Yesterday, I scored the SOTU on the 7 Fairy Tales I discussed previously, and concluded that the President was subscribing to at most two of them, and that he accepted the deficit reduction framing of the Republicans as a basis for negotiation, and was trying to point the US in the same direction as export-led economies emphasizing fiscal austerity, thus joining the world’s race to bottom. Today, I want to analyze the details of the portion of the SOTU dealing with deficit reduction. The President said:
Now, the final step – a critical step – in winning the future is to make sure we aren’t buried under a mountain of debt.
The President is talking about the national debt here. He’s most definitely not talking about private sector debt. Generally speaking, and neglecting distributional issues which are very significant to working people, the greater the Government’s debt, the less private sector debt. This is true because of the macroeconomic sectoral balance model, an accounting identity that must be true.
The Government sector spending/savings balance and the non-Government sector spending/savings balance must equal zero during any period of monetary flows.
— If the Government runs a surplus, reducing the national debt, then the non-Government sector, including the US private sector must, unless it has a trade surplus, run a deficit, which means it must increase its debt. So, without an export surplus, Government policies that succeed in creating a Government surplus, mean more private sector debt.
So, the Government’s attempt to escape from its “mountain of debt,” only produces another mountain of debt for people. Do you really think it’s good for you for the Government to decrease its debt and force you to increase yours? I don’t think it’s good for me. I’d rather see the Government increase its debt, so that I can reduce mine, especially since the Government can literally make more money whereas I have to get already existing USD from others.
— If the Government runs a deficit, then the non-Government sector, including the US private sector must, unless it has a trade deficit bigger than the Government deficit, run a surplus, which means it will increase its savings. So, if the Government runs a deficit, then you and I are more likely to be able to run a surplus and reduce our debts. I know I want to do that. How about you?
— If the Government reduces its deficit, then the non-Government sector, including the US private sector must, unless it has a trade deficit bigger than the Government deficit, run a smaller surplus, which means it will increase its savings and reduce its debts, but by less than it would have if the Government has run a larger deficit. So, if President Obama is successful and implements his fiscal austerity plans, then you and I will likely be poorer for his doing so. Do you want that? I know that I don’t.
So, the question is: If we want to “win the future” are we really better off getting rid of our mountain of debt, or are we better off increasing it? The answer provided by the uncontroversial macro-economic accounting identity is that we, you, and I will all be better off increasing deficit spending, not reducing it, and that if this means increasing the national debt, as it does under the present Congressional mandate to issue debt when we deficit spend, then still we will be better off for it.
We are living with a legacy of deficit-spending that began almost a decade ago. And in the wake of the financial crisis, some of that was necessary to keep credit flowing, save jobs, and put money in people’s pockets.
Much more of it was necessary to end unemployment. The President blew the stimulus opportunity. To make it effective, he needed first to take the big banks into resolution; second, to persuade Harry Reid to get rid of the filibuster, and third, to put through a stimulus that was at least twice as large focused on a payroll tax holiday, State Revenue sharing, and a Federal Job Guarantee.
But now that the worst of the recession is over, we have to confront the fact that our government spends more than it takes in. That is not sustainable. Every day, families sacrifice to live within their means. They deserve a government that does the same.
Well, the worst of the recession goes on for most Americans. There’s massive U6 unemployment, waves of foreclosures and bankruptcies, and depressed wages and salaries for most working Americans, and while things have improved for the President’s Wall Street friends, they are worse than they were for most Americans when the President took office.
As for the rest of the statement this is the famous argument that Government deficit spending isn’t sustainable because the Government is like a household and that since households sacrifice to live with their means, Government ought to do that too. The problem with this is that Governments like the United States, that are sovereign in their own currency aren’t like households. Households can’t make their own currency and require that people use that currency to pay taxes. Households can run out of money; but the US can’t ever run out of money as long as Congress decides to appropriate spending and gives the Executive the authority to implement that spending.
So, it’s false that continued deficits are unsustainable. If economic conditions call for it, then Governments like ours (but not Greece, Ireland, other members of the Eurozone, or nations that owe debts in foreign currencies) can sustain deficit spending indefinitely until full employment and full use of the nation’s productive capacity is reached.
So tonight, I am proposing that starting this year, we freeze annual domestic spending for the next five years. This would reduce the deficit by more than $400 billion over the next decade, and will bring discretionary spending to the lowest share of our economy since Dwight Eisenhower was president.
This freeze will require painful cuts. Already, we have frozen the salaries of hardworking federal employees for the next two years. I’ve proposed cuts to things I care deeply about, like community action programs. The Secretary of Defense has also agreed to cut tens of billions of dollars in spending that he and his generals believe our military can do without.
The President shouldn’t be crucifying Federal employees and important Federal programs on the cross of austerity and using fear mongering about a non-existent deficit problem to do so. There are many Federal programs that ought to be cut because they don’t fit the standard of the public purpose, and produce more harm than good. But none should be cut on the grounds that the Government is like a household and can’t sustain continued deficit spending.
I recognize that some in this Chamber have already proposed deeper cuts, and I’m willing to eliminate whatever we can honestly afford to do without. But let’s make sure that we’re not doing it on the backs of our most vulnerable citizens. And let’s make sure what we’re cutting is really excess weight. Cutting the deficit by gutting our investments in innovation and education is like lightening an overloaded airplane by removing its engine. It may feel like you’re flying high at first, but it won’t take long before you’ll feel the impact.
Versailles commentators had a fit over the joke ending the paragraph. Evidently it violated their principles of good messaging textbook, or something. However, I thought the joke was well-done, and very apt. If it hadn’t been presented in the context of agreement with the frame of deficit reduction, I might even have been pleased with it.
Now, most of the cuts and savings I’ve proposed only address annual domestic spending, which represents a little more than 12% of our budget. To make further progress, we have to stop pretending that cutting this kind of spending alone will be enough. It won’t.
The bipartisan Fiscal Commission I created last year made this crystal clear. I don’t agree with all their proposals, but they made important progress. And their conclusion is that the only way to tackle our deficit is to cut excessive spending wherever we find it – in domestic spending, defense spending, health care spending, and spending through tax breaks and loopholes.
The President repeats the fable that the Fiscal Commission made some proposals. It did not, because it couldn’t assemble the required 14 votes to pass any proposal.
The Co-chairs presented a proposal, and others on the Commission offered their own individual proposals, but there were no Commission proposals as both the President and such doyen of the cable media as Nora O’Donnell love to claim. More importantly, however, in this paragraph the President embraces the frame that we need to cut “excessive spending” wherever we find it both in programs and tax expenditures. But, again, there’s no need to cut anything because we can’t afford the spending, and one person’s excessive spending, will be another person’s necessary program, so that what turns out to be “excessive” will be determined by the politics of the matter, once people have agreed on how much spending has to be sacrificed to the austerity Gods. This stuff is truly “Aztec Economics.”
This means further reducing health care costs, including programs like Medicare and Medicaid, which are the single biggest contributor to our long-term deficit. Health insurance reform will slow these rising costs, which is part of why nonpartisan economists have said that repealing the health care law would add a quarter of a trillion dollars to our deficit. Still, I’m willing to look at other ideas to bring down costs, including one that Republicans suggested last year: medical malpractice reform to rein in frivolous lawsuits.
He’s delivering fairy tales again. He’s not willing to entertain the best idea to bring down costs and still deliver universal health care. That idea, of course, is Medicare for All.
That is likely to reduce national expenditures on health care by 1/3, or as much as $800 Billion per year from its current level of $2.5 – 2.6 Billion. Of course, this would probably raise the Federal deficit in the short run. But it would make the private sector and working and middle class people richer, and would greatly reduce the rate of increase in health care expenditures by taking the insurance companies out of the equation and requiring the providers to negotiate with the Government directly. And, of course, since continued Federal deficits are sustainable for as long as necessary, there is no fiscal problem associated with Medicare for All.
To put us on solid ground, we should also find a bipartisan solution to strengthen Social Security for future generations. And we must do it without putting at risk current retirees, the most vulnerable, or people with disabilities; without slashing benefits for future generations; and without subjecting Americans’ guaranteed retirement income to the whims of the stock market.
The call for a bipartisan solution is trouble for the American people. The Republicans are out to radically change Social Security and privatize or destroy it. They’re after the guaranteed incomes of working people in their old age. There can be no bipartisan solution that won’t involve Democrats giving something away to the Republicans’ desire to make Social Security less effective and less popular. So, the best thing for people is that there be no “solution.” There are two reasons for this.
First, Social Security’s supposed need to cut benefits to 75% in 2037 is a false problem, because even if current projections prove correct 26 years from now (a ridiculous contention), the Government, which again, can never run out of money, can easily deliver full benefits to people, when they are due. And second, the problem with Social Security is not the imaginary problem of Government solvency, but the real problems that the full benefits retirement age is too high, and the cost of living adjustment needs to take into account the higher percentage of income the elderly pay for Medical care than other age groups. Democrats should be talking about these real problems; not agreeing with the austerity frame that Social Security needs a “bipartisan solution.” And they should be taking Social Security off the table of change, until the political winds shift again and they can pass a solution to Social Security’s patent inadequacy.
And if we truly care about our deficit, we simply cannot afford a permanent extension of the tax cuts for the wealthiest 2% of Americans. Before we take money away from our schools, or scholarships away from our students, we should ask millionaires to give up their tax break.
It’s not a matter of punishing their success. It’s about promoting America’s success.
Progressives loved this because they hate the Bush tax cuts. However, the framing is wrong. It accepts that there must be either cuts in spending or tax increases to ‘”fund” our education programs. The truth however, is that we need neither one. All we need is for Congress to appropriate the money and remove artificial constraints, like forced debt issuance and the debt ceiling, from the Executive branch so that it can spend what Congress appropriates. Again, the US can never run out of money, except by Congress’s own choice.
It would be a good thing to end the Bush tax cuts for the top 2%, but the framing used should be that we have an increasingly unequal distribution of wealth in the US, that this is dangerous for the future of Democracy, and that the top 2% must be patriotic enough to accept the ending of these cuts with good grace. We need to end the tax cuts as soon as possible as a first step toward restoring a more reasonable distribution of wealth similar to the distribution existing in this country from 1945 – 1970.
In fact, the best thing we could do on taxes for all Americans is to simplify the individual tax code. This will be a tough job, but members of both parties have expressed interest in doing this, and I am prepared to join them.
So now is the time to act. Now is the time for both sides and both houses of Congress – Democrats and Republicans – to forge a principled compromise that gets the job done. If we make the hard choices now to rein in our deficits, we can make the investments we need to win the future.
Simplifying the tax code is good. But historically, tax reform has often meant lower marginal tax rates for the wealthy. Now, however, we must have a different outcome. We may need a simplified tax code; but we need even more a progressive tax code that redistributes wealth again. Simplification shouldn’t occur unless it’s coupled with more progressive taxation.
In my last post, I said that the President’s orientation in the SOTU was toward joining the race to the bottom and creating an export-led economy. And I also pointed out the implications of this move for working people who would have to endure austerity, both due to less Government spending, and also to lower wages and a lower standard of living. That is what the President was really advocating in the SOTU, and that is the true meaning of his call for innovation, education, and infrastructure spending, while also calling for doubled exports and Government deficit reduction at the same time. He’s asking Americans to get used to more poverty, and privation, worse Medicare, greater inequality, and increasing acceptance of the emerging global plutocracy and its American affiliate.