The Republican’s Debt and Deficit Blackmail

Tuesday, December 18th, 2012
GOP blackmail

(By The Pragmatic Pundit)

Republicans have been using debt and deficit blackmail as a bargaining strategy since the days of Ronald Reagan.Reagan’s brand of politics was successful at promoting the notion that federal government spending on social programs is mostly wasted on pointless handouts to lazy recipients. He carefully cultivated the impression that “government spending” meant “free money” for people who were nothing more than moochers.  Sound familiar?

Ronald Reagan was swept into office on the same Republican fearmongering-propaganda that grips the country today…”spending is out of control, the country is going bankrupt and government is too big.”

There is no denying Reagan inherited an economy that was in a deep recession, but his response to the debt crisis was far different than Republicans would have us believe.

Despite his “small government” rhetoric, Reagan expanded the federal government by 7%, employing a larger federal workforce (those greedy public employees) than any President in history other than Johnson who presided over the Vietnam War.

He did enact a huge tax cut, but then raised taxes eleven times; increased defense spending; ballooned the federal deficit to the largest peacetime deficit in history; raised the debt ceiling 17 times and accumulated a debt burden that equaled the previous 200 years of American history, turning the United States from a creditor nation into a debtor nation.  For the first time in the history of the nation, the United States borrowed in order to cover federal budget deficits.

David Stockman, Reagan’s economic wizard and the architect of the trickle-down budgets wrote:

“The Reagan deficits were intentional, designed to cut revenue as a way of pressuring Congress to cut programs Republicans wanted to destroy….The plan… was to have a strategic deficit that would give you an argument for cutting back the programs that weren’t desired….”

The “small government” mantra and “debt and deficit” narrative continued after Reagan left office and another Republican, Bush (41)  took the helm.

Daily News 1990:  Legislators Say There’s No Money.

During the tenure of these two Republicans, deregulation and imprudent real estate lending contributed to a Savings and Loan crisis and quite possibly the stock market crash.  Between 1980 and 1994, more than 1600 banks were closed or received financial assistance from the FDIC.  Over 1,000 banks with total assets of over $500 billion failed.  The number of savings and loans declined from 3,234 to 1,645.Taxpayers assumed the bill for a $124 billion bailout, while corporate scandals and bankruptcies made matters worse. Enron represented the biggest corporate scandal in history, while Worldcom MCI filed the largest bankruptcy in history.

That was the economy Republicans left for Bill Clinton and they were singing the same song: “spending is out of control and the country is going bankrupt.”  
CNN – 1995
Americans blame GOP for budget mess

Buffalo News 1995

Then as now, Republicans focused solely on cutting the social safety net and entitlement programs.  Remember welfare reform?  Republicans take credit for Clinton’s 1993 deficit-cutting package, but the truth is the balanced budget passed without a single GOP vote in either house of Congress.   By the time Clinton left office, there was a surplus.Bush/Cheney inherited the Clinton budget surplus and immediately began turning it into a deficit.

Despite their opposition to entitlements, Republicans passed the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 expanding the program (can’t privatize it, figure other ways for private corporations to extract money from the program).  After being debated and negotiated for several months, the bill finally came to a vote  on a November morning at 3 am while America slept.  Among other things, the bill prohibits the federal government from negotiating discounts with drug companies.  Read the curious legislative history.

Bush launched wars with Iraq and Afghanistan and introduced tax-cuts that primarily benefited the rich.  None of these expenditures were offset and they all were kept off the books, giving the illusion that the country was in a much stronger fiscal position than it was.  Republicans admit under Bush they  “spent like drunken sailors”,   but when the spending was taking place, not a single Republican rebelled.  Remember, running up debt and deficits is a strategy.  
Six weeks before President Obama was sworn in, the economy collapsed and the Republicans began their familiar chant…“spending is out of control and the country is going bankrupt.” 
Newly installed Governors cut the federal workforce; remember, Reagan ( the man Republicans credit with economic problem-solving) increased the federal workforce to one of the largest in history.  They cut employee pay and pensions, while they delivered more tax cuts to the wealthy.  They busted unions, destroying employees last firewall between workers and employers.  All of these acts redistribute the treasury from the middle class and working poor to the wealthy.

It isn’t ideology that drives the Republican insistence on spending cuts, it’s a strategy.  Think about it…the Republicans controlled the House, the Senate and the White House for four consecutive years.  They could have fixed Medicare and Social Security, but for some reason, there’s never a problem unless a Democrat is in the White House.Listen to how fervently they defend cuts to defense.  Why?  Afterall, defense workers are unionized public employees.  Because there isn’t a department that shifts more taxpayer money to the private sector than the Defense Department.  There is no other federal vehicle that allows the wealthy to extract more money from the treasury, convert more taxpayer revenue to the private sector than the Defense Department.

Throughout history, since 1783, tax cuts for the wealthy and increased defense spending and union busting have increased the gap between the revenues and the expenditures. Shareholders and those on Wall Street have enjoyed inflated returns, while the wages for workers have taken a beating.   It’s a 21st century Gilded Age.

In the final analysis, the real targets are Social Security, Medicare, Medicaid; any program that supports the less fortunate.   Republicans have a long-standing, deeply-held  antipathy for both Social Security and Medicare. Not only did Reagan advocate that Social Security should be privatized, he was at the forefront of a coalition against Medicare with the same arguments we hear today.

How did the public ever buy the idea that Republicans are good stewards of the economy?   Studies have been done comparing every phase of economic growth, during Democratic and Republican presidencies and congresses, and they all show stunningly better performance when Democrats are in power.

The trickle down miracle never worked because lower taxes don’t generate more revenue, they generate deficits.  It is a fact that is so mathematically  basic, it borders on common sense.

Solving the Debt Problems

Tuesday, December 4th, 2012

(By Mark Bridger, cross-posted at ThatMansScope)

For the past 40 years or so there has been a de facto class warfare in this country. While workers’ productivity has soared, worker compensation has remained essentially flat. Meanwhile, corporate profits have boomed and the gap between the top 2% of income earners  and the remaining 98% has widened to the largest its been since the gilded Age of the Robber Barons (late 19th century) or the time just preceding the Great Depression.

(There is really no dispute about this; to see some background and charts, here are some from the Economic Policy Institute.  Also check out this discussion of CEO pay increases at the Institute for Policy Studies.)

In spite of this, Republicans and other so-called “conservatives” are suggesting that we somehow must all share equally in reducing the public debt and balancing budgets. What makes this even more outrageous is that they don’t even mean equally. What they mean is that the rich should continued to enjoy tax breaks that are unequally in their favor, while Congress must enact spending cuts that hit programs that the wealthy don’t need or even like — e.g. national parks, protective regulation, healthcare and aid to education. Thus, as Weill/Brecht say in Three Penny Opera “The answer to a kick in the pants is just another kick in the pants.” Thus, the much-vaunted “Simpson-Bowles” prescription for paying down the debt is yet another kick in the pants for working non-rich Americans.

Yet, we can “fix the deficit” and end class warfare simply by cutting away the nonsense about “job creators” and “balanced approaches” and all the rest of that 2% propaganda that even the Democrats are circulating. Several years ago I suggested an alternative tax and spending program that would have balanced the budget (at that time): You can find it here; it has a link to a NY Times “budget calculator” which, though somewhat outdated, is fun to play with; click here (you can use it to check some of the figures for the suggestions I make below).

Here then is my updated program for tax fairness and spending reform.

1. Tax all income equally. In other words, eliminate a special Capital Gains Tax and tax all income including dividends at the same graduated rates. This will prevent Mitt Romney and Warren Buffet from paying at a lower rate than their secretaries.

2. Put a sales tax on sales and purchases of stocks and bonds. Speculators should pay a tax on their sales and purchases the same as most of us do on school books, garbage cans and refrigerators. I discussed this in a previous blog. This tax would be small (¼% on each sale and each purchase) and would not be burdensome to people who are actually investing as opposed to speculating. It could generate as much as $100 billion a year.

3. Cap total deductions for income tax purposes to something around $50,000. This was, in fact, an idea proposed by Mitt Romney near the end of this year’s campaign. I doubt that either he or any Republicans would actually support its implementation since it would do a lot to level the tax playing field.

4. Return the Estate Tax to 1998-2000 levels (around 50% on estates above $3 million — we could raise that to $5 million even).

5. Sell carbon licenses to industry and allow trading of these licenses. This was also at one time a Republican plan, before the party became opposed to everything except showering money on its wealthy patrons.

6. End the state of perpetual war and cut the military budget  to pre-Cold War levels (as percentage of GNP). Bring all troops home from Afghanistan and Iraq. Drastically cut troop levels in Europe, Japan and Korea.

7. End the expensive and ineffective War on Marijuana and redirect most of the rest of the ineffective “War on Drugs” toward treatment of addiction. This would save not just on police time but also help to lower the lavish spending on prisons.

8. Cut agricultural subsidies to big agribusiness (especially ethanol subsidies to “Big Corn”).

9. Cut oil subsidies to companies like Exxon-Mobil.

10. Save Social Security for a century by eliminating the limit on income subject to the FICA tax. Doing this would make raising the retirement age or adjusting the COLAs unnecessary.

Note that I didn’t mention ending the “Bush Tax Cuts.” I am assuming that they will disappear on schedule January 1. Reinstituting them for people earning less than a quarter million dollars a year will probably be one of the few things that will happen in a somewhat bipartisan way: the Republicans can’t afford not to.

This leaves the last and biggest elephant in the tent: Medicare, Medicaid, and healthcare in general. People far more knowledgeable than I have made many suggestions that might be effective. We know that the problem can be addressed effectively because every other advanced industrialized country (and many others besides) have systems that provide better healthcare results than ours and at half the cost. We should have had “Medicare for All” (the “public option”) but that didn’t happen because of the power of the insurance industry. Nevertheless, we can start with substituting “outcome-based” compensation for the current “fee for services” contracts. Instead of doctors and hospitals being paid for the number of treatments and tests they provide, they would be paid for keeping certain numbers of people healthy over certain periods of time. This is part of Obamacare, but needs to be the standard “operating procedure” for all of national healthcare.

The steps I have suggested above would raise far more money in a far fairer way than anything proposed by either political party. Furthermore, they would help reduce the burden unfairly placed on the working people of this country by 4 decades of class warfare against them.

WP Comments on Social Security, Susan Rice, Military Budgets, and End-of-Life Planning

Sunday, December 2nd, 2012

Here are some of Winning Progressive’s recent comments at the New York Times on Social Security and the payroll tax, the GOP’s misguided witch hunt against Susan Rice, public support for cuts in military spending, and the “pro-life” movement’s harmful attacks on advanced planning for end-of-life care.

Last Sunday, Ross Douthat argued in Our Enemy, the Payroll Tax that we should make permanent the temporary payroll tax cut that the Obama Administration pushed to stimulate the  economy.   Mr. Douthat claimed that the payroll tax no longer makes sense in today’s economy.  But Winning Progressive thinks this trial balloon is being floated as part of the right wing’s desire to undermine Social Security:

No, Mr. Douthat, “how do we make the payroll tax cut permanent” is not the only question that should be asked. In fact, rather than make that cut permanent, we should be eliminating the wage cap on Social Security taxes, which would keep the system fully solvent for at least 75 years.

The reality, of course, is that you’d like to see Social Security disappear, but you don’t want to just come out and say it. That’s why you are looking to raise the retirement age yet again (it was already raised by the deal struck by President Reagan in 1983), means testing, and playing with inflation numbers.

If you doubt that Mr. Douthat is trying to provide cover for the conservative desire to eliminate Social Security, then ask yourself whether you think he’d support any taxes to replace the payroll tax. How about treating capital gains the same as ordinary income? A financial transactions tax? A carbon tax? The Buffett Rule? Restoring the estate tax? All of those would be good things, but I assume Mr. Douthat would oppose them all given that Republicans have always been about cutting taxes for the wealthy without ensuring those cuts won’t increase the deficit.

Taxes are the price we pay for civilized society. And the payroll tax to fund Social Security and Medicais a sensible version of such tax. Let’s restore it so we can preserve Social Security.

On Monday, Stanley Fish had a column titled “Damned If He Does: The Susan Rice Dilemma,” which argued that President Obama had worked himself into a trap by defending Susan Rice so publicly.  According to Fish, President Obama is stuck between either backing down and looking weak, or nominating Susan Rice for Secretary of State and ending up in a distracting fight the Administration might not win.  We respectfully disagree:

Mr. Fish, I think you are viewing this far too pessimistically. In reality, the GOP is continuing to play into Obama’s hands by targeting Susan Rice.

There are two important factors that contributed to President Obama’s re-election that are at play here. The first is that the GOP spent much of the past four years showing the American public just how unreasonable they are. They obstructed just about everything, had a pathological unwillingness to compromise, and catered to the wild-eyed conspiracy theories of the crazies in their party. Then, right after losing this past election, the GOP continues the same strategy of unreasonableness by launching baseless attacks about Benghazi against a well-qualified and reasonable Administration official who had essentially nothing to do with the entire incident.

The second factor that contributed to the GOP’s loss is that many female voters and African American voters were repulsed by how the GOP approached issues of gender equality and disrespected our nation’s first African American President. So, what does the GOP do as one of its first high profile acts after losing the elections? They go after a well-qualified and reasonable African American woman on the grounds of baseless attacks about Benghazi.

It seems that today’s GOP is having a hard time learning the lessons of the 2012 Elections.

Winning Progressive recently echoed the sentiments of Bill Keller in our comment on Honey, I Shrunk the Pentagon:

I would add a reminder that the public is widely supportive of far larger reductions in military spending than are being proposed in Washington.

A comprehensive survey earlier this year by the Center for Public Integrity presented respondents with information about the size of the military budget and arguments for and against cuts. People were then asked how they would change the budget and the majority proposed cutting it by at least $83 billion, with the average proposed cut being $103 billion.

The key to achieving the kinds of reductions in the military budget that are needed is for us to stop treating military spending as somehow sacrosanct. Instead, military expenditures should be subject to the same sort of cost benefit analysis and prioritization that other types of spending and revenue decisions are guided by.

Certainly the core security and defense of our nation must receive top priority, But our current military activities and spending go far, far beyond such core. As such, we should be asking whether we still should account for 40% of total world military spending, whether we still need to prepare to fight two wars, simultaneously in different parts of the world, or whether we need the latest “high-tech” weapon developed by some military contractor. At times of high deficits and harsh budget cuts elsewhere, the answer to those questions is no.

In a recent editorial titled Care at the End of Life, the NY Times explained how in the wake of the GOP’s shamelessly false attacks about “death panels,” it has been left up to individual health care providers and systems to encourage people to engage in advanced planning for end-of-life care. Winning Progressive commented on just how much unnecessary pain and suffering the “pro-life” movement’s opposition to such advanced planning is.

The opposition to advanced planning for end-of-life care by both the so-called “pro-life” movement and the Republicans who are willing to demagogue on that movement’s behalf is one of the most disgusting spectacles I have seen.

Having recently lost my Dad to dementia, I understand well the terrible pain and anguish that debilitating diseases inflict on individuals and their loved ones at the end of life. Some people respond to such circumstances by seeking the most aggressive medical care that they can find to extend life as long as possible. That is their choice and should always remain so.

But many other people would prefer to pursue other approaches, such as foregoing invasive medical procedures, using palliative and hospice care, and pursing patient directed dying. For such people, those approaches means less pain and suffering for themselves and their families, even if it means a somewhat shorter life.

The key is to establish procedures that allow as many people as possible to have their wishes recognized and implemented without undue influence from third parties. By opposing procedures to encourage advanced planning on end-of-life issues, scapegoating hospice care, and opposing patient directed dying, today’s “pro-life” movement is condemning far too many individuals and their loved ones to end-of-life circumstances that are unnecessarily painful.

Enough Preemptive Freakouts

Friday, November 30th, 2012

(By NCrissie B)

The Preemptive Freakout du Jour is, of course, whether President Obama is about to “cave” in tax and budget negotiations with House Republicans. Last weekend, senior White House advisor David Plouffe said that successful negotiations would require concessions from both Republicans and Democrats:

The only way that gets done is for Republicans again to step back and get mercilessly criticized by Grover Norquist and the Right, and it means that Democrats are going to have to do some tough things on spending and entitlements that means that they’ll criticized on by their left.

Cue the Angst Mongers:

Okay. Deep breath.

Note the speculative scare words, such as “could be a raw deal for the middle class,” and “We have a lot of questions here about where this is going to end up, don’t we?”

Never mind that President Obama has plainly stated that Social Security is “off limits” in these negotiations. Never mind that the math is the math and, despite the chart Ed Schultz showed about the current deficit, a new report by the Congressional Budget Office shows that our long-term deficit is driven almost entirely by rising health care costs for seniors:

The aging of the baby-boom generation portends a significant and sustained increase in coming years in the share of the population that will receive benefits from Social Security and Medicare and long-term care services financed through Medicaid. Moreover, per capita spending on health care is likely to continue to grow faster than per capita spending on other goods and services for many years.

If progressives criticize conservatives for ignoring data they don’t like – and we should – then we can’t ignore data we don’t like … and the CBO’s data are very solid.

To solve our long-term deficit problem, we must flatten the growth curve on health care costs, and President Obama began working on that with the American Recovery and Reinvestment Act, which included funding for computerized medical records and comparative studies of treatment outcomes. The Affordable Care Act also includes provisions to reduce Medicare costs, but Christina Romer – former head of President Obama’s Council of Economic Advisers – wrote in June that Obamacare was only the first step in addressing the health care cost curve:

A natural approach is to strengthen measures already enacted. Once the payment advisory board has a track record, for example, perhaps it could be empowered to suggest changes in benefits or in how Medicare services are provided – say, along the lines of successful demonstration projects.

Likewise, the Bowles-Simpson bipartisan fiscal commission recommended, as part of overall tax reform, limiting the amount of health insurance benefits excluded from taxation. Like the excise tax on high-priced plans, this change would probably increase pressure to keep costs down.

Even larger departures from the current system may be needed. The law creates health insurance exchanges where individuals and small businesses can buy coverage. Including a reasonably priced public plan as an option could exert downward pressure on the price of private health insurance policies by increasing competition.

Yet Dr. Romer did not expect progress anytime soon, concluding:

Sadly, serious debate over further cost-savings measures may be a long way off. Some Republicans seem more interested in just limiting the government’s share of health care expenditures than in slowing overall spending. And some Democrats seem more interested in just preserving existing government programs than in making the entire health care system more efficient.

For the sake of the nation’s fiscal health, and the health and economic security of American families, it’s time to embrace cost containment in health care as the next great legislative challenge.

These are real challenges that demand serious discussions of alternatives and their benefits, costs, risks, and tradeoffs. President Obama and leaders in Congress will debate those. I don’t like all of the options currently on the table. I may or may not like all of the solutions eventually adopted. It’s too soon to know.

But it’s a whole lot more entertaining to have a Preemptive Freakout because … well … President Obama always caves in to Republicans anyway, right? Except he doesn’t:

In policy terms, Obama clearly had gotten the better deal. The trouble was that the political world and the public had been conditioned to see this episode as primarily a clash over the top-tier tax cuts – and on that Obama had not gotten what he wanted. Consequently, the media depicted the compromise as a loss for Obama, and progressive Democrats squawked mightily about the continuation of the tax cuts.

As Corn concludes:

In a recent White House meeting with labor leaders and progressive activists, Obama signaled he is ready to fight the GOPers – and this time dare the Republicans to block continuing the tax cuts for the middle class. But no one ought to forget that Obama, a progressive in his policy preferences, remains a pragmatist. What happened two years ago is not an indication that Obama is likely to yield in the new face-off, but that he will be assessing the political dynamics in gridlocked Washington and be willing to bargain hard for a good deal with true benefits. That’s not caving in. It’s governing.

Yes, it’s governing. But governing is messy, and full of compromises and deals that look icky as we watch them happen. As John Godfrey Saxe famously said: “Laws, like sausages, cease to inspire respect in proportion as we know how they are made.”

Or Saxe would have famously said that, if so many people didn’t wrongly attribute his quote to Otto von Bismark and Mark Twain. Those mistakes happen when people substitute ‘sounds true’ rumors for actual facts. Just sayin’.

And yes, Ed Schultz, I’m sayin’ it to you, and the others who are busy with their Premptive Freakout. Enough. Go climb a tree and nibble on a macadamia. It’s a lot better for your blood pressure. And mine.

(Crossposted from Blogistan Polytechnic Institute (

White House Burning, Part III: Choosing Our Future

Tuesday, October 16th, 2012

(By NCrissie B)

This week I am exploring Simon Johnson and James Kwak’s White House Burning: The Founding Fathers, Our National Debt, and Why It Matters To You. First we considered the history of our federal debt and the relationship of government, money, and credit. Yesterday we looked at our long-term debt outlook. Today we conclude with the authors’ proposals for a sustainable budget that preserves essential programs and services.

Simon Johnson is a professor of entrepreneurship at MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. He is a member of the CBO’s Panel of Economic Advisers and of the FDIC’s Systemic Resolution Advisory Committee. He was previously the chief economist of the IMF.

James Kwak is an associate professor at the University of Connecticut School of Law. In 2011–2012, he is also a fellow at the Harvard Law School Program on Corporate Governance. Before going to law school, he was a management consultant and co-founded a software company.

Johnson and Kwak founded The Baseline Scenario economics blog and also wrote 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown.

In Each Other We Trust

Few of us could afford to rebuild our homes after a fire or other disaster. Instead we buy insurance to pool that risk together. While it may seem like “redistribution” when our premiums pay to replace someone else’s home – or theirs pay to replace ours – we all benefit from the security of knowing our homes would be replaced if disaster struck. We trust each other to pay insurance premiums, and we trust our insurance companies to evaluate those risks well, to invest our premiums wisely, and to remain in business and pay claims when needed.

So it is with public insurance like Social Security, Medicare, Medicaid, unemployment, and other social safety net programs. Few of us can know whether we’ll need these programs, or for how long, and few of us could afford to self-insure against those risks. And while it may seem like “redistribution” when our premiums – taxes – pay for others’ benefits, we all benefit from the security of knowing the programs will be there if we need them. We trust each other to pay taxes, and we trust our government to evaluate the risks well, invest our taxes wisely, and to remain stable and solvent, and pay promised benefits when needed.

Or we should. In fact our federal government’s fiscal record is better than any insurance company’s. Since 1792, the federal government has never missed an interest payment and never failed to redeem a Treasury bond upon maturity. Our federal government has (almost) never failed to pay benefits promised by public insurance programs. Indeed that sound fiscal record – and the federal government’s economies of scale and non-profit status – make public insurance programs both less expensive and more reliable than any private insurer could offer.

Preserving our “fiscal space”

As we saw yesterday, we do face a long-term debt challenge. Our federal debt is currently 78% of GDP, and under current tax and spending policy the Congressional Budget Office projects that to grow to over 100% of GDP by 2040, if the Bush tax cuts expire. If the Bush tax cuts do not expire, the CBO projects our federal debt to reach 100% of GDP by 2030, and the the Committee for a Responsible Federal Budget projects that additional tax cuts in the Romney budget could push our federal debt to 96% of GDP by 2021.

The authors cite research of 20 countries over the past century, and found that countries with federal debts over 90% of GDP faced a serious risk of a sovereign debt crisis. That happens when investors no longer believe a government can or will meet its interest payments or redeem its bonds as they mature, as has happened recently with Greece. But the authors note that the U.S. is currently a special case: our strong economy, comparatively responsible government, and fiscal track record have made the dollar the worlds de facto reserve currency and the U.S. a safe ‘global bank.’

Still, they don’t expect that special status to continue indefinitely. Sooner or later, the authors predict, the U.S. will be simply another very rich, very advanced economy, with the same sovereign debt limits as other very rich, very advanced economies. They argue that is likely to happen within a few decades. To remain solvent, they conclude, we must reduce our federal debt to around 40-50% of GDP by 2030, and be able to keep our debt at that level barring unforeseen crises.

They concede both the debt-to-GDP target and the 2030 target are estimates, based on global economic history and projections. But those targets should ensure the U.S. has the “fiscal space” – available credit limit balance – to meet even an emergency like the 2008 financial collapse without risking a sovereign debt crisis.

Meeting our long-term commitments

Yet the authors emphasize that it’s not enough to simply balance our budget and reduce our debt. Government exists to help us solve problems and guard against risks that a market economy cannot or will not do on its own. Our grandchildren will not be better off with a government that has a balanced budget and low debt, yet cannot meet foreseeable risks like terrorism, economic crises, epidemics, or climate change. Nor will our grandchildren be better off with a government that balances its books, but cannot educate their children, maintain infrastructure for a functioning economy, safeguard public health, or ensure they can retire with dignity.

Those long-term commitments to our grandchildren are every bit as important as fiscal responsibility. And, the authors argue, we can meet those commitments – for our grandchildren and beyond – if we can agree to solve problems together rather than waving the flag of deficits and debt as a pretext for shrinking government such that only the wealthiest among us can feel secure from the whims of misfortune. “We the People” means all of us, and “We the People” can ensure that all of us have the basic necessities of life and the opportunity to pursue our talents and our dreams.

Two Scenarios

The authors argue that we can meet those commitments – preserve public insurance programs like Social Security and Medicare, ensure education and opportunity for our children, build and maintain infrastructure for a thriving economy, preserve a healthy environment, and meet foreseeable risks – and still reduce our federal debt to a sustainable 40-50% of GDP by 2030. But we’ll have to pay for it, and they offer proposals for two scenarios:

1. The Bush Tax Cuts expire on schedule

If Congress allow the Bush Tax Cuts to expire at the end of this year, the authors argue, we must reduce the annual budget deficit by about 3% of GDP by 2020. Along with the CBO’s projected economic growth, that would cut our federal debt to 40% of GDP by 2030 and allow us to sustain that through 2080, or to meet a major crisis. To reach that 3% of GDP deficit reduction, the authors propose the following (deficit savings in parentheses as percentage of GDP):

  • Energy – Introduce a carbon tax and gasoline tax, each with one-half low-income rebates (0.6%).
  • Finance – Charge “too big to fail” institutions for anticipated rescue costs and tax excessive risk-taking (0.2-0.4%).
  • Domestic Spending – Reduce farm subsidies and spending for Fannie Mae/Freddie Mac (0.1%).
  • Individual Tax Expenditures – The authors offer four alternatives that cannot be combined: (a) Reduce mortgage interest deduction, replace exemption for interest on state/local bonds with direct subsidy, phase out deduction for state/local taxes with one-half converted to direct subsidies, add floor to allowable charitable contributions, increase maximum capital gains and dividends tax rate to 28%, eliminate step-up of capital gains at death, reduce capital gains exemption for sale of home (1.6%); OR, (b) eliminate all tax expenditures (about 7%); OR, (c) cap tax expenditures at 2% of household income (0.9-1.8%); OR, (d) limit value of deductions to 15% of household income (0.7%).
  • Business Tax Expenditures – Eliminate all business tax expenditures (0.2%).
  • Consumption Tax – Introduce 5% value-added tax with one-half low-income rebate (0.9%).

2. The Bush Tax Cuts become permanent

Given President Obama’s and Democrats’ desire to preserve the Bush Tax Cuts for household incomes under $250,000 – at least until we recover fully from the Great Recession – and Republicans’ unwillingness to yield on tax cuts for the wealthy, the authors believe the Bush Tax Cuts will likely become permanent. If so, they argue, we must reduce the annual budget deficit by about 5.5% of GDP by 2020, cutting our debt to 50% of GDP by 2030. To reach that 5.5% of GDP deficit reduction, the authors propose all of the reductions listed above and add the following (deficit savings in parentheses as percentage of GDP):

  • Social Security – Increase earnings cap on payroll taxes to cover 90% of earned income, index retirement age to life expectancy (projections: 67 for those born in 1960-1984, 68 for those born 1985-2009, 69 for those born 2010-2035), cover newly-hired state and local government employees, increase payroll tax by 1% (0.9%).
  • Health Care – Phase out employer health plan tax exclusion with one-half low-income rebate, require minimum rebates for drugs purchased through Medicare, increase Medicare Part B premium to 30% of costs, increase Medicare payroll tax by 1% (1.3-1.6%).

Choosing our future

This makes the long-term cost of the Bush Tax Cuts clear. Without them, we could meet our commitments with fiscal changes that not only balance our budget but also advance important goals like encouraging sustainable energy. But with the Bush Tax Cuts in place, working families would face higher payroll taxes and seniors would face higher Medicare premiums. Even so, we would preserve Social Security, Medicare, and other public insurance programs in their current forms through 2080.

The authors concede that other economists and think tanks have proposed other plans. There are progressive plans that rely more on tax increases and conservative plans that rely more on spending cuts and ending public insurance programs in their current forms. They do not argue theirs is the Ideal Plan, or that any universally-accepted Ideal Plan is possible. Their point, as President Clinton noted in his speech at the Democratic National Convention, is that this is a problem of arithmetic. Any real plan to meet our long-term commitments – and reduce our federal debt to a sustainable level – must have numbers that add up similar to these.

Mitt Romney offers no such plan. President Obama has pointed toward one – the Simpson-Bowles Commission proposal – yet expressed his willingness to consider other alternatives, and he and Democrats are serious about meeting our long-term commitments while bringing our long-term debt into manageable shape.

The 2012 election offers a clear choice. Democrats are the Party of Fiscal Responsibility who say “we’re all in this together.” Republicans are the Party of Shrunken Government who say “you’re on your own.”

On November 6th, “We the People” will choose one future or the other. Let’s work to make it the best choice … for all of us.

(Crossposted from Blogistan Polytechnic Institute (

White House Burning, Part II: Two Views of Government, a Long View of Debt

Monday, October 15th, 2012

(By NCrissie B)

This week I am exploring Simon Johnson and James Kwak’s White House Burning: The Founding Fathers, Our National Debt, and Why It Matters To You. Previously we considered the history of our federal debt and the relationship of government, money, and credit. Today we look at our long-term debt outlook. Next we’ll conclude with the authors’ proposals for a sustainable budget that preserves essential programs and services.

Simon Johnson is a professor of entrepreneurship at MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. He is a member of the CBO’s Panel of Economic Advisers and of the FDIC’s Systemic Resolution Advisory Committee. He was previously the chief economist of the IMF.

James Kwak is an associate professor at the University of Connecticut School of Law. In 2011–2012, he is also a fellow at the Harvard Law School Program on Corporate Governance. Before going to law school, he was a management consultant and co-founded a software company.

Johnson and Kwak founded The Baseline Scenario economics blog and also wrote 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown.

The Party of Fiscal Responsibility

If the debate over our federal debt were really about the risks of debt, President George W. Bush and a Republican Congress would not have passed budget-breaking tax cuts in 2001 and 2003. Economic growth in the 1990s – fueled by Baby Boomers in their peak earning years, boosting both tax revenues and our overall economy – left a budget surplus in 2000. A fiscally responsible party would have recognized those Baby Boomers would soon be retiring, and proposed saving the current budget surplus to pay for the Social Security and Medicare benefits those Baby Boomers would soon need.

Indeed a fiscally responsible party recognized and proposed exactly that in the 2000 presidential election campaign. The party of fiscal responsibility were Democrats, as Vice President and presidential nominee Al Gore said:

We will balance the budget every year, and dedicate the budget surplus first to saving Social Security. Putting both Social Security and Medicare in an iron-clad lock box where the politicians can’t touch them – to me, that kind of common sense is a family value.

Texas Governor and Republican nominee George W. Bush proposed not fiscal responsibility to prepare for the future, but tax cuts to boost current consumption:

I believe that cutting the taxes will encourage economic growth. I believe cutting all marginal rates will keep the economy growing. I believe we ought to get rid of the death tax. I believe we ought to get rid of the earnings test on Social Security. I believe we ought to mitigate the marriage penalty. I believe we ought to use this time of prosperity to get money out of Washington and into the pockets of the taxpayers.

That pattern has not changed over the past twelve years. While Mitt Romney and Paul Ryan howl about our federal debt, their budget proposal is vague and the Committee for a Responsible Federal Budget estimated that it could push the debt up to 96% of our GDP by 2021.

How did Republicans become the party of fiscal irresponsibility?

Two views of government

Conservatives often call for a “return” to our nation’s true roots of: limited government, little regulation, and low taxes. Yet as we saw in E.J. Dionne’s Our Divided Political Heart, that history is more myth than fact.

However, Johnson and Kwak note that scientific and technical advances increased the scope of government. We learned how public utilities could reduce disease and improve public health, and the need to weigh the risks from pollution against corporate profits. The Great Depression highlighted the need for insurance to ease the suffering of market failures and allow seniors to retire with dignity. Science and technology also increased the need for a better educated population who could both develop and use new technologies. And as advances in medicine pushed health care costs beyond families’ budgets, we saw the need for effective, affordable health insurance to pool the risks. This was less a “government takeover” than increasing awareness that the often brutal hardships of middle- and low-income families’ lives were not inevitable.

Faced with that choice, the authors write, the inevitable result is redistribution of wealth. The only question is who the redistribution favors:

In a low-tax/low-benefit world, your bank account is a little bigger (if you make enough to pay taxes), but you face more risk of running out of money in retirement or not being able to afford health care; in a high-tax/high-benefit world, your bank account is a little smaller, but you face less risk. Since rich people are better able to self-insure, they gain less by pooling their risk with other people, so they might be better off in a low-tax/low-benefit world; poor people cannot self-insure, so they gain the most from risk pooling, and they will be better off in a high-tax/high-benefit world. Compared to current policy, reducing benefits so we can keep our low tax rates is a form of redistribution from the poor to the rich; raising taxes so we can maintain today’s benefit levels is a form of redistribution from the rich to the poor (assuming that the tax increases are progressive).

Thus we get then-Rep. Dick Armey (R-TX), now chairman of FreedomWorks, admitting why Republicans really talk about deficits and the federal debt:

Balancing the budget in my mind is the attention-getting device that enables me to reduce the size of government. Because the national concern over the deficit is larger than life. [...] If you’re anxious about the deficit, let me use your anxiety to cut the size of government.

Or, at least, to cut taxes. Tax cuts are usually popular, but spending cuts are not. So the Republican playbook has been to cut taxes but not spending while a Republican is in the White House, then howl about deficits and force fiscally responsible Democratic presidents to take the political fallout for raising taxes or cutting spending.

A long view of debt

That understanding sets the stage for the authors’ long-term outlook for our federal debt. Our current $11 trillion debt is partly due to the 2001 Bush tax cuts ($3 trillion), partly due to the wars in Iraq and Afghanistan ($1 trillion), and mostly due to the 2008 financial collapse that cost nine million jobs and wiped out an estimated $7.8 trillion in projected GDP growth from 2008-2018. That lost revenue coincided more families eligible for unemployment benefits, Medicaid, Temporary Assistance for Needy Families, the Supplemental Nutrition Assistance Program, and tax expenditures such as the Earned Income Tax Credit and Child Tax Credit. Many displaced older workers also chose early retirement and applied for Social Security benefits.

Our current fiscal crisis will pass, but the long-term debt dangers lie in our primary government insurance programs: Social Security and Medicare. For Social Security, the issue is simply that more people will soon retire and they will live longer. Thus, their benefits will exceed then-current Social Security revenues and deplete the program’s existing trust fund.

For Medicare, those issues are compounded by rising health care costs. That is partly a function of medical advances that offer new tests, new drugs, and new procedures, such that treatment for a given illness costs more now than it did even two decades ago. It’s also partly a function of our fee-for-service model that spurs providers to prescribe as many tests, drugs, and procedures as insurers will reimburse. The authors acknowledge that the Affordable Care Act attempts to limit the growth of health care costs, but argue there isn’t yet enough data to know whether or how well those provisions will work. Their projections assume health care costs will continue to rise as they have the past two decades, and that would create a serious, long-term debt Medicare debt risk.

But as the authors emphasize, privatizing Social Security and Medicare would not eliminate or even reduce those costs. Indeed, turning those tasks over to private, for-profit investment firms and health insurance companies would likely increase net spending for retirees, with the costs borne by retirees and their families or – for those who could not afford it – other public programs that shelter and care for the indigent.

The Baby Boomers will retire, and will need health care in their senior years, and we will all pay for it, one way or another. Given that, the authors argue, both moral and economic factors suggest we should preserve Social Security and Medicare in their current forms, which are less expensive and far less cruel than the alternatives.

But there’s no such thing as a free lunch … and tomorrow we’ll see how they propose to pay for the government we need.

(Crossposted from Blogistan Polytechnic Institute (