The Deficit Problem Is a Political Problem

By James Kwak

By which I do not mean to say it is not a problem. As Paul Krugman reminds us,

“If bond investors start to lose confidence in a country’s eventual willingness to run even the small primary surpluses needed to service a large debt, they’ll demand higher rates, which requires much larger primary surpluses, and you can go into a death spiral.

“So what determines confidence? The actual level of debt has some influence — but it’s not as if there’s a red line, where you cross 90 or 100 percent of GDP and kablooie . . . Instead, it has a lot to do with the perceived responsibility of the political elite.

“What this means is that if you’re worried about the US fiscal position, you should not be focused on this year’s deficit, let alone the 0.07% of GDP in unemployment benefits Bunning tried to stop. You should, instead, worry about when investors will lose confidence in a country where one party insists both that raising taxes is anathema and that trying to rein in Medicare spending means creating death panels.”

The implication is that our deficits really are a serious problem. But what’s making them a serious problem is not just that they are big and getting bigger; it is that our political system seems incapable of dealing with them. So, ironically, deficit peacocks are right that the deficit is a problem, but only because they refuse to do anything about rising health care costs — since the long-term deficit problem is a health care cost problem.

27 responses to “The Deficit Problem Is a Political Problem

  1. The long-term deficit problem is NOT a health care cost problem. It is EVERYTHING, all spending, and that includes the military. It is a political will problem. This mess goes far, far beyond health care spending and I do not believe for one moment that a health care bill will not raise taxes, degrade health care and ultimately make the deficit worse.

  2. Mr. Kwak,

    Did you see Bill Moyer’s Journal with Dr. Marcia Angell.
    She stated that any saving in the bill in only in terms
    of the budget numbers not in terms of actual savings for the american people.
    Her answer is Single Payer. Too bad the economists like Paul Krugman don’t have the guts to go against the system.

    http://www.pbs.org/moyers/journal/blog/2010/03/is_the_presidents_health_bill.html

  3. So, ironically, deficit peacocks are right that the deficit is a problem, but only because they refuse to do anything about rising health care costs — since the long-term deficit problem is a health care cost problem.

    You guys always lose me when you say the deficit (perhaps you mean debt) problem is only this or that, often healthcare. To my mind the long term debt problem is made up of a whole host of problems, of which healthcare is certainly a major factor. The unfunded liablities Social Security and Medicare to be sure (although I’d have to ask, whose fault is that?), but also all federal entitlements, including military and other federal pensions, VA benefits, etc; and most especially, that sacred cow of all sacred cows, Defense spending. I’ve watched several of the PBS and similar documentaries which documented chapter and verse how truly difficult deficit (never mind debt) reduction truly is and I’m a quasi-governmental budget analyst/accountant by trade, so I’m truly appreciative of the mammoth task we have before us. Trivializing it by asserting that it’s “only” due to this, that, or the other borders on malfeasance to my mind.

  4. Krugman: “If bond investors start to lose confidence in a country’s eventual willingness to run even the small primary surpluses needed to service a large debt, they’ll demand higher rates, which requires much larger primary surpluses, and you can go into a death spiral.”

    Krugman is always right, but. . . .

    Death spiral? He certainly seems to be suggesting a possible death spiral for the U. S. Does he really think that there is any realistic chance of a bond market induced death spiral for the U. S.? If not, he is just feeding the fear.

    Does anybody here foresee a possible death spiral for the U. S.? If so, what is the scenario?

    Krugman: “You should, instead, worry about when investors will lose confidence in a country where one party insists both that raising taxes is anathema and that trying to rein in Medicare spending means creating death panels.”

    Don’t just spook us, Dr. K. What is the scenario? What are the odds?

    I suppose that he thinks that the Reps would actually prevent the U. S. from raising the debt ceiling or otherwise cause the U. S. to default.

    Really? Wouldn’t that be political suicide for them?

    —-

    Any bond traders out there? Does any halfway intelligent trader think that there is any realistic chance of a U. S. default? Even given the political situation?

  5. Uncle Johnny used to like to sit in his rocker on the back porch, smoking his corncob pipe and looking out towards the train tracks. One afternoon, so the story goes, he saw one train coming from the east, and one train coming from the west. He looked back and forth between the approaching trains until the inevitable wreck. Then he took his pipe out of his mouth, shook his head and said, “Helluva way to run a railroad.”

    Banks create money by lending. However, bank money is ephemeral, it vanishes when the loan is paid off. By contrast, it makes no sense for the government to create temporary money. After all, money makes the world go ’round. We have a huge economy, we need a lot of money. It would be crazy to fund the economy with money that just disappears.

    But wait! That is, in effect, what we do. The government creates money by spending more than it takes in, and then increases the national debt by the amount of money it creates. Now, that might have made sense when we were on the gold standard, but we went completely off the gold standard in 1971. Yet we continue to fund our economy by, in effect, borrowing. In 2009 we paid out almost $400 billion in interest on the national debt! What sense does that make? In addition, borrowing trillions of dollars when we don’t need to makes people afraid that we might go bankrupt. Presidents are afraid of bond traders. Are you kidding? As Uncle Johnny says, “Helluva way to run a railroad!”

  6. The deficit “problem,” is that people don’t understand the national debt is a public good that can be used to promote socially desirable investment in infrastructure and human capital development that will further public purpose. Of course, there is no guarantee that the national debt will be used in that fashion. In fact, no administration in my lifetime (with the exception of parts of the Clinton era budgets perhaps) has opted to use deficit spending in a broadly productive manner. But it doesn’t have to be this way. The United States government once had independent industrial, labor, trade, and even energy policies. True, those policies were often bound up with a corrupt military-industrial complex and brutal foreign wars, but at least the wealth those policies created was broadly shared. The foundation of that wealth was publicly driven investment funded by deficit spending. Today, the United States has turned its back on publicly directed investment and instead has chosen to rely on the private banking system. Unsurprisingly, the result has been an explosion in private debt and a manic focus on highly leveraged, short-term profit seeking investment. It’s time citizens take back control over the money supply and start letting our government work for us. The first step is to stop referring to public deficits as a “problem.”

  7. Yep. Health care costs are the problem only after:

    1. You make the empire sacrosanct, for two very expensive wars nobody can explain;

    2. You make the banksters sacrosanct, with the bailouts.

    Then, on health care:

    3. Take single payer off the table from the start, even if it would save the country at least $350 billion a year.

    So, don’t tell me “the long-term deficit problem is a health care cost problem.” I really do expect a lot better from you, James, than the regurgitation of Versailles conventional wisdom, and the acceptance of their frames.

  8. Speaking of bond traders, Thomas Edison said:

    “If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good.”

    Remind me again why we need bond traders at all? Arent’ they just another species of parasitical rent collector?

  9. > The deficit “problem,” is that people don’t
    > understand the national debt is a public good that
    > can be used to promote socially desirable
    > investment in infrastructure and human capital
    > development that will further public purpose.

    Of the $13T (or so) of national debt now on the books, how much of that has been spent on “infrastructure” or “human capital improvement”? It’s probably a fair assessment that very little of those Trillions has been spent on either of these two categories. (And the Obama budget adds $1T a year for the foreseeable future.)

    > The first step is to stop referring to public
    > deficits as a “problem.”

    Things are what they are. The current National Debt is about $130K per tax-payer. Not many people around who can write a check of that size and not feel more than a little “pain”–which a’int good. And over time, the $400B in interest payments will become $500B .. and then .. It’s really hard to see how that’s good.

  10. Also, when we rely on private banks to create our money for us we get clobbered with absurdly high interest rates (modern day debt-peonage anyone?). The public sector, on the other hand, can, contrary to what Dr. Krugman implies, pretty much set whatever interest rate it wants when it borrows. Bond speculators aren’t going to be shutting down the United States government anytime soon. As my grandfather used to tell me, the man who’s got the guns is the man who is in charge.

  11. No citizen ever has or ever will be asked to write a check to pay-off the national debt. Operationally, taxation and spending are separate and independent processes in our modern economy. Each generation chooses its tax burden through the political process. The national debt has been with this country for all but one year the government has been in existence. You’d think that by now people would realize the national debt is never going to be paid back.

    As for interest on the national debt, the government will pay its interest obligations the same way it does for any other government program; it will credit the bank accounts of those individuals, corporations, and banks that hold U.S. treasury bonds. This is a form of corporate welfare that should probably be curtailed. The important thing to realize is that this is a distributional question, not a financial one.

    The only question of consequence for the macro-economy then is whether or not injecting that much money into the system through interest payments will be inflationary. In the current environment I would have to say probably not, but that doesn’t mean it won’t eventually become so. But at that point the economy would be experiencing robust growth and the debt/GDP ratio would be declining naturally. Furthermore, the Federal Reserve could always fight inflation by setting interest rates to the appropriate level anywhere along the yield curve low (even to zero, as in the current environment, if necessary). If monetary policy is not sufficient to curb inflation, fiscal policy could also be used. In fact, fiscal policy would probably be superior to monetary policy due to the inevitable compositional issues that arise when adjusting interest rates (lower interest rates reduce the income for those who hold treasury bonds, but as a side-effect would probably induce greater levels of borrowing).

  12. And as for what the national debt has been spent on, the vast majority of the countries budget goes to, and has gone to for quite some time now:

    1) Social Security
    2) Medicare/Medicaid
    3) The Military

    Like you, I am not convinced that this is the best way to be directing public investment. The national debate should be over how and what to spend the deficits on. Instead, we are stuck with nonsensical rhetoric about the debt-burden we are leaving our grandchildren. Until time-travel is invented no citizen will ever be able leave anything behind when they die. Ask yourself, when was the last time you worried about the massive amount of debt your grandparents left you to fight World War Two?

  13. Now, having said that, let’s look at the budget and figure out what politicians can do, which is actually quite a bit. The President’s freeze is bogus, the PAYGO measure, while responsible and which should be a rule, always, is negligible. These are not the way to rein in a deficit, or reduce the long term debt. There are two areas which must be changed to take us to long term success. One is health care spending as it relates to the national debt. It is a horse long dead from beating, but until and unless we change the trajectory for health care generally, and Medicare specifically, we are dead, and in many ways more than physically. The current path is not only unsustainable for ten more years, or maybe even five, and the current suggested reform is, I believe, just smoke and mirrors, and really has an incredibly small positive impact on the future of health care generally and Medicare specifically. We need a new model patterned on one of the available ones from outside the US (there are 37 countries, at least, with better health outcomes, not going broke from their systems). The second is military spending. I know that this is the political third rail, but at least half of the immense amount of spending in this area could be stopped tomorrow, and we would not suffer any loss of security, or even capability. Just one small example is out failed Reaganesque “Star Wars” antimissle system. Thusfar we have spent more than $120 billion dollars on the project (projected to cost more than a trillion dollars more, if completed) and have absolutely nothing to show for that, except lots of employment for the idiots who are working on it. We have more than 700 overseas bases in 130 countries (some with luxury hotels and high end golf courses), which cost untold billions, and keep much of the rest of the world still hating our presence where we don’t belong.

    There is much we could do, and I haven’t even mentioned reform of our tax system which is severly broken, and which benefits mostly the wealthy and accountants (and tax attorneys), but is riddled with inequities and special interest benefits.

    But, so long as the plutocracy persists, there is no cure for our budget problems, and America will sink of its lack of morality and homage to greed. We can be equated, as Simon has argued, with a third world country, or, by my thinking, to Rome before its collapse, or France on the eve of its revolution in the mid 1770’s. Sadly, that’s where our politics are, and the Obama administration is doing nothing to remove or even slightly alter this impression.

  14. Bayard, I agree with most of what you’re saying, but still I don’t think that portraying our current budget position as a “problem,” or as “unsustainable,” is helpful. Right now the problem with our economy is a lack of effective aggregate demand. The answer then is we need more demand. Full stop. The debate should be over what programs provide that demand in an environmentally and socially responsible way. Reining in or reducing future deficits may be necessary if nominal aggregate demand outstrips real output capacity, but with the amount of slack we’re seeing in the economy now that almost certainly won’t be happening anytime soon (barring some supply-side shock of course). So, in conclusion, I think you have to be careful about the words you choose to describe our country’s budget position. Talking about “sustainability,” without any reference to capacity utilization or the price level is a mistake that can easily backfire.

  15. The thesis advanced–the deficit problem is political–is quite correct, but the discussion needs to include recognition of the political sabotage of social programs via unsustainable debt: Cut taxes for long enough and the social programs will have to be cut too. Grover Norquist, a GOP political consultant, called this the strategy of “starving the beast” until the beast (the remnants of New Deal/Great Society programs) drops.

    This strategy has unintended consequences that the GOP has yet to understand, namely, the incitement provided to those dependent on such programs. This reaction tends to be as ferocious as it is uninformed, as exemplified by the recent Tea Party development. At the end of this line is political fire of the most lethal sort, namely, right-wing “populism” in the mold of historic fascism’s mass base.

  16. Dr. Kwak wrote:

    “…since the long-term deficit problem is a health care cost problem.”

    OMG! And all this time I actually believed those so called “experts” who said it was all Social Security, that was the cause of all our present and future deficit problems.

    Gee thanks for setting me straight Dr. Kwak. You should immediately contact the Congressional Budget Office and set them straight too. Apparently they’ve been sending out phony reports for decades.

    Sorry, I get very sarcastic when I see an otherwise brilliant Ph.D. get caught up in political agendas instead of good economics. This tends to screw up his thinking and thus his writing.

    Stick to Economics, leave you political agendas at home.

  17. Silly gaucho… but as much as you don’t like it, the inter-relations that Economics and Politics have with one another is unavoidable.

  18. The entire economic disaster, all of it, is a political problem.
    Politicians did not have the will to regulate what should have been.
    Politicians did not have the wisdom to prevent deregulation of that which kept risk relatively contained.
    Politicians (Iceland may be the recent exception) lack the guts to tall their financial overlords “no”, let alone “**** ***”.
    For that matter, almost century ago US politicians activated the Federal Reserve and this wrecking crew is still causing problems today despite the fact that Congress has the authority (responsibility) to disband the FR.

    If you think one party, regardless of which one, is the sole cause/solution to this disaster you really need to open your eyes or cut your medication. Republicrats and Demolicans share both the blame and the responsibility to the people to fix what they broke.

    Unless they do (I doubt they will), read up on feudalism people, as the oligarchs will win the political game and we really will be literally owned by bankers.

  19. easy e wrote:

    “…Economics and Politics have with one another is unavoidable.”

    Well of course they are, Economics, along with “politics” is a “humanity” after all.

    But the use of inaccurate economic justifications for supporting a political agenda is simply wrong. The reason we have a deficit is NOT because of rising health care costs. Yet Dr. Kwak says it is. Clearly this is false. And the only thing that would cause Dr. Kwak to write such a silly thing is an underlying “political” agenda.

    The facts are the facts. It does no good to try to promote a political agenda with falsehoods. And the statement: “the long-term deficit problem is a health care cost problem.” is simply not true.

  20. As we saw with Iraq, Krugman does have the guts when it’s Republicans who are nominally in power.

    So his despicable conduct vis the health racket bill can only be chalked up to the fact that when the Dems are in power, his default position is to be a Party hack.

    That’s why he parroted the cowardly theme that “I couldn’t demand single-payer because nobody was dmeanding single-payer”. As we know, if everyone who ever said that had simply demanded it, we’d have it.

    And Krugman especially is an influential enough opinion-maker that if he would have demanded it with fervor, it could have made a big difference.

    That’s why the combo of that initial cowardice with his subsequent shilling for this vile bill, with his flat-earth mantra about what a “great progressive achievement” it is, should go down as his defining act. It sure does for me. He’s a corporatist partisan hack.

  21. Plain ‘hack’ works better.

  22. Steveareno: OMG! And all this time I actually believed those so called “experts” who said it was all Social Security, that was the cause of all our present and future deficit problems.

    Gee thanks for setting me straight Dr. Kwak. You should immediately contact the Congressional Budget Office and set them straight too. Apparently they’ve been sending out phony reports for decades.

    It really is amazing — and pretty scary — the degree to which people like this live in an imaginary world.

  23. A view from Europe:

    Whereas people like rightly to take on P.Krugman or J.Stiglitz for their defense of deficit spending, bad timing for the Keynes legacy imho, rare are the critics of the 663.8 billion + budget of the DOD, at a time where most States ( except Brazil and Venezuela ) are cutting down their Defense budgets.
    The war on terrorism will go down in history as the most expensive joke ever…

    http://www.billshrink.com/blog/7779/visualizing-americas-national-debt/

    Maybe should it come as a surprise to some of you
    that a journalist of the French newspaper Le Monde reviews and surveys ‘the political problem’ on a monthly basis:

    http://criseusa.blog.lemonde.fr/2010/03/07/la-dette-federale-au-1-mars-2010-volume-structure-de-financement-investissements-etrangers-interets

  24. Krugman: “…it (investor confidence) has a lot to do with the perceived responsibility of the political elite….”

    That is the SCARIEST line in Krugman’s article. Does anyone really believe our Congress and White House are behaving responsibly with our money, our spending, our taxation, our future???

  25. Daniel Habtemariam

    NKlein1553 is right.

    People who are angry at Obama over the national debt increasingly seem to be either people who don’t bother to look up the facts on federal taxing and spending trends in the last half century and/or people incapable of objectively looking at federal taxing and spending trends in the last half century.

    They get emotionally agitated at the word ‘trillion’, do a few simplistic calculations, and call it a day.

    If you want to know what we spend money on in America, turn to pp. 100-101 here:
    http://www.irs.gov/pub/irs-pdf/i1040.pdf

    Or read a fantastic comprehensive overview here:
    http://en.wikipedia.org/wiki/United_States_federal_budget

    -Daniel Habtemariam

  26. Somewhere up the discussion, someone said that Social Security and Medicare are unfunded liabilities. Last time I checked, SS was funded till sometime around 2038 or 2040. I just checked the 2009 report of the Social Security Trustees and discovered that Medicare Parts B and D are fully funded, and Part A (Hospitalization) is funded for another 8 years. I realize that the current depression reduces FICA revenue, still I would not call any of these programs unfunded.

    I would suggest that people consider the fact that a government — unlike a family — can always raise taxes and issue bonds, so liabilities are much less of a problem. A government — especially the government of a country with a huge GDP — always has funding resources not available to most of us.

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