More Austerity Advice From the Very Rich: Buffett On Deficits!

By Joe Firestone

Warren Buffett’s recent op-ed in the New York Times is making a stir because it calls for a minimum tax on high incomes above $One million annually. But I was much more interested in some deficit targeting he proposes which exposes his ignorance about the sectoral financial balances model of macro-economics, and reveals him as a deficit hawk whose advice, if followed would be unsustainable and lead the United States into another deep recession. I’ll comment on a couple of paragraphs in Buffett’s op-ed.

Our government’s goal should be to bring in revenues of 18.5 percent of G.D.P. and spend about 21 percent of G.D.P. — levels that have been attained over extended periods in the past and can clearly be reached again. As the math makes clear, this won’t stem our budget deficits; in fact, it will continue them. But assuming even conservative projections about inflation and economic growth, this ratio of revenue to spending will keep America’s debt stable in relation to the country’s economic output.

So, our goal ought to be running deficits of 2.5% and this is Warren Buffett’s idea of fiscal responsibility. Now here’s an accounting identity from macroeconomics, called the Sectoral Financial Balances (SFB) model in which the economy is divided into three sectors, and in all the balances are financial flows over a period of time:

Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0.

There’s plenty of empirical evidence showing that the real world interpretation of this identity works. But, there’s NO negative evidence refuting it.

Now, let’s say that the income of the private sector exceeds the amount it pays to the other two sectors by 6% of GDP, so that the private sector has a surplus. And let’s say that the income of the foreign sector in dollars exceeds what it spends on US goods and services by 4% of US GDP, leaving it with a surplus, and the US with a current account (trade) deficit, then what does the formula say MUST happen to the Government balance?

Government spending will have to exceed its income from taxation by 10%. That is, it will have to run a deficit of 10% to support the foreign surplus and the domestic savings. i.e. 6% + 4% + (-10%) = 0.

Now, what happens if we refuse to let the deficit be 10% of GDP, and that we either cut Gov spending or raise taxes to make that happen? Let’s say we want to hit Warren Buffett’s target, so that we try to force that -10% to become Buffett’s – 2.5% of GDP. Then we have choices.

We can force a zero trade balance, by refusing to import more than we export. But that still leaves us with the need to DECREASE the private balance surplus from 6% to 2.5% of GDP to get the Federal budget to a deficit 2.5%. This is a decline of 3.5% of GDP in savings the private sector might have had, if Mr. Buffett’s deficit target was, say, – 6% of GDP.

There are other options here of course. We could leave the foreign sector balance where it is at 4% of GDP, and decrease the private sector balance to -1.5%, of GDP, actually increasing the private sector’s debt by 1.5% of GDP. But, do we really want to do either of these first two options or anything in between?

I really don’t think so. Do you? Why would we want a policy that would impoverish the private sector over time, or minimize its accumulation of nominal wealth? Is this really consistent with the public purpose?

So, is there any way we can retain those private sector savings of 6% and keep Buffett’s recommended budget deficit of 2.5% of GDP? Yes, there is. We can decrease our imports and increase our exports so that the foreign sector has a negative trade balance. That is, we can get more income from trade than we spend on it by 3.5% of GDP, a shift of 7.5% of GDP from that -4% trade balance, placing the rest of the world in a trade deficit with us, provided we can increase our foreign sales (exports) by that much.

Of course, it would be very difficult for us to do that without engaging in a trade war since our attempt to decrease the foreign trade sector’s balance so drastically and quickly would trigger such a war with all our major trading partners, who rely on trade surpluses with the US. There would be an international race to the bottom, which, for us to win, would require US companies to cut prices and costs to the bone in order to export more. This would be likely to result in lower wages, which, in turn, would be likely to reduce domestic sales, and tax revenues, leading a to a higher Government deficit which would work against Buffett’s goal of a 2.5% budget deficit.

But getting back to eliminating the positive foreign sector balance through greater exports, the Government can neither do this for the private sector, nor maintain control over such a process once it starts. And, in any case, a change like this isn’t beneficial in terms of adding to the real wealth of Americans, since even though imports cost money, they increase real benefits/wealth, as opposed to financial wealth. But that’s a story for another time.

For now the important thing is that the SFB model, tells us that trying to enforce a Federal Budget of 2.5% of GDP, would be a negative for the private balance, and a disaster for private sector accumulation of financial wealth over a period of years, unless we could develop a foreign sector balance surplus by selling more than we import.

Even more, if you think about it, you can see that if we want to save 6% in the private sector and import more than we export by 4%, then the Government would have to allow at least a 1.6T deficit in the coming fiscal year, and even better would not target the budget deficit at all, but just let it float against private savings and import desires.

However, assuming the President and Congress compromise on a deficit reduction plan, we may end up with a plan for this fiscal year that is $700 – $800 billion smaller than the Government deficit we ought to have if we want to support our savings and desires for more in imports than we can export. That’s too bad, because it’s likely that if Congress and the President passed a full payroll tax cut, a State Revenue sharing plan and a Federal Job Guarantee Program, then this could produce the additional $700 – $800 billion Government deficit we need, given our current savings desires and import levels, to create a full employment economy.

The programs would cost more than that, of course, but we’d be spending a lot less in unemployment insurance, income support programs, Medicaid, and other welfare programs than we are now because of the effects of these other initiatives. So for an additional $700 – $800 billion in deficit spending we could have complete recovery from the crash and full employment, at last. We’re crazy, and maybe evil, for not going for this, and letting more than 28 million people looking for full-time jobs hang out there, instead.

Buffett adds:

All of America is waiting for Congress to offer a realistic and concrete plan for getting back to this fiscally sound path. Nothing less is acceptable.

And, he clearly thinks that his 2.5% deficit target is that more realistic and concrete plan for getting us to fiscal responsibility. But, unfortunately for him and all of us, it is a profoundly unrealistic plan, because it adopts a deficit target based on Buffett’s expectations about reasonable growth in US GDP over time, and his belief that the debt-to-GDP ratio must go down and not up over time, which is what would happen if his deficit target of 2.5% was met.

However, the debt-to-GDP ratio is just a number. It has no causal relationship to government solvency in nations like the US, that have a non-convertible fiat currency, a floating exchange rate, and no debts in a currency not its own. So, fiscal responsibility in deficit spending has nothing to with the debt-to-GDP ratio, and nothing to do a 2.5% deficit target.

It depends, instead, completely on the impact of deficit spending on real things like employment, price stability, economic inequality, economic growth, and many other societal outcomes that are aspects of public purpose. To achieve good results in these areas we need, in our present rather stagnant economic state, much larger deficit spending than we currently have. And the advice that Mr. Buffett should be giving is that we ought to enact the MMT-based fiscal policy program mentioned above, and let the budget deficit float until we reach full employment.

At that point, when the private sector economy is strong enough to have hired away most people working for the job guarantee program, or receiving unemployment benefits, we can cut back government spending, further to avoid demand-pull inflation if, as expected, private sector savings desires, and the current account balance in the foreign sector both have declined as a percent of GDP. And, if they haven’t, then we can just keep the deficit spending where it needs to be for full employment, without worrying about either government insolvency or demand-pull inflation, Mr Buffett and other austerians, notwithstanding.

41 responses to “More Austerity Advice From the Very Rich: Buffett On Deficits!

  1. I have a question about trade surpluses. Since there’s a finite amount of foreign owned dollars, if a trade surplus were maintained for long enough, there’d be no more foreign owned dollars and we’d have to accept foreign currency for our exports. What happens at that point, would the central bank exchange foreign currency for newly created dollars? How do exporters in countries like China and Norway handle the conversion to local currencies?

    • The central bank of China or Norway accumulates the dollars. Usually they buy US Treasury securities with them. If the US had persistent trade surpluses, the Fed would have to accumulate foreign currencies or sovereign debt.

      In the old days, they accumulated gold. Some still do, including China to some extent. But when one country runs a trade deficit, the central banks of the rest of the world, as a group, accumulate the currency of that country. (Chinese consumers have little use for dollars, so they trade them in at their local bank for Yuan. The local bank does the same with the central bank.) If China spends their dollars on oil or gold, then the central banks of Iran or South Africa might accumulate the dollars.

      The only other thing they can do with dollars is to buy US goods and services. If they, as a group, would rather do that than hoard the dollars then our trade deficit disappears. If they sell Treasuries, as a group, in order to buy US products, then the Fed buys them in order to maintain their target interest rate. If they exchange dollars for Euro or some other currency, the exchange rate drops until the currency markets clear, and the dollars or Treasuries end up in the hands of someone willing to acquire them at the lower price. The lower exchange rate helps to reduce the trade deficit.

      • So when the Chinese exporter exchanges dollars for yuan, the Chinese central bank could vary the amount of yuan they give per dollar. Is this how the Chinese or Norway central bank influences the exchange rate of their currency viz-a-viz the dollar?

        • I don’t think so. Dollars and Yuan are traded on international exchanges. If the Chinese CB (or any local bank) varies much from the posted rate, they would lose business (or lose profits). The local bank typically buys and sells at a spread, for its citizens and tourists who need to change currencies. Outside a tourist area, with some competition, the spread can be very wide.

          What the Chinese CB can do to influence the exchange rate (raise the value of dollars in terms of Yuan, which they would want to do as a mercantilist strategy) is to buy dollars on the Forex market, using Yuan that it can create without limit, at whatever exchange rate it wants. Like the Fed sets the interest rate by buying and selling T-bills.

    • joe,

      Your comment brings to mind an interesting question. Consider a world in which there are but two nations “A” and “B.” Both are Monetarily Sovereign. Each nation, being sovereign over its own currency, has the unlimited ability to credit any bank account in any domestic bank, i.e. create its own currency.

      How do “A” and “B” trade with one another?

      If nation “A” has a positive balance of trade (imports more money than it exports), there would be an inflow of “B’s” currency to “A.” But, “A” has no need for “B’s” currency. “A” creates unlimited supplies of its own currency.

      Over time, how will “B” buy from “A”? One solution would be for “A” to exchange some of its currency for “B’s” currency.

      Why would “A” do that? Answer: If it didn’t, “A” couldn’t export to “B.” But, why would “A,” a Monetarily Sovereign nation, need to export? Remember, exporting of goods and services merely is a method of importing money. But, “A” already can create all the money it needs.

      There are many possible forks in the road, but eventually it all seems to devolve to there being just one currency, used by both “A” and “B,” with both being sovereign over that same currency.

      And that seems to devolve to one world government.


      Rodger Malcolm Mitchell

      • Interesting, but I think that in a situation with only two nations, each with a fiat currency, it would be obvious that the only reason nation A would need nation B’s currency would be to buy stuff from nation B. So I think nation A would only export to B in order to be able to import from B goods that nation A can’t produce itself. I think people lose sight of the macro economy when the number of agents in the economy (or nations involved) is larger than what people can track individually in their heads. An example is the conventional wisdom that it’s good to be a net exporter. But obviously, for every net importer there needs to be a net exporter (same with income afaik, for you to earn more than you spend, someone else must spend more than they earn, I can’t think of a way to circumvent that). With only two or three nations, this would be obvious, but with 120 nations, people somehow assume that everyone could be a net exporter. It’s the conceptual jump from micro to macro that gives people problems. If an economy only has 4 people, who spend in each other’s stores, it’s easy to see that if one person wants to net save a dollar, someone else must net spend a dollar. Same holds with 5 people, same holds for 300 million. I still have yet to find a way to get people to easily see this, almost everyone seems to think that it’s possible for everyone, including the govt, to just work hard and ‘live within in their means’, presumably by earning more than they spend. I find strong parallels between money flows in an economy and conserved energy flows in an electric circuits… The law of conservation of financial flows???

        • Right, but it’s been only forty years since the world abandoned the gold standard. I was trying to visualize where universal Monetary Sovereignty will lead. This is not a trivial question.

          • I am not sure I understand this. If A does not want any of B’s product it does not have to buy it. If B wants some of A it will have to accumulate the currency, borrow for something or go without. Do we have a real world problem now somewhere?

      • The upshot, considering trade only, as in the world of decades ago, not financial investment flows is that if both nations are monetarily sovereign and understand what they are doing, then trade will tend to be balanced. They’ll run their economies at full employment and stop there. If they are both developed nations, there will be no reason to accumulate hoards of the other nation’s currency.

        But they will try to export and get the other’s currency in order to pay for imports. A nation creating its own money like mad to get imports for free won’t work in the (not-so) long run, because that would depreciate its currency. Do it enough and it will vaporize the currency, as Weimar Germany and countless victims of post Bretton-Woods IMF “advice” can attest. A can create all the A-money it wants, but not all the B-money it wants.

        The chapters on International Trade in Abba Lerner’s Economics of Employment is a very lucid basis to understand such things – a world where everyone is a sensible monetary sovereign, where everyone practices functional finance.

      • Why would this not be resolved in the same way as the classical “comparative advantage” example? A and B want to trade with each other because they require different amounts of various inputs to produce the same output. A can produce either 10 cars or 20 refrigerators, using the available inputs. B can produce either 20 cars or 10 refrigerators. Without any trade, A might produce 5 cars and 10 refrigerators, and B might produce 10 cars and 5 refrigerators. Total world GDP would be 15 of each. If they trade, and specialize completely, it could be 20 of each.

        The exchange rate for their currencies, as well as prices of cars and refrigerators, would converge at a point where the total world demand was for 20 “A” refrigerators and 20 “B” cars, and neither would have a trade surplus or deficit.

        If there are to be persistent trade surpluses and deficits in various countries, is it not a requirement that there be an international reserve currency, perhaps dollars or perhaps gold, that central banks (especially in countries that do not have a sovereign, floating currency) wish to accumulate? Surely Zimbabwe would not be able to run persistent trade deficits, would they? No more than Greece has been able to do?

        If two countries are able to create the same currency in unlimited quantities, are either of them really “sovereign” in that currency? Would that not result in a “race to the bottom”, kind of like rampant counterfeiting? A single shared currency might be a possible solution, but I think it would have to be issued by an independent third party, not one of the governments involved. If Greece could create all the Euros it wanted to, and did so, how would Germany feel about that? And how would they react?

        • “If Greece could create all the Euros it wanted to, and did so, how would Germany feel about that? And how would they react?”

          No, the question is, if Greece could create all the drachmas it wanted to, and Germany could produce all the Deutsche marks it wanted — and they were the only two countries in the world — where would that lead?

          • Well, you said you thought it would lead to a common currency, with both countries being able to create the currency. Greece and Germany already have a common currency. Where would it lead next, if Greece could create all the Euros it wanted? Would they be even more generous to their public employees, more kind to taxpayers, and thus run their trade and budget deficits even higher? Indeed, at the ridiculous extreme, why would any Greeks need to work at all, if all their goods could be made by Germans and transferred to Greeks by the stroke of a key, and Greece controlled the keyboard? And then, why would any Germans continue working, no matter how many Euros they were accumulating, when everything they produced went to Greece and they had nothing to consume themselves? And what would stop the current trade situation from continuing to deteriorate toward this ridiculous extreme?

            • I agree with everything you’ve said. One point is that each country running at full employment, with functional finance is the only way that classical comparative advantage balanced trade is going to be valid and happen. That’s sort of what happened under Bretton Woods, everybody used MMT, had full employment, expanded at the same time, so everybody increased imports at the same time. So every currency tended to depreciate through increasing imports, but everyone’s imports is somebody’s export, and every currency depreciating at the same time means nobody depreciates! That’s how you could have somewhat rigid exchange rates for a long time.

              There’s no particular reason for a common currency to evolve. But since trade and productivity should change relatively slowly & their relative ratios even slower, the exchange rates, based on balanced trade, should be pretty stable in an MMT/MS world. Again, that’s sort of the Bretton Woods era.

              • Not to argue the point, but that seems a somewhat idyllic description of the Bretton Woods era. I remember only the last 10 years or so of it, but there were recessions, more frequently than the past 30 years, and devaluations and revaluations, and tariffs, and trade disputes.

                In general, though, I agree that absent sudden shocks the relative values of currencies should change only slowly, and I think that is the experience post-Bretton Woods, although major trends tend to last a long time.

        • “Surely Zimbabwe would not be able to run persistent trade deficits, would they? No more than Greece has been able to do?”

          Greece and Zimbabwe cannot run endless trade deficits, because they are monetarily non-sovereign, so cannot create money to replace money lost via trade deficits.

          By contrast, Canada, China, Australia, Japan and the UK can run endless trade deficits, because each is Monetarily Sovereign, so can create endless sovereign money.

          • I thought Zimbabwe was monetarily sovereign. And did create plenty of currency, not enough goods. They would have loved to have a trade deficit, but nobody wanted their currency. Anyway, even absent their supply problems, would they be able to run trade deficits? Would any other countries hoard their currency like they do the $US, and the Pound, Yen, and Euro? China, Australia, Canada have trade surpluses. I think they might be able to have trade deficits – enough of the world would hoard their currencies – but I’m not sure what other countries would be able to run large enough trade surpluses if they were to switch to deficits.

  2. Every time a prominent person, someone like Buffett, makes an error that shows ignorance of modern economic theory the error should be pointed out directly too them. I wouldn’t cost much to print and fax a copy of this article to Buffett and to some of the news reporters who appeared to have ‘swallowed’ the news release.

  3. “However, the debt-to-GDP ratio is just a number. ”

    I think you mean “endogenous.”

  4. You’re right, of course, and Buffet is wrong, but

    “if Congress and the President passed a full payroll tax cut, a State Revenue sharing plan and a Federal Job Guarantee Program, then this could produce the additional $700 – $800 billion Government deficit we need”

    I just heard somewhere that the FICA tax is currently $1T a year. Your numbers don’t compute, unless you have some undisclosed dynamic analysis that would produce lots more income tax revenue, enough to offset the revenue sharing and JG and part of the FICA reduction. (That would happen, of course, but you must say so.)

    There is nothing wrong with debt as a % of GDP declining. That is what it has always done, in good economic times, even as the debt grows in nominal terms. Perhaps our trade deficit was not so large in those times, but there is no mathematical reason that debt to GDP must grow forever if MMT policies were implemented. As you say, it is meaningless anyway, but as a tactical matter you might allow that it could shrink under MMT.

    “when the private sector economy is strong enough … we can cut back government spending”

    I don’t get this. What is government going to buy when the economy is not strong enough that it doesn’t really need? Or what is it going to stop buying that it does really need, just because the economy is stronger? The adjustment lever must be taxes, not spending. We don’t want to be building half a road when the economy needs help, and then abandoning the project when the economy overheats, or to be hiring and laying off bureaucrats or soldiers as a tool of economic policy.

    • I think FICA taxes are in the neighborhood of $675 B per year, not $1 T. See here. State Revenue Sharing would cost $310 B if$1,000 per person were used. JG cost would depend on how many people registered for the program. Let’s say 10 million did. Then the projected annual cost would be $350 B. But it might be 50% of that or even less because the full payroll tax cuts and the SRS would result in jobs added almost immediately, and, fairly soon in hiring off the JG rolls. So, the raw cost of the three, not considering gains in other sectors is more like $1.2 B.

      Once we begin to factor in changes in unemployment insurance costs, food stamp costs, increased tax revenues, etc. I think we can easily be talking about the $700 – $800 B I estimated. Perhaps even less.

      On the debt-to-GDP ratio, it has no causal impact on anything, so its increase or decline is neither good nor bad in itself. As econobuzz says, it’s endogenous. I also don’t think it is good tactics to talk about the possibility of its decline in a favorable light because we then reinforce the view that we somehow ought to manage around that number. In addition, a declining debt-to-GDP ratio can be bad news depending on the context. For example, Clinton drove down the debt-to-GDP ratio rapidly during the last four years of his Administration. The decline reflected his surpluses, and his surpluses caused the recession of 200-2002.

      . . . What is government going to buy when the economy is not strong enough that it doesn’t really need? Or what is it going to stop buying that it does really need, just because the economy is stronger? The adjustment lever must be taxes, not spending. . . .

      Well, for one thing, it would no longer be buying State level jobs with its SRS program because that would be one-shot deal. For another, the JG program would radically shrink as we approach full employment, because the program wouldn’t compete with private sector attempts to hire JG workers. The valuable JG work going on would then have have to take a longer time to complete, unless the Government believed it was so valuable that it wanted to increase taxes to make room for that Federal spending. Taxes would be increasing anyway because the payroll tax holiday would end when full employment is reached, or might even be phased out gradually between say 4% U-6 and the 0% target.

  5. Not so off topic: to engineer his designs Buffet also recommends Jamie Dimon as the next Secretary of the Treasury.

  6. Joe, you shouldn’t be surprised about Mr. Buffet’s macroeconomic views? As the other Warren once said Mr. Buffet is a micro guy, give him to pick stocks.

  7. Buffett is not ignorant. He knows exactly what he is saying. The primary — and by “primary,” I mean, ONLY — goal of the .1% is to increase the income gap between them and the rest.

    They don’t care about absolute income; they care about relative income. You only are “rich” if you have a lot more money than the next guy. So being rich depends on you making more and/or the other guy making less.

    Because the vast majority of federal spending benefits the 99.9%, federal spending cuts make the .1% richer.

    Rodger Malcolm Mitchell

  8. Warren Buffoon is a bailed out Crony Capitalist and a liar. He hides the majority of his Bailed out Billions in Gates Tax Exempt foundation and yet has the gall to lecture about Social Security a program people along with their employers paid for themselves??? What a scam if they raise taxes it would barely affect him given how he structured things for himself and his kids but it will affect YOU!

    Warren Buffett: Jamie Dimon Is Best Person For Treasury Secretary

    Buffett’s Betrayal

    Warren Buffett Is A Punk

    How Buffett Saves Billions On His Tax Return

    • You bet! It’s incredible to me that the Crash of 2008 didn’t leave the reputations of people in the FIRE sector in ruins across the board. I blame Obama for this. If he had taken the big banks and prosecuted everyone who committed the control frauds, then he would have destroyed the whole status, expertise, reputational, and political capital people like Buffett have. Then it would have been easy to neuter them politically and legislate a Green New Deal for the rest of us. Instead, he saves these guys, and screws everyone else!

  9. Joe, would your analysis change if you assumed the 2.5% government deficit with a 2.5% rest of the world surplus? I would also ask what happens to the debt to gdp ratio? Would that not increase over time leaving our “economists” to fret over those increases? It seems that a 2.5% deficit would accumulate higher debt at that rate every year. And would not the rising debt ratio bring us back to where we are today – – sustainability? So after, say ten years, you have an increase in debt of 25% + interest+ growth of gdp. That doesn’t seem like so much to me but some will fret over it, as I said.
    Bottom line though, could not the 2.5% be seen as a target over time and not an absolute for any year? On thing that would do would be to acknowledge we need government money in the economy.

    • “Joe, would your analysis change if you assumed the 2.5% government deficit with a 2.5% rest of the world surplus?”

      You mean:

      savings US Trade Surplus Gov. Deficit
      5% + (-2.5%) + (-2.5%) = 0 ?

      That would require a 6.5% change in the current account balance from the current 4%, and in the meantime the Government deficit would have to remain considerably higher than 2.5%. But the main point is, why worry about a deficit/debt target anyway? It’s meaningless. Pass programs that will create full employment and then worry about price stability. The size the deficit will then take care of itself. If the debt bothers us; then don’t use borrowing along with the deficit spending. Use proof platinum coin seigniorage to close the gap between revenue and government spending.

      “I would also ask what happens to the debt to gdp ratio? Would that not increase over time leaving our “economists” to fret over those increases? It seems that a 2.5% deficit would accumulate higher debt at that rate every year. And would not the rising debt ratio bring us back to where we are today – – sustainability? So after, say ten years, you have an increase in debt of 25% + interest+ growth of gdp.”

      Buffett assumes that the GDP would grow by an average of 2.5% or more annually. So he thinks we’d stabilize the ratio or even lower it as we move forward. He doesn’t consider what trying to hold the deficit down to 2.5% would do to the economy. Without a credit bubble, and given the trade balance we now have, it would tank it before too many years and pass and the deficit would be way over 2.5% anyway. The Government can’t control the size of the deficit, because its size is endogenous to the system.

      On the possible increase in debt, we can always negate that with PPCS. However, assuming we did that, then we would be decreasing the debt-to-GDP ratio as we went along, and ten what reason would we have to limit the spending/revenue to 2.5%?

      • Still not completely on board here. The debt will continue to grow if we run a deficit. I think that is true. It will grow by the amount of the deficit,each year? Or are you saying Buffett does not understand that?
        That is not a concern of yours, I understand. But the politicians see that as unsustainable.

        As to the make up of the 2.5%, I don’t think that is a hard number. Maybe Buffett is putting out a number for discussion. It serves the purpose of getting some people accustomed to a deficit. The ” man on the street” and some of our politicians see deficits as deadly, since they equate it to a household. Hence, it is unsustainable.

        I presume PPCS refers to platinum coins. Good idea to negate the debt. But again we are still trying to sell that idea. I noticed that the dems are saying they want the debt limits negotiated within the fiscal cliff. So they are not thinking about it. We have more selling to do. On that level I would agree to all you say, but it is just not in the cards for now.

        • I think most of the politicians are on board with the idea that the debt-to-GDP ratio is the thing to look at. So, if that’s going down; they’ll conclude that our position is sustainable, even if the debt is increasing each year. Even Pete Peterson seems to be focusing on the debt-to-GDP ratio, btw.

          Whether PPCS is in the cards or not is up to one man, the President. If he hears about it, comes to understand it, and gets frustrated with debt ceiling games; then he may do it. I don’t think this is predictable either way. It’s up to Obama’s decision. A move like that would greatly increase executive power. I wouldn’t expect him to have any scruples about doing that, so I think it’s going to based on how much pressure he’s under.

  10. Slightly OT but Obama has put a proposal on the table that looks pretty good. Now comes the negotiation. He also wants the debt limit law modified to allow for a Presidential veto. Good luck with that.

    • It looks better than I expected; but let’s see what happens to it now.

      • If you expected some spending cuts as well as tax increases, it’s better – from an MMT perspective. It’s not likely to go anywhere, though. Obama negotiates like an amateur. But it doesn’t matter. Deal or no deal, we are headed down, not up. The Romney tax cuts could have saved us.

        One thing nobody seems to realize is that high income earners benefit fully from the Bush rate cuts in the lower brackets. They pay the same rates as the middle class on the portion of their income in the range of middle class incomes, and the same rate as the poor for the portion of income in the range of poor incomes. For a married couple making $250,024, the entirety of their “tax cut for the rich” is in those lower brackets, not the top bracket. If the Dems really want to get rid of the Bush tax rates for people making over $250,000, they will have to have two sets of tax rate brackets, and for someone making $249,999, a $2 raise will cost him several thousand additional dollars of tax, as he swaps from the Bush set of tax brackets to the Clinton set. I can foresee doctors taking Thursday afternoons off for golf as well as Wednesdays, if they actually do what they say they want to do. But I don’t think they understand what they are saying.

  11. $400 billion in Medicare cuts?

    • It’s evidently directed at the providers. We’d get much larger cuts directed at them if we passed Medicare for All. So, this cut could be on the right path depending on details.

      • Well, then, you have to simultaneously provide free MD degrees for all. Potential doctors aren’t going to spend 10 years in school and internships and residencies working 36-hour shifts for a job that won’t even pay the interest on their student loans.