A few days ago I began a critique of the Catfood Commission Co-Chair Proposals draft, by focusing on a single slide of their presentation stating “our guiding principles and values.” There was enough objectionable material on that slide to justify a post. But there’s much more worth commenting on in the succeeding slides on the same subject. Slide 2 says:
2. The Problem Is Real –the Solution Is Painful –There’s No Easy Way Out –Everything Must Be On the Table –and Washington Must Lead
- We must stabilize then reduce the national debt, or we could spend $1 trillion a year in interest alone by 2020.
- A sensible, real plan requires shared sacrifice –and Washington should lead the way and tighten its belt.
There are many problems in America. Perhaps the biggest is the extent of economic inequality which has now led to extreme political inequality that had developed over the past 4 decades. This problem now threatens the existence of our democracy and open society. The solution to it also will be painful if we want to save democracy; but the ones who should and must bear the pain are people who have benefited over the past four decades, so that a greater measure of equality and with it equality of opportunity can be restored. That this should happen is only simple justice, and it is time in this country for justice.
The Co-chairs of the Commission are telling us that this threat to democracy is not the primary problem we face, but that, instead, the primary problem is Government insolvency arising from excessive, irresponsible, and unsustainable public spending that has resulted in unsustainable deficits, debts, and accelerating debt-to-GDP ratios. In my last post, and many others I’ve questioned whether this problem is real. Co-chairs Bowles and Simpson, and the President who appointed them and their Commission, as well as the Peter G. Peterson Foundation which has been supporting much of its staff, tell many horror stories about what will happen if we don’t constrain Government spending, lower deficits, and reduce the level of the debt-to-GDP ratio over time.
However, these “wise men” have failed to explain how a Government that owes no debt in a currency not its own, that has an unlimited constitutional authority to create money, and that has a floating exchange rate, and a non-convertible currency can ever have solvency problems. The deficit hawks claim that when the debt-to-GDP ratio reaches a certain level which they do not and apparently can’t specify in any evidence-based way, we will no longer be able to sell Federal debt instruments at reasonable interest rates, so that our interest costs will become unsustainable, and we will become insolvent, because we won’t be able to ‘fund” our deficits with further debt.
But this argument is, I’m afraid, itself unsustainable, since 1) it doesn’t take into account that no matter how high interest costs rise, the US can always just pay them by marking up accounts at the Federal Reserve; 2) the Government sector, by which I mean the Congress, the Executive Branch, and the Federal Reserve, can control the interest rates paid by the Federal Government, by targeting the interest rate levels the Government wants to pay, and by managing the supply of reserves made available to member banks so that short-term rates are driven as low as the Government desires; and 3) by the Government deciding to cease issuing debt entirely.
So, since the argument about unsustainability due to rising interest costs doesn’t work, where is the problem with the US continuing deficit spending as necessary to do the things we need to do? Either we can go ahead and let the debt grow and just pay the interest, or we can just regulate interest costs, or put a stop to them and the debt entirely, if the Government chooses to do so.
So, again where is the solvency problem? Unless the Co-Chairs, the Administration, and all the other deficit hawks can show where solvency risks come into the picture, sensible people must conclude that the Catfood Commission is addressing a non-existent problem, with a “solution” that will be very damaging for perhaps 95% of our population.
Even if readers of this post aren’t prepared to concede that solvency is never a problem or a risk, it’s easy to see they’re NOT following their own statement of principles by putting every good spending cut alternative “on the table.” Right now, the Government issues debt because the Congress requires that it do so; a hangover from gold standard days before 1971. If the Commission were to recommend it and Congress were to drop this requirement, the Government would be free to deficit spend without incurring debt. Eventually, all of the national debt would be paid for as it came due, with newly created money, and, of course, there would be no interest costs at all.
In these earlier posts, here, and here , I pointed out that if the Government managed interest rates on Treasury Securities to maintain a low target level, it could save $11.8 Trillion relative to CBO baseline projections, supplemented by AmericaSpeaks, between now and 2025. I also pointed out that $11.8 Trillion in spending reductions over this period dwarfs any possible savings we might get from cutting Social Security, or any other cut the deficit hawks propose. In fact, the Co-Chair’s proposal calls for nearly $4 Trillion in cuts between now and 2020. But if interest costs were cut, that alone would save $5.6 Trillion over this period.
So, the point is that even if one believed that the Government might have a solvency problem and that we ought to engage in deficit cutting over the long term, it’s perfectly clear that we have a choice between entitlement cuts and interest cost cuts. So, I say to Messrs Bowles and Simpson, and all the other deficit hawks as well: Whose side are you on — the side of the American people who need their social safety net programs to remain in place for themselves, their children, and their grandchildren, or the side of the wealthy, and the foreign nations who want us to continue to pay them interest?
I don’t think I can emphasize this last point too much, the Commission talks about “Guiding Principles and Values.” Well, what kinds of values and principles does one have to have to recommend cutting entitlements for most Americans, instead of what amounts to cutting welfare payments for wealthy nations and the rich? And are these the kinds of principles and values we want to endorse as a nation?
I don’t think so. I think we need to strengthen our social safety net because 1) there is really no solvency problem, and 2) even if one won’t accept that conclusion, it’s still true that the biggest expense blowing a hole in CBO’s projections, even bigger than health care costs and far bigger than Social Security costs, is interest on the national debt. Why isn’t that “on the table” in the Co-Chair “everything is on the table” proposals? Is it because it would involve too much sacrifice from people like Bowles and Simpson and their friends, associates, and clients.
Bowles and Simpson go on to say:
3. It Is Cruelly Wrong to Make Promises We Can’t Keep
- Our country has tough choices to make. Without regard to party, we need to be willing to tell Americans the truth.
Of course, none of us would disagree with this last statement, but where we are likely to disagree is on the specific promises Bowles and Simpson claim “we” can’t keep. Since our Government has no solvency problems, I think it can keep all its entitlement promises and even strengthen the entitlement safety net without risk of insolvency. I think it also keep all sorts of other explicit and implicit promises that Congressional and presidential candidates make every time there is a Federal election. Evidently, however, Bowles and Simpson and the new austerians think that very few of those promises can be kept.
Also, there are tough choices to make involving telling Americans the truth. These choices are particularly tough for Bowles, Simpson, and many of the other very, very wealthy people who “serve” on the Commission. Specifically, these choices include:
— Deciding to begin to pay one’s fair share of taxes as citizens of the United States, something the top 5 – 10 % of wealth holders in the United States have not done for many years.
— Deciding to stop seeking short-term profits at any cost and start investing in the United States and its people as supposedly patriotic Americans ought to be doing.
— Deciding to support Government programs that guarantee federal Jobs to people as a last resort when the private sector has no demand for their services.
— Deciding to support Government programs that recognize the right for everyone to get health care when they need it, even if those programs involve removing the health insurance companies from the domain of funding basic health care services for people.
— Deciding to come clean with the American people and tell them that the single biggest step that can be taken to cut deficits is to stop issuing debt instruments and paying interest to “fund” deficit spending, because that would save $5.6 Trillion by itself between now and 2020. And finally:
— Deciding to come clean with the American people about the fact that the US Government is not like their Household when it comes to fiscal issues. Specifically, it needs to come clean about the fact that the Government has no solvency risk, because unlike them, it doesn’t use scarce money that has been created by someone else; but spends by creating money when it marks up private sector accounts.
It needs also to explain to them that since there is no solvency problem, there is also is no debt, deficit, or debt-to-GDP ratio problem, because the Federal Government can spend as much as it needs to help solve America’s problems, and that includes paying the principal and interest on all the debts it has previously incurred, or will choose to incur in the future. In view of this, it should also say, even though this is the hardest truth of all to tell the American people, that the charge of the Commission was based on a misunderstanding by the President and his advisers about the nature of Federal Government fiscal sustainability and fiscal responsibility.
(Cross-posted at FireDogLake and Correntewire).