It's All In the Framing and That's Terrible
While some progressives are happy with the President's speech on the budget; others are suspicious, recognizing the President's repeated pattern of offering words that are reassuring to progressives while later acting to work against the general principles he asserts in a major speech. As Bernie Sanders is saying: “the devil is in the details.”
It surely is. But also, the devil is in the framing of the issues and the negotiation to come. And if the framing is done in such a way that the definition of the problem already implies an unfavorable solution for the middle class, American workers, the poor and the vulnerable, then I'm afraid the outcome is a predetermined defeat. So let's look at the framing in the form of a number of assertions made by the President during his speech.
Our nation has had to borrow money.
Reply: No! Our nation has borrowed money. That it did so was a choice made by Congress. It could have spent without borrowing. It did not do so because Congress required the Treasury to issue debt instruments whenever it wanted to deficit spend. So, the existence of the national debt today is Congress's fault. It's existence from now on will be Congress's fault too, because they refuse to give the treasury permission to spend without issuing debt.
Every national debt projection, or debt-to-GDP ratio projection, made by CBO, OMB, or the many private organizations supported by Peter G. Peterson and other deficit hawks is conditional on Congress continuing to mandate debt issuance. And every one of these projections can be invalidated if it ceases to do so.
A little credit card debt doesn't hurt
Government debt is not credit card debt. It is not even remotely like credit card debt. First, the interest rate is far lower than it is on credit card debt. Second, credit card customers don't get to set the interest rates they pay. The Government, however, has that power and can drive these rates down to close to zero, if it follows that policy. Third, credit card customers can't create the money they use to pay their debts, but the Government can.
Fourth, credit card debt is a liability for a household that lowers a household's net worth, but Government debt, while a liability, doesn't lower the US Government's net worth, because what value can you place on the authority to make the money you need to pay off Government debt? Fifth, credit card debt doesn't create any new financial assets in the private sector, but Government debt issuance, coupled with deficit spending does add net financial assets, making the private sector richer.
But now we have a debt problem, we should have started to save more and go into debt less to provide for the future.
Tell me, how can an entity like the US Government, which at any point in time has exactly the same constitutional authority to create/spend new money appropriated by the Congress as at any other point in time, meaningfully save up money to use in the future? Does Mr. President really think that Treasury piles up its Dollar bills and saves them in a storehouse against the time that it will have to spend?
Give me a break! The Treasury always spends in the same way. It spends by marking up private sector accounts or sending checks, and it does so by using its authority to spend Congressional appropriations. Getting its money from a storehouse of saved US Dollars never enters into the process.
Let's be clear. You and I can save money for the future. Nay, we must save it, or we risk not having any. But our Government is different. It has different powers from ourselves. It has no need to save for the future, even though it may have a need to destroy money it has previously created, or to create new money when it wants to spend.
We could actually see the possibility of paying off the debt in 2000
Sorry to have to tell you this Mr. President, but, there was no possibility of paying off the whole national debt by continuing to run surpluses after Clinton. Why? Because assuming the current account balance ranged from -3.5% to -5.0% of GDP during that repayment period, for the Government to run surpluses it would have been necessary for the private sector to run deficits, thus accumulating more and more debt, year after year until the debt was paid down to zero. The reason for this is that the macro-economy conforms to the following simple accounting identity, which I'm sure, that both you, and Republican whiz kid, Paul Ryan, should have no trouble understanding given your reputed mathematical ability and his. The identity is:
The Private Sector Balance + The Government Balance = The Current Account Balance
So, for example, if the Current Account (external trade) Balance is going to be negative, let's say -3.5% of GDP, and the Government Balance is intended to be a surplus of 2% of GDP, then the Private Sector Balance will have to be -5.5%, a big private sector deficit. Right now the private sector is looking to decrease its debt and is running something like a 6% surplus. So, how can the private sector handle such a deficit?
Well, there's only one way. It can increase its debt. How many years do you suppose the private sector would be able to increase its debt, before the debt bubble created by this would force the banks to suddenly contract credit, cause a crash and undermine economic activity? Maybe two, may be three? As it was, the Clinton surpluses ended up handing off a recession to Bush 43 in 2001. What do you suppose would have happened if Bush had withdrawn 5.5% of GDP in net financial assets from the economy over the next two years?
Yes, it's true. The whole idea that the national debt can be paid off by running surpluses primarily constituted from tax revenues is a false idea; one that can never be achieved without driving the economy into a very deep depression. Both Mr. Obama and Mr. Ryan have to learn that if the Federal Government runs a deficit it, and if the current account balance is neutral (zero), then that ADDS net financial assets to the private sector. On the other hand, if it runs a surplus, and the current account balance is neutral, then that subtracts net financial assets from the private sector.
Then we had those tax cuts, and wars, prescription drug program, not paid for. If we hadn't had those tax cuts, and that program we'd be in great shape.
Our budget deficits might have been much less; but there's no reason to believe that the Crash of 2008 wouldn't have happened, and if it had our economy would still be in terrible shape now.
Now that the economy is starting to take off we have to live within our means, reduce our deficits and pay down our national debt.
We always have to live within our real means including our available resources, and our real productive capacity with all that entails; but one of our “means” is our ability to create financial resources at will by spending/creating Federal money. And that “means,” our capability to create/spend high-powered money, is wholly unaffected by our past deficits and the accumulated national debt. So we neither have to reduce our deficits, nor to pay off our national debt. These requirements are myths, lies, and fairy tales, depending on the motivations of the politicians who tell them. Our politicians need to stop telling them.
Even after our economy recovers, our Government will still be spending more than it takes in. That means we'll have to borrow from China.
It's true that our Government may be spending more than it takes in even five years from now. But it is not true that we will have to borrow from China. Whether or not we do borrow, will depend on whether the Congress still requires that we issue debt instruments when we deficit spend. If they don't, then Treasury can spend Congressional appropriations by marking up accounts in the private sector without issuing new debt, since it has the Constitutional authority to do so.
It is also misleading to suggest that spending more than the Government takes in is a problem. If the economy has a current account balance of -3.5% GDP, and we want the private sector to save 6% or so, then, to maintain full employment, the Government will have to run a deficit of 9.5% of GDP, and that deficit level will be normal, unless we want less than full employment, a smaller current account deficit, or a smaller private sector surplus.
The interest payments on the national debt will go to $1 Trillion per year.
Mr. Obama, who is friends with Warren Buffett, clearly believes that the Bond markets control interest rates on Treasuries. Mr. Obama, however, is wrong! Governments can drive down interest rates to near zero if they want to. Japan has already shown that. But, there are also people who have explained how to do that. If their strategies don't work and interest rates begin to rise, then the Federal Government can just stop borrowing money, spend without debt, and never have to worry about rates on debt instruments again.
People will doubt our ability to pay back our debts, and lead to rising interest rates for all of us.
Again, the markets don't control the interest rates. We do!
We have to discuss where to cut to solve these problems.
We should always be discussing where to cut, because many of our programs are not creating real value. But there's no deficit or debt problem. So, there's nothing we have to cut in order to solve it.
Everything has to go onto the table.
No. It doesn't. Successful programs don't have to be on any table, because there is no money problem. On the other hand, much of what we do is counterproductive, so it, including our current war efforts must be ended immediately.
Social Security isn't the cause of the deficit but it has some problems going forward which require changes.
The only problems Social Security has are are people who see the program as needing to be funded by a regressive tax. The payroll tax should be ended, and Social Security should be funded out of general revenue with its payments automatically guaranteed every year by Congress. Social Security benefits should be expanded. The full benefits retirement age should once again be lowered to 65, and we should then look at reducing the age to Belgian levels. We do not lack the money to do this. All we have to do is to do it, and see how well it works for the economy.
If our recovery speeds up we can make better progress than indicated here.
That would be great if it does speed up. But barring much more deficit spending it won't do that. This is just the logic of the macro-economic identity again. With a negative current account balance and attempts to save 6% of GDP, we need to continue 10% or more of deficit spending to get out of this mess. If we try to force austerity levels, then private savings will fall lower and lower, and economic activity will decline again in the private sector.
2014 trigger: If projections don't get better then we can get more spending cuts and more tax revenues then.
We can. But, first, the projections being referred to are OMB or CBO projections. These projections are unreliable even three years out, much less 15 years out. But if, by 2014, they look bad, then it will be even more necessary at that time to forget about austerity, and do whatever it takes to get people back to work.
This is a shared sacrifice plan.
Huh? When will the banksters and Wall Street traders have to share the bonuses they got from banks bailed out with Federal money? When will the ratio of CEO compensation to average employee compensation go back to 50-1 levels from the present outrageous 350- 1 levels. Take the money back from the banksters and health care CEOs. Then talk to us about shared sacrifice.
Apart from that, however, shared sacrifice is fine when sacrifice is necessary. But no sacrifice is necessary here. We do not need to sacrifice because we are not running out of money. We do not need to sacrifice because otherwise we won't we be able to borrow from the bond markets, simply because we never have to borrow from them. If we do want to let them borrow, and they become obstreperous, then just borrow enough to cover only 50% of new deficit spending, and let the rest just go out without bonds issued in correspondence. If we do that, we'll soon find the bond market people screaming for risk-free Treasuries at whatever rate we want to offer them.
We need to make changes in health care to ensure that we don't have continued inflation in health care costs.
Well, that's certainly true. But it's also true that the President is unwilling to advocate for and pass measures that would bring inflation in insurance costs down. The best method of doing this would be to pass HR 676, Medicare for All. This would create a relationship between the providers and the Government known as monopsony, a market in which there is a single buyer and many providers, and would put the Government in the position of seeing to it that Medical costs could not increase more than the general rate of inflation. That's the no-nonsense approach to solving the cost problem in medical care. When we will see that from Mr. Obama? Probably never!
We can still have the American Dream
The question is whose version of the American Dream are we talking about? Is it the dream of FDR's Second New Deal, or Teddy Kennedy's dream of truly universal health care and an end to poverty, or is it the free market dream of the libertarian? Given the President's reinforcement of the oligarchy that caused the Crash of 2008, his refusal to pursue the fraudsters who tanked the economy and created the mortgage crisis, his ineffectiveness in creating a regulatory structure that can prevent another crash, his current pursuit of austerity when what is needed is much more stimulus; all make it abundantly clear that he cannot help us to pursue any of these versions of the American Dream.
It is sad, but true, that his framing of the issues today makes it clear that he will impose at least enough austerity in his effort to find common ground with the Republicans that millions more American's will suffer in the years to come. This is obvious because our problem is not deficit and debt reduction, and the solution is not austerity. The problem is that we need a full employment economy and the solution is a program that will create those jobs as directly and surely as possible, without relying on the expectations or confidence of huge private companies speculating in global markets to produce them.