The Peter G. Peterson Foundation (PGPF) always does a press release when the CBO issues one of its budget outlook 10 year projection reports. The PGPF did another in January quoting its President and COO, Michael A. Peterson. Let’s go through that press release and see how many troublesome or false statements we can find. Here’s a breakdown of the press release quotation from Michael Peterson.
Today’s CBO report reminds us once again that our nation has significant fiscal challenges that have yet to be solved.
It certainly does, but I doubt that Peterson and I would agree on what those challenges are. He thinks they have to do with bringing the national debt under control. I think they have to do with creating full employment with a federal job guarantee program, price stability, a robust economy, a great public and free educational system through graduate school, stopping and reversing climate change, providing everybody in, nobody out, no co-pays and no deductibles health care for all, a first class infrastructure, and a greatly expanded social safety net including a doubling of SS benefits.
He thinks the debt is a long-term problem that we have to start to solve now. I think there is, literally, no public finance-related debt problem for a fiat sovereign like the U.S., and that the problem that exists is not a debt problem, but a political problem created by Peterson and his allies across the political spectrum who have propagandized the view that there is a debt crisis since the mid-1970s, with increasing success since the 1990s.
In fact, despite recent improvements, CBO projects that deficits will begin rising again in just 2 years.
Let’s get serious about CBO’s 2 year projections. When are they are ever on the mark? If CBO is so damned good at projecting the deficit, then why do they revise their January projections within 3 – 5 months every spring? That is, if they can’t get it right over even that short a period, then how can we take their 2 or 10 year projections seriously?
But apart from CBO’s efforts at science fiction, this sentence clearly implies that higher deficits are a bad thing, that the lower deficits we’ve been having currently are an improvement over what we had before, and that our fiscal situation will be getting worse again soon in the precise sense that we will be running higher deficits. So, this one sentence shows that The Peterson Foundation has no idea what the government deficit really is.
Oh, I’m sure Michael Peterson knows that one gets a deficit when federal spending exceeds tax revenue and that the amount of the gap is the spending minus the tax revenues. But I don’t think he knows what that means in the American context, since if he did, and if he were telling the truth, he wouldn’t view shrinking deficits as an improvement and growing deficits as increasing the severity of the problem, especially since the deficits the U.S. is running at present are far to small to sustain demand.
What he doesn’t appear to know is that when your nation is running a trade deficit, the private sector cannot be running a surplus (getting net financial assets), unless the government is running a deficit larger than the amount of the trade deficit. Right now, the annualized trade deficit is running between 2.5 and 3.0 % of GDP, and the deficit is near there too.
So, the lower deficit Peterson approves of is close to or past putting the private sector into an aggregate annual loss position. And, in advocating for further deficit reduction, what Peterson is doing is advocating for placing the private sector into a much deeper and unsustainable loss position over a period of years. Doesn’t Peterson know that government deficits add to private sector aggregate net financial assets? Doesn’t he know that budgetary austerity will cause the private sector to lose financial wealth? Doesn’t he know that the deficit doesn’t harm the government’s capability to spend, but that cutting it does harm the private sector’s capability to spend by destroying private sector wealth over time?
Soon thereafter, the fundamental drivers of debt, including our aging population and rising healthcare costs, will lead to much more rapid increases in our long-term debt.
Now, Peterson is talking about CBO projections, and implicitly he is equating rising deficits with rapidly increasing debt, and also viewing rising health care cost as inevitable. Well, these things are not obvious. First, rising health care costs are not inevitable. Such costs can be lowered easily if Congress passes John Conyers HR 676, enhanced Medicare for All bill. If we pass that, and if we administer it as efficiently as Canada admnisters its Medicare program, then we could reduce our costs to 12% of GDP per year. Now, we spend about 18% of our GDP on healthcare.
So we could cut our costs by about 1/3 relative to what we’re spending now. How does Peterson know we won’t do that? And even if he and CBO are right that we won’t; would Peterson support our doing that to seriously impact what he thinks is one of our major drivers of future debt, or would he advocate that we cut health care benefits instead and serve less people? Anyone want to guess what he’d favor? Anyone want to guess whether he cares more about the cutting the growing debt, or about preserving the private insurance companies?
Further, it is not true that health care costs and our aging population are the primary drivers of our assumed soon to grow debt, because the real cause of that growing debt is our silly refusal to stop financing our deficits with debt issuance. If the President made the political decision to stop all further debt issuance, and paid back the outstanding debt, and all future deficits using high value platinum coin seigniorage (HVPCS) to force the Fed to generate the reserves needed for the Treasury spending account, then we could eliminate all our debt subject to the limit, and Peterson’s problem would be gone with the wind.
Also, notice that CBO’s projections are purportedly always based on the assumption that no new legislation passes changing the background conditions underlying its projections. So, Peterson might object to what I say just above, by claiming that passing HR 676 would involve a change in the legislative structure underlying the projections.
My reply to any such objection, is first, that it is correct to say that passing HR 676 would change projections by legislative action, but so would passing entitlement and safety net cuts, and “tax reform” of the sort advocated by PGPF change projections by passing new legislation. So why isn’t what’s good for the goose also good for the gander? Why should I privilege spending cuts over HR 676?
If the choice is between changing the projections by passing safety net and entitlement cuts on the one hand, or passing enhanced Medicare for All on the other, then I’ll take enhanced Medicare for All every time, as will, I’d bet, about 80% of American voters.
In addition, however, and I emphasize this very heavily, the HVPCS solution to the political problem of “teh debt” does not involve any changes in the current legislative structure. So, I ask, why aren’t Peterson and CBO doing any fiscal projections based on the assumption that the President uses current law to mint a $100 Trillion platinum coin and have it deposited at the Fed? Why don’t they show us what the implications of that assumption are for their projections?
Could it be that they’re just trying to manufacture projections whose obvious implications are fiscal austerity and real fiscal irresponsibility? Could it be that CBO is, in fact, a partisan organization favoring government fiscal austerity over full employment and increasing economic equality? Would that be an unreasonable suspicion considering the backgrounds of CBO directors and industries from which they are recruited? Is it unreasonable to think that CBO directors all represent the interests of the 1% and not the 99%, and that this is the sort of bias that defines their partisanship.
Interest costs alone are on track to rise to $5.6 trillion over the next 10 years, becoming the third largest federal ‘program’ and threatening to crowd out critical investments in our economic future. We can’t let our future be diminished by our past.
Peterson really needs to learn a little macroeconomics. First, assuming the bill is $5.6 Trillion over the next 10 years, and remember that assumes that the CBO can project its way out of a paper bag, then that “cost” is a contribution from a Government that can never run out of money (because it is the monopoly issuer of high-powered money) to a non-government (including partly, the domestic private) sector. So, if that contribution were eliminated or reduced, then the government, to avoid shrinking the economy, would have to come up with spending on alternative measures that would have an equal impact on aggregate demand.
Second, there is no such thing as “crowding out” because if government borrowing to pay those interest costs, removed money from the private sector, then the Federal Reserve and the private banks would create the credit needed by borrowers to invest to their heart’s content provided only that they were credit worthy. The “crowding out” theory is based on the notion that there is a “loanable funds market” underlying the capacity of the banks to lend, that would be exhausted or strained by Federal borrowing.
But, there is no such market. There is only the Federal Reserve system standing ready to provide whatever back-up is needed to the private banking system to provide whatever reserves are needed to fulfill bank reserve requirements, after they make loans to credit worthy customers.
Third, Peterson seems to believe that higher interest rates on Treasury Securities are produced by the bond markets at their option. But we know that is not true.
Instead, those interest rates follow the Federal Funds Rate, and that is controlled by the Fed. The low interest rates we see today are the result of an activist Fed enforcing near zero overnight interest rates. These are closely tracked by Treasury 3 month securities, which are closely tracked by 6 month securities and so on.
So, future interest rates are dependent on two things: the Fed keeping the overnight rates low and the Treasury issuing short-term securities only. If the Fed wants to keep down the interest the Government pays all it needs to do is its part in keeping those rates low. The Treasury can then do its part to keep the “burden” of interest costs low.
In short, there’s no way that the CBO projections on interest costs will be correct, unless their projections relating to economic growth and tax revenues are much, much higher, and their deficit projections much, much lower. Because unless those conditions are fulfilled, which would happen only if economic stagnation ends, the Fed will keep those interest rates more or less where they now, interest rate history notwithstanding.
Fourth, “interest costs” would certainly be no problem, and nowhere near the $5.6 Trillion projection, if the HVPCS solution to the national debt were used. Then over the next 10 years interest costs would be driven increasingly close to zero since, increasingly over the period, the only debt that would be left incurring interest would be the very long-term debt. So, again, if PGPF is so concerned about the debt and the insupportable interest costs, then why isn’t it an advocate of HVPCS?
And fifth, the people talking about diminishing our future because of our past are Peterson and his “bipartisan” allies, not the rest of us. They want to impose unnecessary austerity budgets cutting the safety net, and all manner of public investments in the future, because of what they say is the unsupportable burden of debt resulting from past commitments.
They would take money from us, our children and our grandchildren today, preventing us from investing in that future, because they say that the Government is like a household and has to run small deficits or surpluses to safeguard its future capacity to spend. But the federal government is the monopoly issuer of the currency, and when it uses that power to deficit spend it generally contributes net financial assets to the private sector and makes it stronger, while when it runs surpluses it doesn’t increase its capacity spend, but only decreases the private sector’s ability to generate economic activity and new investments.
The good news is there are many viable solutions to put us on a better path to fiscal and economic strength.
Yes, there are. But they do not include austerity budgeting, cuts to the safety net or discretionary federal spending, or any false economies denying the reality that the federal government is a fiat sovereign. In fact, all the viable solutions are ones that use the fiat sovereign power of the federal government to enable full employment, price stability, and the variety of problems that America hasn’t been able to cope with because the Peterson uniparty has continually and erroneously asked “how we gonna pay for it.”
Lawmakers have the opportunity to use upcoming fiscal deadlines and the congressional budget process to stabilize our nation’s long-term debt, which will strengthen the current economic recovery and lay a foundation for future prosperity.
Is this an invitation for the Republicans to hold the government and the nation hostage once again to extract concessions from the Democrats to cut and perhaps repeal the remainder of FDR’s legacy to the country? That’s the way it sounds to me. I don’t see it as a call for fiscal responsibility, but rather as an appeal to move further down the road to serfdom for the 99%.
Finally, after offering the quotation from Michael Peterson, the PGPF press release ends wih this:
In its report, CBO warns that the debt path we’re on would “have serious negative consequences, including increasing federal spending for interest payments; restraining economic growth in the long term; giving policymakers less flexibility to respond to unexpected challenges; and eventually heightening the risk of a fiscal crisis.”
That is, it ends with a statement recapping the dire warnings offered by Peterson, which as we’ve seen have no substance because they reflect the arid and dated views on public finance reflecting what has come to be called the Washington Consensus. These views have hurt us in the United States contributing much to the crash of 2008 and the stagnating economy we have experienced since. But across much of the rest of the world they have produced rolling disasters since the early 1990s including millions of unnecessary fatalities resulting from cuts to social safety nets in nation after nation. Austerity kills!
These very views are today largely responsible for the disasters we see in Greece, Spain, Portugal, and increasingly in Italy. It is long past time to end their fiscal reign of terror, by giving them no further credence.
We can do that in the United States, by making everyone understand that there is nothing to the gospel of deficit reductions, surplus budgets, and fiscal austerity except human misery, and making them understand also that the time is long passed to embrace a doctrine of real fiscal responsibility that tells us to evaluate fiscal policy proposals in fiat sovereign nations by their likely real world results without regard to their implications for the public interest-bearing debt.