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Go Home Deep-Six the Deficit Commission Report

POLITICS NOVEMBER 11, 2010

Deep-Six the Deficit Commission Report

BY DEAN BAKER

For more coverage of the debt commission report, read Jonathan Chait and Jonathan Cohn.

Senator Alan Simpson, the chairman of the bipartisan deficit commission, spent much of his life scolding people for being dependent on Social Security and Medicare and complaining that they didn’t save enough. Now, based on the draft proposal released yesterday, it appears that he and his co-chairman Erskine Bowles never departed from this attitude in steering their thinking.

Given the state of the economy, the co-chairs’ report reads like a document from Mars. Just to remind those of us who earn their living on planet earth (outside of Wall Street), the country is suffering from 9.6 percent unemployment. More than 25 million people are unemployed, underemployed, or have given up looking for work altogether. Tens of millions of people are underwater in their mortgage and millions face the prospect of losing their home to foreclosure.

We did not get here because of government deficits, contrary to what Mr. Bowles seemed to suggest at the co-chairs’ press conference today. We got here because of the bursting of an $8 trillion housing bubble. This bubble was fueled by the reckless and possibly unlawful practices of the Wall Street banks, like Morgan Stanley, the bank on whose board Mr. Bowles sits.

This is important background—because the economy’s current problem has nothing, zero, nada to do with deficits. Its problem is a lack of demand. If there were more demand, more people would be employed. The government is the only force capable of creating demand right now, since the housing bubble wealth that had been fueling the economy has largely disappeared. This means that if our commission co-chairs had ever bothered to look at the current deficit in the context of the economic crisis, they would be complaining that the deficit is too small rather than too large.

Their ignorance of basic economics also leads them to hype unfounded fears about the longer-term picture. If they understood the fact that the current deficit is a support for the economy, rather than a drain on the economy, they would not be concerned about the buildup of debt taking place at the moment. There is no reason that the Fed can’t just buy this debt (as it is largely doing) and hold it indefinitely. (The Fed has other tools to ensure that this expansion of the monetary base does not lead to inflation.)

That way, the debt creates no interest burden for the country, since the Fed refunds the interest to the Treasury every year. Last year the Fed refunded almost $80 billion in interest to the Treasury, nearly 40 percent of the country’s net interest burden. This means that the fears raised by Simpson and Bowles of an exploding debt reaching 90 percent of GDP by the end of the decade have no foundation in reality.

The other fear that Simpson and Bowles raised, the Chinese holdings of debt, should be condemned as xenophobic fear-mongering. Insofar as China’s holding of U.S. assets is a problem, it is holdings of assets period, not just government bonds. If China holds $2 trillion of private stock, bonds, and other assets it has the same impact on the United States as if it held $2 trillion in government bonds. It represents money in interest, dividends, and profits that is flowing out of the United States and to China, meaning that we will be less wealthy since much of our future output will be income to foreigners, not to people in the United States.

But the transfer of wealth to China depends entirely on our trade deficit, which is determined by the value of the dollar, not the budget deficit. Simpson and Bowles decided not to let this basic economic fact get in their way.

Over the longer term, the country is projected to face a deficit problem, but this is almost entirely attributable to the projection that private sector health care costs will continue to grow at an explosive rate. More than half of our health care is paid for by the government, so this projected growth rate of health care costs would eventually lead to serious budget problems in addition to leading to enormous problems for the private sector. However, the underlying problem is the broken health care system, not public sector health care programs. This subtlety also seems to have escaped Simpson and Bowles.

Finally, it is striking that they felt the need to address Social Security's solvency even though it was not part of their mandate. The commission’s mandate was to deal with the country’s fiscal problems. Since Social Security is legally prohibited from ever spending more than it has collected in taxes, it cannot under the law contribute to the deficit.

But Simpson and Bowles are scolds. So they produced a plan that will substantially reduce Social Security benefits for most middle class workers, even though this program fell outside of their mandate. They must have been expecting extra credit.

There are certainly some positive items in the report. For example, they want to limit the mortgage interest-rate deduction for expensive houses. They also want to get rid of the deduction for cafeteria benefit plans; one of the stupidest tax breaks ever designed. But, these items will likely go nowhere, which would be a good place to leave the rest of the report.      

Dean Baker is the co-director of the Center for Economic and Policy Research. His most recent book is False Profits: Recovering from the Bubble Economy (Polipoint Press, 2010.)

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29 comments

Thank you.

- Sophia

November 11, 2010 at 1:43am

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The thing is, Alan Simpson in particular has had this long career of scolding about deficits, but no one has ever done anything about them as a result of his scolding. I suspect this report will be much the same. Maybe some cosmetic things will pass, but on the whole very little will change. Very little changing, however, is a different problem. At present there is no political will anywhere to increase government spending to stimulate the economy. That's the bigger problem. To the extent the deficit commission exists, it is a symptom of that problem. The political stalemate our Founding Fathers left us with -- i.e. elections 18 months after a government forms -- means not only that no party can ever get its program through, but also that no bad program can ever be discredited. Since each party finds itself losing an election shortly after it gets started, each can eternally claim its program would have worked given enough time. The GOP in particular pursues policies that were one proven fairly conclusively not to work in recession/depression. But that was 80 years ago. We have en electorate that can't even remember which party was in power when this crisis began 4 years ago. That's the real problem and it's hard to see how that gets fixed any time soon. Japanese style stagnation, here we come.

- bungler

November 11, 2010 at 4:22am

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Shouldn't that be "USS Debt Commission"? Her Majesty's Ship of state is currently making 15% cuts across the board, which means that our government is going to be bigger as a percentage of the economy than Britain's (and Germany's!!). I'm with Simpson and Bowles.

- Robert Powell

November 11, 2010 at 5:41am

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The solutions to these problems are so simple, so blindingly simple, that, of course, they will never happen. First: The income tax code needs to be reformed to junk deductions, all of which are subsidies, none of which is of benefit to the economy, and to have two or at most three brackets, a high zero bracket amount and a marginal rate above that sufficient for fiscal balance under full employment. That needs to be done now, even though we do not have full employment, so that the markets understand that we do not in fact have a structural deficit. In that framework, the government can then safely borrow and spend what it wants to replace missing private demand. Second: There is one and only one means of fixing the healthcare system. If utilization is not going to be allocated by ability to pay, which we properly find morally unacceptable, then it must be allocated by some other means. The only sensible method is with rules administered by the government about what treatments and services are available under what clinical conditions. Government control of your health? What then? Insurance companies who actually make a dollar for every dollar of care that they deny? Give me the government. As for costs, these have to be controlled, by fiat, by a standard cost system. Because if we cannot have a market solution, which we cannot without market-driven demand, then, once again, something has to do it. The alternative is the explosion we face. Therefore, reimbursement rates, as well as the conditions for care, need to be established by government. There is no other possible solution short of a full-blown free-market that allocates care based on ability to pay. Does not exist. If we did these two things, and then one more, carbon taxes to keep shrinking our demand for foreign oil, this country would run so far ahead of the rest of the world that it would in fact look like we were living on a different planet. We already have remarkable under-utilized capital resources, natural resources, a continental market, networks of many kinds. Right-wing economic dogma, all of which is wrong and has just been shown to be disastrous, is in our way.

- roidubouloi

November 11, 2010 at 7:37am

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Grateful for this, the most appropriate response to the ridiculous chairmen's report.

- gary21cp

November 11, 2010 at 8:03am

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The draft does not mention the estate tax (except in a graph about projections using the 2009 estate tax). The estate tax raises revenue without affecting the economy, at least not anywhere near like income taxes would and only if you think that you are working to support your children after your death. Why is it not mentioned? Could it be......politics? Oh, no!

- Nusholtz

November 11, 2010 at 8:44am

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This is a surprisingly limited view from a supposedly intelligent publication. Of course the current economy isn't suffering from the debt -- but all of the future ones will if we don't deal with it. The country is living beyond its means, and no one seems to be willing to tackle those issues and make hard calls. We either need to tax ourselves a hell of a lot more, or spend less, or a little of both, if we want to remain the world's leading economic and political force. Other things need to go well, too, like trade deficits as the author mentions, and perhaps this plan doesn't need to kick in tomorrow while unemployment is running rampant, but the hysterical comments I'm seeing from public figures about how raising the retirement age to 69 so many years from now that no one over the age of 20 will be affected just shows that public figures are really just more interested in promoting their agendas and stirring up the pot than solving problems. I don't claim to know whether or not the proposal is perfect. I'm just glad someone is willing to engage in the issue. Why is it that the UK is focused on this in a rational way, and we can't seem to get ourselves there? Are we not in enough of a crisis yet?

- mattb2518

November 11, 2010 at 9:25am

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I agree without reservation on the need for a simpler tax code, and would throw in dropping other subsidies like agriculture, home mortgages, and most others. Pretty much agree with roi on healthcare too, but would like to see a practical compromise that blends in some Republican ideas like tort reform and a bigger role for already-existing state insurance commissions. Cost control is at some point going to have to confront the appalling extent of waste, fraud, and abuse in Medicare/Medicaid, and the even-more appalling lack of modern oversight to prevent the tens of thousands of medical error-related fatalities each year. We should also means test SSI, Medicaid, and Medicare; and negotiate surrender terms in the Global War on Drugs, which has a huge and little-appreciated negative impact on our economy via our domestic legal justice system, and on foreign policy. We could probably also phase out the Air Force and Army, with the Navy and a super-sized Marine Corps handling upcoming, likely un-declared, wars.

- Robert Powell

November 11, 2010 at 9:38am

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Obviously, no need to "means test" Medicaid. Sorry.....

- Robert Powell

November 11, 2010 at 9:40am

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Robert Powell, "Obviously, no need to "means test" Medicaid. Sorry.." lol

- subterran

November 11, 2010 at 10:49am

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I'm not a homeowner--I rent. Not married and don't have kids (thankfully). Am self-employed and pay my share and the company share of Social Security. Pay my own health insurance -- though it's going to be harder with the 16% premium increase coming in 2011. Don't own a gas-guzzler or green car. Over 50 but don't expect to be able to retire anytime soon -- if ever. I get diddly-squat from the government in terms of subsidies and I don't really mind. But I am so sick of hearing about people with mortgage troubles. I'm sorry some people really got hurt by the housing bubble, but from where I sit, they are milking it to death. You have a right to buy a home, and marry and have kids and be happy. But really, do you have to have everyone else and the government paying you for it? I hope the government does scrap some (not all, just some) deductions on mortgages and families. Perhaps I'm simple and naive, but I don't understand why people aren't more confident in providing for themselves and theirs.

- kaybee

November 11, 2010 at 10:56am

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If the incidents of medical reimbursement and the rates of reimbursement were federally mandated, there would be nothing for health insurers to, and state insurance commissioners, to do but administer payment as efficiently as possible. No problem there. It is trivial relative to the problem. Medical malpractice is not a significant piece of our medical costs. We should have an administrative system not unlike worker's compensation that includes professionals on the panel and sets compensation rates. This should not be part of the jury system. But Republicans want virtually to eliminate compensation for wrongful medical injury. That is not tort reform, but license to kill. Of course, they call it tort reform because that is better marketing. A deal that led to real HCR in exchange for an administrative system for medical malpractice would be a great deal indeed. Not a prayer that the Republicans would go for it though. As for living beyond our means, that IS the trade deficit. The internal debt is a finance question, not a question of living beyond our means. That is, it is only a question of who pays since everything produced domestically is produced and consumed here (some exports but we have net imports). The trade deficit is a serious problem but the free-market orthodoxy resists managed trade, the only way to solve that problem. Once again, rigid right-wing economic ideology has us over a barrel.

- roidubouloi

November 11, 2010 at 11:27am

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Per roi's suggesting that we dump tax deductions. Another TNR contributor suggested that deductions should be used sparingly to help start-up technologies and the like, but sundown after those technologies and business ideas should have had time to become well established. That's how I'd prefer to see them handled (which means that a lot of the current legacy deductions could be thrown out)

- jet

November 11, 2010 at 1:39pm

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Single payer is fine but misses the main point: if the market is not going to allocate care and regulate price, something else must. Who writes the check doesn't matter. I would let people buy what they want but not mix private overpayment with regulated payment. Public or private, no vouchers for the rich. Yes, controlling costs is hard, but if we don't we are out of control. It is not technically difficult, however, only politically difficult.

- roidubouloi

November 11, 2010 at 1:48pm

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The American people pay into Social Security via payroll taxes as a form of insurance, and any benefit reduction is actually stealing from us. Currently, approximately 1 in 10 seniors live in poverty. We need to strengthen Social Security, not cut benefits. It has been calculated that each year that the retirement age is raised equals a 7% reduction in benefits. Social Security has nothing to do with the deficit – it is separately funded and cutting benefits won’t help cut the deficit.Social Security doesn't just benefit seniors – one third of beneficiaries are disabled people, or spouses, widowers or children. Social Security must remain universal – everyone must benefit.Making the program based only on need would substantially undermine public support and take Social Security down the path of welfare – which has essentially been “reformed” out of existence. The Tea Party wants to destroy it. We must prevent Radical right-wing extremists from pitting the young against the old and privatizing or abolishing America's most popular and successful program.

- LawrenceGulotta

November 11, 2010 at 1:53pm

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Why is the HMS Debt Commission sinking rather than the USS Debt Commission?

- roidubouloi

November 11, 2010 at 4:21pm

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Aside from the compelling arguments made in this article about the short-term need for deficit spending to increase demand, even in the longer view Bowles and Simpson showed no sense at all in this set of proposals -- before you can ask the middle class to make such sacrifices, it has to be clear that the richest 1% of Americans, folks who have earned 80% of all the increases in income over the past 20 years, have made a contribution proportionate to their ability to pay. I don't see that in their proposal at all. The sad thing is that this craziness will lend cover to Republicans in Congress who want to protect the interests of that top 1% at the expense of everyone else (as they did in the original Bush tax cuts and will do again in the next few weeks).

- purcellneil

November 11, 2010 at 4:32pm

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roi: "Yes, controlling costs is hard, but if we don't we are out of control. It is not technically difficult, however, only politically difficult." Unfortunately, "only politically difficult" should read, "only politically extremely difficult, in fact politically all but impossible..." ...in American society today (or tomorrow...in the foreseeable future...if ever). Imposing treatment-cost limits on free choice a non-starter. Is it not so? If so, then, politically, how might it be done without some imposed limit by choice, cost, or even feasibility. This is the crucial difference between Americans' idea of health care remainder of industrialized nations. Until the ideal of unlimited, unencumbered individual choice, is shifted to one of greatest good for the many *within certain limits* it will be extremely difficult to impose significant and reasonable limits. We're talking the "American Dream," that anything is possible, nothing is impossible. Of course, "if you work hard enough," and "never give up." Giving up something is choice that can't be regulated, as far as I can see or imagine in American society, unless of course, one is utterly defeated, therefore must endure oppression and tyranny.

- Tgossard

November 11, 2010 at 4:39pm

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Even the HMS doesn't make sense: It was the RMS Titanic (Royal Mail Steamer, a passenger ship that also ferried the Royal Mail) as opposed to HMS (His/Her Majesty's Ship, ie a naval vessel.)

- Crock1701

November 11, 2010 at 5:22pm

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Politically extremely difficult, but once we have universal health care, so that we cannot restrain costs by denying care to those of limited means, the rich will get sufficiently tired of footing the bill that cost control will become politically attractive. The opposite of the republican strategy of starving the government for revenues. Unfortunately, there areva variety of problems that simply cannot be solved by politically palatable means. Those problems are destined to get worse until they are so bad that the politically unpalatable becomes not just palatable but inevitable. It is not the case that there exists for every problem a political compromise that will address it successfully. I do think some great left-wing lies and demagoguery could hasten solutions. No reason why the right should have exclusive use of those weapons.

- roidubouloi

November 11, 2010 at 6:05pm

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Meaning that Democrats have to learn that politics is theater, performance art, or they will continue to be beaten by republican hucksterism. They have to learn to fight the extremist political rhetoric to a draw and that means creating your own dominant narrative which in turn means a punctilious regard for literal truth must go. That 's how the game is played. Just as war cannot be won without doing things that in any other context would be morally repugnant.

- roidubouloi

November 11, 2010 at 6:34pm

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It is hard to know where to start with this strange specimen of economics. I'll try one. Is government the only agency rich enough to stimulate the economy into recovery? In the 1790 a French economist exploded this one with his "Broken Window" argument. Can a government stimulate demand if it simply breaks windows and pays to replace them? Only to the extent that it takes tax revenue to do this, but in so doing it reduces demand elsewhere in the economy to repair whatever broken windows need replacing. In other words, the illusion that only government can stimulate the economy on a mass scale fails to recognize that the benefits of spending to stimulate the economy will be paid for only by reducing demand elsewhere, thus recreating the problem. At some point the spending will have to stop, leaving a massive debt which will paralyze the economy. The resulting inflation will eventually cancel out the debt, but will destroy all our savings as well.

- lance00002001

November 11, 2010 at 10:08pm

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Sorry, lance, but although it may be counter-intuitive, that French economist was wrong. People learned quite a bit in the ensuing 150 years. As Keynes correctly pointed out, while we want stimulus spending to be productive, it doesn't matter from the point of view of economic stimulus whether we pay people to dig holes and fill them in again. It would have the same stimulative effect as government spending on anything else. Indeed, we finally emerged from the Depression because of military spending, paying a lot of people to break a lot of windows in Europe. Your notion of spending as a zero-sum game is only correct once the economy is already operating at capacity, so that consumption by someone, government or private, must reduce consumption by someone else. When there is slack, anyone's additional spending increase's output. The taxes the government extracts to pay for its spending immediately go back into the pockets of the private sector as the money is spent. At the end of a cycle, the private sector has the same amount of money and output has increased by whatever the government spent. Plus, the additional income gained by the people who performed the services for the government leads them to spend.

- roidubouloi

November 12, 2010 at 3:57am

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roid writes: " At the end of a cycle, the private sector has the same amount of money and output has increased by whatever the government spent" So why not send 100% of the money through the fingers of government? Or why not let people keep it all and cut out the middleman?

- seattleeng

November 12, 2010 at 10:11am

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Never been a buyer of that theory Roi. Keynes completely missed the damage caused by unproductive spending, and the resulting misallocation of capital. I laugh that you rail on about Repubs, when your proposals, with which I largely agree, are much closer to typical Repub than Dem arguments. Even a libertarian could support them!

- ds111

November 12, 2010 at 10:13am

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Yep. Sometimes I do.

- Robert Powell

November 12, 2010 at 6:24pm

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"Why not let people keep it all and cut out the middleman?" says seattle. Fine with me. Buy your own national defense and I will buy mine. Or, observe that there are various important functions of society that the private market and private wealth alone cannot and will not achieve, not now, not ever. The whole anti-government argument is frankly inane. The question should always be how best to accomplish something and whether, at the cost, it is worth it. Some things, typically allocative decisions, are best left to the private market, within bounds. Other things must be done by government. Those questions, what to do and whether it is worth the cost, should ultimately be determined democratically, not by who has the most money with which to buy outcomes that favor their own interests. You are either a royalist, believing in one dollar one vote, or a democrat, believing in one person, one vote. I am the latter, you are the former. Constantly trying to dress up royalism in claims about efficiency fails the test of reality. ds111, I don't care much whether Republicans or libertarians agree with me or disagree. I think everyone of all political persuasions should agree with me. Empirically, however, libertarians might agree with me on any given day. The chance that a Republican would agree with me, or that I would agree with a Republican, is pretty close to nil. Keynes did not for a moment miss the loss involved in unproductive spending. His point was that the stimulative effect of spending on an economy in recession was not a function of the value of the spending, only of the fact of the spending. He was of course correct as evidenced by the spending on the war effort in World War II, very little of which would meet any normal definition of productive. It was necessary to protect against much greater loss. That is Keynes point -- even unproductive growth in government spending in a recession is better the none because it prevents even greater losses. It should not need to be stated that Keynes would strongly favor productive spending, such as on needed infrastructure, to digging holes and filling them in again.

- roidubouloi

November 13, 2010 at 11:35am

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Be careful in choosing your enemies roi, for you will become more like your cartoons of them. No one is disputing the need for a, hopefully democratic, government. Republicans, even those of Libertarian leanings, concede that. They also make some pretty good points. It's tough to make the case for unproductive spending as better than none in an era of giant expansion by government, which most of us recognize as replete with examples of it. Are you on board with Simpson/Bowles?

- Robert Powell

November 13, 2010 at 1:46pm

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I'm sorry, but everything uttered by the Republicans is utter nonsense, mendacious lies and weird fantasies. No one makes the case for "unproductive spending." The very correct technical point being made by Keynes is that the stimulative effect comes from the fact of spending, without regard to what it is spend on, including blowing up Europe. That was not productive in any conventional sense, but the massive World War II spending proved Keynes' thesis about recession being the result of a lack of demand and No, I am not on board with Simpson/Bowles. It is but more fantasy on the spending cuts. It is not possible to balance the budget on the 18% that is discretionary spending even if you eliminated the entire government. As well, the intellectual approach is entirely wrong. They should have constructed a model budget and tax structure, providing for moderate surpluses under full employment, as a template for where we need to be. Conceiving of the whole thing as where you can cut is no way to run anything.

- roidubouloi

November 14, 2010 at 4:49am

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