Tomorrow’s election, whatever the outcome, will do nothing to move us toward solving what is arguably the worst financial and economic mess this nation has ever experienced. Neither side has admitted the extent of the problem, nor suggested even reasonably sensible solutions. We are drowning in a horrible bi-partisan morass.
The saddest thing is that this election seems to be mainly about political positioning for the election of 2012. By then it is likely that rescuing the economy will require far more painful actions than what might help today.
There are three basic problems that are being ignored (and which I’ll deal with in future postings). First, our economy over the past 30 years has been built on debt. For consumers and government alike, debt has grown faster than their ability to repay. Consumer debt has grown faster than income, and government debt faster than the economy (measured by Gross Domestic Product). In 1981, when Ronald Reagan became president, Federal debt as a percent of GDP was 30%. When George W. Bush became president in 2001, it was up to 56%. Eight years later, when President Obama was inaugurated, it was up to 76%. As I write this, the ratio of Federal debt to GDP is 93%.
This is a bi-partisan problem that neither party addresses. Our economic woes cannot be solved by further government borrowing. It is fashionable to urge more stimulus spending by comparing today’s situation to the late 1930s, and to fault President Roosevelt for not borrowing to stimulate a stumbling economy. Whatever the merits of the argument, the fact is that FDR could have increased government borrowing; Federal debt remained around 40% of GDP for the entire decade. (It did rise to over 100% during World War II, then declined again to 71% by 1954, and then fell steadily to 30% by 1980.) At today’s 93% of GDP, Federal debt cannot be increased without risking the credit of the whole nation.
The second ignored problem has to do with the increased role our stock market plays in today’s economy. When John J. Raskob wrote in August 1929, on the eve of the market collapse, that “Everyone Ought To Be Rich” by buying stock, only a very small percentage of Americans were investing. More important, the notion of “saving for retirement” by buying stock didn’t exist.
Today, on the advice of experts, at least half of our adult population has come to depend on the stock market for some or all of their retirement income. This bizarre version of the Raskob argument – Everyone Can Retire on Stocks – is based on no more evidence than Raskob offered in 1929, namely that stock prices went up in the past. Today’s promoters can refer to 70 years of stock prices, yet the reality is the same. No one knows where stock prices are going to be 70 years from now, nor for that matter 7 years from now. Can we expect to have a healthy stock market, when government finances and consumer finances alike are in shambles? Maybe, but as I write, stock prices in general are at the same level as they were in 1998.
Finally (since this is becoming even sadder than I can bear), our public and political talk about saving the economy relies heavily on the powers of “the Fed” – that is, on the ability of the Federal Reserve Bank to drive the economy, through its ability to “print money” or “to create money from nothing” (as a recent popular book put it). The reality, unfortunately, is that the Fed has no powers to lift the economy on its own. (I’ll attempt to clear up the confusion in coming months.) In any case, I suspect that no informed American who reads expert commentary on the Fed understands the meaning of “printing money,” nor of the latest fad phrase, “quantitative easing.” I have a gut feeling, and some anecdotal evidence, that the experts don’t really know what the phrases mean either.
The immediate need, of course, is for the government to increase its revenues significantly and use the increases to put Americans to work improving our educational system and undertaking environmental and infrastructure projects. It is just silly to suggest making the rich richer, in the hope that they will invest their added wealth to expand the economy, when there is already enough wealth to make the needed investments, if the wealthy wanted to make them. But it is equally as silly to suggest making it easier for lenders to lend, when borrowers need to reduce their level of debt, not increase it.
I’ll be writing about this as well in future postings.
Social Security bashers may have toned down their rhetoric, but they are still pushing a fundamental lie.
Back in February, when Alan Simpson was reported to be President Obama’s choice to chair the new debt-reduction commission, Lori Montgomery of the Washington Post spoke to Simpson on the phone: “How did we get to a point in America,” Simpson asked, “where you get to a certain age in life, regardless of net worth or income, and you’re ‘entitled’? The word itself is killing us. Our job is to move this issue forward.”
Montgomery dutifully repeated Simpson’s dishonest claim that the nation faces soaring deficits “as retiring baby boomers tap into the entitlement programs, Social Security and Medicare.”
Lumping together Medicare, which presents a real problem for the national budget, and Social Security, which has no bearing on the budget at all, has long been a favorite ploy of those for whom Social Security’s cooperative, inter-generational structure is anathema. The fact that Social Security has also worked financially for 70 years, despite constant predictions of its bankruptcy, only inflames its enemies.
While the tone has been changing, the attacks have continued. Even Paul Krugman, who came in recent years to admit the difference between Medicare and Social Security, hasn’t quite gotten himself to say that Social Security has nothing to do with the Federal budget. On August 15, he wrote in the New York Times: “Legally, Social Security has its own, dedicated funding, via the payroll tax (“FICA” on your pay statement). But it’s also part of the broader federal budget. This dual accounting means that there are two ways Social Security could face financial problems. First, that dedicated funding could prove inadequate, forcing the program either to cut benefits or to turn to Congress for aid. Second, Social Security costs could prove unsupportable for the federal budget as a whole.”
Read that passage again, and I’m sure you will think, as I did, Huh? What can it mean to say that a program with its own legally dedicated funding is “also part of a broader budget”? Krugman knows perfectly well that “dual accounting” is a misnomer. Linking Social Security finances and the Federal budget requires fudged accounting, as I pointed out in this blog in June (“Bill Clinton’s Phantom Surpluses”). That foggy word “unsupportable” gives Krugman away.
Furthermore, Social Security has had its own dedicated funding for 70 years, and whenever that funding was close to inadequate, the contribution/benefit formulas were adjusted. Social Security has never turned to Congress for financial aid, although it is Congress that passes legislation, on the advice of Social Security actuaries, to make those contribution/benefit adjustments. In fact, the other side of Social Security having its own legally dedicated funding is that Congress is legally prohibited from shifting funds from general revenues to Social Security. And unless Alan Simpson and other Social Security bashers have their way, that legal separation will remain in force.
Now David Leonhardt has weighed in with a softer version of the old dishonesty, in his New York Times column this morning. While the focus of the column is on reducing Medicare costs, since they are “above all” the cause of budget problems, he can’t resist adding Social Security as the second most important source of future budget savings. “Tweaking” Social Security, he writes, “can help shrink the deficit,” even more than “cutting waste” or “ending the war in Afghanistan.”
The Times appends a table to the column, showing “Projected Federal Spending” on Medicare, Social Security, and other programs, without explaining how the government “spends” money on a program with its own dedicated funding.
In fact, the government does not “spend” money on Social Security, and neither tweaking nor slashing Social Security will have any effect at all on the Federal budget. But I can hear killer Simpson taking a gentler tack in the future: “We’re only tweaking Social Security.”
Most good-hearted people are pleading with Congress not to cut Social Security benefits, because doing so will hurt poor people. The stronger argument for demanding that the debt-reduction commission take Social Security off the table entirely is that it has nothing to do with the nation’s debt. Period.
For the second time in a decade, official Washington is spreading a bogus story about Social Security and the Federal budget. In the earlier version, the Clinton administration claimed four years of budget surpluses by pretending that the money the government borrows from the Social Security Trust Fund doesn’t count toward the Federal debt. “We are actually paying down the national debt,” Clinton boasted in his final State-Of-The-Union message in January 2000. “If we stay on this path, we can make America debt-free for the first time since Andrew Jackson was President in 1835.”
Of course there never was a surplus, nor a dollar of debt paid down. In fact, when the new
administration and Congress took their seats a year later, the national debt was higher than five years earlier. Congress was soon asked to raise the legal debt limit, and it turned to the Congressional Research Service for an explanation. In June 2002 CRS produced a report with the comical title, “The Debt Limit: The Need to Raise It After Four Years of Surpluses.”
Government debt today, bloated by thirty years of deficit spending, $6 trillion of it during George W. Bush’s presidency alone, is far more troubling than it was in the Clinton years. But the bogus story circulating in Washington is similar. Changes in Social Security contributions and benefits, it is said, will help control future government deficits.
Officials like Alan Simpson, Republican co-chair of the President’s National Commission on Fiscal Responsibility and Reform, and Ben Bernanke, Chairman of the Federal Reserve System, are preparing the American people for adjustments to “entitlements,” notably Social Security and Medicare/Medicaid, that they claim will help reduce the Federal deficit.
They are right about Medicare/Medicaid; some 40% of its expenditures come out of general government revenues. Reducing medical spending will lower the deficit.
But they are wrong about Social Security. Every dollar of Social Security benefits is paid out of the Trust Fund, none out of general government revenues. The only result of raising the contribution rate or reducing benefits would be to increase the money in the Fund. It would not help the deficit at all. The government does not borrow for Social Security; it borrows from Social Security.
But myths die hard in Washington. Peter Orszag’s Office of Management and Budget still publishes historical data showing surpluses for fiscal years 1998 through 2001. And Erskine Bowles, who was Bill Clinton’s chief of staff during those years and now co-chairs the National Commission, is still praised for “orchestrating the first balanced budgets in nearly 30 years.”
If we hope to have an honest discussion of the best ways to attack today’s Federal debt, we need to bury the surplus myth – and its current version – once and for all.
The myth could not have been created before 1997. In that year, the Bureau of the Public Debt, which has published the nation’s official “Total Public Debt Outstanding” since 1791, began dividing the debt into two categories:
Debt owed to Social Security and other trust funds, called “Intragovernmental Holdings,” and debt owed to everyone else, called “Debt Held By the Public.” The rationale for the separation is that “Debt Held By the Public” represents Treasury bonds sold in public financial markets, while intragovernmental debt represents mostly book entry debt – with the notable exception of Social Security, which holds Treasury bonds sold privately to the Trust Fund.
Whether or not dividing government debt that way is useful, doing so does not change the total debt itself. As of April 20, 2010, according to the Bureau, Total Public Debt Outstanding was $12.9 trillion. In other words, over the years the government has borrowed and spent a cumulative total of $12.9 trillion. That is real money that the government has paid to individuals or groups for goods and services it received.
Where does the government find the money? It borrows some in public financial markets, and some from the Social Security Trust Fund. By the end of 2009, it had borrowed a cumulative total of $2.5 trillion from the Fund.
Whatever the source, all the money the government borrows adds to the Federal debt. The CRS report explained the four years of claimed surpluses this way: Debt did fall by $448 billion in the “public” category, but in the “intragovernmental” category, debt grew by $853 billion. “The combination raised the total debt subject to limit by $405 billion between the end of fiscal year 1997 and the end of fiscal year 2001.”
The claim that today’s government deficits can be reduced by raising Social Security taxes and/or reducing benefits is as bogus as the mythical surpluses. Like Las Vegas, what happens in Social Security stays in Social Security.
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Tomorrow’s election, whatever the outcome, will do nothing to move us toward solving what is arguably the worst financial and economic mess this nation has ever experienced. Neither side has admitted the extent of the problem, nor suggested even reasonably sensible solutions. We are drowning in a horrible bi-partisan morass.
The saddest thing is that this election seems to be mainly about political positioning for the election of 2012. By then it is likely that rescuing the economy will require far more painful actions than what might help today.
There are three basic problems that are being ignored (and which I’ll deal with in future postings). First, our economy over the past 30 years has been built on debt. For consumers and government alike, debt has grown faster than their ability to repay. Consumer debt has grown faster than income, and government debt faster than the economy (measured by Gross Domestic Product). In 1981, when Ronald Reagan became president, Federal debt as a percent of GDP was 30%. When George W. Bush became president in 2001, it was up to 56%. Eight years later, when President Obama was inaugurated, it was up to 76%. As I write this, the ratio of Federal debt to GDP is 93%.
This is a bi-partisan problem that neither party addresses. Our economic woes cannot be solved by further government borrowing. It is fashionable to urge more stimulus spending by comparing today’s situation to the late 1930s, and to fault President Roosevelt for not borrowing to stimulate a stumbling economy. Whatever the merits of the argument, the fact is that FDR could have increased government borrowing; Federal debt remained around 40% of GDP for the entire decade. (It did rise to over 100% during World War II, then declined again to 71% by 1954, and then fell steadily to 30% by 1980.) At today’s 93% of GDP, Federal debt cannot be increased without risking the credit of the whole nation.
The second ignored problem has to do with the increased role our stock market plays in today’s economy. When John J. Raskob wrote in August 1929, on the eve of the market collapse, that “Everyone Ought To Be Rich” by buying stock, only a very small percentage of Americans were investing. More important, the notion of “saving for retirement” by buying stock didn’t exist.
Today, on the advice of experts, at least half of our adult population has come to depend on the stock market for some or all of their retirement income. This bizarre version of the Raskob argument – Everyone Can Retire on Stocks – is based on no more evidence than Raskob offered in 1929, namely that stock prices went up in the past. Today’s promoters can refer to 70 years of stock prices, yet the reality is the same. No one knows where stock prices are going to be 70 years from now, nor for that matter 7 years from now. Can we expect to have a healthy stock market, when government finances and consumer finances alike are in shambles? Maybe, but as I write, stock prices in general are at the same level as they were in 1998.
Finally (since this is becoming even sadder than I can bear), our public and political talk about saving the economy relies heavily on the powers of “the Fed” – that is, on the ability of the Federal Reserve Bank to drive the economy, through its ability to “print money” or “to create money from nothing” (as a recent popular book put it). The reality, unfortunately, is that the Fed has no powers to lift the economy on its own. (I’ll attempt to clear up the confusion in coming months.) In any case, I suspect that no informed American who reads expert commentary on the Fed understands the meaning of “printing money,” nor of the latest fad phrase, “quantitative easing.” I have a gut feeling, and some anecdotal evidence, that the experts don’t really know what the phrases mean either.
The immediate need, of course, is for the government to increase its revenues significantly and use the increases to put Americans to work improving our educational system and undertaking environmental and infrastructure projects. It is just silly to suggest making the rich richer, in the hope that they will invest their added wealth to expand the economy, when there is already enough wealth to make the needed investments, if the wealthy wanted to make them. But it is equally as silly to suggest making it easier for lenders to lend, when borrowers need to reduce their level of debt, not increase it.
I’ll be writing about this as well in future postings.