January 4, 2011
Republicans' Deficit Ceiling Bluff an Attack on Social Security
William K. Black: Forces pushing for cuts in social security preparing conditions for its demise
Bio
Showing posts with label Alan Simpson. Show all posts
Showing posts with label Alan Simpson. Show all posts
Tuesday, January 04, 2011
REPUBLICANS ARE PLAYING CHICKEN WITH THE DEBT CEILING (WHICH IF NOT RAISED WOULD CRASH ALL THE WORLD'S ECONOMIES) IN THE HOPES THAT TIMID DEMOCRATS WILL CAVE IN TO THEIR PLAN TO GUT THE MOST POPULAR PROGRAM EVER PASSED BY CONGRESS, SOCIAL SECURITY
January 4, 2011
Republicans' Deficit Ceiling Bluff an Attack on Social Security
William K. Black: Forces pushing for cuts in social security preparing conditions for its demise
Bio
Wednesday, December 08, 2010
A Huge Victory for the American Middle Class: The Bowles/Simpson Threat to Pillage Social Security Is Neutralized by "The Magnificent Seven" of Obama's Deficit-Hawk-Stacked Deficit Commission!
Deficit Commission Fails To Pass Plan
First Posted: 12- 3-10 12:55 PM | Updated: 12- 3-10 01:01 PM
Read More: Alan Simpson, Debt Commission, Deficit Commission, Erskine Bowles, Federal Deficit, Jan Schawkosky, Politics News
WASHINGTON -- President Obama's fiscal commission fell short of reaching consensus on a plan to shave $3.8 trillion from the federal deficit over the next nine years.
Fourteen votes were required for the plan to move forward for a vote in Congress, but the fiscally hawkish proposal garnered support from only 11 members of the 18-person panel.
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| Erskine Bowles and Alan Simpson |
But after weeks of fraught negotiations -- and having worked on the plan for 10 months -- the co-chairmen were unable to convince 14 of their colleagues to support the hawkish plan.
The plan was endorsed by Sen. Richard Durbin (D-Ill.), as well as Senate Budget Committee Chairman Kent Conrad (D-N.D.), House Budget Committee Chairman John Spratt (D-S.C.), and Sens. Tom Coburn (R-Okla.), Mike Crapo (R-Idaho) and Judd Gregg (R-N.H).
Recognizing they did not have the critical consensus, the panel adjourned Friday without so much as taking a formal vote.
Rep. Jan Schakowsky (D-Ill.) objected to the plan over cuts to Social Security and Medicare, while Paul Ryan (R-Wisc.) told reporters at a breakfast hosted by The Christian Science Monitor yesterday that he couldn't support the proposal because it reinforces President Obama's health care law.
"I think it makes health care dramatically worse," Ryan said. "I'm trying to be guarded in my comments, because I really respect what Erskine and Alan have done."
The co-chairmen have been bracing for failure, saying that their greatest ambition is merely to start a conversation about how to rein in the national debt.
"Our goal has been really simple: To start an adult conversation about the dangers of the deficit we are running," Bowles told reporters earlier this week. "It is the exact same conversation that every family, every single business, every state and every municipality has been having for the last several years."
House Republican Whip Eric Cantor (R-VA) echoed that statement in the following statement on Friday.
"Though we may not see eye-to-eye on the specifics, Republicans and Democrats can surely agree that getting our long-term deficit under control will require major entitlement reform," said Cantor in a statement after the vote. "The more ideas that are brought to the table, the better, and we must not allow the urgency of the news cycle to force the demonization of ideas in their infancy. I believe that these type of efforts will set the stage for concrete action."
But many are pleased with the news, insisting there are more progressive ways to go about reducing the country's $13.7 trillion deficit.
"The advocates for the misguided recommendations from the 11 commissioners will tell you there is no alternative," said AFL-CIO president Richard Trumka in a statement Friday. "But this week, Our Fiscal Security, Representative Jan Schakowsky, and the Citizens' Commission On Jobs, Deficits And America's Economic Future all presented plausible plans to bring the budget deficit under control - without jeopardizing our recovery, without asking the middle class to pick up the tab, and without deep cuts in the programs our seniors rely on."
A must watch video by one of "The Magnificent Seven":
Rep. Schakowsky explains her vote against the Fiscal Commission Proposal, 12-03-2010
Go here for economist James K. Gailbraith's take on the Commission majority's rapacious plan just before the Magnificent Seven deep-sixed it:
Moment of Lies: Galbraith Attacks Lack of Evidence for Frantic Deficit Fear Mongering
Wednesday, September 01, 2010
Coup d'Etat: Standard & Poor's Is Now Giving Orders to Congress ... and the American People
Coup d'Etat: Standard & Poor's Is Now Giving Orders to Congress ... and the American People
Richard (RJ) Eskow
Consultant, Writer, Senior Fellow with The Campaign for America's Future
Posted: August 30, 2010 03:05 PM
There's been a lot of talk recently about the enormous power that's been given to the Deficit Commission, which is co-chaired by Alan "Social Security recipients are milking it" Simpson and dominated by people who have advocated cuts to Social Security and Medicare. But here's an aspect of the story that's gone unremarked: Standard & Poor's, the credit rating agency whose reputation should rightfully have been shattered by the economic crisis, is now dictating policy to the United States government. S&P just put our elected officials on notice: Submit to the proclamations of the Deficit Commission or we'll downgrade our rating of government debt.
That's blackmail, plain and simple. This threat comes from a privately-owned company whose rating process is riddled with conflicts, and which has gotten virtually every critical assessment of recent years spectacularly wrong. Enron? Lehman? Subprime mortgages? They were zero for three. Yet rather than reining back their penchant for reckless proclamations, the chairman of S&P's "sovereign rating committee" said that our elected officials' response to the Deficit Commission would be crucial to its analysis of US debt. John Chambers said last week: "It is very important for the credit standing of the United States that the Congress considers very carefully what the fiscal commission proposes." Just in case his intent wasn't clear enough, he added: "It is very important for Congress to take the required steps."
"Sovereign" is right. That's a kingly proclamation.
Bear in mind, we supposedly don't know yet what the Deficit Commission will propose. (We have a good idea, of course, since both the Democratic and Republican co-chairs are long-time advocates for cutting Social Security.) The total extent of the Commission's recommendations, and the extent to which they'll actually provide financial stability, are supposed to be completely unknown at this point. S&P's statement isn't an analysis, since there's nothing to analyze. It's a threat: Turn your authority as elected representatives over to this unelected body or we'll cause financial damage to the United States Government.
It's not a hollow threat, either. This statement was made one day after S&P downgraded Ireland's debt. A downgrade could cause massive harm to the United States government at a time of extreme difficulty. Debt could be harder to obtain, and it would become more expensive. That, in turn, would plunge the US deeper into debt. So who, exactly, is issuing this warning? What kind of credibility do they have?
Standard & Poor's is a division of McGraw-Hill, a publicly traded publishing company. They are a for-profit company, as is their fellow rating agency Moody's (which issued a similar threat last March). Both of these for-profit companies have eagerly pursued the very institutions they were rating, to disastrous effect. Internal documents obtained by the Levin Subcommittee showed that both Moody's and S&P let the profit motive compromise their judgments in the run-up to the economic meltdown. As we noted in a previous analysis, one internal S&P email said this about a rating they did for a customer: ""I don't think this is enough to satisfy them. What's the next step?"
Here's another example of S&P's integrity. When an analyst asked to review loan files for a security he was asked to rate, his supervisor told him the request was "TOTALLY UNREASONABLE!"
And consider this reported comment, which occurred during exploratory acquisition talks with investment research company Morningstar: "The S&P people insisted to Joe Mansueto (Founder/Chairman) that he was leaving big mounds of money on the table by not charging mutual funds for their 'star' ratings. Joe replied to the S&P bidders that it was an obvious conflict of interest to charge the funds for their own ratings -- how would Morningstar maintain its independence? They called him naive -- and stopped the merger talks."
The comments, though unconfirmed, have not been denied. Expert money manager Barry Ritholtz, who reported the story, indicated his confidence in his source and added, "This anecdote rings rather true to me."
Moody's fared even worse in our review of Levin Subcommittee documents. Of four key objectives for its Structured Finance Group, responsible for ratings, "high quality ratings and research came in dead last - behind "generating increased revenue," "increasing market share ...," and "fostering good relationships with issuers and investors."
Get the picture?
Why would companies like Standard & Poor's and Moody's issue threats of this kind? There could be many reasons. One might be to please its corporate clients, who would like to see government spending cut for both ideological and business reasons. Another might be to encourage cuts in Social Security because, under current proposals from both parties, that would place more retirement savings in funds and accounts managed by S&P's key clients. Moody's may also legitimately believe that the deficit needs to be reduced immediately, which is debatable on economic grounds. But if the Moody's action was arguable, S&P's statement is indefensible.
The ratings agency system is broken. These private companies have accrued enormous power without earning it. A lot of that power has been handed to them by government actions that rely on their ratings. That's why the Senate voted for the Franken Amendment, which -- while leaving these companies private -- would have removed the inevitable conflict of interest that's created when they compete for business. (The House/Senate Conference eliminated the Franken Amendment, calling instead for a two-year study. While the final bill is weighted toward an action of the kind called for by Franken's amendment, two years gives lobbyists a long time to influence the outcome.)
Standard & Poor's are called "agencies," but they should be called by their proper name: For-profit companies. These "ratings companies" have undermined the free market by allowing powerful issuers and investors to influence their own ratings. Markets with bad information - information that's bought and paid for - aren't really "free."
Now the "rating companies" are targeting the democratic process, too. We need a national discussion about the proper role of these companies, before they cause even more damage. Standard & Poor's should be reprimanded for its inappropriate and unprofessional intrusion into the working of government. And everyone needs to be reminded: Neither Congress nor the Executive Branch can 'outsource' the democratic process. They are our elected representatives. They must not be forced to submit to conflict-ridden private companies with a track record of failure.
He can be reached at "rjeskow@ourfuture.org."
Website: Eskow and Associates
Friday, August 27, 2010
Alan Simpson, co-chair of Obama's committee on reducing federal deficits, shoulders the heavy burden of objectively deciding whether or not people's Social Security really must be cut. Part 2
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| Alan Simpson (left) |
Alan Simpson, Senator Guttermouth, Spews Again
William Greider
August 26, 2010
Retired Wyoming Senator Alan Simpson, who inherited a soft-cushion career in politics from his father, is a garrulous old crank who at 79 seems desperate for attention. Simpson likes to pop off provocatively. He cannot resist mocking lesser mortals like Social Security recipients with mean-spirited ridicule. Simpson is an always quotable darling of Washington reporters, who mistake his nastiness for straight talk, who are too lazy to check out his ugly distortions.
Simpson should have been turned out to pasture years ago, but instead he was give a teaching post at Harvard and Barack Obama made him co-chair of the President's bipartisan commission on reducing the federal deficits. Every savvy player in the Capital knows what the president has in mind--whack Social Security benefits to lure Republicans into a grand deal on raising taxes. As I have written more than once, when Washington talks up bipartisan compromise it usually means the people are about to get screwed.
That train is rolling down the tracks now, but don't expect major media coverage to alert the populace. The prestige newspapers are on board for this deal and Obama's commission won't reveal its recommendations until right after the election. Too late for folks to make a stink.
Senator Trash Mouth keeps messing up the plan, however, by provoking outrage with his tasteless zingers. Most recently, Simpson compared Social Security--the federal government's most beloved program--to "a milk cow with 310 million tits." Instead of yuks, the senator got angry blowback--congressional demands that he resign or be fired by the president. Important liberal groups like the AFL-CIO joined the chorus of complaints. Simpson apologized, the Prez stood by him. Personally, I hope Simpson stays on the commission and continues to speak out. He's doing more harm than good for Obama's sleight-of-hand politics.
Anyway, Alan Simpson is not nearly as bad as some political reporters at the New York Times and other leading newspapers who dutifully repeat the establishment's falsehoods and distortions about Social Security. Some reporters probably know better but lack the nerve to write dissenting versions. Many reporters are simply ignorant but loyal to their sources. Social Security, as Nation writers have explained many times, does not contribute a penny to federal deficits and it never will, according to the terms of the law. The opposite is the case.
On the same page the Times reported Simpson's latest gaffe, political reporter Matt Bai contributed a far more outrageous falsehood of his own. In condescending style, he dismissed opponents to Social Security cuts (dimwits like me) as stuck-in-the -past liberals, trying to defend big government against harsh reality. Bai celebrated the courage of Rep. Earl Blumenauer of Oregon, a Democrat who evidently embraces the same view. Bai did not mention the people and public opinion overwhelmingly opposed to benefit cuts (check the polls if you doubt this). Someone should ask Congressman Blumenauer's constituents how they feel about his brave stance.
Bai's great falsification was to insinuate that the Social Security's trust fund is bogus--that the massive surpluses collected from working people to pay for their future retirements are meaningless. Social Security, he acknowledged, has amassed a pile of Treasury bonds--IOU's from the government--but he says as a practical matter that money can't be paid back because taxes would have to be raised or more funds borrowed elsewhere. "This is sort of like saying that you're rich because your friend has promised to give you 10 million bucks just as soon as he wins the lottery," Bai explains.
His comparison is a clever but consequential lie, consistent with the elite propaganda. Bai makes it sound like the government is going to give this money to retirees. In fact, it's the other way around. Social Security collected this money from workers as their involuntary savings, better known as FICA deductions. Then the federal government borrowed the money from us and spent it on other things. Congress raised the FICA deductions 25 years ago on all working people to pay for the baby boom generation's copming retirements. The Social Security trust fund has since built up massive surpluses--$2.5 tillion now and growing to $4.2 trillion in 2023--and set it aside for the future. But, starting with Ronald Reagan, the federal government ran massive deficits on its own budgets and borrowed the savings from Social Security to pay for wars and military build-ups, regressive tax cuts for the wealthy and corporations, among other things.
This vast wealth belongs to the working people who paid it--not to the federal government or Congress. Naturally, many politicians would like to get out of paying it back, but that constitutes a massive bait-and-switch swindle of working people. Bai and many other reporters of the mainstream media have been assured by their sources it is impossible to pay back that money, but that is a political choice, not a fiscal requirement. It would make working people pay for Republican gravy that went to someone else.
Another way to understand the swindle is to think of working Americans as the US government's largest creditor, even larger than China. The IOUs belittled by Bai represent the "full, faith and credit" of the US government as surely as the Treasury bonds held by China and other foreign creditors. What Obama's deficit commission is talking about is arranging a sly partial default with the hope the people won't figure it out.
Someone should write a letter of complaint to the Times ombudsman (better still, a thousand letters). Given the facts, why has the Times never reported the full story of Social Security's trillions and its true relationship to the federal deficits? For that matter, why not assign an unbiased reporter to examine what the public thinks? The public opinion polls are shockingly one-sided on this matter.
Meanwhile, if people want to get nasty in return, they might direct some tart reform suggestions to Sen. Simpson and his commission colleagues. In the interest of fairness, for instance, why not cut Simpson's government pension benefits as much or more than they intend to cut Social Security benefits. After all, he can afford it. And Simpson likes to talk about his new knee--recently replaced with a $70,000 operation. Did he pay for his new knee or did the taxpayers? It would be fun to find out.
National Affairs Correspondent
William Greider, a prominent political journalist and author, has been a reporter for more than 35 years for newspapers, magazines and television. Over the past two decades, he has persistently challenged mainstream thinking on economics.
For 17 years Greider was the National Affairs Editor at Rolling Stone magazine, where his investigation of the defense establishment began. He is a former assistant managing editor at the Washington Post, where he worked for fifteen years as a national correspondent, editor and columnist. While at the Post, he broke the story of how David Stockman, Ronald Reagan's budget director, grew disillusioned with supply-side economics and the budget deficits that policy caused, which still burden the American economy.
He is the author of the national bestsellers One World, Ready or Not, Secrets of the Temple and Who Will Tell The People. In the award-winning Secrets of the Temple, he offered a critique of the Federal Reserve system. Greider has also served as a correspondent for six Frontline documentaries on PBS, including "Return to Beirut," which won an Emmy in 1985.
Greider's most recent book is The Soul of Capitalism: Opening Paths to A Moral Economy. In it, he untangles the systemic mysteries of American capitalism, details its destructive collisions with society and demonstrates how people can achieve decisive influence to reform the system's structure and operating values.
Raised in Wyoming, Ohio, a suburb of Cincinnati, he graduated from Princeton University in 1958. He currently lives in Washington, DC.
Alan Simpson, co-chair of Obama's committee on reducing federal deficits, shoulders the heavy burden of objectively deciding whether or not people's Social Security really must be cut. Part 1
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| Some slides from a presentation prepared for the deficit commission by Social Security's chief actuary |
Senator Simpson: He's Not Just Offensive, He's Ignorant
by Dean Baker
Posted: August 25, 2010 05:56 PM
Former Wyoming Senator Alan Simpson, the co-chairman of President Obama's deficit commission, has sparked calls for his resignation after sending an offensive and sexist note to Ashley Carson, the executive director of the Older Women's League. While such calls are reasonable -- Simpson's comments were certainly more offensive than remarks that led to the resignation of other people from the Obama administration -- the Senator's determined ignorance about the basic facts on Social Security is an even more important reason for him to leave his position.
I was also a recipient of one of Simpson's tirades. As was the case with the note he sent to Carson, Simpson attached a presentation prepared for the commission by Social Security's chief actuary. Simpson implied that this presentation had some especially eye-opening information that would lead Carson and me to give up our wrong-headed views on Social Security.
While I opened the presentation with great expectations, I quickly discovered there was nothing in the presentation that would not already be known to anyone familiar with the annual Social Security trustees' report. The presentation showed a program that is currently in solid financial shape, but somewhere in the next three decades will face a shortfall due to an upward redistribution of wage income, increasing life expectancy, and slow growth in the size of the workforce. The projected shortfall is not larger than what the program has faced at prior points in its history, most notably in 1982 when the Greenspan Commission was established to restore the program's solvency.
It was disturbing to see that Simpson seemed surprised by what should have been old hat to anyone familiar with the policy debate on Social Security. After all, he had been a leading participant in these debates in his years in the Senate.
Simpson's public remarks also seem to show very little knowledge of the financial situation of the elderly or near elderly. He has repeatedly made references to retirees driving up to their gated communities in their Lexuses. While this description may apply to Simpson's friends, it applies to very few other retirees, the vast majority of whom rely on Social Security for the bulk of their income. Cutting the benefits of the small group of genuinely affluent elderly would make almost no difference in the finances of the program.
Furthermore, the baby-boom generation that is nearing retirement has seen most of its savings destroyed by the collapse of the housing bubble that both wiped out their housing equity and took a big chunk of the limited money they were able to put aside in their 401(k)s. Simpson shows no understanding of this fact as he prepares to cut benefits for near retirees.
He also doesn't seem to have a clue as to the type of work that most older people are doing. While it is possible for senators to continue in their jobs late in life, nearly half of older workers have jobs that are either physically demanding or require they work in difficult conditions. Simpson seems totally clueless on this point when he considers proposals to raise the retirement age.
The key facts on Social Security are not hard to understand. The shortfall is relatively minor and distant. Most retirees have little income other than their Social Security, and most workers would find it quite difficult to stay at their jobs in their late 60s or even 70. We might have hoped that Senator Simpson understood these facts at the time when he was appointed to the commission, but we should at least expect that he would learn them on the job.
His determined ignorance in the face of the facts is the most important reason why he is not qualified to serve on President Obama's commission. Someone who is co-chairman of such an important group should be able to critically evaluate information, not just insult and demean his critics.
He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. His blog, Beat the Press, features commentary on economic reporting.
He received his Ph.D in economics from the University of Michigan.
He has written numerous books and articles, including The United States Since 1980, Cambridge University Press, March 2007; The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer, Center for Economic and Policy Research, 2006; Social Security: The Phony Crisis (with Mark Weisbrot), University of Chicago Press, 1999; "Asset Returns and Economic Growth," (with Brad DeLong and Paul Krugman), Brookings Papers on Economic Activity (2005); "Financing Drug Research: What Are the Issues," Center for Economic and Policy Research, 2004; "Medicare Choice Plus: The Solution to the Long-Term Deficit Problem," Center for Economic and Policy Research, 2004; The Benefits of Full Employment (with Jared Bernstein), Economic Policy Institute, 2004; "Professional Protectionists: The Gains From Free Trade in Highly Paid Professional Services," Center for Economic and Policy Research, 2003; "The Run-Up in Home Prices: Is It Real or Is It Another Bubble," Center for Economic and Policy Research, 2002. His book Getting Prices Right: The Battle Over the Consumer Price Index (M.E. Sharpe, 1997) was a winner of a Choice Book Award as one of the outstanding academic books of the year. He was also the author of the weekly online commentary on economic reporting, the Economic Reporting Review (ERR), from 1996 - 2006.
He has worked as a consultant for the World Bank, the Joint Economic Committee of the U.S. Congress, and the OECD's Trade Union Advisory Council.
His columns have appeared in many major media outlets including the Atlantic Monthly, the Washington Post, and the London Financial Times. He is frequently cited in economics reporting in major media outlets, including the New York Times, Washington Post, CNBC and National Public Radio.
Friday, July 23, 2010
Noted Economist James K. Galbraith to Obama's Commission on Deficit Reduction: "...it is difficult to believe that the goal of deficit reduction per se serves any coherent, or presently desirable, economic objective."
Statement to the Commission on Deficit Reduction
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
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 creditdriven 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 & 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.
Monday, May 31, 2010
Social Security on the Chopping Block: Obama and the Congress getting set to pull off what Bush could not ...UNLESS WE STOP THEM!
Whacking the Old Folks
In setting up his National Commission on Fiscal Responsibility and Reform, Barack Obama is again playing coy in public, but his intentions are widely understood among Washington insiders. The president intends to offer Social Security as a sacrificial lamb to entice conservative deficit hawks into a grand bipartisan compromise in which Democrats agree to cut Social Security benefits for future retirees while Republicans accede to significant tax increases to reduce government red ink.
Obama's commission is the vehicle created to achieve this deal. He ducks questions about his preferences, saying only that "everything has to be on the table." But White House lieutenants are privately talking up a bargain along those lines. They are telling anxious liberals to trust the president to make only moderate cuts. Better to have Democrats cut Social Security, Obama advisers say, than leave the task to bloodthirsty Republicans.
The president has stacked the deck to encourage this strategy. The eighteen-member commission is top-heavy with fiscal conservatives and hostile right-wingers who yearn to dismantle the retirement program. The Republican co-chair, former Senator Alan Simpson, is especially nasty; he likes to get laughs by ridiculing wheezy old folks. Democratic co-chair Erskine Bowles and staff director Bruce Reed secretly negotiated a partial privatization of Social Security with Newt Gingrich back when they served in the Clinton White House, but the deal blew up with Clinton's sex scandal. Monica Lewinsky saved the system.
Any recommendations require fourteen votes, and Obama has at least five loyalists who will protect him—Senators Dick Durbin and Max Baucus, Representatives Jan Schakowsky and Xavier Becerra, and former SEIU president Andy Stern. On the other hand, if Obama really wants to make a deal, these commissioners will very likely support him.
The people, once again, are kept in the dark. The Obama commission will not report its recommendations until after this fall's elections—too late for voters to express objections. Both parties assume they can evade blame by holding hands and jumping together.
What's extraordinary about this assault on Social Security is that a Democratic president is leading it. Obama is arm in arm with GOP conservatives like Wall Street billionaire Pete Peterson, who for decades has demonized Social Security as a grave threat to the Republic and has spread some $12 million among economists, think tanks, foundations and assorted front groups to sell his case. If Obama pulls the deal off, this will be his version of "Nixon goes to China"—a leader proving his manhood by going against his party's convictions. Even if he fails, the president will get some protective cover on the deficit issue. After all, he is targeting Big Government's most beloved and trusted program—the New Deal's most prominent pillar.
Obama's initiative rests on two falsehoods spread by Peterson's propaganda—the notion that Social Security somehow contributes to the swollen federal deficits and that cutting benefits will address this problem. Obama and his advisers do not say this in so many words, but their rhetoric implies that Social Security is a big source of the deficit problem. Major media promote the same falsehoods. Here is what the media don't tell you: Social Security has accumulated a massive surplus—$2.5 trillion now, rising to $4.3 trillion by 2023. This vast wealth was collected over many years from workers under the Federal Insurance Contributions Act (FICA) to pay in advance for baby boom retirements. The money will cover all benefits until the 2040s—unless Congress double-crosses workers by changing the rules. This nest egg does not belong to the government; it belongs to the people who paid for it. FICA is not a tax but involuntary savings.
As a candidate, Obama assured voters that any shortfall was in the distant future and could be easily resolved with minor adjustments. As president, he has abandoned this accurate analysis and turned rightward without explaining why. He faces an awkward problem, however. Despite conservative propaganda, cutting Social Security will have no impact on the deficit problem that so stirs public anxiety. The White House knows this, and some advisers admit as much. So why is the president targeting Social Security?
Paul Volcker, former Federal Reserve chair and adviser to the president, declares, "In my view, we can deal with the Social Security problem fairly promptly." Cutting benefits, Volcker adds, "is not going to deal with the deficit problem in the short run, but it's confidence building." John Podesta of the Center for American Progress, another adviser, agrees but says, "Reforms could starkly demonstrate to skeptical debt markets that the United States is willing to take on a politically difficult fiscal issue."
In other words, targeting Social Security is a smokescreen designed to reassure foreign creditors and avoid confronting the true sources of US indebtedness. The politicians might instead address the cost of fighting two wars on borrowed money or the tax cuts for the rich and corporations or the deregulation that led to the recent financial catastrophe and destroyed vast wealth. But those and other sources of deficits involve very powerful interests. Instead of taking them on, the thinking in Washington goes, let's whack the old folks while they're not watching.
This issue is a seminal fight with the potential to scramble party politics. If Democrats can no longer be trusted to defend Social Security, who can be? The people from left to right overwhelmingly support the program (88 percent), and a majority (66 percent) believe benefits should be increased now to cope with the loss of jobs and savings in the Great Recession.
Citizens can win this fight if they mobilize smartly. We can do this by arousing public alarm right now, while members of Congress face a treacherous election and before Obama can work out his deal. Some liberal groups are discussing a "take the pledge" campaign that demands senators and representatives sign commitments to keep Hands Off Social Security Benefits. If politicians refuse to sign, put them on the target list for November. Barack Obama is standing on the third rail of politics—let's give him a warning jolt.
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