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“The Fiscal Fizzle”: An Imaginary Budget And Debt Crisis

For much of the past five years readers of the political and economic news were left in little doubt that budget deficits and rising debt were the most important issue facing America. Serious people constantly issued dire warnings that the United States risked turning into another Greece any day now. President Obama appointed a special, bipartisan commission to propose solutions to the alleged fiscal crisis, and spent much of his first term trying to negotiate a Grand Bargain on the budget with Republicans.

That bargain never happened, because Republicans refused to consider any deal that raised taxes. Nonetheless, debt and deficits have faded from the news. And there’s a good reason for that disappearing act: The whole thing turns out to have been a false alarm.

I’m not sure whether most readers realize just how thoroughly the great fiscal panic has fizzled — and the deficit scolds are, of course, still scolding. They’re even trying to spin the latest long-term projections from the Congressional Budget Office — which are distinctly non-alarming — as somehow a confirmation of their earlier scare tactics. So this seems like a good time to offer an update on the debt disaster that wasn’t.

About those projections: The budget office predicts that this year’s federal deficit will be just 2.8 percent of G.D.P., down from 9.8 percent in 2009. It’s true that the fact that we’re still running a deficit means federal debt in dollar terms continues to grow — but the economy is growing too, so the budget office expects the crucial ratio of debt to G.D.P. to remain more or less flat for the next decade.

Things are expected to deteriorate after that, mainly because of the impact of an aging population on Medicare and Social Security. But there has been a dramatic slowdown in the growth of health care costs, which used to play a big role in frightening budget scenarios. As a result, despite aging, debt in 2039 — a quarter-century from now! — is projected to be no higher, as a percentage of G.D.P., than the debt America had at the end of World War II, or that Britain had for much of the 20th century. Oh, and the budget office now expects interest rates to remain fairly low, not much higher than the economy’s rate of growth. This in turn weakens, indeed almost eliminates, the risk of a debt spiral, in which the cost of servicing debt drives debt even higher.

Still, rising debt isn’t good. So what would it take to avoid any rise in the debt ratio? Surprisingly little. The budget office estimates that stabilizing the ratio of debt to G.D.P. at its current level would require spending cuts and/or tax hikes of 1.2 percent of G.D.P. if we started now, or 1.5 percent of G.D.P. if we waited until 2020. Politically, that would be hard given total Republican opposition to anything a Democratic president might propose, but in economic terms it would be no big deal, and wouldn’t require any fundamental change in our major social programs.

In short, the debt apocalypse has been called off.

Wait — what about the risk of a crisis of confidence? There have been many warnings that such a crisis was imminent, some of them coupled with surprisingly frank admissions of disappointment that it hadn’t happened yet. For example, Alan Greenspan warned of the “Greece analogy,” and declared that it was “regrettable” that U.S. interest rates and inflation hadn’t yet soared.

But that was more than four years ago, and both inflation and interest rates remain low. Maybe the United States, which among other things borrows in its own currency and therefore can’t run out of cash, isn’t much like Greece after all.

In fact, even within Europe the severity of the debt crisis diminished rapidly once the European Central Bank began doing its job, making it clear that it would do “whatever it takes” to avoid cash crises in nations that have given up their own currencies and adopted the euro. Did you know that Italy, which remains deep in debt and suffers much more from the burden of an aging population than we do, can now borrow long term at an interest rate of only 2.78 percent? Did you know that France, which is the subject of constant negative reporting, pays only 1.57 percent?

So we don’t have a debt crisis, and never did. Why did everyone important seem to think otherwise?

To be fair, there has been some real good news about the long-run fiscal prospect, mainly from health care. But it’s hard to escape the sense that debt panic was promoted because it served a political purpose — that many people were pushing the notion of a debt crisis as a way to attack Social Security and Medicare. And they did immense damage along the way, diverting the nation’s attention from its real problems — crippling unemployment, deteriorating infrastructure and more — for years on end.

 

By: Paul Krugman, Op-Ed Columnist, The New York Times, Julo 20, 2014

July 22, 2014 Posted by | Debt Crisis, Deficits, Federal Budget | , , , , , , , , | Leave a comment

“Hell Bent On Another Crisis”: Will Congress Ever Grasp That The Debt Crisis Is Fake?

As the American people tried to celebrate last year’s holiday season while mourning the loss of 26 lives in Newtown, Connecticut, Congress and the White House were duking it out over the “fiscal cliff.”

Our leaders reached a temporary solution on New Year’s Day that averted some of the self-imposed toxic mix of mandated tax increases and discretionary spending cuts that threatened to trigger a new recession. In the end, they couldn’t agree on a comprehensive deal, so the sequester went into effect two months later with relatively little fanfare.

We’re still living with those $80 billion across-the-board cuts, which slashed research spending, kicked nearly 60,000 kids out of Head Start and forced Meals on Wheels to provide less help for the elderly and others in need.

Now they’re at it again. After October’s government shutdown, a new congressional committee got a Friday, December 13 deadline to reach an agreement on a budget for the 2014 fiscal year — which began more than two months ago. Come January 15, federal spending authority will run out again and we could begin 2014 with another shutdown.

On the surface, the conflict between President Barack Obama and the Republican Party is over how to cut yearly federal deficits, which pile up over time and increase the national debt. Republicans cite a “debt crisis” and construct economic doomsday scenarios to justify their insistence that Medicaid, Medicare and Social Security should be cut.

Obama says no — we need more revenue, and it needs to come from the very wealthy and corporations who don’t pay their fair share in taxes. Besides, the deficit is already much smaller – thanks to the ongoing sequester and two provisions in that New Year’s fiscal deal: a payroll tax cut for all workers and the end of the Bush-era tax cuts for the very richest Americans.

There are a couple of things wrong with this picture. To begin with, while the government is indeed operating at a deficit (albeit a much lower one) and as a consequence piling up debt, there is no debt “crisis.”

According to leading economists like Nobel Prize winner and New York Times columnist Paul Krugman, deficit spending can improve ailing economies, and we should actually have more of it until ours fully recovers from the deepest crisis we’ve seen since the Great Depression.

Secondly, Republicans don’t really care about deficits and debt. After all, they created both — largely through tax cuts for the wealthy and unpaid-for wars during the George W. Bush administration. Their whole argument is a smokescreen for their core agenda — massive wealth transfers from the poor and what’s left of the middle class to the rich — through regressive tax policies and dismantling the safety net.

This isn’t new. It’s been the Republican agenda for at least 30 years.

In 2011, Republicans brought the country to the brink of default for the first time in history by insisting that a raise in the debt ceiling (historically bipartisan and routine) be offset by program cuts. This year, they shut down the government because they didn’t get their way.

Obama has said that strategy won’t work again, and the current need to once again raise the amount the government can borrow is non-negotiable. And he has upped the ante with a new demand that any future cuts be offset by tax increases on the wealthiest and corporations.

We don’t yet know if the latest standoff will trigger a new round of cuts to programs low-income Americans depend on most. Right now the House is asking for a $40 billion cut in food stamps over the next decade, and Medicare and Social Security are always on their hit list.

What we do know is that Republicans seem bent on causing one “crisis” after another, and the country loses in the bargain.

 

By: Martha Burk, Director of the Corporate Accountability Project for the National Council of Women’s Organizations; Published in  The Bill Moyers Blog, December 4, 2013

December 9, 2013 Posted by | Congress, Debt Crisis | , , , , , , , | 1 Comment

“Addicted To The Apocalypse”: Scaremongers Can’t Bring Themselves To Let Go

Once upon a time, walking around shouting “The end is nigh” got you labeled a kook, someone not to be taken seriously. These days, however, all the best people go around warning of looming disaster. In fact, you more or less have to subscribe to fantasies of fiscal apocalypse to be considered respectable.

And I do mean fantasies. Washington has spent the past three-plus years in terror of a debt crisis that keeps not happening, and, in fact, can’t happen to a country like the United States, which has its own currency and borrows in that currency. Yet the scaremongers can’t bring themselves to let go.

Consider, for example, Stanley Druckenmiller, the billionaire investor, who has lately made a splash with warnings about the burden of our entitlement programs. (Gee, why hasn’t anyone else thought of making that point?) He could talk about the problems we may face a decade or two down the road. But, no. He seems to feel that he must warn about the looming threat of a financial crisis worse than 2008.

Or consider the deficit-scold organization Fix the Debt, led by the omnipresent Alan Simpson and Erskine Bowles. It was, I suppose, predictable that Fix the Debt would respond to the latest budget deal with a press release trying to shift the focus to its favorite subject. But the organization wasn’t content with declaring that America’s long-run budget issues remain unresolved, which is true. It had to warn that “continuing to delay confronting our debt is letting a fire burn that could get out of control at any moment.”

As I’ve already suggested, there are two remarkable things about this kind of doomsaying. One is that the doomsayers haven’t rethought their premises despite being wrong again and again — perhaps because the news media continue to treat them with immense respect. The other is that as far as I can tell nobody, and I mean nobody, in the looming-apocalypse camp has tried to explain exactly how the predicted disaster would actually work.

On the Chicken Little aspect: It’s actually awesome, in a way, to realize how long cries of looming disaster have filled our airwaves and op-ed pages. For example, I just reread an op-ed article by Alan Greenspan in The Wall Street Journal, warning that our budget deficit will lead to soaring inflation and interest rates. What about the reality of low inflation and low rates? That, he declares in the article, is “regrettable, because it is fostering a sense of complacency.”

It’s curious how readily people who normally revere the wisdom of markets declare the markets all wrong when they fail to panic the way they’re supposed to. But the really striking thing at this point is the date: Mr. Greenspan’s article was published in June 2010, almost three and a half years ago — and both inflation and interest rates remain low.

So has the ex-Maestro reconsidered his views after having been so wrong for so long? Not a bit. His new (and pretty bad) book declares that “the bias toward unconstrained deficit spending is our top domestic economic problem.”

Meanwhile, about that oft-prophesied, never-arriving debt crisis: In Senate testimony more than two and half years ago, Mr. Bowles warned that we were likely to face a fiscal crisis within around two years, and he urged his listeners to “just stop for a minute and think about what happens” if “our bankers in Asia” stop buying our debt. But has he, or anyone in his camp, actually tried to think through what would happen? No, not really. They just assume that it would cause soaring interest rates and economic collapse, when both theory and evidence suggest otherwise.

Don’t believe me? Look at Japan, a country that, like America, has its own currency and borrows in that currency, and has much higher debt relative to G.D.P. than we do. Since taking office, Prime Minister Shinzo Abe has, in effect, engineered exactly the kind of loss of confidence the debt worriers fear — that is, he has persuaded investors that deflation is over and inflation lies ahead, which reduces the attractiveness of Japanese bonds. And the effects on the Japanese economy have been entirely positive! Interest rates are still low, because people expect the Bank of Japan (the equivalent of our Federal Reserve) to keep them low; the yen has fallen, which is a good thing, because it make Japanese exports more competitive. And Japanese economic growth has actually accelerated.

Why, then, should we fear a debt apocalypse here? Surely, you may think, someone in the debt-apocalypse community has offered a clear explanation. But nobody has.

So the next time you see some serious-looking man in a suit declaring that we’re teetering on the precipice of fiscal doom, don’t be afraid. He and his friends have been wrong about everything so far, and they literally have no idea what they’re talking about.

 

By: Paul Krugman, Op-Ed Columnist, The New York Times, October 24, 2013

October 26, 2013 Posted by | Budget, Debt Crisis, Fiscal Policy | , , , , , , | Leave a comment

“There Are No Asterisks”: Those Who Wrap Themselves In The Constitution, Must Also Abide By The Constitution

Shortly after the 2010 midterms, as the newly elected House Republican majority was poised to start governing (I use the word loosely), the GOP officials had an idea for a symbolic gesture: they’d read the entire Constitution out loud. In January of this year, as the new Congress got underway, they did it again.

There wasn’t any harm in this, of course, but there wasn’t any point, either. It seemed to be the Republicans’ way of reminding the political world that they are the ones who truly love the Constitution. Sure, there are parts conservatives don’t like (the establishment clause, promoting the general welfare), and the right is eager to amend the document in a wide variety of ways, but for Tea Partiers and their allies, the Constitution has no greater champions than far-right congressional Republicans.

And if that’s still the case, Kristin Roberts has some bad news for them.

Have Republicans forgotten that they too must abide by the Constitution?

The document is explicit in its instruction to America’s federally elected officials — make good on the country’s debts. “The validity of the public debt of the United States,” the 14th Amendment states, “shall not be questioned.”

This is not some arcane biblical reference that needs to be translated from scraps of parchment. In fact, its purpose and intent are fairly well documented.

There’s been quite a bit of talk about exotic tactics President Obama may have to consider if congressional Republicans choose to push the United States into default on purpose. Maybe the White House can pursue a “14th Amendment option.” Maybe he can mint a “platinum $1 trillion coin.” Maybe the Treasury can create “Super Premium Bonds.” Maybe the president can do something to protect Americans from those who would do us deliberate harm, even if those people happen to be elected members of Congress. After all, if the validity of the public debt of the United States shall not be questioned, doesn’t Obama have a constitutional obligation to protect us from Republicans’ sociopathic tendencies?

Maybe it’s time to turn the question around on those who like to wrap themselves in the Constitution they claim to revere.

As this relates to Obama, there’s some disagreement among credible experts about whether the president can act unilaterally to circumvent the debt-ceiling law. Obama himself addressed the point yesterday, arguing that it really is up to Congress to complete this simple task and it wouldn’t do any good for him to experiment with creative alternatives.

But that only helps reinforce the importance of the question for congressional Republicans who swear to support the Constitution before they’re permitted to hold office. The document says, “The validity of the public debt of the United States shall not be questioned.” It doesn’t say anything about justifying extortion schemes, or holding the public debt hostage, or protecting the integrity of U.S. finances in exchange for right-wing goodies to satisfy U.S. House candidates who won fewer votes than their rivals.

Likewise, Article IV, Section 1 of the Constitution — known as the Full Faith and Credit Clause — doesn’t include any asterisks about what happens when one party really hates health care reform.

When the 14th Amendment was ratified, U.S. Sen. Benjamin Wade, an Ohio Republican, argued, “Every man who has property in the public funds will feel safer when he sees that the national debt is withdrawn from the power of a Congress to repudiate it and placed under the guardianship of the Constitution than he would feel if it were left at loose ends and subject to the varying majorities which may arise in Congress.”

Today’s congressional Republicans are prepared — some are eager — to betray this commitment, ignore their constitutional responsibilities, and put Americans’ wellbeing at risk for no particular reason.

Those who claim to cherish the Constitution have some explaining to do.

 

By: Steve Benen, The Maddow Blog, October 9, 2013

October 10, 2013 Posted by | Congress, Constitution, Debt Crisis | , , , , , , | Leave a comment

“The Big Fail”: Too Many Republicans Responsible For Economic Failure Retain Power And Refuse To Learn From Experience

It’s that time again: the annual meeting of the American Economic Association and affiliates, a sort of medieval fair that serves as a marketplace for bodies (newly minted Ph.D.’s in search of jobs), books and ideas. And this year, as in past meetings, there is one theme dominating discussion: the ongoing economic crisis.

This isn’t how things were supposed to be. If you had polled the economists attending this meeting three years ago, most of them would surely have predicted that by now we’d be talking about how the great slump ended, not why it still continues.

So what went wrong? The answer, mainly, is the triumph of bad ideas.

It’s tempting to argue that the economic failures of recent years prove that economists don’t have the answers. But the truth is actually worse: in reality, standard economics offered good answers, but political leaders — and all too many economists — chose to forget or ignore what they should have known.

The story, at this point, is fairly straightforward. The financial crisis led, through several channels, to a sharp fall in private spending: residential investment plunged as the housing bubble burst; consumers began saving more as the illusory wealth created by the bubble vanished, while the mortgage debt remained. And this fall in private spending led, inevitably, to a global recession.

For an economy is not like a household. A family can decide to spend less and try to earn more. But in the economy as a whole, spending and earning go together: my spending is your income; your spending is my income. If everyone tries to slash spending at the same time, incomes will fall — and unemployment will soar.

So what can be done? A smaller financial shock, like the dot-com bust at the end of the 1990s, can be met by cutting interest rates. But the crisis of 2008 was far bigger, and even cutting rates all the way to zero wasn’t nearly enough.

At that point governments needed to step in, spending to support their economies while the private sector regained its balance. And to some extent that did happen: revenue dropped sharply in the slump, but spending actually rose as programs like unemployment insurance expanded and temporary economic stimulus went into effect. Budget deficits rose, but this was actually a good thing, probably the most important reason we didn’t have a full replay of the Great Depression.

But it all went wrong in 2010. The crisis in Greece was taken, wrongly, as a sign that all governments had better slash spending and deficits right away. Austerity became the order of the day, and supposed experts who should have known better cheered the process on, while the warnings of some (but not enough) economists that austerity would derail recovery were ignored. For example, the president of the European Central Bank confidently asserted that “the idea that austerity measures could trigger stagnation is incorrect.”

Well, someone was incorrect, all right.

Of the papers presented at this meeting, probably the biggest flash came from one by Olivier Blanchard and Daniel Leigh of the International Monetary Fund. Formally, the paper represents the views only of the authors; but Mr. Blanchard, the I.M.F.’s chief economist, isn’t an ordinary researcher, and the paper has been widely taken as a sign that the fund has had a major rethinking of economic policy.

For what the paper concludes is not just that austerity has a depressing effect on weak economies, but that the adverse effect is much stronger than previously believed. The premature turn to austerity, it turns out, was a terrible mistake.

I’ve seen some reporting describing the paper as an admission from the I.M.F. that it doesn’t know what it’s doing. That misses the point; the fund was actually less enthusiastic about austerity than other major players. To the extent that it says it was wrong, it’s also saying that everyone else (except those skeptical economists) was even more wrong. And it deserves credit for being willing to rethink its position in the light of evidence.

The really bad news is how few other players are doing the same. European leaders, having created Depression-level suffering in debtor countries without restoring financial confidence, still insist that the answer is even more pain. The current British government, which killed a promising recovery by turning to austerity, completely refuses to consider the possibility that it made a mistake.

And here in America, Republicans insist that they’ll use a confrontation over the debt ceiling — a deeply illegitimate action in itself — to demand spending cuts that would drive us back into recession.

The truth is that we’ve just experienced a colossal failure of economic policy — and far too many of those responsible for that failure both retain power and refuse to learn from experience.

By: Paul Krugman, Op-Ed Columnist, The New York Times, January 6, 2013

January 10, 2013 Posted by | Debt Crisis, Economic Recovery | , , , , , , , | Leave a comment

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