Last weekend that so-called epitome of liberal media bias called The Washington Post continued its on-going war on economic recovery and the American people with two salvos on the “crisis” in Government finances created by our “unsustainable” deficits, written by Fred Hiatt and Robert Samuelson. Hiatt and Samuelson are not the only deficit warriors in the WP army. Others of note include David Broder, Dana Milbank, Steven Pearlstein, and Lori Montgomery. Together, and along with the absence of any writers who write about deficits from a positive point of view, the WaPo reflects a determined Hooverite position on deficits, advocating that the Administration now “pivot” toward deficit reduction, even though their writing recognizes that such a pivot can only come at the cost of a delayed or a denied economic recovery, and even at the cost of a renewed plunge into deeper recession or even depression.
This position is not liberal or “progressive.” Some may call it neo-liberal. I’d prefer to call it Hooverite, because it is a renewed application of the economic philosophy of Herbert Hoover to the 21st century American economy. But, in any case, whatever the label used to characterize it, any Newspaper or other publication taking such a position cannot be characterized as liberal, or progressive, or “left.” But in our modern context must, be seen as “right,” corporatist, “neo-liberal” and globalist, because it demonstrates that it cares nothing for working people and their well-being, but only cares about defending the interests of the already well-off, the financial institutions, and the predatory economic globalists. Let’s take a look at the latest efforts of Hiatt and Samuelson to frighten us over the deficit, beginning with Hiatt’s in this blog post, and then following with Samuelson in my next one.
Fred Hiatt wants President Obama to pivot from health care reform and perhaps other concerns about the economy to do something serious about “deficit control,” apparently even if it means that will hurt economic recovery and leave us with high unemployment rates. He says:
”. . . . According to a Congressional Budget Office analysis, Obama’s budget plan has the government spending one-quarter of the national economy (25.2 percent of gross domestic product) 10 years from now, while collecting revenue that’s less than one-fifth (19.6 percent).”
It’s a popular game around Washington, DC to rely on CBO analyses and projections as if they are facts. However, we know that CBO Government revenue projections and to some extent its projections of Government outlays, are both dependent on the state of the economy, which is not easily predictable. The more the economy recovers, the greater the revenue collected from taxation will be, and the lower Government outlays for safety net expenditures will be. But if CBO revenue and outlay projections are uncertain, that means that its deficit projections are also uncertain and very sensitive to CBO’s forecasts on the state of the economy. So, if CBO underestimates the extent of recovery over the next 10 years, it will underestimate revenues, and over-estimate safety net related outlays. That is, its errors in the projected deficits will come from both its revenue and outlay forecasts. In addition, insofar as its deficit projections based on revenues and operating outlays are over-estimated, its projected cumulative deficit will be over-estimated, and projected net interest costs on debt held by the public will also be higher than they should be.
There is plenty of evidence that CBO may be under-estimating the extent of recovery to be expected in the economy, and even that its future state is very dependent on the choices made by the Government in helping to create jobs. That evidence is historical, and disregards close analysis of the many questionable assumptions in the various models CBO uses to project economic performance. In my view, what the details of these models specify in terms of assumptions is far less important than the face validity of the projections resulting from the models. Specifically, CBO projects the change ratio in GDP between 2010 and 2020 at 1.55, which is slightly more than the change ratio for the ‘aught decade, ending in 2010, which is roughly 1.50. But the ‘aught decade was the slowest growth decade in history since the 1930s, and is unlikely to be repeated if the Federal Government does whatever is necessary to bring down unemployment and manage economic recovery. The GDP growth ratio during the ’90s was 1.69, and across each of the 6 decades from the 1940s through the 1990s, the mean value of the GDP growth ratio is 2.19.
If one uses 2.0 as the expected GDP ratio for the 2010 – 2020 decade, then, assuming that outlays remain the same including, net interest paid on the public debt, and also that the proportion of revenues to GDP remains the same, revenues go up, outlays go down as a percent of GDP, deficits decline over the period by 54%, and the cumulative deficit becomes $4.5 Trillion, $5.3 Trillion less than the CBO forecast of $9.8 trillion. (See Table One)
Of course, the assumption I just made that interest on the public debt will remain the same as in the CBO projection is very, very conservative, and probably far from what would occur under the 2.0 GDP growth scenario. For one thing, the substantially lower deficits over the 10 year period would alone save a substantial part of the projected interest costs. Also, however, CBO treats interest costs as though they must be determined by the market, and then projects its best estimates of what those rates would be. However, the interest costs of the Federal Government depend on the Government’s (including the Fed’s) own actions. The Government can spend without either taxing or borrowing, because it is the monopolist in a fiat money system. It does not have to issue Treasuries and have auctions to get cash. It can spend simply by marking up accounts in the private sector, and if it fails to issue and sell debt instruments or to tax to back that spending, the chief result will be a failure to pay interest it would otherwise have paid, and to clear reserve accounts in banks, thus driving down interests rates in the private sector. In fact, the more spending the Government does this way, the more it tends to drive real interest rates down to zero, as we’ve been seeing in Japan for many years now. So, the CBO projected interest rates on debt held by the public, which gradually increase from 2.3% in 2010 to 4.5% in 2020, are, in no way necessary, and are subject to Government manipulation. They are a policy variable, not a market determined fact. If the Government wants to, it can easily cut those interest rates in half or even more. If it decided to have them remain constant at 2.3%, then net interest on debt held by the public would be $2.6 Trillion, rather than $5.6 Trillion over the decade, and CBOs projection of the increase in the cumulative deficit, would be off by $8.3 Trillion. Since their projection now is at $9.8 Trillion, this leaves a cumulative deficit of about $1.4 Trillion over the next decade, or about 9.9% of the projected GDP increase assuming a 2.0 ratio, over the period. In addition, the debt to GDP ratio in 2020 in this scenario is projected at about 0.37, in contrast to CBO’s 0.90. The interest cost, also, would be about 0.8% of GDP, in contrast to CBO’s projection of 4.1% (See Table Two).
So far, my comments on Hiatt’s views have focused on showing that the CBO projections on which they’re based are highly questionable and very sensitive to differences in basic assumptions. All they really amount to is the view that if the Administration and Congress continue on their present course and do far too little to stimulate the economy and, in addition, don’t do anything to manage the interest rates the Government places on its debt instruments, then the result will be the historically low growth and high deficits described by their projections. However, Hiatt and the other deficit hawks mean to make this projected outcome a self-fulfilling prophecy by using their influence to try to get the Government to tax more and spend less; which they think is a recipe for deficit neutrality, but which in actual fact is most likely one for depressing economic activity and tax revenues further, and creating even higher deficits. In any event, this has so far been an internal critique of Hiatt’s views which doesn’t question his basic neo-liberal assumptions about debt and deficits, and the need to eventually move toward deficit reduction. The rest of this analysis however, will move past the details on which the CBO projections are based, and move to the question of whether deficits, in general, carry with them the dire consequences that flow so easily from Hiatt’s word processor. That is, from now on I’ll question the paradigm behind Hiatt’s views, and CBO’s projections and raison d’etre. Now, back again to Hiatt:
”Such a gap isn’t sustainable for any country. The United States would have to borrow so much money that in interest alone the government would be spending 4.1 percent of GDP — compared with 1.4 percent this year. Other programs — for defense, for the poor, for national parks, for everything — would be squeezed more and more. The United States would be increasingly at the mercy of China, Saudi Arabia and other lenders.”
You hear this kind of thing more and more from deficit hawks like Hiatt, but the trouble is they rarely ever tell you exactly what they mean by unsustainable. In this case, Hiatt seems to mean that the US would have to borrow so much money from the public including foreign powers, that increasingly, foreign lenders would be less willing to buy our debt instruments and so we would no longer have the money to spend on our programs. Perhaps, he even thinks that eventually the US would become insolvent and would have to default on its debt.
If this is what Hiatt means by unsustainability, however, he is reflecting a view of how the Federal Government spends money which hasn’t been viable since Richard Nixon took the United States off the Gold standard in 1971. Since the United States has a fiat monetary system, has no debt to anyone denominated in any other currency than USD, and since the Federal Government has the authority to credit non-Governmental accounts with US Dollars to an unlimited extent consistent with legislative constraints, it can never fail to make a debt or an interest payment, or to make any other expenditure it is obligated to make or wants to make, unless Congress or the Executive decide to impose constraints on the Government’s authority to spend. If the United States ever defaults or declares insolvency it will not be because it can’t spend USD. It will be because it chooses not to spend USD, because its leaders want to conform to some mistaken ideology about the necessity of raising money through taxes or borrowing before the Government can spend. What Hiatt doesn’t understand is that the Government spends money these days mostly by crediting accounts belonging to non-Governmental actors, and doesn’t need to have money in its accounts to perform this crediting. It has an operationally unlimited capability to spend by crediting accounts, limited only by what Congress has appropriated. It must tax in order to 1) make its currency a necessary thing for people to acquire, and 2) also to cool an overheated economy. It may want to borrow USD from others and not just issue credits, because it wants to maintain target interest rates by clearing excess reserves from Banks. But, it never needs to borrow from a functional economic point of view.
These considerations mean that even if CBO’s projections about deficits, increasing interests costs, and increasing National Debt were correct, rather than just a projection based on highly unreasonable and ideologically conservative assumptions, Hiatt would still be very wrong about the idea that these consequences would be unsustainable for the United States. In fact, they are not even worrisome. The United States would not be insolvent even at that projected level of debt. It would not be in danger of insolvency, because it can always spend what it needs to, to fulfill its obligations and to maintain and perform whatever programs it wants to. It can always pay whatever interest costs it decides to incur to maintain its target level of interest rates.
Nor would the United States be “at the mercy” of foreign countries such as Saudi Arabia or China for the capability to spend USD. If these nations don’t want to buy our debt instruments at the offered interest rates, and even if there are no takers at all at the interest rates we care to offer along with our debt instruments, the primary consequence of this is that our instruments will remain unsold, and we will have lower or no interest costs to pay. In fact, there is no necessity at all right now for us to issue debt instruments, since we have no reason to want to maintain interest rates at a level other than near zero.
After following his statement about the unsustainability of the CBO-projected debt increase with some talk about President Obama positioning himself to cut the deficit and explaining that it would take “something like 220 health-care bills of deficit reduction,” “to undo the $9.8 trillion that his budgets will add to the deficit during the next 10 years,” Hiatt says:
”What will it take? The government will have to spend less and tax more. The Bush tax cuts should be allowed to expire this year, as the law was written. The gasoline tax should be higher. Retirement ages need to be gradually pushed back. People who don’t need as much help shouldn’t receive full Medicare benefits. And so forth. There are no secrets here.”
And then he goes on to lament the lack of honesty on this subject by our politicians and ends with a quote from the President suggesting that “events might jump-start the politics, when lenders start to fret about the creditworthiness even of the United States.”
Again, Hiatt exhibits his fundamental misunderstanding of the nature of the Government’s monetary power and authority by claiming that the only way out of our “debt problems” is for the Government to cut spending and tax more because it will have run out of the ability to borrow. However, the Government need not do any of those things in order to continue to spend USD. Once again, the Government’s ability to spend money in the US’s fiat monetary system is not operationally limited by its tax revenues or its ability to borrow. So the “debt problem” Hiatt speaks of is a fiction, a fantasy he and other deficit hawks, including the President of the United States, concoct out of their mistaken notion that they can analogize how a Government that can issue fiat money must operate based on their experiences in families and other organizations that have no power and authority to spend fiat money. These other social institutions are not like the Government, precisely because it has such authority and they do not.
The real problem the United States has is that its leaders in all three branches of Government are either ignorant about economics, or otherwise have been trained in the neo-liberal paradigm that has been dominant in the United States since the 1980s. That paradigm focuses mostly on micro- rather than macroeconomics, and, in addition, its view of macroeconomics is absent of any treatment of the nature of fiat money systems, and the operationally unlimited capability of Governments to spend their own fiat money within the system they control. That’s the immediate problem that threatens the future of the United States, and that’s the problem we need to solve, before our deficit hawks persuade the Government to be even more foolish about its economic policies than we have seen so far. There are many indications that the Administration is considering a future in which it continues to nurse the financial system, bail out the insurance companies, create bailouts for other industries, and our trading partners, and more generally, nurture the neo-liberal elites here, and internationally, while it waits for the economy to solve the unemployment and under-employment problems with little or no assistance from the Government. It is a future that is dark for regular people who work each day at jobs that are not favored by the policies of this Administration and the international elites, it apparently has decided to serve. It is not a future that regular people ought to tolerate.