Imaginary Problem; Hurtful Solutions
The Washington Post editorial page has been one of the primary MSM outlets for aggressive deficit terrorism. There is an axis of deficit terrorism in Washington DC today. It runs from Hooverite Republicans such as Judd Gregg and Mike Spence, to Blue Dog Democrats like Evan Bayh and Kent Conrad, to media organizations like CNN, WaPo, and the Peter G. Peterson funded The Fiscal Times, to foundations like The Peter G. Peterson Foundation, and Peterson-funded think tanks like AmericaSpeaks, to the Congressional Budget Office (CBO), to high-level Administration people like OMB Director designate Jack Lew, and judging by his speech and actions, to Barack Obama himself. This axis has been laying down a carpet of continuous propaganda for many months now distracting attention from the immediate problem of getting people back to work, and toward doing something about an assumed long-term problem, that some argue is fictional, and that many others think may, but, will most probably not, occur
Last Saturday, the WaPo added to its place in progressive infamy with an editorial that managed, in a few short paragraphs, to repeat many of the false arguments the deficit terrorists use to scare Americans into thinking that we really have to cut Government spending as soon as we can or we will be facing unbearable suffering in future years. This post will review that editorial in detail. It begins:
”Sometimes a chart is worth a thousand editorials. The one we reproduce here, courtesy of the Congressional Budget Office, is one of those. It shows the federal debt throughout U.S. history and the daunting slope of what is likely to happen in the next few decades.”
It's true that charts can have a lot greater impact on people's understanding than editorials without them can, but that impact may or may be related to the truth. In this case, the Chart depicts projections of the public debt-to-GDP from the CBO. I'll discuss the “truth value” of these projections as we move through the editorial. For now, I want to call attention to the phrase “. . . likely to happen. . . “ just above. And I want to ask: How do the WaPo editors know that these projections describe anything remotely like what is likely to happen? Do they have some expertise in economics that we don't know about? Have they been right about what is “likely to happen” with the Federal Budget in past years? What gives them the ability to say the CBO projections are “likely to happen”? What reason do we have to do anything but laugh out loud at the idea that Fred Hiatt and his friends at the WaPo know what is likely to happen over the next 25 years, or the next 10 years, or even the next 2 years? In fact, CBO itself doesn't say that its projections are likely to happen. It says instead:
”Neither of those scenarios represents a prediction by CBO of what policies will be in effect during the next several decades. The policies adopted in coming years will surely differ from those assumed for the scenarios. (And even if the assumed policies were adopted, their economic and budgetary consequences would certainly differ from those projected in this report.) Nevertheless, these projections, encompassing two very different sets of policy assumptions, provide a clear indication of the serious nature of the fiscal challenge facing the nation.”
So, CBO claims that its projections provide no more than “a clear indication” of the fiscal challenge we're facing. They don't say anything close to the idea that what they project will happen either over the short run or the long-run. The WaPo, in claiming that these projections are likely to happen is going way beyond what CBO is saying. It is giving us mere opinion. Why should we believe their opinion about what things will be like over the next 25 years? Let's remember that as we move through the rest of the WaPo editorial.
”The federal debt held by the public -- and, increasingly, "the public" means foreign governments and investors -- has mushroomed from 36 percent of gross domestic product at the end of the 2007 fiscal year to a projected 62 percent of GDP at the end of fiscal 2010. By way of comparison, only during and just after World War II has the federal debt exceeded 50 percent of GDP.”
The editorial mentions that '”federal debt,” and especially Treasury Bonds held in foreign accounts at the Fed has mushroomed recently. So what? Why does this represent a danger or a disadvantage to the United States? The editorial assumes that it is. But why should we believe that? Also, why is it important that the level has gone above 50 percent of GDP? Again, so what? Is there some magic percent number beyond which the Government's capability to spend is compromised? Obviously, the editorial wants us to believe that. But, why should we? WaPo goes on:
But that's not the scary part. The scary part, as outlined in the CBO's new issue brief, "Federal Debt and the Risk of a Fiscal Crisis," is the Matterhorn-like incline of what happens next. Assuming the unrealistic -- that is, assuming that the Bush tax cuts are allowed to expire, that the alternative minimum tax is allowed to hit a growing number of taxpayers -- the next several years would simply continue the current, unhealthy level of debt. After that, however, growth in spending on federal health-care programs and Social Security would drive up debt to about 80 percent of GDP by 2035. That is, actually, the rosy scenario.
Where do I begin with this one? Maybe the Bush tax cuts will be allowed to expire, maybe they won't, or maybe only part of them will be allowed to expire as the Administration wants, but it seems to me that any of these possibilities is quite possible right now, and none of these is “unrealistic.” Also, the editorial is vague about the course of increases in the public debt-to-GDP ratio. The CBO's Extended Baseline Scenario projects an increase in the ratio from .62 to .66 through 2020, increasing to .69 by 2025. Not a very alarming increase over the next 15 years even if the projection were to come true. So, the bottom line is that the increase in the ratio accelerates after 2025 through 2035, which years are the least likely to occur as projected in this scenario because of the accumulation of projection errors. Having pointed that out however, I also have to admit that I wouldn't give a plugged nickel for the likelihood of even CBO's 10 year projection out to 2020.
Next, the off-hand comment that the extended baseline scenario is the “rosy” one, leaves me open-mouthed. For one thing, it's apparent that CBO has made a key assumption contributing greatly to increasing debt. That assumption is that Federal interest costs will increase over time because these costs are dependent on the international marketplace and what rate people will accept to induce them to but Treasury Bonds. Neither CBO, nor the WaPo, either mention, or question this assumption. Yet Federal deficits and contributions to Federal debt are not the same. The Federal Government can decide to stop issuing debt on a one-one basis with new spending. Alternatively, the Federal Government can stop issuing long-term debt beyond 3 month instruments, and flood the banks with overnight reserves to bring down overnight rates very close to zero, which, in turn will also drive down three-month rates to close to zero. So, as proved empirically by Japan, whether the Government wishes to pay interest costs is, in large measure, subject to policy and not determined by the market as CBO and the WaPo assume.
Further, if the Government stops issuing debt as it spends, then there won't be any “crowding out problem.” CBO places heavy emphasis on “crowding out” as a drag on the economy in its projections. I think there's no such thing as “crowding out” and that this is false theory affecting CBO's projections. However, even if there is a '”crowding out” effect to worry about, stopping or reducing debt issuance will put an end to that problem in future projections. Elsewhere, in an examination of some projections out to 2025 by AmericaSpeaks, I pointed out that ceasing debt issuance could result in $11.8 Trillion less in Federal Government spending between now and 2025. In short, Federal policy on debt issuance or control of short-term interest rates, can pretty much invalidate both scenarios of CBO, and this point alone shows that while the Extended Baseline Scenario may be “rosy” relative to the Alternative Fiscal Scenario, it is far from “rosy” relative to other scenarios that are very easy to generate by assuming a policy change in a key area.
Another reason why WaPo's remark that the Extended Baseline Scenario is a rosy scenario makes me laugh is because its GDP projections reflect a relatively low growth rate in GDP. In fact, CBO projects the nominal growth rate of GDP at 1.55 over the decade ending in 2020, while the growth rate in GDP for the decade ending in 2010 is 1.50. So they're saying that during the next decade the US economy won't grow very much faster than it did in the decade during which the Great Recession occurred. I find this implausible and pessimistic. The average GDP growth rate beginning with the decade ending in 1950 and ending with the 2010 decade is nearly 2.0. If we directly projected GDP growth based on that history, and extended things out to 2025, we'd be looking at a nominal GDP of roughly $42 trillion in 2025, compared to $27 Trillion using a CBO-like scenario. Of course, this change in assumptions means that projected tax revenues between now and 2025 would be greater by many Trillions of dollars, assuming the same rate of revenues to GDP. Summing up, if one assumes that debt issuance policy is changed and also that Government spending policies get the economy moving at the average rate of growth over the past 70 years, then one comes up with an entirely different projection scenario than CBO's. This figure provides such a scenario out to 2025. It shows the debt-to-GDP ratio beginning to decline by 2013, declining to 37 percent by 2020 and then to 2 percent in 2025, with surpluses in 2017 – 2025.
So, here's WaPo telling us that CBO's Extended Baseline Scenario is a “rosy” scenario, and yet, it's pretty easy to develop an alternative scenario (See the above figure again) that gives you the opposite result from CBO's very pessimistic Alternative Fiscal Scenario, based on its own spreadsheets that, in turn, are based on the CBO model. So, how good is a projection model that with relatively minor changes can produce a scenario that projects a result that almost completely contradicts the “. . . clear indication of the serious nature of the fiscal challenge facing the nation”? Not very good, I'm afraid, since such a model imposes few constraints on reality that can serve as a guide to policy.
Also, in thinking over what I've said, please don't assume that the alternative scenario I've developed is the most optimistic one that can be formulated within the confines of the CBO model. It's not. The decade ending in 1950 had a nominal GDP growth rate of 2.82. So, if one is looking for a really “rosy” scenario, that would be the one to look at. Let's go on with WaPo's editorial.
”The more realistic scenario -- that the tax cuts are extended, the alternative minimum tax is indexed, Medicare payments to physicians are not dramatically reduced -- would bring the debt level to dizzying heights. By 2020, debt would be close to 90 percent of GDP, reaching 180 percent of GDP by 2035. "Under the alternative fiscal scenario, the surge in debt relative to the country's output would pose a clear threat of a fiscal crisis during the next two decades," the CBO report says.”
Well, of course, for reasons I've outlined, there's no reason, except the expectation that the Government will follow extremely stupid economic policies, to believe that “the more realistic scenario” of CBO's is at all "realistic". But let's say it happened, and that we had economic stagnation without the political will to solve our problems, would we then have a fiscal crisis by 2030? That depends on what one means by “a fiscal crisis.” If one means that the Government would no longer have the capability to spend to get the economy growing faster than growth in the debt, then I think there would be no such crisis. The Government would still retain the authority to spend and to create full employment and a growing economy. It has no Government Budget Constraints of the kind that applies to the American States, or to the members of the Eurozone. So, where's the crisis? If the reply is that a debt-to-GDP ratio of 146 percent (the value by 2030 in the CBO scenario) would cause inflation, then my reply is where's the evidence from a nation sovereign in its own currency? Japan, in fact has already gone way beyond the 146 percent level of the ratio and is now at around 190 percent. It retains its authority to spend and inflation has been very low there for two decades, as have interest rates on Government debt. WaPo goes further:
”Even absent a crisis, this debt load would be stifling. So much government borrowing would crowd out private investment. Rising interest payments would require higher taxes or lower spending. The government's flexibility to respond to events such as war or recession would be curtailed. Then there is the risk of fiscal crisis -- a situation in which investors decide the United States isn't such a good bet after all and they don't want to lend money, except at prohibitively high interest rates. If that were to happen, "policy options for responding to it would be limited and unattractive." Debt could be restructured, the currency inflated or an austerity program (tax increases plus spending cuts) implemented. None of these would be pleasant.”
This scenario, of course, is wholly based on these ideas: 1) the Government must borrow ether before or after it spends to get the money it needs; 2) when the Government borrows it will “crowd out” private lending; and 3) the Government's great debt load would drive up interest rates. However, we have already seen that 1) and 3) are false, and also that if 2) turns out to be true, a highly questionable economic theory, that problem can be ended quickly by continuing to spend while ceasing to issue debt. So, in short, the whole scenario in the WaPo paragraph just above, is a bad dream, that cannot happen if the Government uses the tools it has to either no longer issue debt, or drive short-term interest rates down close to zero, and no longer issue long-term debt.
WaPo ends with:
”Which gets to the fundamental point: "The later that actions are taken to address persistent budget imbalances, the more severe they will have to be." Under the realistic budget scenario, to keep the debt to GDP ratio stable over the next 25 years would require immediate and permanent tax increases or spending cuts of about 5 percent of GDP. That is a significant amount, equivalent to about one-fifth of all non-interest government spending this year. But waiting and hoping is not a good alternative. As the CBO put it, "Actions taken later, particularly if there was a fiscal crisis, would need to be significantly greater to achieve the same objective. Larger and more abrupt changes in fiscal policy, such as substantial cuts in government benefit programs, would be more difficult for people to adjust to than smaller and more gradual changes.
”In short, fiscal responsibility and caring for the needy are not antithetical goals. One is necessary to ensure that the government can continue to do the other.”
It's hard for me to express my disgust and contempt for this argument of WaPo and CBO's. First, they have failed to establish that it is necessary to keep the debt-to-GDP ratio “stable.” But, if they did, they would still have a responsibility to tell us what the appropriate level of that ratio is. But, they have no rigorous theory nor empirical evidence that tells us anything about what that level is.
Second, why would it be any harder to get stability in the public-debt-to-GDP ratio in 2030, than it is in 2010? All the Government has to do in either of these years is to stop issuing debt to cover deficit spending, then, whether the debt-to-GDP ratio was at 60 percent, or at 146 percent, it would remain at that level if the Government regulated its debt issuance. So, there is no crisis, and there is no loss of ability to stabilize the debt-to-GDP ratio at whatever level, if that's what we want to do.
But third, I mention contempt and disgust because both WaPo and CBO are suggesting that the CBO projections, which admittedly are not predictions, and in CBO's own view are extremely unlikely to come true, should be taken as the basis for actions this Fall that will put in place a framework for spending cuts that will hurt very real and very vulnerable people, if not this year or next, then certainly in the next few years, when the current economic crisis ends. But this contention is insanity. It is the height of true fiscal irresponsibility.
It is one thing to ask people to sacrifice to fight a war for survival, or to respond to dangers that they have a clear expectation will come true at some time in the future. But, it is entirely another to ask people to sacrifice for some projected state of affairs that by CBO's own admission is “not likely” in the sense that scientific predictions are likely, and that is “unlikely” in the sense that CBO itself doesn't think they will occur. CBO's scenarios are not as likely as an assertion that a Katrina-like hurricane will hit New Orleans again sometime in the next decade. They are not as likely as the scenario that we have a double-dip recession during the next year. Its projections are not predictions that will come true. They are projections based on a policy environment and on policy choices that “we” can change at any time.
And, as we have seen, the so-called projected fiscal crisis is not based primarily on the structure of our current expenditures, or even on the projected growth of our health care and Social Security entitlements. Rather, if it is real at all, which I very much doubt because the absolute level of the public debt-to-GDP ratio has no significance in the abstract, it is because we are refusing to stop issuing Governmental debt, and even more importantly, because we are refusing to provide full employment, out of an exaggerated fear of inflation. If we stopped issuing debt, and also provided a Federal Job Guarantee program ensuring full employment at all times, we could cut out the huge projected interest expense and also, restore economic growth rates to historical norms and even beyond, and then the automatic stabilizers would give us a surplus problem rather than a deficit problem soon enough.
So, because WaPo and CBO are unwilling to consider, or to envision such initiatives, or any other changes that would make a real difference in their projections, except myriad little cuts in spending or tax increases that would cause most Americans to suffer; they tell everyone who will listen that austerity, sacrifice, and suffering are the only way out. And, of course, they expect us to believe this. But what we ought to believe instead is that these institutions have no interest in solving real problems, but are only interested in offering painful solutions to problems they've conjured up to maintain their own sense of authority and relevance.
So, WaPo and CBO, fiscal responsibility in Government is using the Government's fiscal power to fulfill the public purpose, including full employment and price stability and enough economic economic growth that improves the lot in life of all Americans. If you can't recommend fiscal policies that will do that, but instead recommend only actions that stabilize some abstract numerical ratio whose relationship to full employment, price stability, and public purpose escapes you, then all we ought to be saying to you is:
“You have sat too long here for any good you have been doing. Depart, I say, and let us have done with you. In the name of God, go!”