The Mythological Narrative of AmericaSpeaks: Part One
The deficit terrorists ask us to believe that the US has a deficit/national debt problem, to believe in their projections about the future, and to make certain hard choices involving spending cuts and tax increases because we believe in the likelihood of their projections coming true if we don't act to prevent them. Tomorrow, AmericaSpeaks, an organization claiming unbiased neutrality on deficit issues, but funded by the Peter G. Peterson and other Foundations who share the Peterson view that US deficits and the National Debt are something to worry about, will convene some 19 Town Meetings, and more than 40 smaller “community conversations,” all tied together through web streaming, to elicit citizen views on “this problem.” Prior to the meetings, I thought it would be worthwhile to review their argument, as reflected in the video below, about why they think we have a problem.
Their argument begins by noting that the maximum public debt-to-GDP ratio in the history of the United States is 108.6% recorded in 1946, just after World War II. They assert that most economists think that it is dangerous to sustain that level of debt continuously. They then note that because of recent economic events we've had an alarming rise in this number from roughly 40% to a projected 64% by the end of 2010, and that projections show that we will get to the 100% ratio figure by the end of the decade. After that they define the problem as:
”Debt is projected to grow dramatically unless we do something. . . . We can do something if we come together and make good decisions. . . . We can start finding agreement about steps to reduce our deficit.”
They then claim:
”Publicly held debt = accumulation of each year's budget deficits.”
”A deficit occurs in any year when government spending > than tax revenue."
AmericaSpeaks does NOT say we should implement steps reducing our deficit now. And they assume that we ought to wait until the recession is over, when we can follow through for plans to achieve “sustainability,” we are formulating now. They also think that Government often has to borrow money to invest in future needs, and that “temporary deficit spending on things like building new highways and tax cuts” is playing an important role in recovery.
”But, over the long term, rising debt threatens to harm our economy and lower our living standards.”
The video goes on to argue that since Federal interest costs will be increasing dramatically, that will create other effects, such as driving up all interest rates, including consumer interest rates. It also suggests that increasingly heavy Federal borrowing will also “suck up private sector capital” and hurt investment in new innovation increasing productivity. So, rising interest rates, and sharply rising interest costs, both for the Government and for consumers, and “crowding out” of private capital, are the reasons why AmericaSpeaks is asserting that deficits/debts represent a long-term problem of the highest importance that America must develop plans for now, and solve after recovery from the present recession.
Time to examine the AmericaSpeaks argument up to this point.
First, while a deficit does occur in each year that Government spending exceeds tax revenues, by definition, it's not true that the publicly held national debt is the accumulation of each year's deficits. That simple statement, conceals a giant assumption. The assumption is that to make up for the gap between tax revenues and Government spending, the Government must and will issue debt instruments for sale to investors (lenders) and commit to paying interest costs. However, the Government has the constitutional authority to spend money without offsetting its expenditure by issuing an equivalent amount of debt. Furthermore, the more the Government chooses to do that, the more it will create an oversupply of reserves in the reserve funds market, and the more it does that, the more competitive forces in that market will drive the short term interest rates on reserve funds toward zero. If the Government further decides to cease offering longer-term instruments, and to offer overnight debt only, it would decrease its annual interest costs to very near zero.
Second, of course, if federal interest costs and rates don't rise, or perhaps even decline, then they, at least, won't be driving up anyone else's interest rates either. Nor will Federal borrowing suck up private capital, and undermine investment, innovation, and increasing productivity, since if the Government spends without issuing debt on a dollar for dollar basis, it won't be borrowing nearly as much money proportionately as it has in the past or is doing now.
So, in short, the AmericaSpeaks argument that there is a long-term problem with running deficits due to increasing debt, increasing interest rates and costs, and “crowding out” of private capital is dependent on the Government's allowing the markets to determine the interest rates on its debt instruments rather than the Government to manage those rates to drive them down near zero. So, apparently, there's no problem here beyond just a need for the Federal Government to end welfare for rich investors, and foreign Governments, who want to maintain the interest income they enjoy from Federal Debt instruments. Also, there's no need for an exercise which will ask Americans to put on their green eyeshades and work their way through various options designed to either raise Government revenues or lower Government spending in an effort to stabilize our debt-to-GDP ratios either in the short or long-term.
There is however, a real problem. And that problem is the effort of a group of Foundations to focus the attention of Americans on a fantasy problem using a mythological narrative that has little basis in fact, rather than on real national problems such as creating full employment, ending the recession, reconstructing the energy foundations of our economy, our increasingly broken infrastructure and educational system, our manufacturing capability, and our environmental and climatological problems. Perhaps also, these Foundations might, one day, even address the problem of excessive influence in Government by corporate entities at the expense of working people. But I suppose that such real problems are above the pay grade of the these illustrious and tax-exempt institutions.