It all started so innocently: deficit hawks wanted to restore their credibility in the face of the global financial crisis and the comprehensive discrediting of their ideology. They slowly emerged from their caves, trying to re-engage in the policy debate by appearing reasonable. They started saying that "now we should have deficits," but soon (unspecified) "we will need surpluses" to "pay back the excesses."
As time progressed, however, the comeback attempts became outrageous and outright distortion entered the picture. Figures such as Robert Rubin and Alan Greenspan (along with a whole host of Wall Street economists, whose employers had been large, albeit misdirected, beneficiaries of government largess) began to launch revisionist efforts to deny that fiscal policy had any positive impacts. Some went as far as asserting that government intervention actually worsened the recession by virtue of creating great "uncertainty", which allegedly held back business investment.
This latter development has now gathered pace and found its fullest expression through the US National Commission on Fiscal Responsibility and Reform (an Orwellian title if ever there was one) established by President Obama. The Commission has proposed a $3.8 trillion deficit cutting plan that would trim Social Security and Medicare, reduce income-tax rates and eliminate tax breaks, including the mortgage-interest deduction. Yes, there are token cuts in Defense spending in the interests of "fairness", but the cuts are heavily skewed toward middle class entitlements. (Which is a deceiving word because it implies that we're just a bunch of weak supplicants, dependent on the graces of the government. Why don't we call these programs "enablements"?) The priorities laid out by the Commission are truly symptomatic of the degeneracy of our governing class compared to the days of the Great Depression. Grand projects started then are still delivering value to communities and private business interests some 80 years after their completion.
The financial crisis delivered significant empirical blows to mainstream economics, which has consistently downplayed the effects of fiscal policy. Along with the usual ideological hatred of government spending (except, of course, when it favored their particular industries), most of the supporters of this commission continue to trot out the usual fantasies of excessive government spending "crowding out" the private sector. They also cited the perverse idea of "Ricardian equivalence", which says the reason that the private sector is not spending is because it expects higher taxes in the future due to budget deficits, which will have to be paid back sometime -- so they are saving up to pay those bills. And anybody who has the nerve to challenge their ludicrous assumptions is castigated as being "stridently opposed" to any reforms at all.
Yes, some of us remain strident in our opposition to stupid, irrational policy that invokes financial, rather than real, resource constraints. What we need is a policy that puts unemployed people to work to produce output needed by seniors. Providing adequate Social Security benefits to retirees will generate effective demand, which will put labor to work. Just as the rapid growth of effective demand during the Clinton boom allowed sustained growth in the employment rate, even as productivity growth rose nearer to United States long-term historical averages, tomorrow's retirees can provide the necessary demand to allow the United States to operate near full employment. This is a "virtuous combination" of the high productivity growth model followed by Europe and Japan from 1970-95 and the high employment model followed by the United States during the 1960s, as well as during the Clinton boom.
Instead, we now have a commission where people are invoking a bogus "national solvency" argument to justify cuts in Social Security. They fail to understand that resource availability in the future will be enhanced by the fiscal outlays that are done now. Mainstream remedies to perceived budget blow-outs typically manifest as cuts to education, for example. Nothing could be more counterproductive to growth.
As far as the national debt itself goes, those who want to paint the scariest picture possible use the larger gross debt to GDP ratio, which is around 90% of GDP. But that is highly misleading, because it includes the debt held in federal government accounts -- in other words, debt the government owes itself. This includes securities held in civil service and military retirement funds, Social Security, and Medicare, as well as unemployment and highway trust funds.
And Social Security has run large budget surpluses since the early 1980s. It has used those surpluses to accumulate treasury debt. In the future, the program will sell the bonds back to the treasury when Social Security revenues are less than its benefit payments. To all intents and purposes, Social Security's treasury holdings really amount to internal record keeping -- a sort of reminder that someday the treasury will have to cover Social Security's shortfall. The relevant debt figure is the treasuries held by the public.
The rationale for creating this actuarial accounting fiction can be questioned, but it helped establish the program's political legitimacy in its early days, by creating the illusion that Social Security was a "pay as you go" system, in which you take out what you pay in. In fact, it bears no reality to a private sector social insurance scheme. Those who argue, for example, that the debt owned by Social Security should be counted as part of our overall debt levels do so because it reflects a future obligation of government to future beneficiaries. However, as Randy Wray and Yeva Nersisyan have pointed out, the government has that obligation whether or not Social Security owns treasuries, and it will meet its obligations in exactly the same manner whether or not it holds treasuries, by electronically crediting bank accounts. That assertion might seem controversial to many (including the members of the Presidential commission on the deficit), but no less than the Chairman of the Federal Reserve himself has conceded the point. Ben Bernanke has long claimed that there are no technical limits to government spending (or, more specifically, to financing the fiscal components of monetary policy). In a now famous 2002 speech before the National Economists Club, he argued that the central bank can always finance government spending at no cost, under modern monetary arrangements:
Under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero. . . . The U.S. government has a technology, called a printing press (or, today, its electronic equivalent) that allows it to produce as many U.S. dollars as it wishes at essentially no cost.
Bernanke recognizes that the Fed finances government spending by electronically injecting reserves into the system and that there is no limit to its ability to do so. The Commission, however, persists in perpetuating the idea that the American government has run out of money. Meanwhile, American families have spent the past several years facing tough choices in their own lives because the market system failed. This was all due to lax government regulation and dishonest, irresponsible, and indeed fraudulent behavior on the part of the private sector, notably the financial sector, which stands to benefit from any attempt to privatize Social Security.
The deteriorating position of most American families has been exacerbated by the failure of fiscal policy to ensure there was enough spending to support their jobs and, hence, generate increased revenues (which would REDUCE the budget deficit). There are no consequences for the people who helped drive us into the ditch that the President loves to talk about. In fact, to extend the President's metaphor, the very car that veered off into the ditch has run over the people trying to climb out of it. Those victims, in turn, are being blamed for having dug the ditch in the first place. To repeat: the private sector should never spend more than they can afford. That means they should only run sustainable debt burdens and probably not be in debt overall as a sector. But the US government has the unique ability to support spending and employment while the private sector restructures its balance sheet. Policies that maintain high employment and minimize unemployment (both officially measured unemployment, as well as those counted as out of the labor force) are critical to maintain a higher worker-to-retiree ratio. Policy can also encourage today and tomorrow's seniors to continue to participate in the labor force. The private sector will play a role in all of this, but there is also an important role to be played by government.
Even on today's payouts, the vast majority of people will have almost nothing but Social Security with which to support themselves on retirement. The value of their homes has declined, their 401(k)s have been decimated, many have lost their jobs. Yet these are the very people being called upon to make sacrifices to preserve our "national solvency", even as the people largely responsible for this crisis sustain their jobs and lifestyle on the back of huge government bailouts. It is a mark of the degeneracy of our political and economic system that it looks set to succumb to the maniacal protests of the deficit hawks, who urge yet more destructive public spending reductions (how's that work out for Ireland, by the way?), which will drive millions more workers out of jobs. If one really wants to talk about "intergenerational theft" (a theme well beloved by the leading actors of this Commission), then it's fair to say that the government that adopts the recommendations of the commission will truly be guilty of crimes against our children and grandchildren.
Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.