The Futility of Binding Future Congresses

Right now, current law says we don’t have a long-term deficit problem. On the books, everything adds up. The reason we expect enormous future deficits is because we expect Congress will not follow current law:


So why does anyone believe that future Congresses 20 years in the future will actually implement the unpopular tax increases and spending cuts from a “grand bargain” in 2011? Here’s James Kwak on why it is a mistake to use the ten-year baseline:

The big policy uncertainty that hangs over the ten-year baseline is the Bush and Obama tax cuts of 2001, 2003, and 2009, which were extended in December 2010 and now expire at the end of 2012. If we extend all of those tax cuts, we will add $612 billion to the 2021 deficit (on top of $137 billion for patching the AMT). That’s real money. To which my answer is: let them expire. Let all the tax cuts expire, and there is no ten-year deficit problem.

Instead, the Gang of Six plan proposes to cut taxes by $1.5 trillion (over ten years) relative to the CBO baseline — which means $1.5 trillion in unnecessary spending cuts.

The real problems come after the ten-year horizon, when Medicare spending accelerates due to an aging population and increasing health care costs. Those problems need to be solved sooner or later, and sooner is better than later, since every year of high health care cost inflation that goes by makes the problem worse. But the Gang of Six plan is the wrong way to solve those problems (although it is admittedly far better than the Ryan Plan, which only makes them worse). Does anyone really think that the middle class’s paltry 2001/2003 tax cuts will make up for a lower Social Security cost-of-living adjustment and a cap on federal health care spending?

The United States Cannot Be Insolvent

Chris Freind says the United States is “insolvent” and that this is “indisputable.”

I think he does not understand what “insolvent” means. Insolvent would mean we can’t pay our bills – that our economy is not large enough, is not producing enough wealth to pay our debts, and we are unable to collect the tax revenue.

Greece is insolvent, literally cannot hope to pay its bills, but the situation in the United States is not anything like that.

Our problem is that rightwing politicians are unwilling to pay our bills. Our problem is that we have an infantile political culture in which people like Chris Freind want to claim that we are overtaxed, when by any objective measure the opposite is true. In our recent political history, our representatives have simply chosen not to collect more revenue, even though it is perfectly possible to do so. See this from Bill McBride:

The following graph shows receipts by source as a percent of GDP since WWII.

Both income (blue) and corporate taxes (red) are near record lows. Combined income and corporate taxes could rise almost 50% (as a percent of GDP) and receipts would still only be at the median for the 50 years from 1946 through 1996.

Notice the sharp decline in off-budget social insurance in 2011 (Social Security insurance). That is mostly the reduction in the payroll taxes for this year.

Also hidden in the “other” category has been the sharp reduction in the estate tax.

The Insanity of the Deficit Debate

It is simply idiotic that we are even talking about reducing the deficit right now, when it is cheaper to borrow than to pay cash. Here’s Karl Smith:

What this highlights is that real rate of return on government 5 year government securities is now negative. You want to stop and absorb that because I think it’s a bigger deal than most people realize.

Suppose the government had two choices. It could either pay for infrastructure improvements as it went along out of tax revenue or it could borrow money build the infrastructure now and then repay the money with tax revenues.

Ordinarily the question would be, does the advantage of building quickly outweigh the cost of the interest.

However, right now the interest cost is negative. The government saves money by borrowing now rather than waiting and paying cash. Let me say again because I have noticed that this goes against so much intuition that its hard for many people to wrap around when I first say it.

All the people who are worried about non-existant crowding out need to take a second to process this. We’ve got trillions of dollars worth of infrastructure repairs to make. Presumably reasonable people can agree that these repairs will have to be made at some point. If the government spends on infrastructure when growth is strong, they really will crowd out private investment. It’s better to do it now, when borrowing costs are shockingly low and the spending won’t drive up interest rates. We should be trying to get as much building done as we can during this window, because waiting will make it more expensive for taxpayers and more costly to the private sector.

Obama’s Winning the Debt Ceiling Politics, But at What Cost?

Rich Wilkins nicely sums up the state of the politics on the debt ceiling fight:

“Let’s step up. Let’s do it,” the president said at a White House news conference between negotiating sessions with congressional leaders. “I’m prepared to take on significant heat from my party to get something done, and I expect the other side should be willing to do the same thing if they mean what they say.”

Let me translate that. I’m more of a man of principle than them, they’re just nuts. I’ll go past halfway, and give them what they want, for a little of what I want, but they won’t even take that, because they’re a bunch of children, incapable of running this government. Basically, that’s how it got reported today too. The President says he’s willing to make a deal, they aren’t. Now he’ll play chicken with them and begin to probably walk back the terms a little more to his favor as the days go by. Eventually they will either negotiate out a deal, or they will look insane. Oh, and by the way, he’s also making the top Republican in the nation, Speaker Boehner, look incapable of managing his own chamber. Insult to injury.

Rich thinks this shows Obama is a good negotiator, but I’m not so sure. The President may well win the media narrative, but at what cost? I think Economics of Contempt has an important point that Obama is trying to scare Congressional Democrats into accepting a deficit deal that’s 100% spending cuts in exchange for taking Social Security and Medicare off the table. Would that be a win? Absolutely not. Do base Democratic voters care about the deficit at all? I don’t see any evidence that they do. There’s no political gain for the President or the economy in a deficit deal. Maybe accepting a right wing plan will make Obama look like “the adult in the room” to the 7% of Americans who are truly swing voters, but that certainly won’t help his party win more seats in Congress next year.

The whole idea that there should be policy concessions in exchange for raising the debt ceiling is completely insane, but Obama directly enabled this by endorsing the idea of a grand bargain from the beginning. It didn’t have to be this way, and it still doesn’t.

From the outset, Obama should have been threatening to cut Social Security checks and Medicare/Medicaid payments first. Starting today, he can say that the August Social Security checks don’t go out unless the Republicans raise the debt ceiling. That is, after all, what Pat Toomey is proposing. Toomey’s nutty enough to defend the immediate benefit cuts, but the vast majority of the Republican Party will knuckle under within a few days.

There Are Lots of Progressive Ideas for Reducing the Deficit

I don’t usually disagree with Rich Wilkins, but I think this pushback on progressive opposition to a deficit sellout is off-base:

I think some of these fears are a little over-dramatic though. Remember when the President was “selling us up the river” with the last budget negotiations a few months back, and the deal ended up being way better for our side than for Speaker Boehner? I do. Now, apparently the “cost of living adjustment” the federal government pays is on the table, so they think Social Security is getting slashed (I call this more of an adjustment, even if it’s unwelcome). They want to call the other side nuts, as do I, but then they want to basically say the way we’ll balance the budget is to just slash the Pentagon and raise taxes on the rich. I think both of those are good ideas, but that’s not going to be the whole equation. While I understand that the other side is nuts, and will keep asking for more, this is a very important opportunity, and the President seems to be taking it.

To be fair, I’m not sure who exactly Rich is criticizing here.

If it’s Democratic lawmakers, I completely agree. They’ve failed to acknowledge the need to repeal all the Bush tax cuts, not just the high-end ones. They’ve also largely failed to name the real health care cost villains – hospitals, pharmaceutical companies, doctors, medical device manufacturers, and the rest of the actors in the delivery system. Insurance companies are a much easier political target, but they’re just not the source of the inflation.

If it’s the man-in-the-street progressive activist, I also agree to an extent. People who think we can balance the budget only by cutting Pentagon waste (including the wars) and soaking the rich are sadly mistaken. However, I think awareness of the fact that health care costs are the biggest driver of future deficits is pretty common among progressives. It isn’t the thing they’re most interested in, since it’s not usually discussed in the “US vs. Them” (Consumers vs. Providers) frame that it should be, but my sense is that more progressives understand this correctly than conservatives do.

If it’s institutional activists – think tanks, economists, commentators – I completely disagree. Progressive institutions have delivered in force with credible plans to reduce the deficit.  There’s no shortage of good ideas on the left on this issue. If we get a Tea Party plan with 100% spending cuts, it certainly won’t be because the left didn’t come with any serious proposals. It’ll be because of the vote-count math, the President’s horrible negotiating tactics, and the fact that Republicans won’t even vote for their own plan.

It’s a Revenue Problem

The conservative talking point “We have a spending problem, not a revenue problem” is meant to preempt this basic fact about the deficit, as a way to rule tax increases out of hand. But it’s a lie.

Charlie Dent Voted With "Business Interests" 100% Last Year

Via LVCI, the US Chamber of Commerce and The Greater Lehigh Valley Chamber of Commerce say Charlie Dent voted with non-descript “business interests” 100% of the time last year.

But is what’s good for “business interests” good for businesses?

What are businesses saying they need? Sales!

The numbers for taxes and regulation are both within their historical range. Those citing regulations has ticked up about 2% from where it was in 2006. Businesses don’t think it’s a skills mismatch problem, and they’re not seeing any crowding out.

So basically everything Charlie Dent says he believes about what’s wrong with the economy is completely wrong. He’s fighting problems that businesses aren’t having.

Dent thinks slashing government spending in the middle of the slump will grow the economy, despite the overwhelming evidence that it will make things much worse. Even the Morning Call’s usually-cautious economics columnist Dr. Sam Laposata says cutting spending is going to hurt job growth.

How can it be that “business interests” would cheer on a Congressman for inflicting great pain on their small business members? The political economy here seems strange indeed until you think about it as an issue of rentiers vs. debtors. The financial services industry dominates the Chamber of Commerce, so what you have here is the rentiers thanking Dent for bleeding out debtors, even though it’s preventing the labor market from improving.