Galbraith blasts the deficit commission
Jamie Galbraith lets President Obama’s Deficit Reduction Commission have it with both barrels (TOH to Warren Mosler). His arguments, summarized [our accompanying thoughts in brackets]:
- Secrecy, ill suited temperament, an overwhelming presence of politicians instead of economists, and conflicts of interest (including funding by anti-entitlement activists) cast a cloud of illegitimacy over the commission’s work.
- Roughly 90% of recent public deficits and growth in debt was caused by the financial crisis and economic slowdown; not by discretionary public spending.
- Future deficit predictions are based on unrealistic assumptions and forecasts. It is unlikely that private sector credit and demand growth will produce the outcomes forecasted by the CBO. Thus, future debt to GDOP levels are likely to be higher than anticipated [as in Japan]. And if future deficits are due to high unemployment, then cutting spending and/or raising taxes cannot lower them! [Again, think Japan.]
- An “assumed rise in interest rates drives the projected debt-to-GDP dynamic,” but that simply isn’t in the cards today [and probably isn't until sometime in the 2020s.] The Commission’s first step should be to demand more internally coherent and logically consistent economic forecasting models.
- “The only way to reduce public deficits is to restore private credit,” and this can only happen if unemployment falls. In the private sector, this requires that financial sclerosis be cleared out via household debt restructuring and bank reform. It could be carried out by the public sector as during WW2 [and the early to middle New Deal years], but this would fly in the face of the Commission’s mandate [we suspect that demographics make a private sector led deficit reduction, as occurred in the 1990s, almost impossible -- assuming it's even desirable to have sustained balanced budgets in the one sector of the economy that creates money]. Entitlement reform is irrelevant to financial reform, but seems to be the focus of the commission [see #1 conflicts of interest, and #6].
- A focus on the “solvency” of Social Security and Medicare is outside the Commission’s mandate.
- Social Security is a transfer program, and by definition, it uses no net economic resources and cannot be presumed to have an effect on economic variables like real interest rates. Thus, it is irrelevant to deficit reduction. [Some important qualifications could be made on this point -- e.g., to the extent that transfer payments shift incentives they do impact economic variables -- but still an important point for policymakers and the public to understand.]
- The commission’s charter states that a balanced primary budget by 2015 is its goal, without any meaningful economic justification. Judging by Treasury yields, financial markets do not seem to be worried about current or future deficits. [If the U.S. operated on a gold standard, it would have to obtain new units of money from the private sector (the gold industry), and thus unsustainable deficits could indeed lead to a devaluation of money. Today, the U.S. government and a few others create money out of thin air. This has only been the case since 1973, and so far only one country -- Japan -- has tested the limits of deficit and debt levels, with no ill effects to speak of. One could argue that similar experiments were carried out during wars, but there was always an implicit (and often an explicit) assumption that monetary arrangements would revert back to their antebellum status quo.]
- The federal government is self financing (see #8). Unlike any other sector of the economy, it spends first and borrows later, thus financing the purchases of its debt. [This essential process is somewhat obscured by current Federal Reserve system operating procedures, but it's there nonetheless. Deficit phobes and gold bugs will shriek that fiat currencies are always and everywhere inflationary, but the fact is that fiat currencies offer the best tool for mitigating the risks of both inflation and deflation, which occurred regularly under the classical gold standard according to the data.]
- [This one's so good we're inserting it wholesale.] 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.
If there’s a silver lining to Galbraith’s piece, it’s this excerpt (aspects with bullish implications are in bold):
President Obama and his economic team face a daunting challenge: how to deliver economic growth they know can only come from deficit spending, while deferring into the future the “fiscal consolidation” which is being pressed on them by practically everyone, from Peter G. Peterson to Angela Merkel.
Clearly the “bipartisan deficit commission” — like practically all bipartisan commissions – was a device to deflect this pressure. The President created the Commission while pressing for a stronger growth strategy, and has sent every discreet signal (notably in the commission’s minuscule operating budget) that the exercise should not be taken seriously.
URLs:
http://moslereconomics.com/2010/07/02/link-to-galbraiths-latest-well-worth-reading/
Tags: austerity, Deficits, Medicare, Social Security
News and Views | art July 8, 2010
