Wednesday, March 21, 2012
As the Republican presidential hopefuls auger toward the finish line in what will probably result in the nomination of Mitt Romney, it seems the candidates, in straining to hurl things at one another and President Obama, perpetuate something that I like to call (with apologies to Rachel Maddow) the GOP's "War on Math."
Full disclosure: I'm an Obama fan. I don't see eye-to-eye with the president on everything, and I'd like to state for the record that good ideas also come from smart Republicans--although I have seen few so far from GOP presidential candidates.
I give Obama credit for trying to find common ground in his early years in office, even if it was naive to think he could get any help from GOP members who stated categorically that their No. 1 goal was to see him removed from the White House.
I also remember the last guy. And I remember what happened to the country under the watch of a GOP president and GOP Congress. I remember the unnecessary war (and war spending) and the deficits, even as the economy was growing, because of a misguided, ideological need to cut taxes (rammed through Congress using budget reconciliation, lest you who rail against "Obamacare" forget) instead of continuing to shore up the country's balance sheet.
Both sides of the aisle have good ideas. The (somewhat incomplete) Ryan budget introduced this week has options we should consider: a flatter tax code, fewer behavior-related tax subsidies and items designed to shore up social safety-net programs.
As we recover (hopefully) from the Great Recession, we should see a tightening of our collective belt, an increase in revenues (both from general growth and higher effective rates on people who can afford them) and proposals that restructure how we deal with skyrocketing health-care costs.
But before we can get to those solutions--if we ever can--we've got to clean up the rules of the game. It all comes back to this idea that you can have your own opinions, but you can't have your own facts.
Like this one: "Obama has added more to the debt than all other presidents combined!"
This is not true. Since Obama took office, roughly $5 trillion has been added to the debt. That's a lot--no doubt--but it doesn't represent more than all other presidents have added to the debt, which stands at roughly $15.5 trillion, with $10.7 trillion or so owed to the public. (The rest is intra-governmental debt owed to the Social Security and other trust funds.)
And blaming most of that $5 trillion on Obama is disingenuous at best.
An analysis by The Washington Post, in conjunction with the Center on Budget and Policy Priorities, found that programs George W. Bush championed while in office--tax cuts, defense and special war spending, Medicare expansion, and other spending programs--added about $5.07 trillion to the debt.
Obama's spending programs--stimulus spending and stimulus tax cuts, non-defense spending and health-care reform--will have added about $983 billion to the debt by the year 2017, which would be the end of his (not yet realized) second term.
As Ezra Klein writes in the piece, "When Obama entered office, the Bush tax cuts were already in place and two wars were ongoing. Is it fair to blame Obama for war costs four months after he was inaugurated, or tax collections 10 days after he took office?"
What's even more interesting about this question is the context in which it's raised--the country has added to the debt, in part, because the Great Recession saw revenues plunge from 2008 to 2011.
Why? Because most people and companies were making less money, thus paying less in taxes. (Math again.)
But during that same time, mandatory spending (social programs, Medicare, defense spending) continued to go up at the same time that Obama implemented some extraordinary stimulus spending--and additional tax cutting as stimulus.
So, with less money coming in and more money going out (with roughly 20 percent of it due to a swipe of the President's pen), deficits increased.
One prominent school of thought in economics suggests that deficits should increase during recessions, as the government adds spending on infrastructure investments to keep employment at reasonable levels. (Arguably, we didn't do enough of this in 2008, although in hindsight, the deficit burden already in place from the Bush administration might have meant a smaller stimulus was all we could "afford.")
Want a little silver lining? One of the few advantages that the country has experienced over the course of the Great Recession is that the interest the government pays for the money it borrows is ridiculously low right now. So low, in fact, that the amount of interest dollars the government paid on its debt in 2011 was about the same it paid in 2006, even though that debt principal has doubled.
Imagine if your new credit-card rates were so low that you were actually lowering your monthly payments by rolling an older, higher-rate card over to the lower one, again and again. That's been one side effect of the spending and borrowing to get us through this recession: We've gotten a much better deal on the money we've been borrowing. That won't last forever--and, in fact, it could change quickly--but it's given us some breathing room.
So what's next? As we plunge deeper into the election season, let's try to start from this simple place: Deficit spending is bad, but it's tough to avoid during recessions, and it hasn't been as bad as some like to pretend.
From here, we need good ideas about how to keep the economy on a growth path, how to raise revenues to pay off those debts and how to trim fat from the budget without seriously curtailing growth or devastating the safety net.
We will have differing opinions on how best to do that, but the best ideas will come when people decide to start with actual facts, not lies worthy of a chain email.
Legacy Comments
Todd -- Why is deficit spending bad?
2012-03-23T10:56:29-06:00Well, Mark, the way deficit spending works is it forces the government to borrow that money, which then must be paid back, generally with interest. (I'm surprised you don't know that. ;-) Likewise, borrowing now can hurt your ability to borrow later, and borrowing to cover the costs of bad policy (say, wars we didn't need to fight) might someday affect our ability to borrow, if need be, to cover necessary expenses (say, wars we do need to fight). That said, as I pointed out in my piece, there are times when deficit spending is what one might call a "necessary evil" -- while, ideally, the government would be spending money as it came in as tax and fee revenues, sometimes it's useful for the government to spend money now that we'll have to put back into its treasury at some point in the future. Why do you ask?
2012-03-23T13:12:50-06:00Why do you believe that deficit spending forces the government to borrow money? The government is the sole issuer of a fiat currency; it doesn't tax or borrow in order to spend, it creates fiat currency by spending it and then destroys that currency via taxation. Note that I'm not disagreeing that deficit spending is bad, but I am trying to understand why you believe it is bad.
2012-03-23T14:04:55-06:00There's no need to be coy, Mark. Just come right out with whatever it is you want to say.
2012-03-23T14:25:38-06:00I'm not being coy; I'm asking Todd to articulate exactly why he believes deficit spending is bad (and now, why he believes that government must borrow in order to spend) before I attempt to comment or respond to his position. The better I understand his argument, the less likely I'll be to misrepresent it when I do comment or respond.
2012-03-23T14:28:06-06:00(Rubbing my hands together in anticipation; this should be fun. I love it when both Todd and Brian step up to challenge the GOP war on math.) And Brian's presence reminds me of the great link he posted recently on another thread to shatter a commenter's false assertion about Obama and debt. It is apropos here as well considering that that ignorant statement over there probably motivated the above publisher's note: US National Debt by Presidential Term: Per Capita and as Percentage of Gross Domestic Product Facts matter, boys. They just do.
2012-03-23T14:43:04-06:00My reasons for concern about deficits are (a.) some concern about inflation (with a tickle about hyperinflation somewhere in the back of my mind) and (b.) I feel that we can't divorce the social science part of economics from the math. It's been my observation that when we have significant deficit spending, it's bad *politically* if it hasn't been sold correctly, and it can affect our priorities going forward. I don't think the deficits of the past few years have been understood all that well *in context* -- heck, they make me a little jumpy, and I feel like they make sense. As a result, I think that some folks could be rallied toward austerity (or the Tea Party sensibility of "austerity for everyone else"), which I think would still be bad for the economy, and certainly for those who have been most hurt by the recession thus far. It seems the ideal solution would be to bring down the deficit somewhat -- which is arguably already happening -- while, perhaps, doing a better job of explaining why that deficit is there. (I'm hoping some of that comes out in the presidential race.) When and how you start to bring down the budget deficit is a tough one, since you're going to have to do some of it with taxation, and you don't want the taxes to kill growth. Why do you believe that deficit spending forces the government to borrow money? The government is the sole issuer of a fiat currency; it doesn't tax or borrow in order to spend, it creates fiat currency by spending it and then destroys that currency via taxation. (a.) You still have to go through the motions of issuing government debt and selling it. Money supply is going to affect how attractive that debt is, what the interest rates are going to be to service it and presumably could run amok and cause hyperinflation. (b.) If you actually believe what you're asserting above, then why do *you* think deficit spending is bad? Hyperinflation?
2012-03-23T15:08:00-06:00There's no need to be coy, Mark. Just come right out with whatever it is you want to say. Ha! That would go against years of precedent, Brian.
2012-03-23T15:11:37-06:00My reasons for concern about deficits are (a.) some concern about inflation (with a tickle about hyperinflation somewhere in the back of my mind) and (b.) I feel that we can't divorce the social science part of economics from the math. Agreed on the concern about inflation, however... (a.) You still have to go through the motions of issuing government debt and selling it. Money supply is going to affect how attractive that debt is, what the interest rates are going to be to service it and presumably could run amok and cause hyperinflation. What do you mean here? Are you referring to securities like T-bills or bonds? I've already pointed out that our government is not required to borrow before it spends; it spends by transferring funds from the Treasury's account at the Federal Reserve to private accounts in individual banks. The purpose of the bond market in a fiat currency system is to adjust interest rates, not to fund spending.
2012-03-23T15:52:34-06:00The purpose of the bond market in a fiat currency system is to adjust interest rates, not to fund spending. I understand that certain economic theories hold that to be true, and yet here we are, continuing to buy and sell treasury bonds and call it debt financing of the government. The government has a line-item for paying the interest on those instruments, foreign governments convert their excess U.S. currency into those instruments and people exchange their savings for those instruments all the time. So, sure, maybe it's just a system "to adjust interest rates" but it sure does walk and quack like debt financing. BUT -- if I stipulate that everything you say is theoretically true, will you make an interesting argument about deficits? Please?!
2012-03-23T17:45:27-06:00I have often wondered how much of the debt is Obama's fault. There isn't much fact-checking in the media as a whole these days and politicians take advantage of the fact that most people either don't have time to research or just won't do it because it doesn't fit their agendas/feelings.
2012-03-23T18:51:57-06:00Todd -- I understand that certain economic theories hold that to be true, and yet here we are, continuing to buy and sell treasury bonds and call it debt financing of the government. The government has a line-item for paying the interest on those instruments, foreign governments convert their excess U.S. currency into those instruments and people exchange their savings for those instruments all the time. So, sure, maybe it's just a system "to adjust interest rates" but it sure does walk and quack like debt financing. This is exactly what I'm talking about. What you're describing is all borrowed language left over from the gold standard. The issuance of bonds when government spends (and the debt ceiling itself) is a self-imposed constraint -- it's a rule we've carried over from the gold standard but it has no operational importance in the current fiat currency system. This is not the opinion of one group of economists; this is the operational reality of our current system. You or I may not like how it works, we may think it's dangerous, we may think it's counterintuitive, but it does work this way. Highly recommend this link: http://moslereconomics.com/mandatory-readings/soft-currency-economics/ Particularly relevant are the subsections labeled "Mechanics of Federal Spending" and "Federal Government Spending, Borrowing, and Debt".
2012-03-24T10:36:31-06:00This is not the opinion of one group of economists; this is the operational reality of our current system. A link for you: http://krugman.blogs.nytimes.com/2011/08/15/mmt-again/ Now... I quote myself... BUT -- if I stipulate that everything you say is theoretically true, will you make an interesting argument about deficits? Please?! How does your view of the way we cover deficits change anything? What's the prescription, Doc?
2012-03-24T15:48:03-06:00Come on, Todd...economists on every side of the debate recognize that Krugman constantly mischaracterizes MMT (and Austrians, and market monetarists, etc.). He's a partisan shill. But let's set that aside for a moment -- Krugman's article (misguided as it was) was aimed at the prescriptive elements of the MMT camp. Even he, in the midst of a muddled critique, admitted in a roundabout way that the descriptive side of MMT is correct -- the government is not revenue constrained; the danger is inflation (among other things). How does your view of the way we cover deficits change anything? What's the prescription, Doc? What's the rush? We're still discussing how the system actually functions. Trying to discuss a remedy would be akin to discussing who the villain in the story is when we've been reading two different books.
2012-03-24T18:36:22-06:00By the way, if you feel I'm being unfair here, just read how the NY Fed Reserve Bank describes its bond market operations: Open market operations enable the Federal Reserve to affect the supply of reserve balances in the banking system and thereby influence short-term interest rates and reach other monetary policy targets. [...] By adjusting the level of reserve balances in the banking system through open market operations, the Fed can offset or support permanent, seasonal or cyclical shifts in the supply of reserve balances and thereby affect short-term interest rates and by extension other interest rates. [...] Through this adjustment to the supply of reserve balances, open market operations influence the federal funds rate—the interest rate that depository institutions pay when they borrow unsecured loans of reserve balances overnight from each other. Banks borrow reserves in the federal funds market in order to meet reserve requirements set by the Federal Reserve, and to ensure adequate balances in their accounts at the Fed to cover checks and electronic payments that the Fed processes on their behalf. Changes in the federal funds rate often have a strong impact on other short-term rates. http://www.newyorkfed.org/aboutthefed/fedpoint/fed32.html And also, concerning the obligations of a primary dealer on the bond market: Primary dealers are also required to participate in all auctions of U.S. government debt and to make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account-holders. http://www.newyorkfed.org/markets/pridealers_policies.html Again, Krugman's partisan politics aside, it's clear that the Federal Reserve itself does not see its role in the bond market as funding government expenditures; its responsibility is to target the agreed-upon interest rate. I've read and reread those pages; if I've missed the portion where it says, "And thus proceeds from bond sales are transferred to the Treasury such that government spending may be adequately funded," please point it out.
2012-03-24T20:47:26-06:00By the way, if you feel I'm being unfair here, just read how the NY Fed Reserve Bank describes its bond market operations: Mark, I don't feel you're being unfair, just obtuse. (Except, perhaps about Krugman being a "partisan shill" because he doesn't subscribe to all the same economic schools of thought that you do.) And if you're going to quote the Fed's About page, how about we quote the Treasury Department's Dept of the Public Debt About page: http://www.publicdebt.treas.gov/ Our job is to borrow the money needed to operate the federal government and to account for the resulting debt. In a nutshell, we borrow by selling Treasury bills, notes, and bonds, as well as U.S. Savings Bonds; we pay interest to investors; and, when the time comes to pay back the loans, we redeem investors' securities. Every time we borrow or pay back money, it affects the outstanding debt of the United States. Treasury is, no doubt, a bunch of partisan shills. What's the rush? We're still discussing how the system actually functions. Trying to discuss a remedy would be akin to discussing who the villain in the story is when we've been reading two different books. I disagree; I think the more apt analogy is we're talking about the same villain and you, for some reason, are arguing over the villain's blood type. So, whether Treasury debt instruments are being issued as (a.) a total sham based on the entire government's lack of an understanding of fiat currency -- which is certainly an interesting theory (b.) exclusively to influence interest rates or (c.) to do what they say they're doing, debt-finance operations of the U.S. government -- are you able to answer this question: Mark, how should the country should treat budget decifits going forward?
2012-03-26T08:44:49-06:00Regarding Krugman, I don't see the point in debating it. It has nothing to do with his economic views (though obviously I do disagree with him) and everything to do with his inability to avoid mixing his partisan hackery with his economic analysis. The Treasury's description of its responsibilities is funny, but not particularly helpful, since it's just restating the historical role of the Treasury and not describing the actual day-to-day operations in a post-1971 monetary system. The silliness of it has been noted, however: http://rodgermmitchell.wordpress.com/2011/12/27/get-this-the-employees-of-the-treasury-dont-know-why-they-sell-t-securities/ If you want to actually research how government spending is financed, I highly recommend this paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=115128 It's a bit technical, but if you want you can skip the detailed explanations and start reading at Section 5 (The Nuances of Reserve Accounting). I'd also recommend this paper on the mechanics of the federal funds rate: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1723591 It is my sincere hope that you find the authors of those papers less obtuse than myself. In any case, I'm unwilling to discuss future policy recommendations when we're still in disagreement over the nature of public debt. The fact that you believe I'm arguing over the "blood type" of the villain reveals that you've not understood how the modern monetary system operates and how it changes what public debt actually signifies. I'm happy to continue discussing the issue of government funding and public debt, but I'd need you to offer some argument or source that actually addresses how the system operates. If you've decided that the only interesting part of the discussion is future policy on budget deficits, I'll respectfully bow out and allow anyone who wants to pursue that thread to do so unencumbered with this discussion on what the public debt actually is.
2012-03-26T09:55:37-06:00OK, Mark. See ya! ;-)
2012-03-26T10:24:16-06:00
Of course, the people spreading lies about the president are getting their marching orders from the man who will likely be the Republican nominee. Look at this whopper he told in February, and has apparently kept telling (even yesterday): http://www.mcclatchydc.com/2012/02/23/139762/romney-blows-call-on-obamas-budget.html Throw the flag against: Mitt Romney Call: Offsides. What happened: Romney claimed that President Barack Obama has doubled the federal budget deficit. "He said he'd cut the deficit in half. He's doubled it. He's doubled it," Romney told a rally Wednesday in Chandler, Ariz. Why that's wrong: Obama inherited a budget deficit that topped $1 trillion. He increased it, but nowhere near doubled it. The deficit doubled before he took office. ... The 2009 budget deficit ended up at $1.4 trillion. That was an increase of about $200 billion, or 16 percent. Not a doubling. The 2010 deficit totaled $1.3 trillion. Still nowhere near double. The 2011 deficit totaled $1.3 trillion. Same. Read more here: http://www.mcclatchydc.com/2012/02/23/139762/romney-blows-call-on-obamas-budget.html#storylink=cpy It's one thing for anonymous bloggers and chain emailers and radio-screamers to make up whoppers like this, but how does this kind of lie help people trust Romney???
DonnaLadd2012-03-22T11:19:34-06:00