The Very Idea of A Long-term Deficit Reduction Plan
This week and last we've seen the appearance of four plans for “deficit and debt reduction.” Erskine Bowles and Alan Simpson started things off by releasing their Co-Chair's plan. At about the same time, the Peterson-Pew Commission on Budget Reform issued a plan on reform of the budgetary process designed to ensure that fiscal rules organized around specific debt-to-GDP ratio targets would be implemented. These plans were quickly followed by releases from Jan Schakowsky, and Alice Rivlin and Pete Domenici, on behalf of the Bipartisan Policy Center's Debt Reduction Task Force.
The Peterson-Pew Commission Report is distinct from the other three in the sense that it lays out debt-to-GDP ratio targets and procedures for meeting these targets regardless of economic conditions. It's about constructing a disciplinary framework for budgeting and expenditures that would bind Federal spending come what may. It's neutral about where cuts would come from however, preferring to advocate an institutional framework for discipline rather than substantive spending reductions in particular areas.
The other three sets of proposals offer different mixes of spending cuts and tax reforms designed to reduce spending. Currently, policy wonks are poring over these proposals characterizing them as more or less progressive, easier or harder on the middle class, less or more advantageous to the wealthy, less or more favorable to the social safety net. None of the reports or proposals however, considers the question of whether there really is a long-term debt or deficit problem. All simply assume that there is one, and that the courageous and fiscally responsible thing to do is to bite the bullet and develop a long-term plan for managing deficit numbers and especially the debt-to-GDP ratio.
No doubt over the next few weeks we will get other proposals from other members of the Catfood Commission, or others interested in fiscal responsibility and reform who will just assume that there is a deficit, debt, or debt-to-GDP ratio problem in the United States and who believe that we need an austerity strategy of some sort to handle that problem. Before we take any of these plans seriously we really ought to require that their authors provide an answer to a few simple questions:
-- First, do you understand that a Federal Government deficit ADDS financial assets dollar-for-dollar to the non-Government, including the private, sector?
-- Second, do you understand that a Federal Government surplus SUBTRACTS financial assets from the non-Government sector?
-- Third, do you understand that any long-term program of deficit cutting will decrease the amount of additional financial assets flowing into the non-Government sector over time, barring an increase in exports at least equivalent to the reduction in the deficit cuts?
-- Fourth, if you understand these three accounting facts, then do you really think we should be adopting a long-term deficit reduction policy aimed eventually at running surpluses, regardless of developments in the economy providing the backdrop for Government fiscal policy? What if, contrary to what you now expect there is no recovery in the economy greater than we have now in 2011, 2012, 2013, 2014, 2015, etc.? Do you think that in those circumstances a long-term deficit reduction policy requiring scheduled cuts in various programs would be helpful or harmful to the financial assets of the non-Government sector?
-- Fifth, what if the mortgage foreclosure fraud mess results in another banking crisis and plunges us once again into an accelerating recession? Would it then be helpful or harmful for the financial assets of the non-Government sector if the Government were implementing a long-term deficit reduction plan?
-- Sixth, If the answers to the last two questions are harmful, then why does it make any sense to have a long-term deficit reduction plan? Would you really be willing to make the private sector poorer than it would otherwise be under worsening economic conditions by reducing the amount of the deficit or even running a surplus? That is, are you really willing to put the goal of deficit reduction ahead of the goal of recovery in a worsening economy?
-- Seventh, all of the deficit reduction plans being offered now don't schedule cuts or tax rises until some time in the future when, it is assumed, the recovery is likely to have occurred. The Schakowsky and Rivlin/Domenici plans even include stimulus measures to hasten the recovery. But what if there is no recovery? Or what if there is a brief recovery, followed by a plunge into another recession in late 2012 or 2013, or in 2015, then are you willing to go ahead with planned deficit reductions, even though people are losing their jobs left and right and deficits are rising rapidly due to the effects of the automatic stabilizers?
-- Eighth, what if your deficit reduction plan did not pass the Congress and the debt-to-GDP ratio in the United States increased from its present value to 125% in 2020? Would this mean that the Government had any less ability to continue deficit spending than it has now? Wouldn't Congress still have the same power to appropriate spending? Wouldn't the Treasury still have the same power to spend, and in the spending create money by marking up private accounts? In answering these questions please keep in mind the experience of Japan which is that it is possible for a major industrial nation with a non-convertible fiat currency system and a floating exchange rate to have a public debt-to-GDP ratio of nearly 200% and still maintain near zero interest rates for Government bonds.
-- Ninth, so, keeping all the above in mind, can you explain why it is you still think, if you do, that the US Government faces a debt, deficit, or public debt-to-GDP ratio problem, and that this problem is so serious that we need a long-term deficit reduction plan that will prevent the Government from spending enough to ADD the financial assets to the private sector needed to enable a recoveries when we experience recessions?
-- Tenth, all of you are responding to a call for fiscal responsibility and reform and are offering plans that assume that fiscal responsibility means cutting deficits, stabilizing and decreasing the level of the public debt-to-GDP ratio, and in some instances working towards and even running budget surpluses. But what makes you think that such plans are fiscally responsible?
Is a plan, that might require the Government to destroy more private financial assets than it provides fiscally responsible, when bankruptcies and foreclosures are at an all-time high and U6 unemployment is moving towards 20%?
Is such a plan fiscally responsible when we need to spend $2.5 Trillion to rebuild our infrastructure?
Is such a plan fiscally responsible when we need to re-build our energy foundations and our educational system, or when there other great public and private needs?
These questions should focus you on the more general question of what is fiscal responsibility anyway?
It should also focus you on the even more important question of whether the very idea of a long-term deficit reduction plan is really fiscally responsible?
It may be responsible, if you define fiscal responsibility as following particular budget rules targeting levels of Government deficits, debts, and public debt-to-GDP ratios. But if you define it, instead, in terms of the relative effectiveness of Government spending in fulfilling the public purposes of the people of the United States, then you'll soon become convinced that a long-term deficit reduction plan implemented prioritized ahead of more significant public purposes such as unemployment, health care for all, education, and other important needs of people is about as fiscally irresponsible as economic plans can get.
In the year 1984, I wasn't sure that we had yet reached 1984. But in the year 2010, we are increasingly reaching the time when the names given to Governmental policies actually mean the opposite. So, health care reform actually means insurance company bailout, and credit card reform actually means giving the credit card companies an excuse to raise their customers average interest rates by 50%. And now, fiscal responsibility and reform means fiscal irresponsibility, austerity, and the abdication of Government responsibility for the social safety net that gives many Americans a decent life.
To those contributing to this kind of doublethink, my final message is that the very idea of a long-term deficit reduction is pernicious, anti-democratic and fiscally irresponsible, since it will result in an unprecedented decline in the wealth and well-being of working Americans and the destruction of the American middle class.
And to so-called progressives like Jan Schakowsky, I say stop participating in this charade. The very idea is a corruption of our democracy by a plutocratic elite trying to undermine Government economic activism to protect their own previously gained wealth, and you and other progressives on the Commission, if you have a shred of honor and integrity left ought to resign in protest over it.