The One-Sided Deficit Debate

By James Kwak

Michael Hiltzik (hat tip Mark Thoma) wrote a column lamenting the domination of the government deficit debate by the wealthy. He clearly has a point. The fact that Simpson-Bowles—which uses its mandate of deficit reduction to call for . . . lower tax rates?—has become widely perceived as a centrist starting-point for discussion is clear evidence of how far to the right the inside-the-Beltway discourse has shifted, both over time and relative to the preferences of the population as a whole.

What’s more, the “consensus” of the self-styled “centrists” is what now makes the Bush tax cuts of 2001 and 2003 seem positively reasonable. With Simpson-Bowles and Domenici-Rivlin both calling for tax rates below those established in 2001, George W. Bush now looks like a moderate; even many Democrats now endorse the Bush tax cuts for families making up to $250,000 per year, which is still a lot of money (for most people, at least).

But some of the blame for this state of affairs must rest with Democrats, liberals, and their usual mouthpieces as well. For over a year now, the refrain of the left-leaning intellectual class has been that the only thing that matters is increasing growth and reducing unemployment, and any discussion of deficits and the national debt plays into the hands of the Republicans. It may be true that jobs should be the top priority right now, but the fact remains that many Americans think that deficits matter (and most of those left-leaning intellectuals would concede that they matter in the long term). Those Americans are currently getting a menu of proposals with Simpson-Bowles in the right, Paul Ryan and Mitt Romney on the far right, and Fox News on the extreme right. There is no explanation of how to deal with our long-term debt problem in a way that preserves government services and social insurance programs and protects the poor and the middle class.

One of my objectives with White House Burning was to help fill that gap, beginning with an explanation of what the federal government does and why it matters and continuing with a proposal for how to fill the long-term budget gap without gutting Social Security, Medicare, and Medicaid. But Simon and I don’t carry a lot of weight with the Serious People who like talking about deficits and shared sacrifice and belt-tightening (not as much as American hero Jamie Dimon, apparently). As long as those people have the floor to themselves, nothing is going to change.

30 responses to “The One-Sided Deficit Debate

  1. How hard can it be to create a platform for deficit-spending? Just play an audio clip of the inimitable Dick Cheney saying “Reagan told us deficits don’t matter” prior to any announcement/statement you make about how it is more important right now to reduce unemployment, and you’re pretty much set. If pressed, simply explain that since Cheney felt that destroying Iraq was important enough of a reason to add $2-3T to the deficit (here you should perhaps point out that the major beneficiaries of that choice have been Halliburton, ch2m hill, Lockheed, the surveillance state/Drone builders, etc. etc.), then it must be true that it is also permissible if the object is to avert a second great depression. Problem solved, non?

    The problem is, of course, that the Rubinomicians would never go for it, because are enjoying destroying the welfare state too much.

  2. markets.aurelius

    “People crushed by law, have no hopes but from power. If laws are their enemies, they will be enemies to laws; and those who have much to hope and nothing to lose, will always be dangerous.” Edmund Burke (1777)

  3. Such a perspicacious fellow, that guy Burke who wanted to save the monarchists from themselves. Too bad it didn’t interest him that “the masses” have a voice as well, that their grievances were real, and that they have just as much right to feel aggrieved by decades of personally experienced exploitation as his beloved superior men did (who were fewer).

  4. @foppe, “….because are enjoying destroying the welfare state too much….”

    Oh, c’mon :-))

    They’re the biggest Welfare Queens going! Who else got trillions, NO QUESTIONS ASKED as was demanded by HankyPanky Paulson on TV?

  5. So…the American people, having been thoroughly conned, support a deficit reduction scheme that will create vast misery, and the Democrats are to go along. When the public suddenly notices that they are worse off—polities can have Wile E Coyote moments, too—, the Republicans will blame Democratic spending, just like they do right now, and call for a new round of cuts. So far as I can see, US conservatives will only be happy when the economic and military policies of 1890 have been restored.

    Croak!

  6. Let’s get this deficit debate straight: Federal “debt” does not exist. Show me a single indebted family who can (legally) mint the money to repay any deficit. It’s not debt, it’s the monster in the closet, trundled out when the elites need to scare an already terrified population even more, and cut social safety nets and state revenue sharing.

    The dismantling and privatizing of the public sector proceeds apace, and as Michael Hudson observes, the elites believe they can turn the ports and parks into toll booths for the rentiers.

    And for all y’all whose heads are exploding because “printing” money debases the currency: The first-ever audit of the U.S. central bank (“The Fed”) disclosed that, in the wake of Lehman’s collapse, it issued $16 – $29 trillion to cure the financial markets. That was five years ago. Where’s the inflation? We have *de*flation now, and bond yields are at record lows.

    The big question: if we can give the guys who crashed the economy multi-trillions without the slightest hesitation, what’s holding up fully funding the social safety net, state revenue sharing, and a new WPA? Could the real agenda of even Mr. Hopey-Changey be privatizing, toll-booth-izing the economy? Looks like it to me.

    The Chartalists, or Modern Monetary Theorists (economists) ‘splain it all. See Steve Keen, Michael Hudson, Stephanie Kelton, Bill Mitchell, etc.

  7. The long-term deficit “problem” solves itself when we tax more during boom times, and less during downturns. It isn’t rocket science, it is simple Keynes. We just have to have the will to spend what it takes now to restore employment, and tax what it takes to solve inflation when and if that ever becomes a problem.

    All this emotional handwringing is just so much class warfare, beating down public services and goods for the sake of high-end tax cuts.

    Incidentally, by MMT, issuing federal debt at all is quite unnecessary other than for central bank needs. It neither “funds” federal spending nor moderates inflation, but rather just pays an annuity to the rich. Eliminating it would be an experiment well-worth carrying out.

  8. The US can reduce its deficit fairly easily because our income taxes are far too low. From 1945 to 1980 income taxes averaged near 12% of GDP. Reagan reduced marginal tax rates so much that they fell close to 9%. Clinton increase them back to 12%; and Bush/Obama reduced them again to 9 %(and below). However, on budget expenses have remained 12%(+/-1%)) of normalized GDP throughout. The deficit in income taxes has been financed by borrowing, largely from the Social Security trust fund. But, not only can we no longer continue to borrow from the trust funds, we have to start paying money back as beneficiaries start relying on the trust funds. In the short term, we have to raise income taxes to 12%, simply to cover on budget expenses. In the long term, income taxes must rise above 12% in order to pay back the trust funds.

  9. When the people and corporations are spending less and saving more (as is now the case), the government should spend more — even if it means deficit spending. When the people are saving less but spending more (i.e. after recovery) the government should save and pay off deficits.

    The question isn’t *if* the deficit should be reduced but rather *when* it should be reduced. The question isn’t *if* austerity is good, but rather *when* austerity is good.

  10. As BMZ pointed out the SSI fund has been in effect, corrupted, by using the surplus to help politicians get elected and promising to pay it back in the future with more taxes. Now with the help of Obama the solvent SSI fund will run in the red because of the payroll tax holiday. I think it is clear that that the debate keeps shifting to a lower and lower tax rate for the rich, capital gains, etc. Propaganda is very effective when the public schools are destroyed and the public universities strangled while the investor owned quickie colleges make billions off of the federal student loan program.

  11. You will find Michael Hiltzik’s column in the Sunday Los Angeles Times well worth reading. Here is the email I sent him.
    “While we don’t always agree, you hit it out of the park with this one!! Why anyone would pay the slightest attention to anything Alan Simpson says is a mystery to me. I am reminded of what James Fallows once said about Ross Perot. ‘There is a wire that is supposed to go from A to B but doesn’t get there’.”

  12. A thank-you to all the letter writers today (so far). Some very thoughtful comments here.

  13. As long as those people have the floor to themselves, nothing is going to change.<<<

    Boy Mr. Kwak, you have been a bit cynical lately. Why are you doing all this then? The truth is that it takes time to reverse a philosophy that is entrenched, but it took the supply siders decades to get to this point. It will take time to wake people up but hang in there, it is happening.

  14. Anyhow, thanks for the work on the book. Maybe it will change a few more minds.

  15. Thanks for your valiant efforts. I fear that they will be for naught. I for one will be moving to Canada if O loses.

    Mon-tree all here I come.

  16. Moses Herzog

    I enjoyed “White House Burning” very much (I had started with low expectations because of the ostentatious title, which I had misperceived as an indication of the authors going into “let’s sell garbage with our name recognition” mode, a la Dubner and Levitt). The book is one of the better books you could read on the national deficit and also the national debt. Others have tried to address this issue before, and some very well (one of the best books I ever read was when I was in high school, and I’m ashamed to say I can’t even remember the author’s name now, but I want to say it was written in the early 90’s and I think the man’s last name was “Friedman” (not Milton). Had a red cover.

    I think the deficit wouldn’t have ballooned as fast if Walter Mondale had won in ’84, and I also think there is a decent chance that Paul Tsongas would have even lessened the national debt had he been able to compete with the very charismatic–to–females Bill Clinton. Who would have thought pasty white thighs could outdo middle aged reason in a Presidential vote?? Don’t ask me, ask your nearest resident female on that one.

    I think it is worthy to note, when Alice Rivlin was recruited (or maybe forcefully drafted) to come up with a budget plan, she had to haggle and cajole Republicans such as Pete Domenici to meet her in the middle so that is was a “bipartisan” plan which would actually have a chance of passing if it made it to a Congressional floor vote. For whatever it’s worth to the general baselinescenario reader and Professor Kwak, Rivlin’s own devised plan (if she could write a tax plan to her own personal inclination) would probably come closer to James Kwak’s deficit prescription than Kwak imagines. See here:

  17. Moses Herzog

    Some more Alice Rivlin here, where she talks about the home mortgage deduction. The home mortgage deduction encourages more debt in the private economy, and also mostly rewards the wealthy, who of course will purchase grander homes.

  18. Wish everybody would read Bill Still’s “No More National Debt.”

  19. James you are right the Democrats share blame. They are part of this distorted money politics system which gives voice to wealth and they scramble to survive. You and Simon have a big and powerful voice and many listen but the VSP will not listen because it is not about the country it is about their net worth. Reminds me of the old Upton Sinclair line.

    ‘It is difficult to get a man to understand something, when his salary depends on his not understanding it.’

    Substitute “net worth” for salary and you are on your way.

  20. markets.aurelius

    From today’s politico.com:

    THE BIG IDEA: MEET THE JOBLESS GENERATION – FT’s Shannon Bond: “Andrew Grzywacz has a university degree, a job that pays $8.50 an hour, a stack of résumés ready to be mailed – and more than $30,000 in student debt … Even so, Mr Grzywacz is luckier than many his age. The share of American 18- to 24-year-olds who were employed fell to 54 per cent last year, the lowest since the labour department began tracking data in 1948, according to the Pew Research Center. The share who are in college has risen, but the researchers say this only partly explains the drop. The jobless rate for Americans age 16 to 24 is above 16 per cent, more than twice the national rate” http://on.ft.com/NFbEwy

    What’s the government’s budget going to look like after 10 years of this? What do you think the next presidential debate’s going to focus on? The budget deficit? Probably not. Most likely, the collapse in asset values — real and financial. The U.S. will fall into a euro-type existence of increased gray-market contracting in cash or barter, and heroic efforts to avoid earning reportable income.

    Everything you thought you knew about America, the American dream, and the promise of the future gets re-written then.

  21. Moses Herzog

    I finally found the name of the book I mentioned above. Even though the book is 24 years old, it is still one of the best books you can read which explains how our nations’ debt got where it is today. Yes the real reason for our nation’s debt problems, written 20 years before President Obama took office. “Day of Reckoning: The Consequences of American Economic Policy” by Benjamin M. Friedman

    Also, and old book written in 1997 but explains a large part of America’s current debt situation: “The Age of Diminished Expectations” by Paul Krugman.

    Although the topic may be considered dry by some, if you are a layman to America’s deficit crisis and want a couple cheap books which explain the root cause</b. of our current mess, you couldn't have a better starting point than these two books.

  22. Moses Herzog

    oops, screwed the pooch on that html, didn’t I???

  23. Moses:
    if the home mortgage deduction encourages more debt, what do you think is the effect of the employer exclusion for health insurance, which is much larger than the home interest deduction?
    What effect on premiums will there be when subsidies are provided to the for-profit health insurers, so they can earn their 15-20% profit, a profit that never would have materialized except for the taxes for the general welfare going to the private health insurers?
    Don Levit

  24. Moses Herzog

    Mr. Levit, you’re not a real estate realtor are you?? (ribbing you)

    I wouldn’t argue with your concern Mr. Levit or the need to address that possible bogus rationalization for private insurers to jack-up prices. I think both the home mortgage deduction and employer exclusion for health insurance would introduce some systemic problems.

    Have you ever heard of something called transparency Mr. Levit??? Basically ALL private insurers are super KGB secretive about their costs. Sure, private insurers whine about costs in a GENERAL way, to elicit sympathy from Rupert Murdoch’s FOX news anchors (who usually start crying for private insurers as if remembering their dear departed mother). But private insurers rarely segment or compartmentalize the costs so consumers can see them. And for good reason. A good deal of health insurance premiums “costs” are exorbitant administrative salaries and CEOs bilking companies.

    One way to address that is requiring insurers to breakdown their costs on an internet website in each of the 50 states they operate in. The insurance companies already tabulate these costs, so submitting them to a state government website in each of the 50 states for consumers to read would be easy for them. Then any consumer, from the sophisticated state capitol all the way to the smallest “podunk” town with a broom closet Postal Office and 2 farmers on the volunteer fire dept, could pop online and see how insurers justify costs. If voters in states would petition (or even vote for a non-Republican insurance commissioner who might push insurers to breakdown individual costs for consumers to see) their state insurance commissioner to require private insurers to list individual/compartmentalized costs on a website, private insurers would have to justify and be held more accountable for rate increases.

    This blog addressed the issue:
    http://grahambrokethemold.blogspot.com/2010/03/if-insurance-companies-raise-rates.html

    One might ask what one individual could do in work in one year that equates to $102 million in pay??? http://www.forbes.com/lists/2011/12/ceo-compensation-11_Stephen-J-Hemsley_NBHE.html

    http://www.huffingtonpost.com/2010/03/20/cigna-gives-1109-million_n_506974.html

    http://capsules.kaiserhealthnews.org/index.php/2012/07/study-high-ceo-pay-doesnt-boost-hospital-quality/

    http://www.ibj.com/compensation-dips-slightly-for-wellpoint-brass/PARAMS/article/33623

  25. ‘Also, and old book written in 1997 but explains a large part of America’s current debt situation: “The Age of Diminished Expectations” by Paul Krugman.’

    Ha! I’ll bet Krugman is hoping everyone forgot about that book. Two years after it came out the unemployment rate was 4%.

    Nor did it warn about the unhealthy ‘affordable housing’ mania then currently underway and eventually to cause the housing bubble/bust.

  26. markets.aurelius

    Hello, Paddy. You forgot to mention the massive fraud already apparent in 2004 — way before the congressional push for affordable housing. Have a look:

    http://www.seattlepi.com/national/article/FBI-saw-mortgage-fraud-early-1298591.php

    Here’s some of the testimony from the FBI in 2004!!

    “Market Impact:

    “The potential impact of mortgage fraud on financial institutions and the stock market is clear. If fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed to become unrestrained, it will ultimately place financial institutions at risk and have adverse effects on the stock market. Investors may lose faith and require higher returns from mortgage backed securities. This may result in higher interest rates and fees paid by borrowers and limit the amount of investment funds available for mortgage loans.

    “Often times, mortgage loans are sold in secondary markets or are used by financial institutions as collateral for other investments. Repurchase agreements have been utilized by investors for protection against mortgage fraud. When loans sold in the secondary market default and have fraudulent or material misrepresentation, loans are repurchased by the lending financial institution based on a ‘repurchase agreement.’ As a result, these loans become a non performing asset. In extreme fraud cases, the mortgage backed security is worthless. Mortgage fraud losses adversely affect loan loss reserves, profits, liquidity levels and capitalization ratios, ultimately affecting the soundness of the financial institution.”

    Talk about a window on the future, huh! Four years+ before the great market collapse occasioned by the most massive mortgage fraud at every level of the process ever seen in the history of the world.

    Pres. Bush did nothing about it … If memory serves, they shut down (or seriously defunded) this FBI special task force after this testimony was delivered to Congress. And, to think, your buddy Pres. Obama and his AG, Mr. Holder, could say with a straight face that what the banks were doing may have been unethical or amoral but not illegal … is still the best laugh track from the entire 4 years of Obama’s presidency.

  27. markets.aurelius

    In case you’re interested, it’s page 4 of this doc:

    http://financialservices.house.gov/media/pdf/100704cs.pdf

  28. markets.aurelius

    Great reading here, too: http://fcic.law.stanford.edu/

    And, for some light-hearted rememberence:

  29. Who do you people think your kidding?
    Who inherited a surplus?
    Who said “Ronald Reagan proved deficits dont matter”?
    Who voted for them twice?
    Who fired Paul O’Neill after he warned of huge deficits from the taxcuts ?
    Who took taxcuts diring wartime for the first time in human history?
    Who passed medicare part D,unfunded and more expensive than Obama=Romneycare?

    Now you care about deficits.Right got it.

  30. @frog in a pot – Perfect! You get the “best bottom line” award!

    “….Who took taxcuts diring wartime for the first time in human history?…”

    Have you gotten wind of what the next big thing is with “tax reform”…? They’re INSANE….