't! Make a deal that gets rid of the mandate to issue Federal Debt, and with it the whole issue of whether the Federal Government can afford to do what we need it to do. Get on with the real problems facing our country, and tell the bond markets, the deficit hawks, the Republicans and the blue dog Democrats who are forever saying that the Government can't do this or that important thing, because it's running out of money, to go to hell!