Galbraith's Scathing Testimony to the Deficit Commission Sham

[chill_wind]

Rebooted. Just want to keep this as a current memory refresher of facts as we wait for the verdict due any time now. And for those who might have never read it.

There Is No Economic Justification for Deficit Reduction
by James K. Galbraith
Statement to the Commission on Deficit Reduction
by James K. Galbraith, Lloyd M. Bentsen, jr. Chair in Government/Business Relations, Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin, and Vice President, Americans for Democratic Action, June 30, 2010


Mr. Chairmen, members of the commission, thank you for inviting this statement.

I am a professional economist, but I have served in a political role, as Executive Director of the Joint Economic Committee of the United States Congress. I am offering this statement on behalf of Americans for Democratic Action, an organization co-founded in 1949 by (among others) Eleanor Roosevelt, John Kenneth Galbraith, Arthur M. Schlesinger, jr., and Ronald Reagan. Accordingly I would like to begin with a political comment.

1. Clouds over the Work of the Commission.

Your proceedings are clouded by illegitimacy. In this respect, there are four major issues.

First, most of your meetings are secret, apart from two open sessions before this one, which were plainly for show. There is no justification for secret meetings on deficit reduction. No secrets of any kind are involved. Nothing you say will affect financial markets. Congress long ago -- in 1975 -- reformed its procedures to hold far more sensitive and complicated meetings, notably legislative markups, in the broad light of day.

Secrecy breeds suspicion: first, that your discussions are at a level of discourse so low that you feel it would be embarrassing to disclose them. Second, that some members of the commission are proceeding from fixed, predetermined agendas. Third, that the purpose of the secrecy is to defer public discussion of cuts in Social Security and Medicare until after the 2010 elections. You could easily dispel these suspicions by publishing video transcripts of all of your meetings on the Internet, and by holding all future meetings in public. Please do so.

Second, there is a question of leadership. A bipartisan commission should approach its task in a judicious, open-minded and dispassionate way. For this, the attitude and temperament of the leadership are critical.

I first met Senator Simpson when we were both on Capitol Hill; at Harvard he became friends with my late parents. He is admirably frank in his views. But Senator Simpson has plainly shown that he lacks the temperament to do a fair and impartial job on this commission. This is very clear from the abusive response he made recently to Alex Lawson of Social Security Works, who was asking important questions about the substance of the commission's work, as well as calling attention to the illegitimate secrecy under which you are operating.

A general cannot speak of the President with contempt. Likewise the leader of a commission intended to sway the public cannot display contempt for the public. With due respect, Senator Simpson's conduct fails that test.

Third, most members of the Commission are political leaders, not economists. With all respect for Alice Rivlin, with just one economist on board you are denied access to the professional arguments surrounding this highly controversial issue. In general, it is impossible to have a fair discussion of any important question when the professional participants in that discussion have been picked, in advance, to represent a single point of view.

Conflicts of interest constitute the fourth major problem. The fact that the Commission has accepted support from Peter G. Peterson, a man who has for decades conducted a relentless campaign to cut Social Security and Medicare, raises the most serious questions. Quite apart from the merits of Mr. Peterson's arguments, this act must be condemned. A Commission serving public purpose cannot accept funds or other help from a private party with a strong interest in the outcome of that Commission's work. Your having done so is a disgrace.

In my view you also should not have accepted help from the Economic Policy Institute, even though EPI's positions on the merits are substantially closer to mine.

Let me now turn to the economic questions. A first economic question is, what caused the deficits and rising public debt? The answer comes in two parts: present deficits and projected future deficits.

2. Current Deficits and Rising Debt Were Caused by the Financial Crisis.

Overwhelmingly, the present deficits are caused by the financial crisis. The financial crisis, the fall in asset (especially housing) values, and withdrawal of bank lending to business and households has meant a sharp decline in economic activity, and therefore a sharp decrease in tax revenues and an increase in automatic payments for unemployment insurance and the like. According to a new IMF staff analysis, fully half of the large increase in budget deficits in major economies around the world is due to collapsing tax revenues, and a further large share to low (often negative) growth in relation to interest payments on existing debt. Less than ten percent is due to increased discretionary public expenditure, as in stimulus packages.

This point is important because it shows that the claim that deficits have resulted from "overspending" is false, both in the United States and abroad.

3. Future Deficit Projections Are Generally Based on Forecasts Which Begin by Assuming Full Recovery, But This Assumption Is Highly Unrealistic.

Unlike the present deficits, expected future deficits are not usually considered to be due to continued recession and high unemployment. To understand how the discussion of future deficits is being framed, it is necessary to grasp the work of the principal forecasting authority, the Congressional Budget Office. CBO's projections proceed in two steps. First, they wipe out the current deficits, over a very short time horizon, by assuming a full economic recovery. Second, they create an entirely new source of future deficits, essentially out of whole cloth. The critical near-term assumption in the CBO baseline concerns employment. CBO claims to expect a relatively rapid return, over five years, to high levels of employment, and the baseline incorporates a correspondingly high rate of real growth in the early recovery from the great crisis. If this were to happen, then tax revenues would recover, and ordinarily the projected deficits would disappear. This is what did happen under full employment in the late 1990s.

But under present financial conditions this scenario of a rapid return to high employment is highly unrealistic. It can only happen if the credit system finances economic growth, which implies a rising level of private (household and company) debt relative to GDP. And that clearly is not going to happen. On the contrary, de-leveraging in the private sector is sure to remain the rule for a long time, as mortgages and other debts default or are paid down, and as many households remain effectively insolvent due to their mortgage debt.

With high unemployment, high public deficits are inevitable. The only choice is between an active deficit, incurred by putting people to work or otherwise serving national needs -- such as providing a decent retirement and health care to the aged -- and a passive deficit, incurred because at high unemployment tax revenues necessarily fail to cover public spending. Cutting public spending or raising taxes, now or in the future, by any amount, cannot reduce a deficit due to high unemployment. The only fiscal effect is to convert an active deficit into a passive one -- with disastrous economic and social effects.

4. Having Cured the Deficits with an Unrealistic Forecast, CBO Recreates Them with Another, Very Different, But Equally Unrealistic Forecast.

In the CBO models, high future deficits and rising debt relative to GDP are expected. But the source is not a weak economy. It is a set of assumptions describing an economy after full recovery from the present crisis. In the CBO forecasts, big future deficits arise from a combination of (a) rapidly rising health care costs and (b) rising short-term interest rates, in the context of (c) a rapid return to high employment and (d) continued low overall inflation. This combination produces, mechanically, a very large net interest payout and a rapidly rising public debt in relation to a slowly rising nominal GDP.

Even if CBO were right about recovery, which it is not, this projection is internally inconsistent and wholly implausible. It isn't going to happen. Low overall inflation (at two percent) is inconsistent with the projected rise of short-term interest rates to nearly five percent. Why would the central bank carry out such a policy when no threat of inflation justifies it? But the assumed rise in interest rates drives the projected debt-to-GDP dynamic.

Similarly, the rise in projected interest payments is inconsistent with low nominal inflation. Interest payments rising to over 20 percent of GDP by mid-century would constitute new federal spending similar in scale to the mobilization for World War II. Obviously this cannot happen with two percent inflation. And although a higher inflation rate is undesirable, arithmetically it means a lower debt-to-GDP ratio.

Finally, rapidly rising health care costs and low overall inflation are mutually consistent only if all prices except health care are rising at less than that low overall inflation rate -- including energy and food prices in a time of increasing scarcity. This too is extremely unlikely. Either overall health care costs will decelerate (relieving the so-called Medicare funding problem) or the overall inflation rate will accelerate -- reducing the debt-to-GDP ratio.

In sum: the economic forecasts on which you are being asked to develop a credible plan for reducing deficits over the medium term are a mess. The unemployment and growth forecasts are implausibly optimistic, while the inflation and interest rates projections are implausibly pessimistic and mutually inconsistent.

Good policy cannot be based on bad forecasts. As a first step in your work -- long overdue -- the Commission should require the development of internally consistent, and factually plausible, economic forecasts on which to base future deficit and debt projections.

5. The Only Way to Reduce Public Deficits Is to Restore Private Credit.

The conclusion to draw from the above argument is that large deficits going forward are likely to have the same source as they do right now: stubbornly high unemployment.

The only way to reduce a deficit caused by unemployment is to reduce unemployment. And this must be done with a substantial component of private financing, which is to say by bank credit, if the public deficit is going to be reduced. This is a fact of accounting. It is not a matter of theory or ideology; it is merely a fact. The only way to grow out of our deficit is to cure the financial crisis.

To cure the financial crisis would require two comprehensive measures. The first is debt restructuring for the entire household sector, to restore private borrowing power. The second is a reconstruction of the banking system, effectively purging the toxic assets from bank balance sheets and also reforming the bank personnel and compensation and other practices that produced the financial crisis in the first place. To repeat: this is the only way to generate deficit-reducing, privately-funded growth and employment.

As a former top adviser in the Clinton White House, co-chairman Bowles no doubt knows that privately-funded economic growth produced the boom years of the late 1990s and the associated surplus in the federal budget. He must also know that the practices of banks and investment banks with which they were closely associated worked to destroy the financial system a decade later. But I would wager that the Commission has spent no time, so far, on a discussion of the relationship between deficit reduction and financial reform.

To be clear: unemployment can be cured without private-sector financing, if public deficits are large enough -- as was done during World War II. But if the objective is to reduce public deficits, for whatever reason, then a large contribution from private credit is essential.

One more time: without private credit, deficit reduction plans through fiscal austerity, now or in the future, will fail. They cannot succeed. If at the time the cuts take effect the economy is still relying on public expenditure to fund economic activity, then reducing expenditure (or increasing taxes) will simply reduce GDP and the deficits will not go away.

Further, if the finances of the private sector could be fixed, then an austerity program would be entirely unnecessary to reduce public debt. The entire national experience from 1946 to 1980, when public debt fell from 121 to about 33 percent of GDP and again from 1994 to 2000, proves this. In those years the debt-to-GDP ratio fell mainly because of credit-driven economic growth -- certainly not because of public-sector austerity programs. And this is why the deficits returned, in 1980-2 and in 2000, once the credit markets froze up and the private economy entered recession.

Thus until the private financial sector is fully reformed -- or supplemented by parallel financing institutions as was done in the New Deal -- high deficits and a high public-debt-to-GDP ratio are inevitable. In the limit, if there is no private financial recovery, debt-to-GDP will converge to some steady-state value, probably near 100 percent -- a normal number in some countries -- and at that point the public deficit will be the sole engine of new economic growth going forward. Only when the private sector steps up, will the debt-to-GDP ratio begin to decline.

For this reason, a Commission report focused on "entitlement reform" rather than "financial reform" would be entirely beside the point. Entitlement cuts, no matter how severe, cannot and will not achieve deficit reduction. They cannot "meaningfully improve the long-term fiscal outlook," as required by your charter. All they will accomplish is to impoverish vulnerable Americans, impairing the functioning of the private economy and the taxing capacity of the government.

6. Social Security and Medicare "Solvency" Is Not Part of the Commission's Mandate.

I note from Chairman Simpson's conversation with Alex Lawson that the Commission has taken up the questions of the alleged "insolvency" of the Social Security system and of Medicare. If true, this is far outside any mandate of the Commission. Your mandate is strictly limited to matters relating to the deficit, debt-to-GDP ratio, and fiscal stability of the U.S. Government as a whole. Social Security and Medicare are part of the government as a whole, so it is within your mandate to discuss those programs -- but only in that context.

To make recommendations about the matching of benefits to payroll taxes -- now or in the future -- would be totally inappropriate. Within your mandate, the levels of payroll taxes and of Social Security benefits are relevant only insofar as they influence the current and future fiscal position of the government as a whole. Their relationship to each other is not relevant. You are not a "Social Security Commission" and there is no provision in your Charter for a separate discussion of the alleged financial condition of either program taken on its own. Such discussions, if they are occurring, should be subjected to a point of order.

The usual "solvency" arguments directed at the Social Security system and at Medicare as separate entities are in any event complete nonsense. These programs are just programs, like any others, in the Federal Budget, and the Social Security and Medicare "systems" are thus fully solvent so long as the Federal Government is. Further, as explained below, under our monetary arrangements there is no "solvency" issue for the federal government as a whole. The federal government is "solvent" so long as U.S. banks are required to accept US. Government checks -- which is to say so long as there is a Federal authority in the Republic. This point has been demonstrated repeatedly in times of stress, notably during the Civil War and World War II.

7. As a Transfer Program, Social Security Is Also Irrelevant to Deficit Economics.

Political discussions of "long-term fiscal sustainability" -- including in the Charter for this Commission -- make an economic error when they loosely use the word "entitlements" and suggest that supposed economic dangers of federal deficits (for instance, rising real interest rates) can be reduced by "entitlement reform." As a matter of economics, this is not true.

"Government Spending" -- as any textbook will verify -- is a component of GDP only insofar as the spending is directly on purchases of goods and services. That alone is what economists mean by the phrase "government spending." GDP is the final consumption of produced goods and services, and government is one of the major consuming sectors; the others being private business (investment) and households (consumption).

Social Security is a transfer program. It is not a spending program. A dollar "spent" on Social Security does not directly increase GDP. It merely reallocates a dollar from one potential final consumer (a taxpayer) to another (a retiree, a disabled person, or a survivor). It also reallocates resources within both communities (taxpayers and beneficiaries). Specifically, benefits flow to the elderly and to survivors who do not have families that might otherwise support them, and costs are imposed on working people and other taxpayers who do not have dependents in their own families. Both types of transfer are fair and effective, greatly increasing security and reducing poverty -- which is why Social Security and Medicare are such successful programs.

Transfers of this kind are also indefinitely sustainable -- in fact there can intrinsically be no problem of sustainability with transfer programs. Apart from their effect on individual security, a true transfer program uses (by definition) no net economic resources. The only potential macroeconomic danger from "excessive" transfers is that the transfer function may be badly managed, leading to excessive total demand and to inflation. But there is no risk of this so long as the financial crisis remains uncured. Under present conditions Social Security and Medicare are bulwarks for stabilizing a total demand that would otherwise be highly deficient.

Similarly, cutting Social Security benefits, in particular, merely transfers real resources away from the elderly and toward taxpayers, and away from the poor toward those less poor. One can favor or oppose such a move on its own merits as social policy -- but one cannot argue that it would save real resources that are otherwise being "consumed" by the government sector.

The conclusion to be drawn is that Social Security should in any event be off the agenda of your Commission, as it is a transfer program and not a program of public spending in the economic sense. In particular it does not use capital resources and will not drive up interest rates. This is true whether the "Social Security System" is in internal balance or not.

8. Markets Are Not Calling for Deficit Reduction, Now or Later.

Let me turn next to a larger economic question. Do deficit projections matter? Are they important? Was the President well-advised to frame the mandate of the Commission as he did?

What, in short, are the economic consequences of a high public deficit and a rising debt-to-GDP ratio, and what (if any) benefits are to be expected from creating an expectation that deficits will come down and that the debt-to-GDP ratio will fall?

The idea that US economic policy should aim for a path of reduced deficits in the future is shared by liberals and conservatives, and it is, from a political standpoint, a very powerful idea. The Commission's charter takes for granted that this goal is desirable. It specifies that your objective is to achieve a balanced "primary budget" -- net of interest payments, by 2015.

Yet your charter does not say why this is an appropriate goal. It cites no study to which one might refer. It does not explain why 2015 is the right target date, as opposed to (say) 2025 or even 2050. It does not spell out the economic consequences -- if any -- of failing to meet the stated objective.

Does the requirement make economic sense? I shall tackle that question in two parts. The first accepts the view most people hold of the fiscal and financial world. The second reflects, from an operational standpoint, how that world actually works in practice.

Most informed laymen believe that the Federal government must borrow in order to spend. They believe that the interest rate on Treasury securities is set in a market for government bonds. The markets impose discipline on the government. Thus their idea is that "fiscal responsibility" will produce low long-term interest rates and tolerable borrowing conditions for the federal government, while "irresponsibility" will be punished by higher, and eventually intolerable, debt service costs.

Accepting this view for the moment, what does the present level of long-term interest rates tell us? As I write, thirty-year Treasury bonds are yielding just over four percent -- or just a little more than half their yield a decade back. On the argument just given, this must be an extraordinary success of virtuous policy. It seems that Wall Street has made a strong vote of confidence in the fiscal probity of our current policies. This vote is unqualified, backed by money, contingent on nothing. It therefore represents a categorical rejection, by Wall Street itself, of the CBO's doomsday scenarios and all other deficit-scare stories.

On this theory, it follows that the mandate to reduce the primary deficit to zero by 2015 is unnecessary. Such an action can hardly reduce interest rates -- neither short nor long-term -- which are already historically low.

But wait a minute, some may say. Yes interest rates are low at the moment. But bond markets are fickle, they can turn on a dime. And what then?

Yes, it is possible that interest rates could rise. But the problem with this argument is that it takes us away from the premise of rationality. If bond markets are fickle and arbitrary, who is to say what they will do in response to any particular policy? In the face of irrational markets, the sensible policy is to borrow heavily for so long as they are offering a good deal. One may say that all good things end, and perhaps they will. But if markets are irrational, then by construction you cannot prevent this by "good behavior."

The conclusion from this section is that one cannot logically argue that markets insist on deficit reduction. Either the markets are rationally unworried about deficits, or they are acting irrationally right now, in which case they can hardly "insist" on anything.

9. In Reality, the US Government Spends First and Borrows Later; Public Spending Creates a Demand for Treasuries in the Private Sector.

As noted, the above argument is based on the common belief that the government must borrow in order to spend, and thus that the government faces "funding risks" in private markets. Such risks exist, of course, for private individuals, for companies, for state and local governments, and for national governments such as Greece that have ceded monetary sovereignty to a central bank. But the situation of the United States government is quite different.

The U.S. government spends (and the Federal Reserve lends) in a very simple way. It does so by writing checks -- in fact simply by marking up numbers in a computer. Those numbers then appear in the bank accounts of the payees, who may be government employees, private contractors, or the recipients of federal transfer programs.

The effect of government check-writing is to create a deposit in the banking system. This is a "free reserve." Banks of course prefer to earn interest on their reserves. Thus they demand a US Treasury bond, which pays more interest without incurring any form of credit or default risk. (This is like moving a deposit from a checking to a savings account.) The Treasury can meet that demand, or not, at its option -- it can permit, or not permit, the stock of US Treasury bonds in circulation to increase.

So long as U.S. banks are required to accept U.S. government checks -- which is to say so long as the Republic exists -- then the government can and does spend without borrowing, if it chooses to do so. And if it chooses to issue Treasuries to meet the demand, it can do that as well. There is never a shortfall of demand for Treasury bonds; Treasury auctions do not fail.

In the real world, the government creates demand for bonds by spending above the level drained by taxation from the system. The extent to which those bonds are held locally, or abroad (another common source of worry), depends on the US current account deficit. This also has nothing to do with approval or disapproval by foreign bankers, central bankers, or their governments of American deficit policy. A foreign country cannot acquire a US Treasury bond unless someone outside the United States has acquired dollars to pay for them, which is generally done by running a trade surplus with the United States. And when foreigners do acquire those dollars, then like domestic banks they prefer to earn interest, which is why they buy Treasury bonds.

Insolvency, bankruptcy, or even higher real interest rates are not among the actual risks to this system. The actual risks in this system are (to a minor degree) inflation, and to a larger degree, depreciation of the dollar. However at the moment there is wide agreement that a lower dollar would be a good thing -- against the Chinese RMB and now also the euro. So it is difficult to believe that the goal of deficit reduction per se serves any coherent, or presently desirable, economic objective.

We can conclude that there is actually no economic justification for the target of reducing the primary deficit to zero by 2015 or any other date. The right economic objectives are to meet real problems, not those conjured from thin air by economists. Bringing about a rapid end to unemployment, caring properly for an aging population, cleaning up the Gulf of Mexico, coping with our energy insecurity and with climate change are all far more important objectives than reducing a projection of future budget deficits.

10. The Best Place in History (for This Commission) Would Be No Place At All.

Most people assume that "bipartisan commissions" are designed to fail: they are given thorny (or even impossible) issues and told to make recommendations which Congress is free to ignore or reject. In many cases -- yours is no exception -- the goal is to defer recognition of the difficulties for as long as possible.

You are plainly not equipped by disposition or resources to take on the true cause of deficits now and in the future: the financial crisis. Recommendations based on CBO's unrealistic budget and economic outlooks are destined to collapse in failure. Specifically, if cuts are proposed and enacted in Social Security and Medicare, they will hurt millions, weaken the economy, and the deficits will not decline. It's a lose-lose proposition, with no gainers except a few predatory funds, insurance companies, and such who would profit, for some time, from a chaotic private marketplace.

Thus the interesting twist in your situation is that the Republic would be better served by advancing no proposals at all.

Thank you again for the opportunity to present this statement.

http://www.fiscalcommission.gov/meetings/public-forum/additional/James_Galbraith.pdf

Galbraith's website
http://utip.gov.utexas.edu/JG/Comments%20and%20Interviews.html

The above statement is testimony to the deficit commission and considered to be in the public domain. (bold edits mine).

[bluethruandthru]

1. This needs to be recirculated and spread throughout the country

especially in light of the cat food commission's recommendations today.

[chill_wind]

2. And here's what you should know about the Democratic DLC positioning.

Testimony of that same day.

TESTIMONY OF WILL MARSHALL
PRESIDENT OF THE PROGRESSIVE POLICY INSTITUTE
BEFORE THE NATIONAL COMMISSION ON FISCAL RESPONSIBILITY AND REFORM
WEDNESDAY, JUNE 30, 2010

As Prepared for Delivery

Chairman Bowles, Chairman Simpson, and Members of the Commission, I appreciate the
opportunity to appear before you to discuss ways to put America on a fiscally sustainable course. Once unemployment rates start to fall, U.S. policy makers must be prepared to pivot sharply from fiscal stimulus to fiscal restraint. Otherwise, a large and growing federal debt will deplete our capital stock and thereby limit future economic growth. It will divert resources from productive investment to interest payments on the debt, half of which is already held by foreign lenders. And it will shake investor confidence, here and abroad, in the fundamental soundness of the U.S. economy, eventually driving interest rates up and the dollar down.

Despite these dire and entirely foreseeable consequences, too many federal policy makers remain in denial about the need for fiscal discipline. You have taken on what many consider a Mission Impossible: forging a bipartisan consensus on how to defuse the nation’s debt crisis. That’s put you in the crosshairs of extreme partisans of the left and right, who imagine this problem can be solved strictly at the other side’s expense. By refusing either to cut spending or raise taxes, the two have joined in a tacit conspiracy to bankrupt the country.

Common to both is the assumption that you can have fiscal responsibility, or you can have progressive government, but you can’t have both. We at the Progressive Policy Institute have always rejected this false choice. We believe that a progressive government can and must live within its means, and that if it instead chases the illusion of borrowed prosperity, it’s not really progressive. To paraphrase Franklin Roosevelt, Americans know instinctively that borrowing routinely to consume more than you produce is both bad economics and bad morals. I don’t think it’s an accident that, as public worries about deficits have been mounting, public trust in government
has been plummeting.

So there’s a lot riding on your ability to forge consensus behind a bold and balanced plan to restore fiscal responsibility. Let me offer some thoughts on what that plan should include from the perspective of a “progressive fiscal hawk.”

We’ve dug a pretty deep hole, so it’s not realistic to talk about balanced budgets anytime soon. What’s needed instead is an ambitious but attainable fiscal target to shoot for. The National Research Council and the National Academy of Public Administration in their indispensible report, Choosing the Nation’s Fiscal Future, set a reasonable target: stabilizing the national debt at 60 percent of GDP within the next decade, and working to reduce it afterwards. It may also make sense to set targets for annual budget deficits, but only in tandem with a national debt target. We can tolerate fluctuations and spikes in short-term deficits; it’s the inexorable rise in our long-term debt that poses the gravest threat to America’s future growth and economic
sovereignty.

Stabilizing the national debt at that level would preserve what Austan Goolsbee, in a PPI report, called America’s “strategic fiscal reserve.” In other words, it would leave room for deficit spending should the United States find itself facing another emergency like the credit freeze and recession of 2008-09, without pushing our debt-to-GDP ratio toward the danger zone of 100 percent or more.

It’s worth quoting the Choosing report in full on this point:

The committee judged that a debt of 60 percent of GDP reflects an appropriate balance
and is an achievable target within a decade—and is therefore useful to guide policy
choices that will ultimately be made by elected leaders. This is a different ratio than the
committee would have likely proposed under different circumstances. Indeed, it will
surely be seen by some as too high and by others as too low. But the committee believes it is the lowest ratio that is practical given the fiscal outlook. A higher debt burden would leave the nation less able to cope with unforeseeable but inevitable shocks—such as international crises or natural disasters—requiring a vigorous federal response. It would put the nation closer to a point from which no politically credible path to sustainability could be constructed. Moreover, stabilizing the debt at a higher ratio implies a higher deficit, a greater draw on the nation’s saving or more foreign borrowing, which will have a negative impact on future living standards. On the other side, a lower ratio would imply even more painful changes in tax and spending policies.



A FAMILIAR MENU OF OPTIONS

Getting agreement on a target is half the battle, since it determines the magnitude of the tax and spending changes that must be made. Most budget and policy analysts work from a familiar menu of options, and assume that any politically feasible package will have to be split roughly 50-50 between tax hikes and spending cuts.

We believe the menu should include these actions:

• Cap discretionary spending. Alice Rivlin estimates that a hard freeze on discretionary
spending would save over $1 trillion between 2012 and 2018.

• Trim future Social Security benefits. The big three—Medicare, Medicaid and Social Security—are driving the unsustainable growth of public spending. It’s true that closing Social Security’s funding gap is relatively easy compared to controlling the growth of health care costs. But that’s an argument for repairing Social Security first.

The best way baby boomers like me can contribute to fixing Social Security is to work
longer. PPI also has endorsed progressive indexing of Social Security benefits, which
entails a shift from wage indexing to price indexing of benefits for well-off retirees who
have other sources of retirement income. Under progressive indexing, benefits of high
earners (over $90,000 per year in average career earnings) would grow with inflation,
while those of middle earners would grow at a rate somewhere between inflation and the rise of wages. The bottom 30 percent, who are least likely to have other income sources, would continue to have their benefits indexed by wage growth. According to Robert Pozen, this would reduce the present value of the 75-year deficit of Social Security by somewhere between $2.6 trillion to $3.2 trillion, depending on how it’s designed.

• Contain Medicare and Medicaid costs. This is hands-down the toughest fiscal challenge facing the nation. In addition to raising the age of eligibility, reducing Medicare’s growth rate will require applying income-relating of Part B premiums to a broader swath of beneficiaries. We also need a stronger Medicare Commission empowered to example all aspects of Medicare, including its dominant fee-for-service design – not just prices and payments. Ultimately, the federal government will probably have to cap health care spending, either on a per capital or global basis. Therefore, I’d encourage the Commission to revisit two ideas: adopting vouchers or “premium support” for Medicare, and turning Medicaid into a block grant.

• Cut tax expenditures. Back in the mid-1990s, PPI developed a long list of tax
expenditures – backdoor subsidies to individuals and businesses – that had outlived their original rationale. It’s a testament to the immortality of federal programs that most of them are still on the books. The Joint Tax Committee lists tax expenditures costing more than $1.2 trillion in foregone revenue. We continue to believe a base-closing commission should be established to draw up a hit-list and present it to Congress for an up-or-down vote. This should be seen as part of a base-broadening exercise that would also allow for lowering tax rates, though of course tax reform also needs to raise additional revenues to reduce the government’s need to borrow.

Now let me offer for your consideration three specific recommendations that might be less familiar:

First: Bring mandatory spending on budget.
Second: Let Bush tax cuts expire or extend them temporarily.
Third: Put defense spending on the table.

AN ENTITLEMENT BUDGET

The first recommendation was developed by the Brookings-Heritage Fiscal Seminar, of which I’m a member. The Seminar is a nonpartisan group of budget and policy experts from various Washington think tanks that includes three former CBO Directors: Alice Rivlin, Rudy Penner and Bob Reischauer.

The idea very simply is to take entitlement spending off auto-pilot, and establish a fixed, overall budget for the Medicare, Medicaid and Social Security.

These entitlement programs grow automatically each year, with no deliberation by Congress, no pressure to reconcile spending and revenues, no attempts to adjust them for demographic changes or generational equity, and no attempts to make trade-offs among competing public priorities.

The best solution, of course, would be for this Commission to propose, and Congress to accept, major structural reforms in the big three entitlements that allow them to continue to provide health and retirement security without running up massive deficits. Even so, bringing them on budget would provide greater transparency and allow Congress to mark progress toward solvency.

The plan works like this: Congress and the president enact explicit, long-term budgets for Medicare, Medicaid and Social Security. With this one step, entitlements would be forced to compete for budget dollars with other vital national priorities.

Either the trustees or the Congressional Budget Office would review the programs at regular intervals, possibly every five years, to determine whether they stay within their budget. Failure to do so would trigger automatic adjustments in benefits, premiums, provider payments or tax revenues. Of course, Congress could override these adjustments – but it would have to take explicit action to jettison fiscal constraints. This is preferable to its current passivity in the face of automatic, formula-driven spending growth.

Finally, this proposal would end the ever-narrowing scope of Congressional decision-making, and fully restore lawmakers’ constitutional power of the purse.

THE BUSH TAX CUTS

The major Bush tax cuts passed in 2001 and 2003 are set to expire at the end of this fiscal year. Last week House Majority Leader Steny Hoyer made headlines by wondering aloud about the wisdom of permanently extending any of the Bush tax cuts absent a serious plan for long-term deficit reduction. It’s a good question.
Extending all the Bush cuts, as some Republicans insist, would cost at least $3 trillion over the next decade. All of that would be added to the national debt since GOP leaders have yet to embrace an offsetting list of spending cuts.

During the 2008 campaign, then-Senator Obama promised to extend the Bush cuts for the “middle class,” defined as families earning less than $250,000 and individuals earning less than $200,000. According to the Joint Committee on Taxation, that would add $1.4 trillion to the nation’s debt over the next decade.

Of course, the nation’s fiscal outlook has deteriorated dramatically since the campaign. The cost of averting a financial and economic collapse last year could push this year’s deficit to $1.7 trillion. The national debt has swollen from 40 percent in 2008 to 60 percent now and is on course to reach 90 percent of GDP by 2020.

Cutting taxes in wartime never made sense to me. The truth is, America really can’t afford any of the Bush tax cuts right now. I know: it’s an election year and no one wants to be accused of “raising taxes on the middle class.” But if Congress ends the fiscal year with a huge, unpaid-for extension of tax cuts, right before this Commission is supposed to deliver the President a credible plan for debt reduction, it will send a confusing signal to investors anxious about our deteriorating fiscal picture, as well as other nations taking painful steps to get their fiscal houses in order.

A one-year extension, by contrast, would send a bracing signal of seriousness. And it would give this Commission a lot more room to devise a balanced package of spending and tax changes aimed at whittling down our debts.

A CONTRIBUTION FROM DEFENSE

Third, no program should be exempted from the new constraints of fiscal discipline, including defense.

PPI has always stood unequivocally for a strong defense. We have opposed routinely
irresponsible calls by some in Congress for deep and arbitrary cuts in military spending. At the same time, we’ve criticized a wasteful and inefficient procurement system, the Pentagon’s habitual reluctance to clarify roles and missions and make hard choices among competing priorities, and Congressional moves to buy more weapons than the military says it needs.

We’ve also argued that America’s qualitatively superior, high-tech military and global reach grow out of a vibrant domestic economy – a theme that also runs through the administration’s new national security strategy. Keeping our economy strong is thus a prime imperative for U.S. defense policy.

In the 1990s – the last time America got serious about fiscal responsibility – declining military spending after the Cold War contributed mightily to bringing the federal budget back into balance, and indeed, into surplus. Military spending was 5.5 percent of GDP when Bill Clinton was elected and fell to 3.6 percent by the time he left office.

With America embroiled in two wars and a global counterterrorism campaign, we’re obviously not going to reap another such peace dividend soon. Last year, military spending went back up to 5.5 percent of GDP and may exceed 6 percent this year.

Nonetheless, with U.S. troops scheduled to quit Iraq by the end of 2011, and possibly beginning to draw down in Afghanistan before that, it’s not unreasonable to assume that future military budgets can be constrained in the interests of securing fiscal stability.

By one estimate, a “hard freeze” on military spending, meaning no inflation adjustment, would save over a $1 trillion between 2012 and 2018. The Pentagon could still shift resources into urgent areas of need, but it would have to make up the difference by cutting other programs.

For purely illustrative purposes, here are several CBO options for cutting military spending:

• Reverse the “Grow the Army” initiative once U.S. troops leave Iraq, and let the Army
shrink from 547,000 to 482,200. Obviously, changes on the ground in Iraq or
Afghanistan would have to be taken into account. CBO says this change would save $90 billion over 10 years.

• Reduce F-35 Joint Strike Fighter buy for USAF and USN with possible supplemental
UAV purchases to boost warfighting capability. This could save anywhere from $47 to
$67 billion over 20 years.

• Raise military health care premiums and deductibles, for a savings of $6-8 billion
annually.

Finally, PPI believes it is time to end the practice of supplemental budgeting of war and other defense spending. The supplemental budgets have become larded with provisions unrelated to war needs, including over $20 billion in “no compete” procurement contracts. By including all funding in the baseline budget, Congress would force trade-offs that give priority to wartime requirements.

Thank you.

http://www.fiscalcommission.gov/meetings/public-forum/2/Will_Marshall_6_30_2010.pdf

[glitch]

11. Will Marshall, wasn't he one of the infamous PNAC signers? nt

[mod mom]

14. exactly:

In the introduction to the 2006 book With All Our Might: A Progressive Strategy for Defeating Jihadism and Defending Liberty, editor Will Marshall, president of the Progressive Policy Institute (PPI), promotes what he calls “progressive internationalism” as opposed to the “conservative unilateralism” of the George W. Bush administration. He argues that the Iraq War is part of a larger strategy for “building a world safe for individual liberty and democracy,” and that the “Bush Republicans have been tough but they have not been smart” in directing the course of the war in Iraq. Part of being smart is “using our strengths,” says Marshall. “Democrats must be committed to preserving America's military predominance, because a strong military undergirds U.S. global leadership.”

-snip

A core member of a neoconservative-like vanguard within the Democratic Party establishment, Marshall has been instrumental in creating organizations that have worked to move the party to the right on everything from foreign to economic policies. With Al From, in 1985 Marshall cofounded the Democratic Leadership Council (DLC), an important bastion of center-right Democrats that was once chaired by Sen. Joseph Lieberman (D-CT). In 1989, Marshall founded the PPI, a think tank that is affiliated with the DLC. Marshall and From were both staffers for Rep. Gillis Long (D-LA), who was the chairman of the House Democratic Party Caucus in the early 1980s. Marshall served as Long's speechwriter and policy analyst and was also senior editor of the 1984 House Democratic Caucus policy blueprint, “Renewing America's Promise.”

-snip

Marshall was one of 15 analysts who co-wrote the PPI's October 2003 foreign policy blueprint, “Progressive Internationalism: A Democratic National Security Strategy.” Using language that closely mirrors that of the neoconservative-led Project for the New American Century (PNAC), the PPI hailed the “tough-minded internationalism” of past Democratic presidents such as Harry Truman. Like PNAC, which in its founding statement warned of grave present dangers confronting America, the PPI strategy declared that, “Today America is threatened once again” and is in need of assertive individuals committed to strong leadership. The authors' observation that, “like the Cold War, the struggle we face today is likely to last not years but decades,” echoes both neoconservative and Bush administration national security assessments. As the “Progressive Internationalism” authors explain, the PPI endorsed the invasion of Iraq “because the previous policy of containment was failing, because Saddam posed a grave danger to America as well as to his own brutalized people, and because his blatant defiance of more than a decade's worth of UN Security Council resolutions was undermining both collective security and international law.”



http://rightweb.irc-online.org/profile/1295

[glitch]

17. He aptly demonstrates the hair's width of difference between neoliberals and neoconservatives.

Their goals are the same, they disagree slightly on strategy and tactics.

[chill_wind]

3. January 20, 2010 : White House, Democratic lawmakers cut deal on deficit commission

White House, Democratic lawmakers cut deal on deficit commission

By Lori Montgomery
Washington Post Staff Writer
Wednesday, January 20, 2010

Faced with growing alarm over the nation's soaring debt, the White House and congressional Democrats tentatively agreed Tuesday to create an independent budget commission and to put its recommendations for fiscal solvency to a vote in Congress by the end of this year.

Under the agreement, President Obama would issue an executive order to create an 18-member panel that would be granted broad authority to propose changes in the tax code and in the massive federal entitlement programs -- including Medicare, Medicaid and Social Security -- that threaten to drive the nation's debt to levels not seen since World War II.

http://www.washingtonpost.com/wp-dyn/content/article/2010/01/19/AR2010011903310.html

Just want the who/what/when facts on that kept straight, as well.

[Zenlitened]

4. K&R - n/t

[ellenfl]

5. kick for later. eom

[kayob1]

6. Interesting read

thanks for posting

[chill_wind]

7. Gratis. Thanks for taking time to read it. Pass it along and welcome to DU.

:hi:

[Demeter]

8. Thank you for posting

a Must Read!

[chill_wind]

9. And hopefully very useful slices of facts and objections that can be used

with our Reps and LTE's and additional comments in petitions.

[MsPithy]

10. How about a quote from John Kenneth Galbraith,

I can't remember who first posted this extraordinarily useful quote,

"The modern conservative is engaged in one of man's oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness."
John Kenneth Galbraith

[Lugnut]

12. K&R n/t

[Misskittycat]

13. Wow. K&R. Long read, but well worth the effort. n/t

[Catherina]

15. Bookmarked. rec'd. n/t

[Myrina]

16. Kick and Rec

:wow: Now it makes sense to this Econ 101 Challenged gal. Thank you, Mr. Galbraith.

[chill_wind]

18. And to furthur illustrate some of his sharpest points

about conflicts of interest.

Washington Post: Many deficit commission staffers paid by outside groups

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x9535264

http://www.washingtonpost.com/wp-dyn/content/article/2010/11/10/AR2010111006850.html?hpid=topnews

[laughingliberal]

19. K & R nt

[housewolf]

20. Excellent read

K&R

[Uncle Joe]

21. Kicked, too late to recommend and bookmarked.

Thanks for the thread, chill_wind.

[chill_wind]

22. And thank you too, Uncle Joe.