Which Would You Rather Cut: Social Security, or Interest for Foreign Governments and Rich Bondholders?
Alan Simpson and Erskine Bowles, the Co-Chairs of “the National Commission on Fiscal Responsibility and Reform,” would have us believe that a deficit and debt crisis threatening the fiscal future of the United States is upon us, that "This debt is like a cancer,” and that unless we begin to make across the board cuts in expenditures, and also raise taxes in a way that distributes the pain across all segments of the population, there is no way we will return to fiscal sustainability. This view is false and also alarmist for many reasons. One is that Bowles's view that: "We could have decades of double-digit growth and not grow our way out of this enormous debt problem”, is ridiculous, even if one thinks there is “a debt problem.” I've shown elsewhere, that all the US needs to do to “grow our way out of the problem” is to return to the historical average decade-long growth rate we experienced between 1940 and 2000 to begin producing surpluses by 2017 and bring the public debt-to-GDP ratio down to 37% by 2020.
A second reason is that there is no “debt problem,” if someone means by that, that our debts can grow so large that there is a solvency risk for the US Government. As I and others, have written before, there is no solvency risk, and so there is no “debt problem.” A third reason why the views of Simpson, Bowles, and other deficit terrorists on the “Catfood Commission,” are false and alarmist is that their conclusion that we are in a crisis, is based on assumptions, that will only be true if we choose to make them so. There are two kinds of assumptions, that, if true, would account for large deficits, and, also, the “debt problem” that is scaring our co-Chairmen out of their wits sufficiently that they want to take a hatchet to Social Security and other entitlement programs, such as Medicare and Medicaid. The first kind of assumption relates to revenue projections. The second kind relates to interest costs.
Revenue assumptions first. Revenue projections are a function of assumptions about future US GDP growth and also the percentage of projected GDP that will be tax revenues. The “Catfood Commission” seems to be relying on CBO's assumptions used in its recent projections of the Federal Government's fiscal state from 2010 – 2020. The Commission is then extending projections based on these assumptions out further to 2025, and probably even further to 2050. I've pointed out numerous times in previous posts that such long-range projections are just a fairy tale. However, it's still worthwhile to show how the ending of this fairy tale is dependent on assumptions that have no basis in evidence or valid economic modeling.
CBO's annual GDP change ratios (not adjusted for inflation) between 2010 and 2020 ranged from a low of 1.027 to a high of 1.060 and averaged 1.044 over the period. These are considerably below historical averages over the decades since 1940 which are about 1.07 – 1.08. So, the CBO economic growth projections are very conservative, taken in historical perspective. Also, tax revenues taken as a proportion of GDP, from 2011 to 2020, vary from a low of 0.164 to a high of 0.196, and are either virtually the same, or increase by a small amount throughout the decade, with an average increase from 2010 to 2020 of 0.003. That is, the CBO projections of tax revenue as a percent of GDP constantly increase from 2011 to 2020.
Now, even though the “Catfood Commission's” own projections haven't been released yet, it's pretty clear, given their limited budget, and their reliance on the Peter G. Peterson Foundation for staff funding that they'll have to rely on extensions of CBO projections already calculated by staff from other Peterson organizations, such as AmericaSpeaks. However, we already know something about the projections AmericaSpeaks has made because they used these in their recent “Our Budget, Our Economy” national event.
AmericaSpeaks, claiming its projections are an extension of CBOs and are based on them, projects a deficit of $2.46 Trillion in 2025, and says that is 9% of GDP. This means that their GDP projection is roughly $27.33 Trillion, compared to CBO's 2020 projection of $22.544 Trillion. In turn, interpolation of the intervening year GDP projections between 2020 and 2025, yields estimates of $23.423 T, $24.337 T, $25.286 T, $26.297 T, and $27.331 T. This projects an average annual GDP growth ratio of 1.039 from 2020 – 2025, which is a bit more conservative than the 1.044 that CBO projected from 2010 to 2020. This small difference translates to an expectation of about $125 Billion more in revenue in 2025, improving the deficit picture a bit relative to the $2.46 Trillion projection.
Why does AmericaSpeaks project an average annual growth rate slightly less than CBO's own very conservative average? I don't know. But I do know that they claim their projections are based on CBO's, so they ought be explaining any deviation from the CBO pattern. They don't explain this one, of course.
When we look at tax revenues as a percentage of GDP, we find that there, also, the AmericaSpeaks projections deviate from CBOs in a direction that makes the projected deficit and national debt worse in 2025. Specifically, the CBO ratio of tax revenue to GDP in 2020 is 0.196, if we were to continue the trend of increase in this ratio to 2025, we'd get something like 0.198, 0.200, 0.202, 0,204, and 0.206 in 2025, an average increase 0.002 per year. Using the AmericaSpeaks GDP projection at $27.33 T, the 0.206 ratio translates to revenue of $5.63 T in 2025, a difference from the AmericaSpeaks projection of $870 Billion in revenue in 2025. When we interpolate the revenue ratios that AmericaSpeaks must have developed for the years 2021 – 2025 in order to get their very low estimate of $4.76 T in tax revenue in 2025, the picture looks something like this: 0.191, 0.187, 0.183, 0.178, and 0.175 for 2025. This means that their estimates of the tax revenue as a proportion of GDP declines over the 5 year period and the decline is an average of 0.004 per year, a much larger average decline than the CBO average increase of 0.003 during 2010 – 2020, and a much larger decline than my assumption that the average increase in the tax revenue proportion would be 0.002
What accounts for this change in both the magnitude and direction in the proportion of tax revenue collected? AmericaSpeaks doesn't say, but it is clear that this difference in assumptions needs to be explained because 1) it departs from CBO's projections, and 2) this departure results in an $870 Billion increase in the deficit projected for 2025 than would otherwise have been the case if they had followed the CBO pattern. Also, the higher deficits resulting from both deviations from the CBO pattern I've covered, total nearly $ 1 T in projected revenue in 2025, meaning that if AmericaSpeaks had followed the CBO pattern strictly, it would have projected a deficit of roughly $1.465 T, rather than $2.46 Trillion, which, of course, would make those 2025 projections look a lot better than they do now. Also, even though I haven't troubled to compute the annual deviation of the AmericaSpeaks projection from a CBO-based projection during 2021 – 2024, it's also pretty clear that the sum of these deviations would total about $2 T, added to the $1 T for 2025, that's a total of $ 3 T. The Peterson Foundation allied organizations including AmericaSpeaks have been using a national debt to GDP ratio of 114% in 2025 to underline the seriousness of the US's debt problems. However, taking the $27.33 T estimate for GDP and multiplying by 1.14 gives us a projected national debt figure of $31.15 T, and subtracting $3 T from that gives us a new debt-to-GDP ratio projection of 103%, somewhat less scary than the earlier figure, I think.
So, in short, this analysis suggests that a sizable part of the big “debt problem” the ”Catfood Commission” and its allies see for 2025, is due to assumptions that, without explanation, depart from the pattern of CBOs projections. Whether these are due to errors, or to a deliberate bias toward pessimism even greater than CBO's, I cannot say. But when the leaders of a National Commission are so committed to the idea that there is a “deficit problem,” one has to assume that any analysis produced by allies of that Commission is likely to make assumptions that produce the kind of results that those leaders want to hear. That, in fact, is what has happened here.
Now, let's move on to the question of interest costs. CBO estimated that interest costs from 2011 – 2020 would total $5.64 T, extending its projection to 2025 using an annual rate of increase of 1.1, roughly the rate used by CBO in 2019 and 2020, we get AmericaSpeaks projection that interest costs will be $1.49 T in 2025. We also get total interest costs from 2011 to 2025 of $11.8 T. Without these costs, and assuming we take into account the roughly $3 T difference resulting from using CBOs assumptions rather than AmericaSpeaks's, the projected national debt in 2025 would be projected at: $16.35 T in 2025, not $31.15 T, or even $28.15 T. And even assuming the very pessimistic GDP figure of $27.33 T, we come out with a public debt to GDP ratio of about 60% in 2025, not very different from what we have now. Also, the projected deficit of $1.465 T in 2025 is completely wiped away and turns into a small surplus if we have no interest costs at all. So, where's the “deficit problem”?
Well, of course, this analysis has shown that it is partly in shading the CBO assumptions so that they are even more conservative than CBO's, without even telling people that's what you're doing. And it has also shown that the heavy majority of the problem is in the interest costs the US would pay on its debt instruments. So how do we get rid of this 'deficit problem.” Well, first, we need to quit making assumptions that shade the CBO's assumptions in an even more pessimistic direction simply because we want to believe that there really is a deficit problem. And second, the Federal Government must stop issuing debt instruments when it spends money. If it does the latter, Federal interest costs will approach zero percent of GDP in a very short time, and we can avoid spending that $11.8 T over the next 15 years.
Alan Simpson, Erskine Bowles, Alice Rivlin, and our other deficit terrorist friends are fond of talking about how we all have to make sacrifices to solve our “deficit problem,” and that entitlements, among other expenditures, will have to be cut in order to solve our problem. But, even if we believe (which I don't), along with them, that there is, or may one day be, a deficit problem that we need to bring under control, there is no need to solve that fantasy problem either by raising taxes, or by cutting entitlement programs like Social Security, Medicare, and Medicaid. If you insist on believing in either the fantasy of solvency risk, or the fantasy of the bond markets imposing high interest rates on the United States, then the solution to both of these fantasies is the same. It is to stop issuing debt instruments, and, consequently, paying foreign nations and rich investors needing a safe harbor for their funds, interest that we need not pay on debt that a country, sovereign in its own currency, like the United States need not incur.
If you believe that cuts must be made to bring the deficit problem under control, then see clearly the real choice here. Would you rather cut Social Security and other entitlements, as well as other valuable Federal programs, and also raise taxes; or would you rather take care of the whole “crisis” by ceasing to issue debt and stopping interest payments to the wealthy, the Chinese and other foreign creditors who are parking their USD in Treasury Securities rather than spending them on American products? Whose side are you on -- the side of the American people who need their social safety net programs to remain in place for themselves, their children, and their grandchildren, or the side of the wealthy, and the foreign nations who want us to continue to pay them interest?