The Mythological Narrative of AmericaSpeaks: Part Two
In Part One, I addressed the question of whether the AmericaSpeaks argument showing that increasing deficits, debts, and public debt-to-GDP ratios is a real problem America needs to solve make sense. I concluded that their reasoning doesn’t show there’s a real problem because they assume that interest rate levels for Government debt instruments are determined by the market because deficits require dollar for dollar financing by debt instruments. However, this assumption is false because the Government can, if it chooses, spend without issuing debt, and implementing this choice, in turn, can drive interest rates toward zero, so that, in fact, Government interest costs can decrease over time on those debt instruments the Government does choose to issue.
Since the above suggests that the deficit/debt problem pointed to by AmericaSpeaks doesn’t exist, I could just leave things there. But, I think I’d be remiss if I didn’t provide some analysis of the quality of the projections on the basis of which they project revenues and expenditures. So here are some comments on their projections. In making these, I don’t mean to suggest that their focus on the deficit, debt, and ratio issues should be taken as indicating the importance of these issues, because what we need to do for the sake of this country and its people is to just forget about deficits, debts, and ratios, and just have Government spend what it needs to spend to enable us to solve the very great variety of our looming problems. However, the narrative suggested by the AmericaSpeaks projections is so at variance with reality, that I think there’s an issue here of the credibility of any organization that would take such projections seriously, including CBO, which is responsible for them up till 2020, at least.
First, I think the projection of spending and revenue are highly questionable. This is partly due to the problem with interest rates and costs I explained in Part One. If interest costs fall to near zero, as the Government can make them do, then the portion of debt accumulation due to increasing net interest costs won’t come close to the AmericaSpeaks projections, and their over total debt-to-GDP ratio would be dramatically effected, even if the other portions of their projections were valid. For example, let’s say that interest costs in 2025 were reduced by Government action to 2% of pre-interest Federal outlays. That would reduce their projection by $1.38 Trillion dollars in that year alone. Reduced interest cost projections in the years between now and then would greatly reduce the national debt projected by AmericaSpeaks and also the public debt-to-GDP ratio.
But, second, however, the non-interest cost projections in the AmericaSpeaks video are also not valid. The reason is that in order to estimate revenues, the CBO/AmericaSpeaks models on which these projections are based have to be able to project the state of the economy and its growth rates, because tax revenues are very sensitive to property values, personal incomes, and sales, and these, in turn, are highly sensitive to economic growth.
But who would bet the proverbial plugged nickel on any economic growth and tax revenue projections that are 30 or 40 years out? Would you bet anything of consequence on CBO’s projections of economic growth and tax revenues even 3 or 4 years out? Did CBO in 1996 project four straight years of Government surpluses at the end of the Clinton Administration? In 2001, did they accurately project the size of the Bush Administration’s deficits, or the rate of growth of the economy in the four years after 2001? In 2005, did CBO project the Crash of 2008, and the falling off of tax revenues we’ve seen as a result?
If one looks at CBO’s numbers on projected GDP in the period 2010 – 2020, one finds a projected growth ratio of 1.55 over the 10 year period, only slightly higher than in the 2000 – 2010 decade when the growth ratio is estimated at 1.50. These numbers are far from the previous historical average which is roughly 2.00. I developed alternative projections to CBO’s from 2011 to 2020, based on 1) the 2.00 growth ratio and 2) the assumption that Government interest costs, which could be driven much lower if we want to do so, would remain, where they are today, at, roughly, 2.26%. The resulting projections show four straight surpluses towards the end of the decade, and also a reduction in the debt-to-GDP ratio declining to 37% in 2020, in contrast to CBO’s ratio of 90%.
To be very clear about this, I don’t think this projection of mine is any better than CBO’s. In fact, I believe that unless there is inflation, the US cannot run substantial surpluses for four years running without causing a very serious recession. But my point here is that fairly reasonable alternative assumptions about key parameters in such projection models can produce wide variations in outcomes. To me, this means that such projections are risky, dangerous and invalid. Minimally rationally rational people should not make major policy changes that could cause great pain to large numbers of working people based on 10 year projections of deficits, debts, and debt-to-GDP ratios, that can vary all over the lot when one varies assumptions about some key parameters. In cases like this, the measures being looked at are not causes of anything, but are themselves dependent on the parameters which determine them. Instead, of shaping policy to manage such endogenous effects, what we ought to doing is developing policies that will effect the key parameters. In this case, I mean growth ratios, and interest rates, rather than their effects.
Later in their narrative, AmericaSpeaks makes reference to projections showing that the debt-to-GDP ratio will increase to more than 300% by 2040. They also say that there is “universal agreement” that if America reaches this debt-to-GDP ratio level, that we will cease to be an economic superpower. Perhaps that’s true, but, if so, the empirical evidence we have so far indicates that the “universal agreement” might be wrong, as it was when there was “universal agreement that the ‘earth is flat.’” Japan currently has a public debt to-GDP ratio in excess of 190%. Yet, last I looked, it is still an economic superpower and has very low net interest costs of 1 – 2 %. This is not to say that a nation with a very high ratio can’t be an absolute mess, as is evidenced by Zimbabwe. What it does show however, is that economic collapse is a function of many factors, and that the debt-to-GDP ratio is not, in itself, a causal factor in economic performance.
Apart, from their argument about rising interest costs, and their assumption of a historically low growth ratio, AmericaSpeaks also predicts that deficits and the debt will increase because we have an aging population, rapidly increasing health care costs, and also, tax policies that won’t generate enough revenue to cover rising health care and Social Security expenditures. However, why is it that they mention these factors in producing debts and deficits, but not the pitiful growth ratio CBO projects for the 2010 – 2020 decade, which AmericaSpeaks projects further out from 2020 to 2025? Why is it they don’t have a number of alternative projections about the period 2010 – 2025? Could it be that they’d rather just figure out how to cut expenditures, or raise revenues, than figure out how to put everyone to work and re-build America? Could it be that they’d rather just accept an America in which the American Dream is lost for most of us, than work for a better economy, a more equal and abundant society, and a healthier democracy?
AmericaSpeaks never says this in its video, but it’s whole orientation is exclusively towards trying to get Americans to figure out and buy into an accounting perspective on how we might cut Government spending and raise additional revenues to fulfill a gold standard view of what sound Government finance is. It is about getting the US Government to accept Governmental Budgetary Constraints (GBCs) that are inappropriate and limiting for a Government sovereign in its own currency and having a responsibility to prioritize public purpose and the public good over mere money.
This GBC/austerity/deficit terrorist orientation is both morally wrong and unworkable. Americans have seen Paree. They don’t want to stay down on the farm. This economy and we, collectively, can make this economy work, to fund all of our basic human needs. But to do that we need to have Government play its proper role, as an active participant in enabling and supporting the economic endeavors of Americans. We need never to forget that Government spending is the only way that the private sector can get new currency, because the Federal Government alone has the authority to issue. As a matter of simple accounting, that national debt is simultaneously the amount of savings accumulated by the private sector since the inception of the Republic. As my friend Marshall Auerback recently put it:
”And the government sector is in the unique position of being able to create new net financial assets, by virtue of its ability to create currency. When a private entity goes into debt, its liabilities are another entity’s asset. Netting the two, there is no net financial asset creation. When a sovereign government issues debt, it creates an asset for the private sector without an offsetting private sector liability. Hence government issuance of debt results in net financial asset creation for the private sector. Private debt is debt, but government debt is financial wealth for the private sector.”
If a country is, as we are, a net importer of goods, it needs its Government to run deficits to create new financial assets to fund its growth. AmericaSpeaks wants us to work towards balanced budgets and surpluses as a virtuous goal we ought to seek. But they are mistaken in this. They would be right, if the Government were a Household, a business, or even a State which wasn’t sovereign in its own currency. But for us, balanced budgets and surpluses aren’t virtuous. They are just meaningless abstractions. We need to manage Government spending according to its planned and real outcomes, its consequences, and our ideas about whether these consequences are in accord with aspects of public purpose like full employment, price stability, great education for all, public safety, a healthy environment, and many other well-known dimensions of public purpose. Among such dimensions is not where we stand on deficits and debts. Those are just old metrics that have no relevance in themselves any longer. They are a waste of time, energy, and effort. It is just silly for any Government commission and an associated effort like AmericaSpeaks, to be focused on the deficit/debt issue because, as we’ve seen, high levels of those things are a fantasy problem. It’s "Look over there, it’s the out-of-control public debt-to-GDP ratio," and no one to say "Bull Shit, where’s your commission on ending this recession in 90 days."