The deficit hawk gang is again trying to take our children hostage with new threats of enormous debt burdens. As in the past, most of what they claim is very misleading, if not outright false.
First and foremost, the basis of the bulk of their horror story has nothing to do with spending being out of control, but rather a broken private health care system. If per person health care costs were comparable to the costs in any other wealthy country we would be looking at long-term budget surpluses, not gigantic deficits. This would lead honest people to focus their energies on fixing the U.S. health care system, but not the deficit hawk gang.
But there is another part of their story that contains some truth. The government is borrowing large amounts of money right now to sustain demand in the wake of the collapse of private sector spending following the deflation of the housing bubble. If the deficit continues on the projected path, the country will substantially increase its debt burden over the course of the decade.
A higher debt burden will imply much larger transfers from taxpayers to bondholders in future years. This will require either higher taxes or cuts in other spending. Alternatively, the government could run larger deficits. However, in a decade or so, if the economy is again near full employment, higher deficits will either lead to higher inflation if the Fed opts to accommodate the deficits, or higher interest rates, if it targets a low rate of inflation. The latter could crimp investment and long-run growth. For these reasons, it is desirable to prevent the debt from reaching the levels now projected, even if the outcome may not be the disaster promised by the deficit hawks.
There is a simple way to avoid a sharp rise in the interest burden associated with a higher debt. The Federal Reserve Board can buy and hold the debt that is currently being issued by the Treasury to finance the deficit. The logic of this is straightforward. If the Fed holds the debt, then the interest on the debt is paid to the Fed. The Fed then returns the interest to the Treasury each year, meaning the net cost to the government is zero.
This is not slight of hand. The point is that the economy has a huge amount of idle resources in the form of unemployed workers and excess capacity. In this situation, the increased demand created by government spending does not have to come at the expense of existing demand. The economy can simply expand to fill the additional demand created by larger deficits. While that may not be true in five or ten years, assuming the economy is again near full employment, right now deficits need not lead to either higher interest rates or higher inflation.
In fact, the financial markets and the "bond market vigilantes" should even support the decision to have the Fed purchase and hold the government debt being issued now to finance the deficit. This practice will lessen the future interest burden on the Treasury. In fact, interest should be seen as an entitlement like Social Security and Medicare since it is paid each year without new authorization by Congress. If the deficit hawks had any integrity they would be insisting that we should require the Fed to hold the government debt issued during this downturn. It is a surefire way to substantially reduce entitlement spending.
Of course no one ever accused deficit hawks of being consistent. Not only do they not advocate having the Fed buy and hold the debt, they don't even want this policy discussed in their "everything is on the table" sessions. Keeping this simple solution off the table makes good sense if your concern is not deficit reduction, but rather cutting Social Security, Medicare and other important social programs.
Fortunately, the rest of us don't have to be bound by the deficit hawks' agenda. If Social Security and Medicare are on the table, then having the Fed hold the debt better be on the table; otherwise this exercise is just a charade to cut the country's most important social programs.
This will be a great lie detector test. We will soon know whether the "deficit hawks" care about the interest burden on our children or just want to destroy the social safety net.
The debt based economy we have today is not sustainable without injecting money from somewhere; and, people are just arguing where that money is going to come from. Well, there are trillions of dollars overseas that could be used to buy some US product. But our currency is too stable, so instead of buying a US product they buy US Treasuries. We could continue to perform the Fed money swap to generate money, but the deficit hawks are closed minded. And forget the people, they are just tapped out. The only other source are the large corporations. OK, we need to battle the lobbyists.
In any regard, it's all a Ponzi scheme if money is not sourced to feed the interest. And ultimately, isn't that the purpose of the modern economist, to make sure the economy isn't going to fail?
If one day all those USD returned to the USA, the USD would collapse, because there are no goods to cover them.
If the USD looses their status as the prime international reserve currency, the proposed sceme would never have a chance to work.
The real problem are, that we are in the middle of a class war. The rich made average people believe, that theý could borrow on ever increasing real estate prices, so they forgot to fight for a pay rise.
The result are we witnessing now.
The cure is not to cut away the remnants of the welfare states, but to tax the rich in a coordinated international move, closing down tax havens.
There are two ways to combat deficits, savings or increased income.
I vote for the last, and let the rich pay back some of their stolen goods.
Also ,I thought the short definition of inflation was too much money chasing too few goods. With so many producers hurting wouldn't more demand for goods be a good thing?
The opposite is reducing the deficits and thereby the debt. This is a long term job and leads to much
opposition,social upheaval ,to the extent that it will fail as well.It directly throttles off the "green sprouts" and kills the economic comeback Like in 1936.
Suggest a measured approach by clever people who are not in anybody's pocket and who may apply the correct amounts of medicin.The trick is to get them on the job ,protected by a leader with a view
who is not trying to "coordinate" every Joe's input.It appears that otherwise Uncle Sam is toast.
And since this is all free we can do as much as we like...let's borrow some more to help people buy a new car, and some solar panels, and a refrigerator and well....whatever.
Problem solved.
We've got to start at the solution that is in front of our face instead of looking around and acting like we don't see it. We've been here before in recent history (the 20's) and we're proving that since we didn't learn those lessons that we are now doomed to repeat it, and here we are repeating (repeating the 1930's!).Yes we've been here before and we know what has to be done. Why not go to the solutions we found the last time in the late 1940's instead of insisting on going back to 1929 and learning it all over again the hard way?
Could we get to some form of agreement that 20 percent of GDP is the highest we'll go re government revenues (taxes)? That spending increases in some realm of government must be offset by corollary reductions in other areas? Because the truth is that once a government program is in place (think of agricultural subsidies) it can never be truly reduced or eliminated bacause of the vested interests that are created with it.
Could we agree that government should get the most productivity from government employees at the lowest possible cost? Because the reality is that governments routinely assume foolish pension liabilities, early retirements, etc. that far exceed the averages for the private sector (note that 6 of the higest 8 family income counties in the USA are in the Washington suburbs). Does anyone think that we will begin getting better deals for taxpayers on teacher salaries when there are clearly now more people wanting jobs as teachers than there are available jobs? If not, why not?
I am not optimistic, but I know we cannot sustain government spending that is 6 percent higher as a pct of GDP than revenues - that defies common sense.
I believe what article advocates is the same thing, and I'm all for it.
Less than 30% of US debt is owned by foreigners.
70% of our national debt is owed to Americans, the ultra-rich, mainly inherited wealth.
The interest we pay (20% of income taxes) is payments to America's own "royals".
Pay them all back with printed money.
The dollar devalues, but most don't have money. The rich do, only they lose. Print money.
As for inflation: note that the loss of wealth due to the meltdown was more than our total debt.
Paying it off with printed money would just restore the M3 to where it was.
And it will happen over several years, as T Bills mature, so inflation should be acceptable.
What deficit hawks seek is to have a clear sense that fiscal responsibility is a fundamental to the development of national policies. Politicians have no expertise and no one comes to Washington with an agenda to slim down government. As a result, we have developed massive entitlement programs that have consistently with government lying about their current and future costs and paying out unsustainable benefit levels. The combined future obligations of SS+Medicare will bankrupt the country. Period. So, cut the military, cap healthcare costs as a gov't paid benefit(read - rationing), delay SS payouts.
The ability for the government to bring healthcare costs in line with other countries is ludicrous in our political environment.
Why are so many other wealthy countries in problems with their debt, as well? Everyone can find something that ,if changed, would solve all of our problems, but for some strange reason no one ever has. They'd just spend it on something else.
It would be like seeing a drunk drinking tequila all day long and ignoring the vodka and gin. if we just took away all the bottles of tequile, he'd be sober.
Do some research before making sweeping generalizations about the rest of the world. The whole developed world is better off than the US, budget-wise, living standards, health care, everything. Try travel. I injured myself in Paris and was treated for free, not even any forms. France is rated #1 in the world for health care; spends 9% of its GDP on health care, compared to our 17%.
It's simple: profit is the same as taxes, overhead.
Profit for health insurers is just like a tax, and people in other countries don't pay it.
While we are it, why not put the "perpetual war" budget on the table?
The Defense Department cannot and has not passed any audit. No one knows where the money spent in Iraq and Afghanistan by contractors has actually gone. Surely, a 10 to 20 percent cut in the defense budget that goes to legitimate defense contractors and mercenary firms would cut the federal budget deficit.
The same 10 to 20 percent cuts could apply to the Department of Homeland Security which hands out security contracts to private firms like candy to a child.
The State Department's embassy in Iraq cannot even keep track of its inventory of vehicles, let alone how it actually is spending money for the Iraqis.
For the Baghdad embassy to lose track of its vehicles is just sheer incompetence or malfeasance.
But, if the Democrats really sign up to cutting Social Security and Medicare, they are toast. Especially, if you are correct that there are other ways to control spending and the deficit.
Evelyn Guzman
http://www.debtchallenges.com (If you want to visit, just click but if it doesn’t work, copy and paste it onto your browser.)