The Deficit Commission Proposals to cut social security

Washington, D.C.- Dean Baker, Co-Director of the Center for Economic and Policy Research (CEPR) released the following statement on the proposals offered by Erskine Bowles and Alan Simpson, co-chairs of the President's deficit commission: "Senator Alan Simpson and Erskine Bowles appeared to have largely ignored economic reality in developing the proposals they presented to the public today. "The country is suffering from 9.6 percent unemployment with more than 25 million people unemployed, underemployed or who have given up looking for work altogether. Tens of millions of people are underwater in their mortgage and millions face the prospect of losing their home to foreclosure. "This situation is not the result of government deficits, contrary to what Mr. Bowles seemed to suggest at the co-chairs' press conference today. The downturn was caused by the bursting of an $8 trillion housing bubble. This bubble was the basis of the construction and consumption demand that drove the economic expansion through 2007.  "The large government deficits are the only factor sustaining demand following the loss of this bubble wealth. If today's deficit were smaller, we would not be helping our children; we would just be putting their parents out of work. Simpson and Bowles somehow think they have covered this concern by delaying their cuts until fiscal year 2012, 11 months from now. Virtually all projections show the unemployment rate will still be over 9.0 percent at the point when the Simpson-Bowles cuts begin to slow the economy further. This leaves the economy like a plane with one engine already out and Simpson Bowles prepared to knock out the other engine as well. "The failure to understand current deficits contributes to a misunderstanding of the debt burden. For example, Simpson and Bowles raised fears of an exploding debt reaching 90 percent of GDP by the end of the decade. There is no reason that the Fed can't just buy this debt (as it is largely doing) and hold it indefinitely If need be, the Fed can use other tools at its disposal to ensure that this expansion of the monetary base does not lead to inflation. "This creates no interest burden for the country, since the Fed refunds its interest earnings to the Treasury every year. Last year the Fed refunded almost $80 billion in interest to the Treasury, nearly 40 percent of the country's net interest burden. "This means that the country really has no near-term or even mid-term deficit problem, just paranoia being spread by many of the same people who led the economy into its current disastrous situation. "Over the longer term, the country is projected to face a deficit problem but this is almost entirely attributable to the projection that private sector health care costs grow at an explosive rate. This projected growth rate of health care costs would eventually lead to serious budget problems in addition to leading to enormous problems for the private sector. However, the underlying problem is the broken health care system, not public sector health care programs. For some reason, though, Simpson-Bowles never directly addresses these of the health care system. "Simpson and Bowles apparently never considered a Wall Street financial speculation tax (FST) as a tool for generating revenue. This is an obvious policy-tool that even the IMF is now advocating, in recognition of the enormous amount of waste and rents in the financial sector. Through an FST, it is possible to raise large amounts of revenue, easily more than $100 billion a year, with very little impact to real economic activity. The refusal to consider this source of revenue is striking since at least one member of the commission has been a vocal advocate of financial speculation taxes. It is also worth noting that Mr. Bowles is a director of Morgan Stanley, one of the Wall Street banks that would be seriously impacted by such a tax. "Finally, it is striking that the Co-Chairs felt the need to address Social Security, even though it was not part of their mandate. The commission's mandate was to deal with the country's fiscal problems. Since Social Security is legally prohibited from ever spending more than it has collected in taxes, it cannot under the law contribute to the deficit. Their proposal would cut benefits for tens of millions of middle class workers who are overwhelmingly dependent on Social Security for their retirement income. It would also raise the retirement age for lower income workers who have seen little increase in life expectancy. "While there are some positive items in the report (it would limit the mortgage interest rate deduction get rid of the deduction for cafeteria benefit plans), it suffers from the fact that the co-directors never reflected on their basic economic assumptions. It is hard to avoid the conclusion that this exercise was a waste of time and that we should go back to having Congress determine our budgets through the normal process rather than secret commissions." ###

Republicans, deficit hawks, make the economy worse

Christopher Hayes. The Nation.

First, the facts. Nearly the entire deficit for this year and those projected into the near and medium terms are the result of three things: the ongoing wars in Afghanistan and Iraq, the Bush tax cuts and the recession. The solution to our fiscal situation is: end the wars, allow the tax cuts to expire and restore robust growth. Our long-term structural deficits will require us to control healthcare inflation the way countries with single-payer systems do.

But right now we face a joblessness crisis that threatens to pitch us into a long, ugly period of low growth, the kind of lost decade that will cause tremendous misery, degrade the nation's human capital, undermine an entire cohort of young workers for years and blow a hole in the government's bank sheet. The best chance we have to stave off this scenario is more government spending to nurse the economy back to health. The economy may be alive, but that doesn't mean it's healthy. There's a reason you keep taking antibiotics even after you start to feel better.

And yet: the drumbeat of deficit hysterics thumping in self-righteous panic grows louder by the day. Judging by its schedule and online video, this year's Aspen Ideas Festival was an open-air orgy of anti-deficit moaning. The festival is a good window into elite preoccupations, and that its opening forum featured ominous warnings of future bankruptcy from Niall Ferguson, Mort Zuckerman and David Gergen does not bode well. Nor does the fact that there was a panel called "America's Looming Fiscal Emergency: How to Balance the Books." This attitude isn't confined to pundits. The heads of Obama's fiscal commission have called projected deficits a "cancer."

The hysteria has reached such a pitch that Republican senators (joined by Nebraska Democrat Ben Nelson) have filibustered an extension of unemployment benefits because it was not offset by spending cuts. Keep in mind, the cost of the extension for people unlucky enough to be caught in the jaws of the worst recession in thirty years is $35 billion. The bill would increase the debt by less than 0.3 percent.

This all seems eerily familiar. The conversation—if it can be called that—about deficits recalls the national conversation about war in the run-up to the invasion of Iraq. From one day to the next, what was once accepted by the establishment as tolerable—Saddam Hussein—became intolerable, a crisis of such pressing urgency that "serious people" were required to present their ideas about how to deal with it. Once the burden of proof shifted from those who favored war to those who opposed it, the argument was lost.

The Nation

Teachers robbed of jobs by deficit cult

On Saturday night, the White House released a letter Obama sent to congressional leaders of both parties asking for nearly $50 billion in emergency aid to state and local governments to fend off "massive layoffs of teachers, police and firefighters" and to prevent a possible double-dip recession.

"We are at a critical juncture on our nation's path to economic recovery," the president warned. "It is essential that we continue to explore additional measures to spur job creation and build momentum toward recovery, even as we establish a path to long-term fiscal discipline. At this critical moment, we cannot afford to slide backwards just as our recovery is taking hold."

And, from the Economic Policy Institute: Mishel urged Congress to pass three key pieces of jobs legislation, including the American Jobs and Closing Tax Loophole Act of 2010, which would extend unemployment insurance and COBRA health care subsidies for the long-term unemployed; legislation from Senator Tom Harkin (D-Iowa) to preserve education jobs; and the Local Jobs for America Act, introduced by Rep. George Miller (D-Calif.), which authorizes $100 billion over two years to create and save jobs in local communities around the country.

The Deficit and our children: Some facts please

The Deficit and Our Children: Just the Facts

Share  Dean Baker Truthout, April 26, 2010 This is deficit-fest week with President Obama’s deficit commission scheduled to have their big public kickoff on Tuesday, followed by an all-day affair sponsored by the Peter G. Peterson Institute the next day. If the deficit hawks succeed, everyone should be really really scared about the deficit by the end of the week and just dying to cut Social Security and Medicare for the sake of our grandchildren. While there will be many facts about the debt and deficit tossed out at these gala events, there are some important tidbits of information that are likely to go unmentioned. So, courtesy of billionaire investment banker Peter G. Peterson (not) we bring these facts to you here. Under any plausible set of projections, our children and grandchildren will enjoy far higher standards of living than we do today. On average, real hourly compensation is projected to rise by at least 1.2 percent a year. This means that workers in the year 2040 will enjoy compensation levels that on average are more than 40 percent higher than what workers receive today. This means that even if they paid hugely higher taxes, our children and grandchildren will have far more after-tax income than we do today. There is a problem of inequality so that most workers may not share in this income growth. Due to the growth of inequality, most workers have seen little improvement in living standards over the last three decades. If the trend towards growing inequality continues, then workers in 2040 may not be much better off than workers today, but that is an issue of intra-generational inequality, not inter-generational inequality. Fixing inequality would cause us to focus on issues like trade policy, the ability of workers to join unions and taxpayer subsidies to the financial sector, not budget deficit. The reason that the country is projected to face enormous deficits in the future is our broken health care system. We pay more than twice as much per person for our health care as people in Canada, Germany and other wealthy countries. This gap is projected to grow even larger in future decades. We have little obvious benefit from this additional spending, since people in all these countries have longer life expectancies than we do. If our per person health care costs were comparable to those in other countries then our budget projections would show huge surpluses, not deficits. The debt to China has nothing to do with the budget deficit and does not present the disastrous risks claimed by the deficit hawks. The United States borrows money from China because of the trade deficit. The budget deficit is beside the point. If we had the same level of GDP and the same value of the dollar against the Chinese yuan, we would have just as large a trade deficit with China today even if the budget were balanced. If we are concerned about borrowings from China, then we should focus on reducing the value of the dollar, not the budget deficit. If we didn’t have a budget deficit, China could be offsetting its trade surplus by buying private assets like shares of General Electric stock or bonds issued by private corporations. Of course, if China wanted to acquire government bonds it could sell these other assets and buy government bonds any day of the week. So, there is no special reason for anyone to be concerned about China owning U.S. government bonds as opposed to any other U.S. financial asset. Finally, the scare story, that China might one day dump its bonds and send the dollar tumbling, is absurd on its face. Both the Bush and Obama administrations were pressuring the Chinese to raise the value of its currency. Are we worried that one day they will dump their huge holdings of dollars and send the yuan soaring against the dollar? In other words, the deficit hawks want us to be worried that the Chinese government will one day do exactly what we have been asking them to do for years: stop buying up dollars to depress the value of the yuan against the dollar. The country faces real problems. In the short-term we face the problem of re-employing people in an economy with near double-digit unemployment. In the longer term we need to rebuild the economy on a cleaner more energy efficient path. And, we desperately need to fix our health care system. How we deal with these problems will determine the well being of our children and grandchildren. Unfortunately, the deficit hawks diverted discussion from the housing bubble when it was growing to ever more dangerous levels. It is unfortunate that even now they can still use their money and power to prevent the country from focusing on the real dangers to the country’s future.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of False Profits: Recovering from the Bubble Economy. He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues.