The Washington Post’s mission has been to create a “moral panic” sufficient to cause the Obama administration to overcome the objections of Senate Democrats and adopt the “Grand Bargain” (sic). The deal would actually constitute the Grand Betrayal. The betrayal of Democratic Party principles and promises would inflict a recession through massive austerity via large cuts to the safety net and social programs and modest/moderate increases in revenues.
Throughout December, the Post flogged the “fiscal cliff” as its panique du mois. Using the “fiscal cliff” to panic Obama into the Grand Betrayal required the Post’s writers to panic us through two simultaneous, contradictory moral rants (1) it was essential to prevent the fiscal cliff by agreeing to the “Grand Bargain” (sic, Grand Betrayal) immediately because austerity would doom us to falling back into recession absent a deal and (2) it was essential that the “Grand Bargain” (sic) impose even more severe austerity than the “cliff” – for a full decade – because only austerity could save us.
The fact that the Post’s deficit hawks felt that their best way to panic Obama into agreeing to austerity was to scream that the “fiscal cliff’s” austerity would cause a disaster and must be avoided by adopting the Grand Betrayal’s even greater austerity reveals that they knew they had no coherent argument in favor austerity as a response to the Great Recession. They would not have picked an internally contradictory argument if they had a logical alternative.
The Post’s reporters and columnists have drunk Pete Peterson’s punch. Peterson is the Republican Wall Street billionaire who is devoting the remainder of his life and $1 billion to pushing his assault on the safety net and spending on social programs. Peterson’s ultimate goal is to privatize Social Security so that Wall Street can obtain hundreds of billions of dollars in fees off managing our retirement savings. The Post’s hawks have seen austerity throw the Eurozone back into a gratuitous recession, but remain eager to inflict austerity on us even though they predict it will cause a recession.
The questions I had about the Post’s coverage once the “fiscal cliff” deal was struck were how long would it take them to try to generate a new moral panic demanding prompt passage of the Grand Betrayal how would they deal with their contradictory messages that austerity was the problem and the solution? The combination of sharp cuts to spending and moderate/modest increases in taxes constitutes severe austerity for an economy that is still performing far below capacity and suffers severe unemployment and underemployment. The Grand Betrayal’s austerity is likely to throw us back into recession. Because the austerity will last for a decade it could inflict multiple recessions us and make those recessions more severe. How would they try to make more frequent and severe recessions attractive to the public?
The answer to the first question of how long it would take the hawks to renew their efforts to induce a new moral panic about deficits was less than 24 hours. The answer to the second question varied by the deficit hawk writer. I wrote a column about Robert Samuelson’s relentless efforts to panic the public in October 2012 entitled: “Robert J. Samuelson tries to create a moral panic about deficits.” I exposed in that column, and a follow-up column, his mendacious description of another Pete Peterson outfit (“Third Way”) as a “liberal” group that supported his position. It’s actually Wall Street on the Potomac.
The aspect I liked best about Samuelson’s column was that he was demanding that the millions of additional workers lose their jobs through a gratuitous recession he admitted that inflicting austerity would cause accept their fate without protest. It’s unpleasant for us when you, or your hungry kid; whines all night after we cut your SNAP (food stamps). It is impossible to compete with unintentional self-parody.
Well, Samuelson is back, and pissed as hell at Obama for not getting the Grand Betrayal past Senate Majority Leader Harry Reid – who literally threw Obama’s suggest instrument of surrender into his burning fireplace. As soon as the “fiscal cliff” deal reached Samuelson thundered that it represented at a “failure of presidential leadership” because Obama did not agree to Republican demands for austerity as a response to the Great Recession.
Samuelson laments first that the “fiscal cliff” deal slightly increases the marginal income tax rate for the richest two percent of us. Their highest marginal rate will remain dramatically lower than in any modern war. Seriously, that’s Samuelson’s top concern? Samuelson claims:
“The obsession with rates is bad policy (higher rates may threaten risk-taking, work effort and hiring) but qualifies as good politics: It signals Obama is macho; he’s tough on the rich, who are implicitly blamed for the nation’s budget and economic woes.”
So many untruths in two sentences: one, it’s not an obsession, it’s a deal on taxes and marginal rates are what have been lowered repeatedly for the wealthiest Americans. If Samuelson were serious about a “deficit crisis” he would be pushing over the longer term for much higher taxes on the wealthy. Samuelson, however, is a Peterson stooge and shares Wall Street’s continuing demands for ever lower income taxes on the wealthiest one-to-two percent.
Two, there is no credible evidence that a minor, partial return, still well below modern historical norms, in the highest marginal rate will have any negative effects on “risk-taking, work effort, and hiring.” We have experienced our worst, negative growth, under our lowest marginal tax rates for the extremely wealthy.
Inequality has surged and yes, the top people in finance, who represent a disproportionate share of the wealthiest Americans are by far the most culpable people for the Great Recession. It was their frauds that made far too many of them wealthy and caused the greatest loss of middle class wealth in at least 75 years. So, on any grounds of fairness the wealthiest Americans should have never have gotten these tax cuts and the maze of tax advantages they abuse to pay marginal tax rates that are often lower than their employees.
Being responsive to unfairness produced by power and the abuse of power is a good thing in a democracy. What Samuelson is describing is good democracy, not simply politics.
No one thinks Obama is macho. The media accounts from 2011 and the current deal are consistent in describing him as a weak negotiator saved from disaster by Senate liberals and Tea Party Republicans in the House.
But Samuelson soon gets to the Peterson agenda – Social Security is first on his list for betrayal.
“The larger cause is that Obama refuses to concede that Social Security, Medicare and Medicaid are driving future spending and deficits. So when Republicans make concessions on taxes (as they have), they get little in return. Naturally, this poisons the negotiating climate.”
How did Social Security make it to first on his list? It is producing surpluses, not deficits. Samuelson loathes the AARP and literally blames older Americans for “ruin[ing] America.” He thinks grandpa is a fifth columnist leech. He pines for the day in when the Paul Ryans of the world will have the “courage” to throw grandpa under the bus. Here’s the title and the link to his article denouncing “the elderly.”
Why are we in this debt fix? It’s the elderly, stupid.
Medicaid also does not belong on the list. We can substantially reduce Medicaid expenditures by reducing unemployment and poverty. Unemployment and poverty cause enormous economic waste. We can virtually eliminate long-term unemployment at any time we wish by creating a federal jobs guarantee program that would also significantly increase growth. If we reduce unemployment dramatically we will also reduce poverty substantially. Medicaid is a program for those at or near poverty.
That leaves Medicare, which does in fact, overwhelmingly, drive the long-term CBO projections that Samuelson often cites. I will return to Samuelson’s arguments about long-term budget issues, but there is a more immediate point that must be emphasized here – nothing he argues (even if it were true) would justify austerity now. Imposing austerity now would make all of the difficulties he cites far greater
There is no economic rationale for inflicting austerity on an economy in our circumstances. We are suffering from a jobs crisis, not a debt crisis. Samuelson concedes that: “A weak economy creates few new jobs, and the lack of jobs is the nation’s No. 1 social problem.” When there is a recession unemployment grows substantially, causing the national government’s revenues to fall sharply and increasing its expenditures, e.g., for unemployment compensation. (The opposite effect occurs during rapid growth if inflation begins to develop.) This process is part of the automatic fiscal stabilizers we and other prudent nations have built into our economies. The result is an automatic (no delays to pass new legislation) counter-cyclical fiscal policy that reduces the severity of economic crises. Recessions are now, on average, far less severe and long-lived than before automatic stabilizers.
We are not suffering, however, from an average recession. It is called the Great Recession because it is much more severe than a typical recession. As Samuelson concedes, in the recovery from a Great Recession demand will be severely inadequate and far too employers will hire, making jobs the number one problem. To increase jobs and recover more quickly from a Great Recession it is essential that the federal government step forward to replace the lost demand. The last thing one wants is for the federal government to inflict austerity through (net) tax increases and (net) spending reductions. Obama’s failure of leadership was not getting the payroll tax reduced. He should not have made expenditure cuts “in return” to the Republicans for tax increases to the wealthiest because that would have harmed the recovery, as Samuelson has conceded. Obama should have lowered the payroll tax and rates for the working and middle class to ensure there was no net increase in taxes. Reducing those taxes would have greatly added to private sector demand, which would speed the recovery.
Austerity is a pro-cyclical policy – it makes the recession more severe. It is as economically illiterate as bleeding a patient is medically illiterate. In a moment of clarity (soon obscured by analytical incoherence), a Post reporter, Zachary Goldfarb, concedes this point in the first clauses of his first sentence.
“The deal to which the House gave final approval late Tuesday will head off the most severe effects of the “fiscal cliff” by averting a dangerous dose of austerity….”
Very good: “austerity” is “dangerous” and will have “severe effects” on our economy. It needed to be “head[ed] off.”
Goldfarb notes that the agreement fails to “defuse” the Republican Party’s threat to use the debt ceiling to extort President Obama by threatening to cause a default unless he agrees to inflict austerity on the Nation. That’s a fair and important criticism that Samuelson ignores because it would refute his claim of Republican virtue spurned by Obama. It is logically consistent with Goldfarb’s prior argument – austerity would be disaster.
Goldfarb’s next major point is also logically coherent.
“Nor does the package do anything to address stubbornly high levels of unemployment, with 12 million Americans out of work. Instead, the deal could aggravate the problem. By allowing the payroll tax cut to expire, the deal takes money out of the hands of many Americans, sucking it out of the economy and slowing economic activity.”
Again, the consistent point being made is that austerity would be self-destructive. Then things come unhinged.
“And, finally, the deal is too modest to fundamentally tame the government’s soaring debt. The nation’s long-term finances remain in peril, with federal spending projected to rise dramatically as a wave of retiring baby boomers turns to the government for help in paying for ever-more-costly health care.”
Suddenly, the problem is that the deal inflicts too little austerity. Immediately after explaining that austerity would “slow economic activity” the writer claims, that the deal imposes too little austerity. He makes the claim not as a matter of opinion, but of fact. He makes his assertion with no apparent understanding of his internal inconsistency. Note that he does, implicitly, concede that the key issues are health care costs and Medicare rather than Social Security or Medicaid.
The article then appears to recover, only to plunge into total incoherence.
“Despite the drawbacks, the bipartisan deal may well have been the heaviest lift a deeply divided Congress could have accomplished. And the package, no doubt, has its benefits.
It is likely to prevent the nation from dipping back into recession. It cancels massive tax increases facing middle-class and poor Americans. And it delays deep and blunt government spending cuts for two months.
And while the agreement does nothing to reduce joblessness, it renews unemployment benefits that would have otherwise expired, offering vital help to the jobless and averting another blow to economic activity.
And finally, by raising a little more than $600 billion in fresh tax revenue from the wealthy, the deal takes a step toward bringing spending and taxes into line for the next few years — though economists say much more needs to be done over the long run.
President Obama had sought a larger agreement that would raise taxes by more than double what he got in the deal. He also wanted to take the debt ceiling off the table and offset deep spending cuts with more taxes and more targeted savings in entitlements — including Medicare and Social Security. He also asked for new economic stimulus measures to help bring down unemployment, including an extension of the payroll tax holiday.
Republicans had also wanted a deal that would cut the deficit more, though their prescription was different from Obama’s. Instead of taxes, they preferred deeper cuts to domestic spending and changes to entitlements.”
The first two sentences remain coherent – by avoiding austerity the deal prevents us from being thrown into recession. That is an incredibly important thing.
The third sentence slides into an internal contradiction.
“And while the agreement does nothing to reduce joblessness, it renews unemployment benefits that would have otherwise expired, offering vital help to the jobless and averting another blow to economic activity.”
Goldfarb has just explained that the deal is likely to prevent a recession by blocking the “fiscal cliff’s” austerity (tax increases and spending cuts), so it does an enormous amount to “reduce joblessness” by blocking austerity. But Goldfarb misses an even more direct self-contradiction. Extended unemployment benefits were lapsing, so extending the benefits to roughly two million recipients will provide increased demand that will “reduce joblessness.”
It gets worse. Goldfarb’s next sentence begins an ode to austerity.
“And finally, by raising a little more than $600 billion in fresh tax revenue from the wealthy, the deal takes a step toward bringing spending and taxes into line for the next few years — though economists say much more needs to be done over the long run.”
No, the (net) tax increase is an austerity provision. Austerity does not necessarily “bring spending and taxes into line for the next few years.” It is far more likely to do what Goldfarb wrote earlier – cause a gratuitous recession in which case it will certainly increase unemployment and likely increase the deficit.
Goldfarb’s fifth sentence takes him further off course (but shows that Samuelson got his criticism of Obama completely wrong).
“President Obama had sought a larger agreement that would raise taxes by more than double what he got in the deal. He also wanted to take the debt ceiling off the table and offset deep spending cuts with more taxes and more targeted savings in entitlements — including Medicare and Social Security. He also asked for new economic stimulus measures to help bring down unemployment, including an extension of the payroll tax holiday.”
Goldfarb showed what many of us began warning about before the 2012 election. Obama wanted to enter into the Great Betrayal in 2011, 2012, and the start of 2013. He wanted to inflict “deep spending cuts with more taxes and more targeted savings in … Medicare and Social Security….” Note that Goldfarb is describing Obama’s incoherence on austerity. Remember, had Obama succeeded in July or November 2011 in achieving his goal – the Great Betrayal – he would have inflicted a program of austerity that would have forced the U.S. back into recession, caused a severe increase in unemployment, destroyed his reelection chances, and cost Democrats the Senate. Obama’s key advisors in fall 2011 – Treasury Secretary Geithner, Chief of Staff William Daley, and OMB head Jacob Lew – are all representatives of the Wall Street wing of the Democratic Party who generally oppose stimulus and support austerity. Lew is considered the leading candidate to replace Geithner as Treasury Secretary.
“[Obama] wanted to take the debt ceiling off the table and offset deep spending cuts with more taxes and more targeted savings in entitlements — including Medicare and Social Security.”
I understand that Goldfarb is setting out Obama’s goal here, but the failure to understand economics is so fundamental and vital to the story that if Goldfarb had spotted Obama’s error he would have pointed it out in the article. Obama thought that “deep spending cuts … and more targeted savings in … Medicare and Social Security” would “offset” “more taxes.” When the topic is austerity, “spending cuts” do not “offset” “more taxes” – they compound austerity. Obama wanted a double-barreled blast of austerity (spending cuts plus tax increases) aimed at our economy. Had he succeeded, he would have blasted us into a recession. Goldfarb and Obama appear to believe, however, that tax increases and spending cuts “offset” each other when it comes to austerity, as the next sentence of the article confirms. “[Obama] also asked for new economic stimulus measures to help bring down unemployment, including an extension of the payroll tax holiday.” Yes, that request was for stimulus, but neither Obama nor Goldfarb appear to understand that the net effects of tax changes and spending changes are the key to determining whether the overall budget inflicts austerity or provides stimulus. In both spending and taxes the net effect of the budgetary changes that Obama sought through the deal was the infliction of severe austerity on the Nation that would have forced us into recession.
Similarly, Goldfarb’s description of the even more self-destructive austerity program that the Republicans sought to inflict on the Nation demonstrates that neither he nor the Republicans understand economics.
“Republicans had also wanted a deal that would cut the deficit more, though their prescription was different from Obama’s. Instead of taxes, they preferred deeper cuts to domestic spending and changes to entitlements.”
The key error here is subtle but critical – the assumption that even “deeper cuts to domestic spending and [the safety net]” would “cut the deficit more” than Obama’s proposal. Obama and the Republicans were both trying to inflict austerity on the Nation, at a time when we were still years from full recovery from the Great Recession. As Goldfarb explained at the start of his article, such austerity was likely to force the U.S. into recession (as it did the Eurozone). A new recession would increase unemployment, dramatically reduce tax revenues, and increase expenditures. The most likely result is that the deficit would increase under both the Republican and Obama plans. The recession, unemployment, and the deficit would have been worse under the Republican plan than the Obama plan because their plan sought to inflict the greatest self-destructive austerity.
A recession occurs when demand is so inadequate that economic growth becomes negative, which is what drives large increases in unemployment and underemployment. The assumption of proponents of austerity is that if there is a $1 trillion federal budget deficit and we raise taxes by $500 billion and cut spending by $500 billion the budget will be balanced. This assumes that the federal budget has no effect on the economy. No one thinks that assumption is true. Everyone now agrees that inflicting austerity on the Nation would be stupid and likely to force us back into recession. That is why they now agree that the fiscal cliff had to be avoided – it was a program of austerity. (Governor Dean is the exception that proves the rule. He wanted us to deliberately go off the “fiscal cliff” in order to inflict severe austerity on the Nation. He predicted that it would only cause a six-month recession and then enthused about how the sacrifices made (by others, the unemployed, not him) would make America a much better place. He sounded like your Grandmother touting the benefits of her enema.) In any event, even a physician like Dean now admits that inflicting austerity would force us back into a recession. This is what has austerity did to the Eurozone (except that Spain, Greece, and Italy have Great Depression-levels of unemployment).
The news accounts about fiscal cliff, however, rarely explain why inflicting its austerity would cause a recession and make the deficit larger rather than balancing our budget. Here’s the shorter version: raising taxes in response to the Great Recession reduces private sector demand – in an economy that already has massively inadequate demand. Cutting federal spending obviously reduces public sector demand, but it indirectly reduces private sector demand. The vast bulk of federal expenditures do not go to pay federal workers’ pay, but to purchase goods and services from the private sector. (Federal workers’ spending also goes overwhelmingly to the private sector.) By further reducing demand, austerity makes the recession worse or forces the Nation back into recession or even depression, which causes unemployment and underemployment to rise. The fall in employment reduces federal revenues and increases federal expenses. The net result, therefore, of austerity in response to the Great Recession is to make the federal budget deficit, the recession, human misery (as a result of the cuts to spending), and unemployment larger. Austerity is often a lose-lose-lose-lose strategy. Stimulus in response to a Great Recession is likely to have the opposite effect because it increases growth, employment, and federal revenues while decreasing misery and federal financial assistance. By increasing revenues and decreasing expenditures for those who would have been unemployed a stimulus program can reduce the budget deficit. Stimulus can be a win-win-win-win strategy.
To be more precise, what matters is the net change. It is fine to kill stupid governmental programs and add funding to superior programs. The mix matters on both the spending and tax side, but a $50 billion job training program is not magic, it will not cause a surge in employment unless we restore adequate demand to support sharp rises in employment. One of President Obama’s best ideas was a large revenue sharing program (a Republican innovation) because he knew that the Great Recession would cause budgetary crises in many states and localities. States and localities do not have sovereign currencies and they cannot run deficits the way a nation with a sovereign currency should as part a counter-cyclical policy. Left to their own devices, states and localities respond to a Great Recession in a pro-cyclical fashion – they fire workers and cut spending when our recovery would be much faster if they were hiring. (The labor statistics have been showing this perverse pro-cyclical impact for over a year.) What we really need is a jobs guarantee program that would provide a job to everyone willing and able to work. Neither Party, however, supports such a program.
Reducing taxes for the wealthy is a bad way to respond to a recession because it does not increase their consumption as much as would tax cuts to less wealthy workers. The single best tax reduction is to stop collecting the payroll tax. It provides immediate stimulus at no material administrative expense. The payroll tax is our most regressive tax, so cutting it creates the greatest percentage boost to demand. It helps those who need the relief. The single worst decision involving the “fiscal cliff” was the refusal to extend the partial moratorium on collecting the payroll tax.
As with spending, the net change in taxes is what matters. We could increase the marginal tax rate for the wealthy and make greater cuts in taxes for those who were not wealthy, particularly by a moratorium on collecting the payroll tax. The net effect would be stimulus in response to the Great Recession and for the reasons I explained the payroll tax moratorium has a far greater stimulus effect than would a comparable tax reduction for the wealthiest Americans.
With that macro-economic review in mind we can cut through most of the nonsense chatter that discussions of the fiscal cliff generated. We do not want to make a “down payment” on deficit reduction at this time. That phrase is code for inflicting lose-lose-lose-lose austerity. It would make on a down payment on inflicting a gratuitous recession.
The time to consider raising (net) taxes and/or cutting (net) spending is when we are about to reach full employment and inflation is becoming a serious concern. Both of those factors need to be present. If we have full employment without serious inflation we will have very strength growth and the federal deficit will be coming down. You may have read from Peterson’s acolytes that we have a long-term “structural” budgetary “crisis” that must be addressed now by austerity. Our review has shown why that is false. It is the Great Recession that caused the large increase in deficits. That is what recessions do. That is why it is so insanely self-destructive to inflict a gratuitous recession via austerity on the purported grounds of the need to cut the deficit.
It is economic growth and recovery that causes deficits to fall sharply. Because the U.S. has had the sense not to inflict austerity (the eurozone’s disastrous policy) we have not been forced into a recession. The stimulus was far smaller than it should have been, but it has been sufficient to produce economic growth and the federal deficit has fallen at record rates over the last years. There is no deficit or debt crisis – as the long-term U.S. bond rate demonstrates every day.
There is one clear structural issue for our economy – the fact that health care costs have been rising much faster than the economy grows. Social Security poses no such issue. Health care costs matter because they use real resources, and real resources, unlike “money,” are scarce even for a nation like the U.S. that has the sense to maintain a sovereign currency. (Nations that adopted the euro had to abandon their sovereign currencies.) I have explained these points in some detail previously so I will only hit the most essential points here.
Here are the three things you need to understand to cut through the hysteria about health care costs, which debt hawks portray as a “structural” “crisis” for Medicare and Medicaid. First, if they are right that health care costs are going to continue to increase far more rapidly than the economy grows for the next 70 years, then Medicare and Medicaid are the least of our problems. We are unique among nations with a developed economy (but underdeveloped understanding of economics). We pay for health care costs primarily through private insurance and we have no effective cost-containment system. That combination is an idiotic recipe and if we assume that we will never learn from our experience, or the experience of our peer nations, then health care costs will continue to grow far faster than our GDP. Medicare and Medicaid are not the key generators of these increases in medical costs. Indeed, they are islands of modest constraint. Republican mandates have barred Medicare and Medicaid from imposing far more effective cost constraints. Debt hawks assume we will never learn from that mistake and will continue it for 70 years, at which point Medicare and Medicaid would represent roughly 100% of the federal budget.
Projecting that U.S. health care costs will continue to increase at roughly twice the average growth rate of GDP guarantees that federal budget expenditures will be driven by health care costs. Under the long-term scenarios that Samuelson relies on, Medicare would rise to approximately 10.5% of GDP by 2080. By 2080, this implies that combined federal Medicare and Medicaid expenditures would exceed 20% of GDP – roughly 100% of the federal budget. That is absurd, a point made forcefully by Federal Reserve economists in an article entitled: AN EXAMINATION OF HEALTH-SPENDING GROWTH IN THE UNITED STATES:
PAST TRENDS AND FUTURE PROSPECTS (by Glenn Follette and Louise Sheiner).
“All other” health care expenses would, under similar approaches to projections, rise to over 40% of GDP by 2080. The overwhelming bulk of these expenses would be private health insurance and state contributions to Medicaid. The first question that should arise, therefore, is which constraint would actually bite first and doom the projections. The imminent constraint is not the federal budget. The U.S. is neither a household nor a business firm. We have a sovereign currency that we allow to freely float and we borrow in our own currency. The U.S. federal government, therefore, is nothing like a nation that has joined the euro and given up its sovereign currency. Like Japan, the U.S. can create money, or if it chooses to issue debt it can do so at minimal interest rates even with a debt to GDP ratio over twice as large as the current U.S. ratio.
Businesses have to compete. Many must already compete globally and the future will increase the number of firms that must maintain global competitiveness. Foreign firms often provide no health care benefits to their workers. U.S. businesses also have to compete against small U.S. businesses that are not subject to the employer mandate of Obamacare. Decades before the U.S. federal government experiences ran into any real budgetary “crisis” the increase in health care costs that the CBO is projecting would bankrupt businesses that offered health insurance. If health care costs increase indefinitely at twice the growth of GDP no business can long survive paying such costs. The only question is how soon they will become uncompetitive and fail – and the business critics of Obamacare are claiming that we have already rendered them uncompetitive by requiring them to provide health insurance to a pool of very young workers in good health (i.e., a far cheaper pool to insure than would be the case for most professions and industries).
The first point is that Samuelson has missed the real crisis and where it would cause the collapse of America decades before the federal government budget would be the relevant constraint. The second point is that Samuelson fails to understand that if we cut the safety net we do not save anything – we simply transfer costs to less wealthy, sicker Americans and hospitals and their shareholders. Medicare and Medicaid are not the major drivers of the large increase in health care costs relative to GDP growth. They tend to constrain health care costs and, freed of Republican constraints on their rational operation, they would be far more effective in constraining health care cost increases. Yes, as our population ages we will have greater demands for health care, but that is because our population ages – not because of Medicare.
Our delivery system for health care, which relies primarily on private insurance, creates the perverse incentives that primarily explain the rapid increase in health care costs and why we spend roughly twice as much as a percentage of GDP for health care as our developed nations but report comparable or even inferior health outcomes. If we do not contain the increase in health care costs and we cut the health care safety net we will not save money as a society, we will simply transfer (as did Paul Ryan’s health care voucher proposal) huge expenses to the those who get sick. Many of them will be unable to pay, so if the government safety net is reduced the rapidly increasing expenses will either fall on hospitals and their shareholders in the form of unreimbursed expenses or people will die, suffer, and have their last years crippled. Actually, both things will happen as hospitals seek to minimize a dramatic increase in unreimbursed care obligations.
We could reduce our budgetary expenditures greatly in our wars if we used the draft and did not provide Veterans’ Administration, Medicare, or Medicaid health care for our returned troops. That action would certainly be cruel and unjust, but it would also fail to save costs. It would simply transfer the costs to our injured veterans.
The third point is that we will change our practices and contain the cost escalation in health care. We will do so because we have to and because it is smart to do so. We know we will be able to change and dramatically reduce the escalation in costs because dozens of other nations have been able to do so through several different approaches and we can follow proven successes. We have failed to do so at this juncture because of ideology, arrogance (if it’s not invented here it must not be useful), and because we are such a wealthy nation that we can survive our dogmatic failures for years. In the end, however, we are pragmatists with a long record of choosing paths that work. The problem in health care cost increases isn’t the safety net; it is ideologues like Samuelson who oppose measures to contain the increasing costs of health care.
The problem with reducing the payroll tax is that it will deplete the Social Security trust fund of $2.7 trillion than otherwise would be the case. The fund was instituted by Roosevelt to protect these savings for the elderly from the predations of the US Treasury, who might otherwise be tempted to use these funds for other purposes.
It’s ugly when liberals turn conservative. Adding no heart to no brains is NOT an improvement.
I wished you’d left my grandmother out of this, for most practical purposes she was almost a saint and not at all boring. Thanks for the article, the hints dropped about health care constraints becoming practical necessity is insightful. It’s obvious that time and trends will meet at a point where where available options offer little choice in the matter. I think constraints it will come sooner than later, austerity could play in forcing that hand to be played.
Thanks for Prof. Black’s most astute comments and article, and I apologize for repeating myself again, but to any American clueless about the causes of the economic meltdown, once again, it was an ultra-leveraged bankster run, coupled with the largest insurance swindles in human history.
Recall, please, that AIG’s failure necessitated the bailout and that AIG was supposed to have then been the largest insurance corporation around, and that AIG’s Financial Products group sold $460 billion worth of “unregulated insurance” or CDSes, with a potential payout of between $20 trillion to well over $40 trillion, and that AIG did not have the capital reserves to make those payouts.
Itemized explanation of financial fraud payouts from AIG: John Paulson and Goldman Sachs’ Abacus CDO, which they designed to be loaded with the crappiest mortgage loans possible, then Paulon’s hedge fund, and GS, bought shiploads of CDSes (breakdown: for each $1.4 million CDS they purchased, the insurance payout was $100 million).
Not to step on America’s greatest criminologist, Prof. Black’s toes, but that — as we all should know — constitutes colossal financial fraud, and that was simply the tip of the super-sized iceberg (Mangnetar Capital, Ambac, MBIA, etc., etc., etc.).
Frank says, “The problem with reducing the payroll tax is that it will deplete the Social Security trust fund . . . ”
100% false. FICA does not support Social Security. If FICA were $0, Social Security could continue paying benefits — even double benefits — forever. The federal government supports SS. The proof: When FICA was reduced 2%, the difference was made up out of the general fund. That is what Congress decided.
Congress similarly could (and should) decide to eliminate FICA and support all of SS out of the general fund.
No federal tax supports anything. Federal tax dollars are destroyed upon receipt. Until the public understands this, there is no hope for the U.S. economy.
Those who do not understand Monetary Sovereignty do not understand economics.
As I understand it, Social Security is funded from a payroll deduction of 6.2% of the annual maximum of $110,000.
Since the SS trust fund contains $2.7 trillion invested in US Treasury Bills which pay interest, it has never been necessary for the US government to subsidize SS payouts from general taxation.
Perhaps you are confusing this with Medicare, which receives partial funding from a payroll deduction of 1.45 % with no annual maximum and partly from general funding.
With regard to your assertion that federal tax dollars are destroyed upon receipt by the IRS, this is really just semantics since the same dollar amount is recreated in the US Treasury account. Whether or not the dollars are “destroyed” is immaterial if they are recreated, whether any actual wire transfer occurs or not. It is just an administrative convenience, which cuts banks out of the loop, who would otherwise be needed to effect the transfer.
You are correct regarding tax dollars being “destroyed.” Read your whole paragraph again, and you will see that is the whole point about Social Security and Medicare funding. The entire process is merely, as you say, an administrative convenience. Bottom line, this is what happens:
Taxpayers’ dollars arereduced. Social Security benefits are paid. The illusion is that the taxpayers are paying for Social Security benefits, but in fact, they are not. They merely are seeing their dollars reduced, while the government is paying the benefits.
Visualize taxpayers throwing dollar bills into a shredder and the government printing new dollar bills to pay Social Security and Medicare. I always think of a railroad signal, which appears to be a red light moving back and forth, when in fact, it is one light blinking ON simultaneous with another light blinking OFF. That is how all federal spending is done.
Federal taxes do not pay for federal spending. Unlike state and local taxes, federal taxes serve only to remove dollars from the economy. Federal spending adds dollars to the economy. We could have either without the other, i.e. we could have spending without taxing, and we could have taxing without spending. (And no “borrowing” needed.)
Federal taxes and federal spending — And ne’er the twain shall meet.
Rodger Malcolm Mitchell
“federal taxes serve only to remove dollars from the economy. Federal spending adds dollars to the economy”
This would be just fine if the Federal spending were done with dollars that are debt free.
That depends on what you mean by “debt free.”
When the federal government spends, it merely credits bank accounts. That does not increase debt in the classic sense, though by definition, all forms of money are debt.
The so called federal “debt” is not a burden on the federal government. It is the total of deposits in T-security accounts at the Federal Reserve Bank. These deposits continue to be owned by the so-called “lenders,” and are not owed by the government or by you or by or your grandchildren. They are just deposits in bank accounts. Period.
The words” federal debt” are misleading, as federal debt is nothing like personal debt. It’s a completely different concept. In the case of the federal “debt,” the word “debt” should be changed to “deposits.” Then people would have a better understanding of what it really is.
All of William Blake’s blog makes sense, but when it comes to the battle with Pete Peterson and his entourage, team MMT is not yet winning. Team MMT is trying to win the battle intellectually, and in the end I think that they’re only going to convince people like me who are already on board.
People in general make decisions on an emotional basis and Pete Peterson’s position is appealing to that area of decision making in the general public. Team MMT needs to promote a position that is simple to understand, concise and more emotionally appealing than the position of Mr. Peterson and his supporters.
This may be a tough pill to swallow, but team MMT could use an outspoken politician to head up the position against Pete Peterson. In addition, making peace with Paul Krugman would probably be productive to the total effort to stop Mr. Peterson’s attempts to dismantle the current entitlements. Maybe current disagreements with Paul Krugman could be reframed as a friendly game of ping pong between him and Randall Wray.
I recommend that Stephanie Kelton try to contact and meet with Congressman Alan Grayson. I believe that if team MMT is going to be successful in nullifying the attempts of Pete Peterson, then they’re likely going to need the help of Congressman Grayson. Then the position in favor of entitlements could be further simplified and appeal to the emotional as well as the rational side of the general public.
Here’s a suggestion. Start by reframing seniors as one of the “jet engines” of the economy. Seniors spend a greater percentage of their money since they are not likely putting money away for a down payment on a house or for a college fund. The money that they receive from Social Security and the savings they get from the lower premium Medicare insurance will be spent in the economy and thus create jobs. Any reduction in these entitlements would lead to a reduction in jobs. In other words Pete Peterson and his supporters want to put in place policies that would reduce jobs in the economy. This is the type of emotional argument to make against Mr. Peterson, and it can be consistent with MMT in that government spending, including the money spent for entitlements, creates jobs. Front-loading an emotional position; then adding some of the intellectual positions of MMT would in my opinion be the best approach to counter Mr. Peterson and hopefully get the best results from the policy makers in favor of the current entitlements.
“Peterson’s ultimate goal is to privatize Social Security so that Wall Street can obtain hundreds of billions of dollars in fees off managing our retirement savings.” Peterson will accomplish his goal as long as people like Barack Obama are in office. People like Obama who have no scruples in turning the working class people into poverty stricken wage slaves with no mass transit, no public safety, no health system and no housing.
Since Obama took office the minimum wage of $7.25 per hour has not been increased or even raised for discussion, despite significant increases in the cost of living, even though wealth continues to be accumulated at the top of the pyramid. Ethnic minorities have been sold down the river, but continue to adore their anointed one.
Ray, you are correct, but it’s even worse that what you say.
The goal of the .1% is to widen the gap between them and the 99.9%. It is the gap, not personal earnings, the concerns the wealthy.
If you had a $1 million, and everyone else in America had $1 million, you would not be wealthy. But if you had $1 million and everyone else had $1 thousand, you would be wealthy. It is the gap that makes people rich, and widening the gap is the goal of the rich.
Austerity is the government’s method of widening the gap. Obama’s agreement to raise FICA 2% is an example of a politician, paid big money by the rich (in campaign contributions), paying off his debt to the rich. It dramatically widens the gap, just as his sponsors want.
Rodger Malcolm Mitchell
I honestly do not know what goes on in President Obama’s head. Yet I have some sense about what others may think of him.
My guess is that the President doesn’t run his own show as much as we think or would like to believe. As Wynton Marsalis said in his song “Where Y’All At?” — “they’ll all work together to make your pocket light.”
Here are some of the questions. Will this President ignore Congressman Alan Grayson’s ear piercing shouts of foul play at any suggestion to change Social Security? Does this President want his legacy to include a trigger of a future end of one of the finest government programs ever created? Does this President have a fundamental misunderstanding of seniors in our society? Does this President have the backbone “to take the Republicans in congress to the mat” as they threaten not to raise the debt ceiling and/or to shut down the government?
I do not know the answers to these questions — so like everyone else I’ll just have to wait and see.
Obama has been saying for years that Social Security and Medicare are “unsustainable.” He will not be forced to cut them. He actively wants to cut them.
He may be the most right-leaning Democrat since the 1920’s.
If you turn out to be right, then the President has a fundamental misunderstanding of seniors in our society.
Even in situations that look most grave, I still maintain some hope that one can choose to change their mind.
It seems fairly obvious that the US administration is more frightened of its own people than foreign elements.
The Patriot Act, Homeland Security, the repeal of Posse Comitatus, the NDAA Act and warrantless wiretapping etc. They know full well that the the poor have seen their incomes fall and that they will be squeezed even further in the coming years and are preparing for mass discontent. The Occupy Wall Street Movement is a case in point, but this was soon crushed by the FBI using violence and arrests. The right of protest is now being outlawed.
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