Joe Minarik2013-06-19T04:55:31-04:00Joe Minarikhttp://www.huffingtonpost.com/author/index.php?author=joe-minarikCopyright 2008, HuffingtonPost.com, Inc.HuffingtonPost Blogger Feed for Joe MinarikGood old fashioned elbow grease.Reduce the Debt Limit?tag:www.huffingtonpost.com,2011:/theblog//3.9086192011-07-27T12:33:33-04:002011-09-26T05:12:02-04:00Joe Minarikhttp://www.huffingtonpost.com/joe-minarik/
A bill introduced in the Congress, H.R. 2409 (by Representative Paul C. Broun, R-GA), would reduce the statutory debt limit from its current $14.294 trillion to $13.000 trillion, effective October 1, 2011. On the basis of some calls I received on a talk radio program and comments on the Internet, some citizens agree, and probably more would espouse at least gradually reducing the debt limit going into the future.
One can understand the popular concern as people try to get their arms around the potential fallout from our skyrocketing debt. Refusing to increase the limit might seem like tough-love cold-turkey therapy for a credit-card junkie: Stop borrowing, right now -- for your own good. And if that is acceptable, why stop there? Why not actually cut the limit? Then Washington would really have to shape up, and in a hurry.
So let's take that argument at face value. Suppose that H.R. 2409 became law. What would happen?
Well, assuming that the nation managed to limp along to October 1 at the current limit (the Treasury says that it will be out of cash and unable to pay its bills on time in early August, as you know), then at the opening of business on that date, the nation would have to get its hands on $1.294 trillion in cash to pay off debt and drop to the new, reduced limit. It would be as though you had taken out a balloon mortgage on your home, and you let it run all the way to its due date.
For a sense of scale, total tax revenues this year are projected to be $2.230 trillion. So to stay legal, the Treasury would need cash equal to 58 percent of all annual revenues. (The tax revenues already expected wouldn't count, of course; the revenues collected up until October 1 would already be totally gone, and revenues to be collected after that date would be both too late and more-than-spoken-for to cover already-scheduled future outlays.)
How in the world could the Treasury instantaneously (or even over the next 10 weeks) raise cash equal to 58 percent of a full year's revenues? A national bake sale? A national lottery? A world lottery? Needless to say, such a requirement would be totally unmanageable.
And no, we could not do it by cutting spending. Last year, non-interest federal outlays in those two months totaled $496 billion. Just to get to October 1 at the current debt limit, we would need to cut non-interest spending for both August and September by half. But rather than cutting spending by just 50 percent to stay at the current debt limit, saving an additional $1.294 trillion to comply with the debt-limit decrease bill would require cutting spending in August and September by about 311 percent. We have only a couple of weeks to get started, so please send your spending-cut ideas in now.
But suppose we get a little more real. Is it conceivable that the nation could reduce the debt limit in the future gradually, rather than cold turkey? Well, if you think it through, it is conceivable -- but the implications would run directly counter to the principles and past stated intentions of those who now refuse to increase the debt limit.
What does it take actually to reduce the nation's debt? To pay down debt, you need cash left over after you have paid all of your bills. Or in the language of the federal government, you need a budget surplus.
When did the nation last have a budget surplus? At the end of the Clinton administration, from 1998 through 2001. And what did the leaders of the political faction that now wants to hang tough on the debt limit have to say about that? Here is newly elected President George W. Bush, in his initial address to the Congress, on February 27, 2001:
You see, the growing surplus exists because taxes are too high and government is charging more than it needs. The people of America have been overcharged and, on their behalf, I am here asking for a refund.
Prior to that time, others had talked about using that budget surplus to pay down the nation's debt, just as some who now refuse to raise the debt limit propose today. For example, then-President Bill Clinton projected that by 2015 the debt could be paid down to its size relative to the GDP of before World War I. However, clearly, President Bush -- probably like those who now advocate reducing the debt limit -- would not tolerate the budget surpluses necessary to do so.
But the situation is even more complex, because of the technical specifications of the debt limit itself. The debt limit applies not only to the debt that is sold to the public to raise cash for the operation of the federal government, but also to the Treasury special securities held in the government's trust funds. People think instantly of the Social Security and Medicare trust funds, and perhaps with prompting recall the highway trust fund; but in fact, there are more than 100 trust funds internal to the federal government. Even if the government runs a balanced cash budget, and does not need to borrow any additional money from the public, the debt subject to limit will increase because of growth of the balances in the many intragovernmental trust funds.
Let's go back to February of 2001. The statutory debt limit was $5.950 trillion, and the government had stayed below that limit since it was set on August 5, 1997. President Bush intended his budget to continue running an overall budget surplus -- but not enough to offset the growing balances in the trust funds. Therefore, even if the budget and the economy had proceeded fully according to plan -- which they obviously did not -- the nation's debt subject to limit would have continued to rise. According to the February 2001 budget document, the debt limit would have been breached in 2008, and by now, the debt subject to the limit would be $1.179 trillion above the limit, and $1.537 trillion greater than the actual debt subject to limit at the end of fiscal year 2000. President Bush estimated his proposed tax cuts to contribute $1.620 trillion of that $1.537 trillion increase in debt.
In this light, to be logically consistent on principle, anyone who opposes increasing the debt limit today should in 2001 similarly have opposed President Bush's tax cuts. Fortunately, those tax cuts are up for reenactment at the end of 2012, so those who oppose increasing the debt limit today will have the opportunity to make honest persons of themselves, and vote to allow the tax cuts to expire.
Is that likely to happen? Probably not. But before you talk about cutting the debt limit, you had better be careful what you wish for.]]>What Would a Genuine Budget Crisis Look Like?tag:www.huffingtonpost.com,2011:/theblog//3.8144182011-01-27T10:30:02-05:002011-05-25T18:30:24-04:00Joe Minarikhttp://www.huffingtonpost.com/joe-minarik/
I am far more concerned, for three reasons. Past warnings were intended not to announce then-impending disaster, but rather to keep the country from ever straying as close to a true budget crisis as it now has. A crisis well beyond today's apparent public understanding can happen here. However, most Americans have no conception of the serious, even dire, potential consequences of a true budget and debt meltdown.
No one knows precisely what will happen if our nation continues to accumulate massive amounts of public debt, because our situation is truly unprecedented. World War II is not a valid model; then, the nation accepted extreme measures -- rationing, forced saving, income tax rates rising above 90 percent, and price controls among them -- to limit the growth of the public debt. There are no signs of such public tolerance today. Moreover, at the end of the war, demand for American products from flattened foreign nations and demobilized troops swelling our labor force were the exact opposite of today's intense trade competition and population aging. We will not "grow out of" today's debt as we did World War II's.
As to the size and the immediacy of the problem: The best measure of our budget woes -- the size of the public debt relative to our collective income (to economists, the "debt-to-GDP ratio") -- is now at a level not seen since 1953; almost triple its low point of the middle 1970s; almost double the level of ten years ago; and higher than the level that triggered the 1990 bipartisan budget summit. Moreover, it is rising by the day, much faster than at any time since World War II. By reasonable projections, the debt could reach its highest levels in history within this decade, and still be rising at a rate nearly as fast as that during World War II. Over the last 25 years, in effect, the little boy was crying "wolf" to call his neighbors' eyes to the horizon; now, the wolf is almost to the door.
America is exceptional; and our accumulated public debt is becoming exceptional as well. Our debt-to-GDP ratio is the twenty first highest of the 28 OECD-member developed countries, and the nations with larger debt -- Japan, Italy, Iceland, Greece, Belgium, Hungary, and France -- are not the best role models. The status of these nations ranges from crisis to struggling to fend off the worst. The troubles of the euro and the yen, and the peg of the Chinese renminbi to our dollar, have left the dollar to this date in the role of a safe haven, the world's reserve currency. However, continued mounting debt will shake that status, sooner or later, as some alternative investment is perceived safer. The more debt we accumulate, the greater the ultimate risk that overseas holders of dollars will panic, and the harder our nation's eventual fall.
The path to a crisis is clear enough today. Our elected policymakers continue to follow a course that is politically -- though certainly not economically or financially -- risk averse: refusing to raise taxes, and refusing to consider spending savings in Social Security, Medicare, and defense -- or to specify precise savings anywhere else in the budget. If the financial markets conclude that our two political parties will continue this game of chicken no matter how large and fast-growing the debt, the wide range of possible consequences is uniformly dire.
A new report from CED, This Way Down to a Debt Crisis, describes several alternative plausible ways in which the nation might blunder into a full-blown debt meltdown, and what the chilling consequences could be:
A surprise "lender's strike" -- a sudden reluctance of the financial markets to buy at a Treasury auction -- could leave the federal government on short notice unable to meet its obligations. The markets would be most likely to question the Treasury's reliability as a borrower at such a vulnerable time: on the eve of federal government refunding, interest coupon and Social Security obligations, and weeks before the next major tax payment due date. A collision with the federal government's statutory debt limit could precipitate or facilitate such a crisis. To conserve cash to pay its many creditors, the government could be forced to postpone benefit and salary payments -- even to the military -- and delay payments to small-business contractors.
An outright federal government default -- likely because an undersubscribed auction prevents redemption of maturing debt obligations - could gridlock the financial markets, spike interest rates across the board, and send households and small businesses to the brink of disaster. Realization that Treasury securities may not be redeemed when due would threaten the operations of all manner of financial institutions, here and abroad. The federal government could scramble to redeem and service its public debt only at the cost of public services that Americans need, and take for granted today. Any auction failure or near-failure would tarnish the reputation and standing of the United States, perhaps beyond repair.
The Federal Reserve could implicitly head off a public auction failure by buying Treasury securities to make the auction manageable. However, the cost of Fed intervention would be lender uncertainty and a rise in interest rates, and more-rapid inflation as well. Again, higher interest rates would especially threaten credit-dependent small businesses, and many households as well.
Economic growth will be hobbled if the Federal Reserve is forced to intervene, or if our elected policymakers take the minimum action necessary to muddle through the budget problem. Growth requires strong business investment, and businesses will not invest if the federal government crowds the credit markets, interest rates are high and inflation threatens. Continued large budget deficits will not crowd out only private investment; important public investment in education and transportation, for example, will be curtailed as well, as tax revenues are diverted to paying rising interest on the public debt. We saw such "stagflation" in the 1970s, and the result of frustrated aspirations for rising incomes was both anger and despair.
The nation can wait until the financial markets revolt, and then respond in a panic and rush through a weak budget agreement -- essentially at the barrel of an economic gun -- or elected policymakers from both political parties could put statesmanship and stewardship ahead of political gamesmanship. The two sides could agree not to argue over who deserves the credit, which certainly would be better than pre-scheduling an argument over who deserves the blame for an inevitable economic and financial catastrophe.
If the American people understand the stakes, surely they will demand action.]]>Gridlock Is Not Enoughtag:www.huffingtonpost.com,2010:/theblog//3.7838062010-11-15T15:38:43-05:002011-05-25T18:10:25-04:00Joe Minarikhttp://www.huffingtonpost.com/joe-minarik/
The uncertainty surrounding those tax cuts was always economically risky. People don't know how much will be withheld from their paychecks just eight weeks from now. In fact, millions of middle- and upper-middle-income people don't know how much they will owe in alternative minimum tax (AMT) for this year when they file their tax returns before April 15. Managing these delays will be a major headache for the IRS and for payroll managers -- and therefore for the taxpayers they serve.
But far worse, the economy is much weaker than many forecasters anticipated. Allowing the tax cuts to expire now could well send the already stumbling recovery into the mud.
So the two parties will duke it out in their lame-duck session of Congress, and it will all be settled, right? No, probably wrong.
Republicans want to extend all of the tax cuts. They cannot do that now, and they cannot do that after the new Congress arrives in January. They can pass such legislation through the new House; the House majority can do anything it wants in the crack of a gavel. But they can't get it through the Senate; they don't have even a majority, let alone 60 votes to stop a filibuster. And even if they could pick off 13 Senate Democrats - an exceedingly tall order - President Obama still has his veto, and the Republicans cannot possibly get a two-thirds vote in both chambers.
Democrats say that they want to extend the tax cuts permanently for everyone from the lower-upper class ($250,000 per year for a family) on down, and to allow the upper-income tax cuts to expire. The Democrats are far stronger now than they will be in January. But they were just as strong before the election. If the Democrats could get that deal, they would have gotten it already. Their ranks are too fractured to win that vote, they have only 59 votes in the Senate anyway, and their probability of winning Republican Senate votes now is less than zero.
Both sides have hostages. If Democrats fail to blink, the estate tax -- after a one-year expiration -- comes back. If Republicans fail to blink, low- and middle-income taxpayers face higher taxes.
But if neither side blinks, all of the tax cuts expire. This is the only outcome that does not require compromise. And expiration of all of the tax cuts would be a jarring blow to the economic recovery.
Meanwhile, the federal government is piling up debt at an alarming rate. In fact, the debt is growing faster than the economy, approaching separation velocity to enter the stratosphere - an ever-increasing cycle of deficits adding to debt adding to debt service adding to deficits. Just about everyone agrees that we must get the economy to liftoff first, but that slowing the deficit cannot be far behind. Both political parties pledged budget control in the elections. So surely budget action is high on the agenda, right?
Again, no. The gridlock on the expiring tax cuts is a branch office of the likely gridlock on the budget. Everyone is for deficit reduction. No one will say how. Both sides have made "pledges." The only way to get the specifics on parchment is through a bipartisan deal, with each side providing cover for the other. But there are no signs of cooperation, or even communication.
In the 1990s, some say, gridlock balanced the budget. The economy was strong, the budget was improving, and the deficit fell simply because no one made it worse. Although that reading is questionable, it makes an important point: Today, gridlock clearly is not enough. The budget is heading the wrong way. It will explode if no one fixes it. And the economy is weak.
In fact, we believe that the two years of the next Congress is too long not to act. The markets do not need a solution right now, but they need a commitment to find one, and soon.
So we are deadlocked on the expiring tax cuts, and deadlocked on the budget. Inaction leads to enormous economic risk, or worse - and each party thinks that it wins politically from inaction, and has pledged publicly not to compromise. How to square the circle?
Here is one way:
Both sides say the nation needs deficit reduction, and that they want the nation to succeed. OK, prove it. Commit to a two-year bipartisan process to find a solution.
Democrats want the upper-income tax cuts to expire. Republicans want them made permanent. We cannot let all the tax cuts expire. Let's split the baby: Extend all of the tax cuts, but for two years. That avoids the shock to the economic recovery.
How do we know that the deficit reduction will happen? Tie it to the tax cuts, but with a trap door under both sides' hostages. If the bipartisan negotiators fail to reach agreement, then the tax cuts expire, and spending is cut across the board to achieve equal savings. If this trap door were sprung, the deficit would be reduced by enough to make the budget sustainable. This trap door is absolutely workable, absolutely credible, and absolutely awful. It is precisely what is needed to motivate both parties to negotiate in good faith - to reform the tax code and streamline government programs while cutting the deficit to size.
Is it politically realistic for the two parties in Congress to agree to such a deal? Most probably not. But by that standard, the only politically realistic outcome is an eventual budget and economic meltdown. Follow a straight line from the recent pattern of Washington policymaking behavior, and these problems don't get solved. Either we change the way Washington is working, or the whole nation suffers. (That was the premise of the election, right?)
But even if it is "unrealistic," this bargain is perfectly consistent with both parties' claims. They both say they want at least some of the tax cuts. They both say they want to fix the budget.
So are you willing to put your tax cuts where your mouth is?
Joe Minarik is the Senior Vice President and Director of Research, Committee for Economic Development (CED). From 1993 to 2001 Dr. Minarik served as the OMB associate director for economic policy.
]]>The Statement on the Other Side of This Paper Is True: Today's Unfortunate Economic Policy Dilemmatag:www.huffingtonpost.com,2010:/theblog//3.6737152010-08-06T16:20:03-04:002011-05-25T17:15:21-04:00Joe Minarikhttp://www.huffingtonpost.com/joe-minarik/
I suspect that logicians have found some way around this mind-bender. On that, I must beg off. But there is an analog in the current economic policy debate. One side argues firmly that "We can't afford to stimulate the economy." The other counters with equal vigor that "We can't afford not to."
Unfortunately, both sides may be right.
We can only hope that there is a way between the horns of this dilemma. But there are no guarantees. There is a firm lesson only for the next time when -- if -- the nation is so lucky as to come to the entryway to this maze.
The case for economic stimulus right now is extremely strong. Where is the greater risk: on the upside, with faster than expected growth and accelerating inflation; or on the downside, with a second dip of recession and perhaps even chronic deflation? A poll of economists on that question would not be close. Economic indicators from employment to housing are flashing yellow signals.
Remedies are hard to come by. Conventional Federal Reserve policy already is fully wound out, with the federal funds rate as close to zero as possible. Further "quantitative easing" options, purchasing financial assets such as longer-term Treasury securities to reduce those longer interest rates, are at the ready. However, those measures are of uncertain efficacy. All else equal, few economists would argue against buying some insurance against the downside risk with a further jolt of fiscal stimulus.
But all else is not equal. The federal government's public debt already is at 60 percent of the GDP, its highest in more than half a century, and it is rising rapidly. Factor in the debt of state and local governments and the United States is in the company of other nations that are considered high risks of financial crisis, and into the admittedly vague danger zone identified by recent research. Elected policymakers have confronted the vital question of the treatment of the large expiring tax cuts, and they have procrastinated. All else equal, virtually every macro- or public finance economist would cry for Washington to get serious -- immediately -- about reducing the federal deficit.
When will all else get equal and save us from these conflicting crises?
Extreme positions in this policy debate are easy to find. Some assert that the nation cannot afford to extend the duration of unemployment insurance benefits for the long-term jobless, in the face of the worst job market in 30 years, and despite every piece of evidence that jobs are extraordinarily hard to come by in most parts of the country. On the other side is a campaign to argue that "deficits don't matter," so stimulus can be applied with abandon and without fear of a rising public debt, despite all the recent financial turmoil here and around the developed world.
The more nuanced position relies on timing. It calls for stimulus first, followed by fiscal restraint as the economy recovers. This follows the classical prescription for fiscal policy in any economic cycle: Encourage the economy into an upturn, but lift off the gas before resource use becomes too tight and inflation accelerates. Under normal circumstances, this is tricky enough. No one knows the future, and economists have long lamented that fiscal policy is almost always late -- both in applying stimulus, and then in removing it. But circumstances today are far from normal, with several economic indicators - including interest rates and the public debt -- either near their historical extremes or beyond. It is difficult to navigate when you sailed off the end of your chart days ago.
The only sensible path that we have is the nuanced, timed approach. We need greater confidence that the economy will avoid renewed recession so that monetary policy can begin to move off of its historical extremes. And we need an early commitment to deficit reduction, with its effect postponed until the economy is stronger, to buy time before the credit markets panic and raise interest rates -- over whatever objections the Federal Reserve might make.
But there is no guarantee that even the most carefully timed policymaking will not fail -- that both the "can't afford tos" and the "can't afford not tos" will be proved correct. The credit markets could panic under the weight of a mass of Treasury paper before the economy recovers. The economy could drop into renewed recession despite an attempt at stimulus, given financial dislocation abroad and the legacy of overbuilding of real estate at home, and that downturn itself could trigger a financial panic. We are in uncharted waters.
Only one thing is clear from our current conundrum -- and that is that we should never have allowed ourselves to get here in the first place. If our nation ever again finds itself at the policy crossroads that we reached at the turn of the millennium -- and I pray that it happens in my lifetime -- we should not again listen to those who preach fear of a future with too little public debt. Even Alan Greenspan -- whose green light for early and massive dissipation of budget surpluses in 2001 unfortunately short-circuited that debate -- seems to have realized the tragedy of that decision. The nation can find a way safely to use budget surpluses after paying down the public debt -- praying, again, that we are so fortunate as to have a second chance.
Joseph Minarik is Senior Vice President of the Committee for Economic Development (CED), a member of the Bipartisan Policy Center's Debt Reduction Task Force, and a contributing author of the recently released National Research Council report, "Choosing the Nation's Fiscal Future." Dr. Minarik also served as Associate Director for Economic Policy of the Office of Management and Budget in the Clinton Administration."]]>"Good Debt" and "Bad Debt?"tag:www.huffingtonpost.com,2010:/theblog//3.6640462010-07-29T18:15:23-04:002011-05-25T17:10:24-04:00Joe Minarikhttp://www.huffingtonpost.com/joe-minarik/
The same could be true of a family. Borrow to finance an expensive vacation that you cannot afford in cash, and you accumulate "bad debt." But borrow for education, or for a home where you build equity, and that is "good debt."
So why not extend the analogy to the federal government? Borrow for "consumption," and you get "bad debt." Borrow for things that increase future economic growth, and that is "good debt."
There are two schools of advocates of "good" public debt.
One school is the supply-side tax cutters. Borrow today to cut tax rates, and the lower tax rates strengthen incentives and increase economic growth, which increases revenues and reduces the deficit over the long haul. The larger budget deficit in the near term also "starves the beast" and slims down the wasteful government. (You might also hear the bait-and-switch approach: Tax cuts pay for themselves, so logically there is no need to worry about spending. Then after the revenues fail to arrive, the deficits are the fault of a failure to cut spending, or were intended to "starve the beast.")
The other school is the supply-side spenders. Borrow today for a massive public investment program, and the investment increases productivity and economic growth, and pays for itself. The initial debt is paid off with the resulting tax revenues.
The two schools are singing in different keys, but from the same hymnal. On this issue, I am an agnostic, and I believe the hymnal is wrong. Here is why.
The case against supply-side tax cutting is simpler. Each tax rate cut since the bad old days when the highest personal tax rate was 91 percent has reduced the leverage on incentives. (Take it to its extreme: If the highest rate were 1 percent, eliminating the income tax would be a 100 percent rate cut. Would taking home 100 cents on the dollar, instead of 99 cents, increase incentives meaningfully? I don't think so, either.)
Decrease tax rates by whatever percentage, and in the first instance the Treasury loses revenue on every dollar of income already earned. It takes an equal percentage increase in total incomes just to break even. How much more are people likely to work? Instead, they can leave their work (or saving) unchanged and still have more spendable cash. They can work (or save)less and have the same spendable cash. Experience suggests that most people behave the same, and the work-lesses at least offset the work-mores.
So some reasonable analysis - not to mention the experience of the 1980s, when the debt doubled as a percentage of the GDP, and the 2000s, which wiped out the progress of the reviled tax-increase 1990s - says that supply-side tax cuts do not produce "good debt." But what about supply-side spending?
First of all, the basic math of "investment" spending is just as daunting as it is for tax cuts. Say you incur a dollar of debt to "invest." Average tax rates in the economy are well under one-third. So that one-dollar investment would need to increase taxable incomes in the economy by at least three dollars just to break even.
How many public investments would yield that kind of increase in taxable incomes? Very few. In fact, much of the return to public investments is non-monetary - which is not to say "bad," merely that it does not yield higher tax revenues. Suppose that a highway investment saves every commuter 40 hours each year - which would be an extraordinarily successful project. Is that an extra week of work, and higher (taxable) incomes? Or even an extra week of vacation? More likely, it is just an extra five minutes to linger over morning coffee before getting in the car, and an extra five minutes to play with the children before dinner every evening. Is that a good investment? Depending on the cost, almost certainly yes. But would it pay for itself in the budget? Surely not.
But didn't the nation borrow to build the interstate highway system, and didn't that contribute massively to economic growth? The jury is out on the second question, which is extraordinarily complex. (What would the United States be like today without the interstate highway system?) But let's assume the answer is yes. Did we borrow to build it? Not really. Most of the cost was paid with user fees. And over the first 16 years following the 1956 authorizing legislation, the public debt as a percentage of our GDP was cut by about half. The answer is that we paid for it, as we went (i.e. drove) along.
Highway investments must be judged on a project-by-project basis. Most projects that pass a cost-benefit test are maintenance rather than new construction. (With the nation so much more developed than it was half a century ago, new highways near and through major population centers are much more problematic. Ditto for high-speed rail, which requires the straightest possible track to maintain those high speeds.) They entail not only long-term benefits and short-term construction costs, but also short-term disruption costs. And again, most of the benefits are non-monetary or entail avoidance of costs rather than increases of incomes - which again is not to say that they are bad investments, merely that in most instances they will not pay for themselves.
But what about a higher-speed Internet? It surely would enable some business uses now totally unknowable, some of which could add to productivity. But by how much? And how much would that public investment return through higher taxable incomes? Counting on those unknowable returns to pay for the investment would be gambling. Reducing business-use wait times by seconds would not realistically add much to output. And to the extent that the investment uses borrowed money to reduce wait times of non-business users for personal or social purposes, it obviously would not pay for itself.
Why not invest more in basic research? Sure. There will be returns to the public. But returns to basic research are highly uncertain, tend to be very long-term, and can be non-monetary. So again, public investments in basic research should be paid for. That findings from basic research are by their very nature unknowable up front firmly dictates that research not be counted upon to pay for itself, much less to reduce the deficit.
Finally, business borrowing and public borrowing are importantly different. Corporate debt instruments are rated. Prospective lenders look at the business, look at the proposed uses of the funds, and vote up or down. If a firm proposes an unjustified bond issue, it can be rejected by the market, and the project scrapped. And no individual corporate financing plan is really big enough to move the entire market.
In contrast, the federal government is by far the biggest borrower there is. It can sink the market all by itself. Its bonds are not tied to individual projects - if they were, the increase in complexity and marketing cost would be enormous - and they are rated only in the most formal sense. Rather, they are sold at auction - backed by the government's power to tax in the future, or in the extreme, by the government's printing press. If the federal government were to borrow unwisely, its new bonds still would have the same ostensibly gilt-edged standing as all of the old ones. Fiscal mistakes are corrected only after the economic cost already is felt.
So, is there "good" public debt? Debt can be necessary: Look at the massive borrowing to finance World War II. But consider the costs. We left World War II with a debt equal to 109 percent of our GDP. What if the nation had been spendthrift, and gone into the war with that level of debt? Excessive debt can prevent necessary borrowing in true emergencies. Debt entails debt-service costs, which crowd out productive public investment and force higher taxes.
Public investment is essential. But like the original interstate highway system, it should be paid for up front or through a pay-as-you-go mechanism (like the gasoline tax for the highways). Specific tax cuts can be wise. But they should be paid for with other tax increases, or with spending reductions. Public debt can be a necessary evil. But it always entails costs. There is no "good" public debt.
]]>The Trust Fund and the Baby Boomtag:www.huffingtonpost.com,2010:/theblog//3.6543732010-07-23T14:50:09-04:002011-05-25T17:10:24-04:00Joe Minarikhttp://www.huffingtonpost.com/joe-minarik/
The number of arguments raised would fill a book, and many will be worth discussing later. But one kept recurring: The Social Security trust fund was built up by the 1983 law to finance the retirement of the baby-boom generation. That trust fund can be redeemed to pay benefits through 2037.
There is a lot of misunderstanding of both Social Security's history and economics here. Let's review both.
Was the Social Security trust fund beefed up to pay for the retirement of the baby boom? Well, no. Here are the words of Robert J. Myers, who was the Executive Director of the National Commission on Social Security Reform (the "Greenspan Commission"):
This false premise is that in 1983, the financing provisions were developed to build up a mammoth fund to take care of the baby boomers. This is not so at all.
Rather, the major effort in 1983 was to solve the short-run problem by using pessimistic assumptions for the financing provisions. Then to solve the long-range problem, on the average -- and I emphasize on the average -- you might ask why didn't Congress and the National Commission do a more thorough job in 1983? Well, the situation was that the ship was about to hit the iceberg. At that time, you worried about dodging the iceberg not how to redecorate the dining salon, namely, long-range funding procedure.
I would challenge anybody to find anything in the Report of the National Commission on Social Security Reform that said the intention of developing the financing of the program was to build up a mammoth fund to take care of the baby boomers. Nor will you find any of this in any of the Congressional discussions, the debates, the Committee reports. All the fabric has been made up subsequently.
In terms of the ship-and-iceberg metaphor, the Social Security Amendments of 1983 were enacted on April 20, and the previous year's estimate was that Social Security could not write benefit checks in July. So given the uncertainties and delays inherent in the legislative process, it is no surprise that the Commission and the Congress were rushed.
So the Greenspan Commission did not intend to build up a large trust fund that could be used to finance the retirement of the baby boom, nor did it design its proposals to do that. Still, could they work to achieve that result? Well, again, the answer is no -- unfortunately.
As noted perhaps too briefly in my original post, the problem with the federal budget is that we need to borrow far too much money for the health and safety of our economy. Anything that increases the amount of money that we need to borrow makes that problem worse. This year, and again in 2016 and thereafter, Social Security will need to redeem its Treasury securities to pay benefits. The Treasury has no cash because of the massive budget deficit, and so to raise the cash for Social Security, it must borrow. This means more total borrowing, which threatens the economy. (This problem obviously would not apply if we had a surplus, or only a small deficit.)
Does Social Security have the legal right to that cash? Absolutely. But will it have adverse consequences for the economy? Sadly, that too. That is why, once they had the chance to digest the unexpected trust-fund implications of the 1983 law, economists quickly concluded that the trust fund accumulation could not be drawn down in large amounts to maintain the program after its revenues started falling short of the program's benefits - which they are doing right now.
For part of the time when I was working in the executive branch, the head of my office was a very bright non-economist who was charged for a time to work on Social Security. Like most normal people (that is, non-economists), he believed that Social Security could draw down its trust fund in any large amount. When I told him why economists had concluded to the contrary, he at first did not believe me. The next day, he came to me and told me that having thought more about it, I was clearly right. Not long thereafter, he had a private meeting with one of the lead members of the Greenspan Commission. I suggested to my boss that he ask the commissioner what he thought about this question now, and what the Commission had thought at the time. This member of the Greenspan Commission also had subsequently concluded that Social Security could not make an unlimited draw on the trust fund. As to what the Commission thought at the time? "You know, we never thought about it." (So it turns out that Robert J. Myers was right about that.)
There were many more questions and arguments. Can we exempt current and near-term retirees from any change and still make Social Security's financing sound? (Yes.) Can we protect low-wage workers? (Yes.) Can we raise the ceiling on the payroll tax to finance Social Security? (Yes, but it won't be enough.) Should we cut defense to reduce the deficit? (We will have to cut everything.) More on all of those questions later.
But can we, or should we, run the Social Security trust fund into the ground? Unfortunately, no.]]>An Imbalanced Recoverytag:www.huffingtonpost.com,2010:/theblog//3.6526652010-07-20T14:25:16-04:002011-05-25T17:05:23-04:00Joe Minarikhttp://www.huffingtonpost.com/joe-minarik/Co-authored with Joseph E. Kasputys, Chairman and Founder IHS Global Insight
Before the economic and financial crisis hit with full force in 2008, we warned of the dangers of imbalances in the global economy. These global imbalances largely reflected underlying national imbalances in the United States, China, and other major economic powers. The problem for the United States at that time was easily demonstrated by the large current account deficit, which reached an unprecedented 6.0 percent of GDP in 2006. The current account deficit, in essence, is the amount we must borrow from other countries to maintain a combined level of domestic spending exceeding the incomes of consumers, businesses, and all levels of government. This level of borrowing was widely deemed not sustainable in the long run -- but economics is a behavioral science, and precisely when economic behavior would bring that borrowing to a halt was a matter of intense debate.
The counterpart to the U.S. deficit was the large trade surpluses of China, Germany, Japan, and the oil-exporting countries. Their surpluses reflected, among other things, high rates of saving in those countries and export-led economic growth policies.
As the global economy fell, affected nations undertook policies to pull themselves away from the brink of depression. At the moment of crisis, policies to stimulate the economy by sustaining demand made the most sense. Thus, those policies would tend to remedy the imbalances in other countries, but to exaggerate them in the United States.
In this country, the American Recovery and Reinvestment Act of 2009, monetary easing, and other steps provided a significant boost to aggregate demand. Other nations undertook similar efforts, although of different sizes and compositions. And to a large extent these efforts have paid off in renewed income growth, though at levels not sufficient to appreciably lower historically high unemployment rates.
Despite (or in the case of the United States, because of) these efforts, the global economy today looks similar in many respects to the economy of early 2008. Influenced by the domestic slowdown, the U.S. current account deficit had fallen to about 4.6 percent of GDP in 2008. With the recession well underway in 2009, the deficit fell to about 2.6 percent. But at present, the trade deficit is edging back up, to an annual rate of about 3.0 percent. While better than at the height of the pre-recession period, these numbers indicate that the United States continues to consume and invest more than it produces. A similar analysis for the major pre-recession surplus countries would indicate that although they, too, have moderated their consumption, investment, and saving patterns, the basic imbalances that existed before the crisis are still present.
That is not to say that everything remains the same. For example, the mix of spending in the United States has changed dramatically. Before, consumer and business spending were driving an economic expansion. Government spending contributed, but it was not historically high as a percentage of GDP. At present, consumers and businesses are putting their finances on a more stable footing, both out of necessity and prudence, and so personal consumption and private investment are sluggish. Meantime, the federal government deficit has moved up to about 10 percent of GDP, a level last experienced during World War II.
Looking ahead, it is easy to see that the recoveries taking place around the globe will not be stable or sustainable unless surplus countries, such as China and Germany, take steps to rebalance their economies away from export production and towards greater domestic consumption. It is also obvious that the United States cannot fall back into the pattern of over-consumption, leading to continuing high trade deficits and foreign borrowing. We must get spending under control, and some cutbacks in spending are taking place.
As mentioned, consumers are cutting back. The personal saving rate (based on disposable income), which was negative before the recession, is 3.7 percent so far in 2010. But the increase in the saving rate is modest by historical standards; and although monthly figures carry considerable statistical noise, the saving rate perceptibly peaked at 5.4 percent last year. And household saving has both a numerator and a denominator. With almost 10 percent of the workforce unemployed, and many more either discouraged from seeking work or "underemployed" (involuntarily in part-time or temporary, lower-wage work), the saving ratio may be helped by a low denominator of disposable income. What this figure will show, if and when employment and consumer incomes recover, is unclear. Newly employed workers could save more because of the trauma of their bouts of unemployment; or they could resume the U.S. consumption binge of the last three decades.
Businesses do appear to have restrained their spending, judging from cost-cutting, layoffs, and reports of record levels of corporate cash reserves. Of course, in a world of fluctuation-free and continuous economic growth, we would expect that every month would see a new record level of nominal corporate cash reserves. However, the level of business reserves does appear to be significantly above trend -- which is not a great surprise, given low levels of business capacity utilization and sluggish consumer demand.
Should the limited improvement in household saving over the last few months be a matter of alarm? Or concern? Or does it merely bear watching over the next few years? With the economic recovery appearing fragile, it would seem premature -- to say the least -- to intervene with public policy to restrain consumer spending. Altering consumer behavior has never been easy. Past efforts have often backfired. In fact, the beginning of a rapid decline in household saving came in the early 1980s, just as tax policy was changed in significant part to increase incentives for household saving. Recent legal changes with respect to automatic enrollment of new employees in pension programs probably have exhausted the limits of our sound ideas to increase saving.
The greatest need -- and the need most amenable to policy change -- is to reduce the deficit spending of the federal government. Many -- perhaps most -- macroeconomists would say that the economic recovery is too fragile to begin significant reduction of the federal budget deficit. However, it is none too soon to begin planning for deficit reduction, and actions by policymakers now that will bring the federal budget toward balance in the future would be reassuring for international financial markets. Certainly, the current budget deficit of 10 percent of GDP is a temporary phenomenon. Unfortunately, even with recovery, the deficit is forecast to remain at about 5 percent of GDP for the next 10 years (CBO). To rebalance our economy internally and externally with the rest of the world, the long-term federal budget deficit needs to come down.
After economic recovery and federal budget deficit reduction are secured, the nation should reassess its level of aggregate saving and its international imbalance, and if need be seek ways to encourage consumer thrift. And, we must continue all the while to press the surplus nations to move their international trade and capital flows toward a more stable footing.
__________________________________________________________ Dr. Joseph E. Kasputys founded Global Insight, Inc. in March 2001 to join together the world's premier economic information and consulting firms, consisting of Data Resources (DRI) and WEFA (formerly Wharton Economic Forecasting Associates). He served as Chairman, President and CEO until the sale of Global Insight to IHS Inc. on October 10, 2008. During this period, he acquired and integrated eight additional companies providing economic and business information. Dr. Kasputys now serves as Chairman of IHS Global Insight and Chairman of the IHS Insight Advisory Board, which develops and recommends products and services that can best meet client needs utilizing all IHS insight capabilities. ]]>Social Security for Stimulus: The Trade of the Centurytag:www.huffingtonpost.com,2010:/theblog//3.6459152010-07-14T11:50:32-04:002011-05-25T17:05:23-04:00Joe Minarikhttp://www.huffingtonpost.com/joe-minarik/
At the same time, the public debt has reached heights not seen for almost half a century -- from the immediate wake of World War II -- and is growing unsustainably. Chilled by signs of renewed financial crisis in some debt-burdened European countries, some policymakers and citizens say that the nation must draw a hard line -- now -- and borrow no further.
Squaring this circle requires a package deal: We need legislation now that reduces deficits in the future to convince financial markets that a near-term stimulus is within the bounds of budget responsibility.
So, how to achieve that future deficit reduction?
Realistically, our elected policymakers cannot now solve the entire long-term deficit problem in one go. As is widely understood, the key driver of future deficits is health care. Not only are the Congress and the White House suffering from health care fatigue, but as they have learned over the last two years, health care is devilishly complex. The work of those two years fell far short of the savings needed to "bend the curve" of health-care costs -- much less deal with the public debt. Health care must be truly reformed -- but it will not happen now.
So any deal now will be only part of a long-term deficit solution, but must be consistent with a long-term solution. And it must give something to each side in the budget and policy debate -- that is, it must be a politically viable compromise.
By those standards, the "cats and dogs" of the budget -- annual appropriations, and miscellaneous entitlement programs - are not large enough or malleable enough to provide sufficient savings to motivate a stimulus-and-deficit-reduction deal. And though taxes will almost certainly be necessary to slay the long-term deficit dragon, a package based on tax increases and stimulus spending today is not a compromise -- and will not happen.
So what is left? Like it or not, the only remaining large component of the future deficit problem is Social Security. Impossible, you say? We need to think about it.
Social Security is not the primary driver of the long-term budget deficit. But it is an important contributor. It also needs repair in its own right. According to the latest estimates of the Congressional Budget Office, Social Security revenues this year will fall short of benefits, and they will do so again in 2016 and continuously thereafter.
Unlike health care, the remedies for Social Security are well understood and comparatively easy to estimate. The number of prospective beneficiaries is known with reasonable precision. And future earnings, which are about as predictable as anything in this vale of tears, determine the program's receipts. The policy options to deal with both outlays and receipts have been explored and mapped over decades. So unlike the struggle over health care, the solution for Social Security awaits not the discovery of knowledge, but simply political will.
How can fixing Social Security be part of a compromise? After all, it is seen as a low-income program, and for that reason some on the political left try to block any reduction in Social Security benefits.
But the reality is that Social Security will be repaired -- it must be. Its advocates should be the first to recognize that and pursue it in ways that best protect low-income recipients -- which can be done, if the repair is properly designed.
In any case, there is broad consensus that any Social Security repair must not touch the benefits of current and immediate future retirees -- at least not those with anything resembling middle-class total incomes. Current retirees have nothing to fear.
Many advocates of Social Security argue that "the budget must not be balanced on the backs of the elderly." They must recognize that an underfunded Social Security system pushes the budget out of balance, and moving the system to adequate funding moves the budget toward balance. Fixing Social Security is a natural "twofer," and there is no unfairness in that. Failing to repair Social Security, by adding to future deficits and rushing Social Security itself to a financial train wreck, threatens the very interests of those who will rely on the program in the future.
Some Social Security advocates insist that the program not be touched because its trust fund is projected not to be exhausted until 2039. Sadly, this view reflects a misunderstanding of the purpose of the trust fund, and of budget economics.
The trust fund was created as a short-term buffer to cover benefits in economic downturns, not a reservoir to fund the system year after year. Drawing down the fund simply forces the Treasury to raise cash from the public -- i.e. borrow. That borrowing has economic effects no different from any other deficit.
But if Social Security benefits are to remain an adequate retirement foundation for low-wage workers, the system will need more tax revenues, not just benefit reductions. Also, if current beneficiaries are to be exempt from benefit reductions, and near-term future retirees are to receive fair warning so that they can adjust their plans for future work and saving, then protecting the trust fund from its troublingly early projected exhaustion demands a near-term replenishment -- a few years down the road, after the economy has recovered - that can come only from revenues. So compromise on Social Security must come from both sides, and this is where those on the right must give ground. And only if the outcome is a balanced, bipartisan deal will financial markets trust that the repair actually will take effect a few years down the road.
As for the near-term stimulus part of the package, we should set much higher standards than the first bill. That bill created some completely new programs (health care information technology, "Race to the Top" grants for schools) whose delivery of "stimulus" to the economy has been agonizingly slow, whatever their other merits. This time, we must stick to the quickest-moving stimulus vehicles: extended unemployment benefits, aid to the states, perhaps temporary tax cuts.
To be effective, stimulus -- enabled by an attack on the deficit -- must be enacted quickly. The President's Fiscal Responsibility Commission, which surely is considering Social Security as a part of its charge, could be directed to begin a negotiation now.
The reflex reaction of many in Washington will be that every element of this imagined stimulus-now-and-deficit-reduction-later deal is "dead on arrival." But here is the cold shower for every interested citizen, whether considering this idea or any other: If we do not resuscitate many "dead on arrival" deficit-reduction ideas, then our economy will be "dead on arrival" -- and distressingly soon.]]>