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Myths of Peter Orszag

September 9th, 2010 · No Comments

Orszag’s maiden voyage at the New York Times entitled “One Nation, Two Deficits,” is full of myths, and that’s the polite way to say it. I’ll review these and comment on each of them one-by-one.

“The nation faces . . . . an unsustainable budget deficit over the medium and long term.”

This is an article of faith among deficit hawks and deficit doves too, but neither group has been able to explain what they mean by “unsustainable” budget deficits, or to explain why they are “unsustainable.” This statement applies to OMB, to CBO, to the Catfood Commission, to the Peter G. Peterson Foundation, to the International Monetary Foundation, and even to people like Paul Krugman who share the view that the United States has a medium and long-term deficit problem.

We can’t let them get away with this any longer. We need a clear definition of fiscal sustainability from them, and we also need to know what that definition implies about what levels of the deficit, the national debt, or the debt held by the public to GDP ratio, are, in their view, unsustainable. Until that is done the view that there are unsustainable budget deficits in any of the short, medium, or long-terms has to be considered a myth when it is applied to a nation like the United States, sovereign in its own fiat currency, able to create that currency by spending and marking up accounts at will, and owing no debts to anyone except debts denominated in the currency it has full authority to create to pay its obligations. In short, nations with monetary systems like ours have no solvency risk. So it is up to the deficit hawks, including Orszag to explain how a nation with no solvency risk can possibly have “a fiscally unsustainable deficit”, national debt, or public debt-to GDP ratio.

“. . . Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.”

Worth it? That really depends entirely on your point of view. In Orszag’s view, Government spending must be funded either through tax revenues or through borrowing. That’s another myth. I don’t hold it. I know it’s not necessary to end the tax breaks for the rich because we need the money for other things. The truth is that we don’t. We (the Treasury and the Fed) can always make more money.

However, we have another problem to consider. The problem of growing inequality in the distribution of wealth in America. We know that the incremental effect of that growing inequality over the past 35 years has been to undermine the political power of middle and working class Americans and to make Government much less responsive to the needs of the many. We need to start changing that now. Wealthier people have to pay their fair share, starting now. A first, but very small step is to let those tax cuts for the wealthy expire. Force the vote on extending the middle-class tax cuts before the election. If the Republicans oppose those tax cuts, then let them live with that on election day. We don’t need a deal on this one. What we need to to ram this down their throats.

“. . . over the medium term, the tax cuts are simply not affordable. Yet no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned.”

Again, the tax cuts are “affordable” if we choose to extend them. They are bad for American society and the political system, but they are affordable, in the sense that no issue of fiscal solvency is raised, and right now, no issue of inflation is raised either.

“ . . . since financial markets don’t seem at the moment to view the budget deficit as a problem — take a look at the remarkably low 10-year Treasury bond yield — there is little reason not to extend the tax cuts temporarily.”

It doesn’t matter what the financial markets think about the budget deficit either now or in the future. It is totally within the power of the Treasury/Fed to control the interest rates the Federal Government pays for its debt. It is even possible for the Federal Government to stop issuing debt and to phase out its interest payments altogether. It is a myth and a dangerous one that we need to be worried about the financial markets or the “confidence” they have in our financial management. Greece has to worry about that. Eurozone nations have to worry about that. Developing nations with debts denominated in USD or other foreign currencies have to worry about that. But nations like the US (Japan, Australia, Canada, UK, etc.) that are sovereign in their own currencies do not.

“. . . losing the confidence of the bond market could prove painful, since it is widely known that our fiscal trajectory is unsustainable and market sentiment may therefore shift quickly and unpredictably.”

Again the myths about the bond markets and fiscal sustainability. If this is true than why is Japan’s interest rate so low right now. With a public debt-to-GDP ratio approaching 200% Japan shouldn’t be able to get anyone to buy their bonds. But not only is there no problem, but Japan’s interest rates are very low. Why is that? Because its central bank follows policies that ensure it will pay very low interest on its debt. To understand how this is possible, you have to understand that any nation holding another nation’s currency, has a limited number of choices about what to do with its accumulated currency. It can buy products and services, of course. But, if it doesn’t want to do that, it can only sell that currency, keep it in a non-interest bearing account, or buy the securities of that nation whose currency it is holding. Often, the realistic choices for a currency holding nation, come down to the last two, and the most attractive of these alternatives is to buy the securities, since the gain from them beats letting the money sit around in your reserve account and making no profit at all..

“. . . Making all the tax cuts permanent would expand the deficit by more than $3 trillion over the next decade.”

The truth of this statement is wholly dependent on the accuracy of projections by OMB, CBO, and other such organizations, and therefore is also dependent on the assumptions they make. Their estimates are often way off even three years out, much less a decade out. I know, I know, they’re among the best we have, Orszag will say. But we have to recognize that our best is so bad that it is foolish to base policy decisions on it.

Apart from the notion that it is silly to take decade projections seriously, however, there’s also the matter that even if the deficit were expanded by $3 Trillion, it would present no solvency risk for the US, and the idea that it would is another myth.

“. . . we’re not going to solve our budget problem over the next decade unless revenue is part of the equation.”

Well, of course, that might be true if there were “a budget problem.” However, that too, is a myth, in the sense that Orszag’s expected budget deficits are “a problem.” I think, however, that there is a real budget problem. And it is that Government spending is not great enough to make up for the US trade deficit and the increasing private sector saving we are seeing in the Great Recession. Both of those detract from aggregate demand, and the only economic sector that can make up for that is the Government. Unfortunately, its worry about future deficits, debt-to-GDP ratios, and the national debt, have hamstrung it so that it has been unwilling to spend enough to create the aggregate demand needed to end the recession and create full employment. So, because of Orszag, and his fellow deficit hawks including the President, we have the incredible waste of almost 25 million people who want to work full-time either under- or unemployed. This waste of the lives of people is criminal. And it is directly traceable to the myths spread by Peter Orszag and his fellow deficit hawks.

“Let’s look at the facts. The projected deficit for 2015 is 4 percent to 5 percent of G.D.P., depending on whose assumptions you use. A sustainable level is more like 3 percent or lower. So we need deficit reduction of 1 percent to 2 percent of G.D.P., or about $200 billion to $400 billion a year by 2015. These figures are uncertain, but they’re the best we have (and they may well turn out to be too optimistic).”

Well, first of all, THESE ARE NOT FACTS. They are PROJECTIONS about the deficit, and such projections can vary widely, depending again, on the assumptions one makes. I’ve done a projection myself, for example, which projects a deficit of 1.1 percent of GDP in 2015, well within Orszag’s “sustainable” range. Of course, I’m sure that my projection is unreliable. However, whether it is more “uncertain” than OMB’s or CBO’s depends on what policies the US Government follows, and not on any structural aspects of the economy, or the Government, that we cannot change if we want to. So, 1) Orszag’s projection of a deficit of 4-5% of GDP in 2015 is not a fact, but an uncertain vision of the future, and 2) even if it were to happen why is a 4-5% percent deficit in 2015 more “unsustainable” than a deficit of 3 percent or lower? Again, what is the unfalsified theory of “fiscal sustainability” that allows Orszag to advance this myth?

“. . . The health carereform act included substantial savings in Medicare and Medicaid, so there aren’t further big reductions available there in our time frame.”

This one is a purely political myth. The health care reform legislation is likely to remain very unpopular in the next couple of years, and Orszag cannot tell whether or not a movement will emerge that will force the repeal of the whole thing by 2012, and the introduction of Medicare for All. That would have such a pronounced impact on the medical establishment and its practices, the insurance industry, the national economy, and the Federal budget that we cannot know what savings would be available by 2015. Orszag has no crystal ball that can tell him how the politics of this is going to go. All we can say is that the next few years are going to be volatile.

“The other half of the budget is mostly net interest (which is not negotiable unless we renege on our debt) . . . ”

Here is another statement that is a myth. We don’t have to “renege on our debt” to reduce our interest costs. The interest rates we pay are a policy variable, within our control. Right now, we choose to subject them to the markets. We can end that practice and choose to drive interest rates down to near zero, which, of course, would greatly reduce the interest costs projected by the likes of OMB and CBO. If we choose, we can even cease issuing debt on a dollar for dollar basis following deficit spending, and gradually retire our current debt. If we did that we would no longer have to be concerned about interest costs in the budget at all. In another post, I’ve shown that the budget can be reduced by $11.8 Trillion between now and 2025, if we really want to save that interest money.

On the other hand, our ability to reduce budget deficits by this amount is not something we have to do. If we continue our present practices, which essentially provide interest subsidies for foreign nations and wealthy Americans, there is no solvency issue involved. It will not cause us to run out of money. It will not break the budget. It will not introduce a risk of solvency.

“The beauty of extending the tax cuts for only two years is that canceling them doesn’t require an affirmative vote. It happens by default, so Congressional deadlock works in its favor. . . . “

This last one is really amazing. The same argument can be applied right now, except, of course, that we don’t want all the tax cuts to expire. Only the ones for wealthy taxpayers. If we listen to Orszag, we’ll have exactly the same problem in 2012. Why should it be any easier then to extend the tax cuts for the middle class and end them for the rich, then it is now? The political problems will be the same, except the Democrats are likely to have fewer members of the House and Senate, and be a minority in one or both Houses. Orszag makes no attempt even to explain why it should be easier then. It makes you think that his whole point here, is really to avoid the issue, and let Republicans and blue dog Democrats off the hook in the November elections.

“. . . . middle-class and lower-class families would be saddled with higher taxes. That’s a legitimate concern, but also a largely unavoidable one if we are to tackle the medium-term fiscal problem.”

Here, Orszag is talking about what would be desirable in the medium and long-term from his point of view, which is the deficit hawk point of view. But, of course, his claim that this is unavoidable assumes that we have a deficit problem. He wants us to crucify the middle class on a cross of high taxes because he believes in a myth about the meaning of fiscal sustainability. Again, we must no longer let the deficit hawks get away without being completely explicit about what fiscal sustainability is and why the idea implies that we have a medium and long-term deficit, debt, and/or debt-to-GDP ratio problem. Making them lay out their case that there is a problem is of paramount importance, because if there is problem, then Government spending must be constrained as they advocate. But if there is no solvency or sustainability problem, then Government can spend what it needs to meet all the many, many challenges our nation faces in re-building democracy. It’s of the utmost importance that we be able to do that. And we must not, any longer, accept half-baked policy myths rather than well-tested and unfalsified knowledge about whether there is really a need to constrain Government spending according to some deficit, debt, or debt-to-GDP ratio standards.

The deficit hawks, and even deficit doves, like Krugman, are claiming that there is such a need and that there are such standards. It’s time they put up or shut up about why that need exists and what those standards are.

“Finally, a key part of this deal is actually ending the tax cuts in 2013 — and that will surely require a presidential veto on any bills to extend them after that. (Failing to follow through would be particularly problematic if the high-income tax cuts are made permanent — at a 10-year cost of more than $700 billion.) Minimizing this risk requires as much upfront clarity and commitment as possible, including a strong and unambiguous veto threat from the president.”

So, this last statement reveals how ridiculous this suggestion is from a real world standpoint. Given the current political and economic situation, there is every chance that this is the best chance we will have for eliminating the outrageous tax cuts for the wealthy enacted by the Bush Administration for at least a few years. The Republicans are expected to make huge gains very soon. And, if they take over the House, the prospects are good that this President will be a one-term President, and that his successor may well have a Republican Congress. If that happens we will be saddled with these tax cuts for a long time to come, and while their budgetary cost is of no real concern, their corrosive effect on the values of fair play, justice, and at least a measure of equality will continue. And it is that last that we really cannot afford. The sense that there is at least a modicum of justice and fair play and a willingness to share burdens has to be returned to American Society. If it is not, our society will devolve to something very like Hobbes’s state of nature, and that won’t be a pretty sight in a land full of guns and angry people all chanting me, me, me, me . . . .

(Cross-posted at FireDogLake and Fiscal Sustainability).

Tags: Politics