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A New “Progressive” Deficit Reduction Plan

December 14th, 2010 · No Comments

Even though I deny that there is a deficit/debt/debt-to-GDP ratio problem, I thought I’d get in on the fun everyone is having this month and offer my own deficit reduction plan. It prescribes 1) Keeping average interest rates at 0.0226; 2) finding a way to increase the growth in nominal GDP from an average annual change ratio of 1.044 (CBO’s assumption about growth) to a more historically (since 1940) typical average annual change ratio of 1.072.; and 3) putting a stop to increasing health care costs by passing Medicare for All immediately. The first two changes would result in deficit reductions in CBO-based projections of $8.3 Trillion from 2011 to 2020. The absolute value of the national debt increases from $9.2 Trillion in 2010 to $10.7 Trillion in 2020, and the debt-to-GDP ratio declines from 69% in 2010 to 37% in 2020.

The third change will flatten the steep projected increase in health care costs and bring that increase down to the rate of inflation. This result will come from the fact that the provider industry will have only one customer, the Federal Government to negotiate cost increases with. If Congress is really interested in holding down the deficit, it can do so by mandating that provider costs cannot increase at a rate greater than the annual rate of inflation.

How can we ensure that the economy will grow at a rate more in keeping with the historical average of 1.072 nominal GDP increase annually? The first thing we need to do is end the “recession,” as fast as we can, where “recession” means less than a full employment economy, and “full employment” means a U6 unemployment rate of 3%. Here are the measures needed to do that:

— Increase the minimum wage to $10.00 per hour;

— Decrease the standard work week to 35 hours;

— Provide a one-time $500.00 per person grant to each State Government for the purpose of maintaining local and State employment;

— Implement a payroll tax holiday for employers and employees until full employment is reached with the Government making payroll tax payments in lieu of employers and employees;

— Implement a Federal Job Guarantee (FJG) program with a $10.00 per hour wage and standard fringe benefits, including Medicare coverage within six months to guarantee full employment into the future. FJG jobs should focus on public needs like infrastructure re-building, re-inventing the energy foundations of economy, environmental protection etc.

These measures would create full employment within 6 months, would increase the deficit to roughly 12% of GDP in 2011, but in 2012 the automatic stabilizers and the end of the payroll tax holiday would raise tax revenues sufficiently to end large deficits entirely, and leave us with the possibility of demand-pull inflation. Inflation may not happen because of demand leakages to imports, and also because the motivation of Americans to save and repair their balance sheets is very high right now. But, if this occurs, marginal tax rates for the wealthy and estate tax rates should immediately be substantially increased to pre-Reagan levels to begin to restore a wealth distribution that is healthier for American Democracy, and also to cool the overheated economy. Heavy tax increases may be necessary to accomplish this because the low multipliers associated with consumption activity of the wealthy mean that their taxes must grow proportionately more to remove the necessary aggregate demand from the economic system to contain possible inflation.

An objection that will be raised to this program is a claim that the Government doesn’t control the interest rates it pays on bonds, and that the rates are controlled by the bond markets. But that happens by our choice. If the Congress would let the Government deficit spend without issuing debt instruments dollar-for-dollar (something not required by the constitution), the Treasury and the Fed could target whatever interest rate they wanted for Treasury Bonds. Japan has already shown that this is the case and has only a 0.0025 average interest rate on its debt.

In addition, one can argue that all debt issuance on Federal deficit spending should stop because it only 1) keeps interest rates materially above zero; provides “welfare” for the rich and foreign Governments; and also keeps the national debt issue alive when it can easily be laid to rest (since if we don’t issue anymore debt, all of our current debts would be paid off in a few years as hey come due). If we did this it would save roughly $11.8 Trillion in interest payments between now and 2025 relative to CBO-based projections.

Other objections to my plan will focus around items 2) and 3). Some will claim that it’s “socialist” because of the level of Government activity involved. But, taking up the measures designed to restore growth, I think it’s pretty clear that all measures except for the payroll tax holiday and the Federal Job Guarantee have precedents in similar measures enacted by the New Deal or previous Democratic Administrations. Also, no one can possibly think that a payroll TAX CUT is “socialist.”

And as for the FJG program, FJG jobs are, by their nature, temporary, but set the minimum wage at $10.00 per hour and establish Medicare as a health care standard for everyone. As the private sector recovers, the FJG job rolls will decrease, as will Government spending on it. The FJG will expand and contract with the fortunes of the private sector. It’s size will be driven by private sector spending or lack of it, not by the Government. It’s a pure safety net program, a buffer stock that maintains the employability of workers who have lost their jobs so that their long-term viability for private jobs is maintained. What’s “socialist” about that?

Of course, some will claim that my Medicare for All proposal is “socialized medicine.” But this kind of claim is an old and discredited story. No one who has Medicare now thinks that it’s socialist. How can it be when all the Doctors, hospitals, and pharmaceutical companies we deal with are private and most of them are for-profit institutions. We can see with our own eyes and from our own “socialized medicine.”

The most it is is socialized insurance, since the Government becomes the sole insurer for all necessary health services. Even if Medicare is socialized insurance however, in considering it we have to be practical. The private insurance companies have not done the job for Americans. The high cost of insurance today in the United States makes that apparent. The millions of bankruptcies and foreclosures resulting from medical bills also make it apparent. The more than 50,000 fatalities per year Americans experience due to lack of insurance define the bottom line of failure of the private insurance system. That system is a killing field. We need to plow it under!

Americans need a system that will work for them. The private insurance system doesn’t. The recent health care reform doesn’t affect the health care cost projections enough to remove the long-term deficit problem caused by increasing health care costs. We need to end the failure of the private insurance market in giving us what we need by ending that market, and putting the companies out of our misery. The sooner we do that, the sooner our long-term deficit problem, if you believe there is one, will also disappear.

Finally, people looking at this “deficit reduction” plan may say that this isn’t a deficit reduction plan, but an economic stimulus plan which assumes that a return to full employment will get rid of deficits. To some extent, that’s true. I believe that the deficit problem is really not a problem because Government solvency isn’t a problem for the United States, so I focus largely on creating full employment.

However, for those who continue to think that there is a long-term deficit problem, my proposals on containing interest costs and Federal medical costs will result in reducing nominal Federal spending by a greater amount than any of of the other “deficit reduction” plans I’ve seen these past few weeks. So, if you still believe that deficit/debt reduction is a major US problem, you ought to be all for this plan because it will really do the job.

(Cross-posted at FireDogLake and Fiscal Sustainability).

Tags: Politics