[Scott_H]

A Surplus of Silliness
Washington's balanced-budget fetish is bad for the economy.
BY ROBERT B. REICH
Saturday, September 1, 2001 12:01 a.m. EDT

The Congressional Budget Office, in a report released Tuesday, says the government will be forced to take $9 billion from the so-called Social Security surplus in fiscal year 2001 to make ends meet. The news undoubtedly will elicit a new round of fancy-dance explanations from the Bush administration for how it plans to avoid dipping into the Social Security surplus next year, and will add more fuel to the Democrats' charge that the president's tax cut has put Social Security in jeopardy. Expect the decibel level to grow when Congress returns to Washington and both sides go to battle over the 2002 budget.

No one ever said political rhetoric over economic policy would edify the public, but we have reached a new low. The plain fact is that the economy has slowed faster than anyone predicted, and so tax receipts are shrinking faster than anyone projected. This is the mirror image of what happened when the economy grew faster than anyone imagined, causing receipts to grow faster than anyone projected. Budget projections are based on historic models of how the economy swings between boom to bust, so no one should be surprised if projections are revised and revised again.

The more fundamental oddity is that both parties have grasped so tightly the orthodoxy of fiscal austerity. Republicans who a few months ago proudly proffered the supply-side mantra that the Bush tax cut would spur economic growth over the long term are suddenly squirming over the possibility that their budgets may go into the red in the short term. Democrats who used to celebrate Keynesian deficits as means for stimulating the economy during downturns and simultaneously accomplishing liberal objectives for enhanced public spending are suddenly sounding pious demands that the budget be balanced every year and the Social Security surplus remain untouched.


Welcome to the magic world of fiscal constraint as an end in itself. Both parties have bought into the budget numbers racket--a zero-sum game that confers enormous power on green-eyeshade actuaries in the Congressional Budget Office, the Office of Management and Budget, the Social Security Administration and even the International Monetary Fund. Their assumptions about productivity growth, population growth, levels and rates of immigration (both legal and illegal), and mortality, whirl and click and then spit out budgets that are either balanced (win!) or unbalanced (lose!) over arbitrary periods of time.

Meanwhile, the American public--though confused and bored--nonetheless has come to accept the premises that the Social Security surplus must not be "raided," that a balance in the remainder of the budget is always better than an imbalance, that revenues should always exceed expenses, and that debt is bad. Politicians, either ignorant or fearful of the truth, play along. Much of the financial press accepts the gospel as given. And thus the gap between public understanding and economic reality widens.

Back to basics for a moment. The purpose of fiscal policy is to accomplish two objectives. The first is to complement monetary policy in making full use of the nation's productive capacities. This may mean running deficits when the economy is shrinking and when neither business nor consumer spending is adequate to the task of maintaining adequate aggregate demand.

Granted, this is a tricky thing to pull off. Timing is difficult. By the time Congress enacts a tax cut or additional spending and it is put into effect, the economy may already be on the rebound. Mostly by luck, the 2001 tax rebate checks are arriving at about the perfect time to give families a bit of incentive to keep spending--not as much incentive as they probably need, but a worthwhile complement to monetary easing.


The Bush administration should state flatly that it doesn't matter if the so-called Social Security surplus erodes this year, or even next. The Social Security surplus is an accounting fiction. It didn't even exist until about 18 months ago, when some Democratic advisors thought such an invention might be a good bulwark against candidate Bush's proposed tax cut. In light of swelling surpluses, merely to "save Social Security first" wasn't enough of a defense, so Democrats raised the rhetorical bar to "Save the Social Security surplus first." Republicans were cowed into agreeing that we should put the surplus some place where it couldn't be touched.

This fictional "lock box" was harmless enough when the economy was booming but makes no sense when it's slowing. The White House should be clear with the public: Under current conditions it's perfectly permissible for total government expenses to rise relative to total revenues, including revenues from payroll taxes and current payouts for Social Security. And Democrats should stop their bellyaching about "raids."

The second objective of fiscal policy is to help enlarge the nation's productive capacity over the long term. Conservatives believe the best way to do this is to allow people to keep more of the money they earn rather than pay it in taxes. Liberals believe the best way is to spend more money on improving the quality of the nation's "human capital" and infrastructure--schools, child health care, mass transit, and so on. Both are "supply side" rationales. There is a legitimate debate to be had about which is more correct, and an even more important one about how and under what circumstances tax cuts can best stimulate investment and innovation, and when additional expenditure on schools or other "public investments" can have the largest positive impact.

If the administration believes its $1.3 trillion tax cut will generate additional growth of a sort that will reduce deficits (and even public debt) over the long term, it should say so explicitly, and set out its expectations in its budget documents. For example, the "crisis" that the administration's Social Security commission expects to occur several decades from now is premised on very conservative growth projections emanating from the office of the chief actuary of the Social Security trust fund. If the White House thinks the supply-side consequences of its tax cut will spur growth, it should provide its own more optimistic growth projections. The fact that surpluses of Social Security revenues over Social Security payments might be utilized in the short term to pay for the tax cut, along with other spending, is irrelevant to this more important discussion.

Democrats, likewise, would do well to be clear about their own "supply side" notions of public investment, and make as compelling a case as they can for why additional dollars put toward human capital and infrastructure will add to the nation's growth. Pious pronouncements about the importance of fiscal rectitude are putting Democrats in the absurd position of saying--as Richard Gephardt did last week--that they're willing to cut spending on education, health care, and other programs for the poor and working families in order to avoid dipping into the Social Security surplus. The cynical totem of fiscal orthodoxy has nothing whatever to do with the goals for which Democrats have fought for almost a century.


The numbers game also obscures some important distributional issues. From a liberal perspective, the problem with the Bush tax cut is not its fiscal profligacy but its regressivity. Most of the $1.3 trillion will go to people who are already very rich. Arguably this makes little sense in a society becoming ever more divided between have-mores and have-lesses, and it's questionable even on Keynesian grounds. Richer people are far less likely to spend extra money they get from the government than poorer people, for the obvious reason that rich people are already spending what they want to spend. Most poor and middle-income people need to, or would like to, spend more.

Conservatives may want to argue in response that their assumed supply-side growth outcome will do more to help the poor ascend into the middle class than a tax cut whose benefits were more equitably distributed, and that, even on Keynesian grounds, the additional investments by the rich will do more to stimulate the economy than additional spending by the less well-off.

The problem is that we aren't having this debate. We're talking instead about angels on the heads of fiscal pins, fictional Social Security surpluses, and actuarial projections grabbed out of the ether. By making a fetish out of balancing the budget every year and excluding Social Security surpluses, both parties are locking themselves into a rhetorical prison from which there's no easy escape. Worse yet, they're imprisoning the public behind walls that don't exist, making it impossible to understand what's truly at stake.

Mr. Reich, a former secretary of labor, is a professor of social and economic policy at Brandeis University and the author of "The Future of Success" (Knopf, 2001).

[lee vieira]

Can't say as I really agree with Mr. Reich (geez, what an unfortunate name )

What Mr. Reich completely (and suspiciously) fails to mention in his otherwise pretty-good article are the following facts:

1) We have a national debt of somewhere on the order of $3 trillion dollars, that we need to pay interest every year upon (usually around $150 billion/year), which increases govt spending in a way that is bad in both liberal and conservative's eyes. Liberal, because that is govt spending that contributes nothing to infrastructure or social programs, and conservative, because its more govt spending, period, and because it contributes nothing to conservative pet peeves (defense spending, for example).

2) While being hamstrung by #1 (above), the govt still has to contend with the looming retirement of a HUGE number of baby boomers, starting in 2010, which will DRAMATICALLY increase Social Security payouts. The impact on the federal budget will be severe.

THEREFORE given #1 and #2, it makes a great deal of sense to pay off the national debt BEFORE problem #2 happens, because dealing with both problems at the same time is likely to be a real bit*h.

Perhaps in the old days, Reich's rationale made sense...you ran deficits as a stimulative effect in times of economic downturn, and you ran surpluses in times of plenty, and the government acted as a counterweight to the traditional business boom-bust cycle. But with trillions of debt and an enormous wave of retirees getting ready to draw money from the system, the old rules just do not apply in the same way anymore.

Some very good economists have said that the govt should be running big surpluses between now and 2010, in order to help pay off the debt. I'd argue that yes, in times of downturn, it might be wise to go down to a budget that is merely balanced instead of one that runs a huge surplus, in order to let more money go into a weak economy, BUT running up yet more massive amounts debt in the face of what's going to happen down the road is just asking for it.

Fortunately, both parties have managed to manuever themselves into a position of doing the right thing here, even if its for the wrong reasons.

For example, make no mistake-- Dubya Bush's overly large tax cut was never part of some sort of economic 'medicine'(he came up with it long before there was any sign of the current downturn), it was, as with Reagan, all about getting the marginal tax rates for the wealthiest Americans down(that's a quote from David Stockman, a former Reagan adviser, not me). If Bush could cut more and put the budget in deficit, he probably would-- but he can't, since he'd have to raid Social Security at a high political cost, and because --contrary to Reich's assertions-- the Congressional Republicans themselves also championed the idea of a Social Security 'lockbox', in order to 1) demonstrate to seniors that Republicans loved them too, and 2) to, on paper, at least, greatly reduce the amount of surplus Democrats could spend on new programs.

Democrats fare little better as well. Gore went with the 'lockbox' mechanism in order to demonstrate his fiscal responsibility during the election, and to court the senior vote, and many centrist 'new' Democrats went right along with him.

In fact, it's funny-- the only folks really railing against the idea of maintaining a balanced budget that also does not touch Social Security funds are extremists of both right and left-- on the right, tax-cutting supply-sider crusaders who still espouse (the now largely discredited) notion that super-massive tax cuts of even larger scale than Bush's are ok since they stimulate growth so much that any lost revenue is quickly made up, or, on the left, traditional big-government Keynesian liberals such as...well, Robert Reich.

In fact, even more ironically, it was the collision of these two extremist groups in the '80s under Ronald Reagan's two terms in office that has left us with no further room to manuever, thus making both camps rationales for running budget deficits now unworkable.

As we all know, the national debt exploded under Ronald Reagan, but it was not only he who was at fault. Yes, Reagan's big tax cut and massive defense spending did make a balanced budget all but impossible, but the Democratically-controlled Congress also digged its' heels in on spending to a large extent, and most entitlement programs remained largely untouched. It must be added, though, that Congressmen of both parties engaged in 'pork barrel' spending practices in their own home districts, thus worsening the spending situation.

Lower revenues(due to massive tax cuts) + more spending(due to locked-in entitlement programs, defense build-up, and pork) = HUGE deficits.

So we ran up the national debt up from $1 trillion to $3 trillion in just one decade, thanks to Reaganite conservatives and traditional big-govt liberals butting heads and compromising very little.

Now, both sides are whining about the problem THEY helped cause.

Supply-sider whacko conservatives in Congress whined when the Bush tax cut went through that it should be even BIGGER, more like $2 - 2.2 trillion, instead of the $1.35 trillion that did go through (it should be noted that Mr. Bush should be counted among the supply-sider whackos, since he originally wanted $1.6 trillion, he wanted it long before there was any sick economy to stimulate, and only got talked down $250 billion by an obstinate US Senate).

Big-government-dinosaur liberals don't want a surplus either-- they want to spend it all on social programs, seemingly not seeing the big picture of huge deficits + the massive wave of retirements in 2010 and beyond.

So, even as cynical and as politically-motivated as it is, I for one am very happy that the rhetoric of fiscal responsibility has taken on a life of its own, and that balanced budgets are a priority in Washington now, even if it's as a political weapon that both sides use. We could've used more of that kind of cynicism in the '80s, when we were running $300 billion-a-year deficits with a truly idiotic "What, Me Worry?" attitude.

With both sides politically painted into a corner on the issue, and with Mr. Bush no longer having a GOP-controlled Senate to work with, both sides are going to have to compromise on their priorities, and that's a good thing, and much better than what we did 20 years ago, no matter what the old righties and old lefties have to say about it.

Don't get me wrong, Reich is a very elegant and passionate writer... for a dinosaur, that is.

--lee

[nonhuman]

I think the more important message here is that the government need to start working for the people, and not for the budget...

[lee vieira]

Originally posted by nonhuman:
<STRONG>I think the more important message here is that the government need to start working for the people, and not for the budget...</STRONG>

That's a fine and noble sentiment, but perhaps a bit simplistic.

Whether you define 'working for the people' as greatly increasing social program spending, or providing super-massive tax cuts, the end result is the same: big budget deficits.

Why is this a bad thing?

Well, because then the govt has to borrow a huge amount of money. In doing so, the govt becomes a competitor with businesses and individuals in borrowing money, and, since the demand for borrowing money goes up, so do interest rates.

Higher interest rates then make it tough for businesses to invest in new technologies, equipment, training, etc. Which reduces US business competitiveness with other nations, lowers growth, lowers employment opportunities, and, yes, high interest rates even make it harder for the average person to finance a car or home. In general, it hurts not only big companies, but your average working Joe or Jane, both in the pocketbook and in terms of opportunities.

Now, what was that about the govt working for the people instead of the budget again?...

--lee

[gwrjr33]

Originally posted by lee vieira:
<STRONG>
Well, because then the govt has to borrow a huge amount of money. In doing so, the govt becomes a competitor with businesses and individuals in borrowing money, and, since the demand for borrowing money goes up, so do interest rates.
</STRONG>

That's the argument anyway. However, the historical data show no such correlation.

People borrow for student loans. They borrow to buy homes. And sometimes they borrow to buy stupid things. Same is true with government. It's not the borrowing that is the problem. It's what it's for. As a percentage of GDP we borrowed dramatically more to win WWII but that was clearly worth it. In the 80's we borrowed enough to pull the economy out of the ditch it was in at the end of the 70's and also win the Cold War. It was worth it. Our current federal debt as a percentage of GDP is almost trivial. I know that sounds absurd when you are talking about trillions of dollars but compared to the size of GDP it's true.

The economy just isn't doing all that well. This debate over whether we should use the Social Security surplus in the same way we've ALWAYS used it or to pay down more debt (we aren't talking about more borrowing) is rather bizarre. Not to be overly dramatic here (by way of comparison) but Herbert Hoover was also very concerned that he should be running a balanced budget. He raised taxes to make that happen too. That wasn't the reason we had the Great Depression but it just wasn't a good idea at all.

[nonhuman]

Originally posted by lee vieira:
<STRONG>

That's a fine and noble sentiment, but perhaps a bit simplistic.

Now, what was that about the govt working for the people instead of the budget again?...

--lee</STRONG>

Yes that was a very simplistic way to put it and it didn't really explain my point, so I'll try to do that now.

The way I see it (and perhaps I'm wrong about this) the various politicians and political parties in charge put their political goals in a secondary position to appearing cost effective and not looking like they're wasting money. If the republicans say they're going to put so much money into these various social programs the democrats feel obligated to present a plan in which they appear more fiscally responsible. Sure they're probably end up spending more because of their different philosophy, but they'll make sure that the extra money goes to programs that sound better, and look better on paper. If the same amount of money will have a bigger short term benefit in wellfare than in education, then it will go to wellfare regardless of the long term consequences.

Elected officials and their parties are far too concerned with having a good image in order to get reelected and stay in power. This means that immediate benefit outweighs future harm. If they can institute something that will make the economy flourish within their term of office and stay up long enough for them reelected they'll do it even if it means serious recession 3 years later. The worst part is, the American people fall for it. The politicians and media all hype the immediate benefit, they all try to make today as good as possible even at the cost of tomorrow.

What is needed is a much more middle-of-the-road approach. There will always be ups and downs in the economy, and there will always be ways of making those ups much higher. But instead of higher ups at the cost of lower lows we should try for smaller variation, and hope to increase the average, not the peak.

[BRussell]

I have to question this basic assumption that running up a debt is good for the economy.

If we compare the Reagan years to the Clinton years, Reagan ran up the debt more than it had ever been in history, and Clinton reduced the deficit more than it had ever been in history. Yet Clinton's economy was, by virtually every measure, better than Reagan's. That really defies the Keynesian logic.

Reagan cut taxes and raised spending (he wanted to spend more than the congressional Dems every single year, so you can't blame the Dems), Clinton raised taxes and cut spending. So, according to traditional theory, and according to Reich and everyone else, Reagan's economy should have been better than Clinton's. But the reverse was true.

So there's just no evidence for the assumption that running up a debt improves the economy.

I agree with Dubya's daddy that it's voodoo.

gwr: You said the debt is trivial as a fraction of GDP. I believe the publicly-held debt is almost 4 trillion, and the GDP is just over 10 trillion. Is 1/3 a trivial percent?

[lee vieira]

Originally posted by gwrjr33:
<STRONG>

That's the argument anyway. However, the historical data show no such correlation.

</STRONG>

Really? That's interesting, considering that Fed fund rates during the '80s (our time of highest deficit spending) varied from about 5% to 17%, spending most of the time in the 7-10% range.

Compare that to now, a time of surplus spending... interest rates are at 3.5%, coming down from a recent high of 6.5%.

One could argue that so-called 'real' interest rates (rate - inflation) show less correlation, but even by that measure, real interest rates during the deficit-spending '80s were 4-6%. In balanced-budget '90s? 0-4%. Presently? About 2%.

<STRONG> Our current federal debt as a percentage of GDP is almost trivial. I know that sounds absurd when you are talking about trillions of dollars but compared to the size of GDP it's true. </STRONG>

Mmm...no. US GDP is currently approaching $10 trillion. The Federal debt is roughly $3 trillion. 30% of GDP really isn't 'almost trivial', especially when you consider that servicing that debt consumes almost 10% of our annual federal budget dollars-- money that could be used for new social programs, improving education, or further tax cuts.

30% of GDP in debt only looks good compared to countries that are in deep sheeite...like Japan, for example, which has been mired in a ten-year slowdown/recession, and whose govt has tried to spend its way out of it, to no avail. More proof that running big deficits doesn't always help, and can actually hurt.

<STRONG>The economy just isn't doing all that well. This debate over whether we should use the Social Security surplus in the same way we've ALWAYS used it or to pay down more debt (we aren't talking about more borrowing) is rather bizarre. Not to be overly dramatic here (by way of comparison) but Herbert Hoover was also very concerned that he should be running a balanced budget. He raised taxes to make that happen too. That wasn't the reason we had the Great Depression but it just wasn't a good idea at all.</STRONG>

I fully agree that Hoover's policies made the Great Depression worse, but can one fully equate then with now? We were projected to run about $120 billion in non-Social Security surpluses this year...now it looks as if we're going to run zero in non-Social Security surpluses. About half of that is due to decreased revenues from the slowing economy, but the other half is due to the tax cut and federal spending increasing faster than projected. Hmmm...a tax cut and more spending... this is not a stimulus to the economy?

Even if it we could afford to run a huge deficit right now, its unlikely that it'd do that much good. What's going on right now isn't truly a traditional boom-bust business cycle problem, it's an investment-led recession. Businesses got themselves into a huge hole, both by overinvesting and by running up huge inventories during the go-go times of the '90s. Their balance sheets aren't going to look good until they work that debt and excess inventory off, which takes time, and which more govt spending isn't really going to help. As a result, don't expect the stock market to rise much soon, and the market's 'wealth effect' on the general population is going to remain flat.

Where running big govt deficits might theoretically help is with the consumer side of the economy. More govt spending = more govt jobs and contracts, and thus lower unemployment. But wait a sec... US unemployment right now is 5%, which is historically very low, and among the best rates we've seen in the past 30 years. Most everyone has a job...that isn't the real problem. The real problem is that consumers, like businesses, have run up a great deal of debt, and they need to work it off; and the stock market is no longer going to help them do so, at least not until businesses have worked through their own overspending and overinvestment.

Hate to say it, but the solution here is, again, time.

And, yes, not running a surplus until the economy recovers...that much I agree with. But still more deficit spending that we can't really afford? No.

--lee

[lee vieira]

Originally posted by nonhuman:
<STRONG>

Elected officials and their parties are far too concerned with having a good image in order to get reelected and stay in power. This means that immediate benefit outweighs future harm. If they can institute something that will make the economy flourish within their term of office and stay up long enough for them reelected they'll do it even if it means serious recession 3 years later. The worst part is, the American people fall for it. The politicians and media all hype the immediate benefit, they all try to make today as good as possible even at the cost of tomorrow.

</STRONG>

Well, you're going to hate me, but I'd have to say that the opposite is true. Politicians don't seem to make economic decisions based on what is going to look good short-term (well, ok, they do, when it comes to hot-potato issues like Social Security), but more based on political ideology, which is amazingly stupid.

Take Dubya's massive tax cut. He first proposed it when the economy was growing by leaps and bounds. Now let's assume that the current economic bust didn't happen, and Dubya still got elected and got his big tax cut. What would've happened? That's right...he would've further stimulated an already overstimulated economy, and Greenspan would've had to slam on the brakes via very high interest rates. A real case of the wrong solution at the wrong time.

But did Dubya care when people told him this? Nope. Because he's an ideological conservative. It's simply a case of luck that the economy is now in a position where his tax cut will actually help, rather than hurt. As they say, its better to be lucky than good.

Not to say that Dems are much better. During the go-go years of the '90s, it would've been nice if the govt had been a bit stricter on spending, and we had run bigger surpluses in order to pay off the debt faster. But its not like the Dems ideologically believe in restricting the growth of social program spending, right? The one major case of them doing that (welfare reform) nearly split the party, and it was almost as much a political move as 'the right choice', in that it kicked the legs out from under Dole during the '96 election. The poor guy had nothing to run on after that, and Clinton clobbered him in the election.

I agree with you that 'looking good' is a factor, but you have to understand, today's politicians are more ideological than ever, and they do not listen to pragmatism and what is actually needed much anymore. If an ideological politician actually solves a problem, its usually by lucky coincidence, not the strength of their ideology

--lee

[nonhuman]

Originally posted by lee vieira:
<STRONG>

Well, you're going to hate me, but I'd have to say that the opposite is true. Politicians don't seem to make economic decisions based on what is going to look good short-term (well, ok, they do, when it comes to hot-potato issues like Social Security), but more based on political ideology, which is amazingly stupid.

I agree with you that 'looking good' is a factor, but you have to understand, today's politicians are more ideological than ever, and they do not listen to pragmatism and what is actually needed much anymore. If an ideological politician actually solves a problem, its usually by lucky coincidence, not the strength of their ideology

--lee</STRONG>

Actually, we're more in agreement than you think. As you said, my point about preoccupation with image is a factor in the problem. I don't think it's the only factor, I just tend to only mention what's specifically relevant to my point in my posts so they lose a bit of perspective. Political ideology is, in my opinion, one of the worst problems in our system (which is why I refuse to formally affiliate myself with any political party).

In a way, these are both just two sides of the same problem. Excessive concern with image causes a lack (intentional or otherwise) of foresight and strong ideology doesn't allow the flexibility necessary to adapt to a changing politico-economic (is that word?) environment. These two things together essentially bind politicians�especially those with strong party ties�to an almost predetermined course of action that they're afraid to deviate from because they don't want to lose the support of either the party or the people.

I wish I could even think of a way to fix the system without rebuilding from the ground up, but so far I'm stuck.

...Introducing the next generation government for the modern age: the U.S. X. Comes with full user customization, protected budgets, and efficient multi-tasking. All on top of a rock-solid democratic foundation with a pleasing, easy to use interface. The open-source constitution allows it to evolve and improve quickly and easily and allows other countries to easily build their own government with a minimum of effort.

[Millennium]

While I do agree that the government should increase spending in times of economic downturn and then cut back when the economy goes well, I don't think it should be necessary to run up a deficit in all but the most dire of circumstances.

What I think we should be doing with the surplus (or rather, what is left of it) is saving as much of it as possible. Tax cuts are all well and good, and certainly we can afford some in times of high surpluses (and should have moderate tax cuts in such circumstances, as a measure to keep the economy running as well as possible), but we should be putting the rest towards emergency funding. Lock it away, requiring an act of Congress to then actually make use of it (with Presidential approval, of course, to act as a check).

Once a suitable emergency fund has been built up, then it should suffice for minor or even moderate crises. Only in the most extreme circumstances should it truly be necessary to run a deficit (the last one I can think of where such a thing would have been justified was -maybe- World War II).

I'm not going to say that deficits are never necessary. But they're truly needed rarely enough that most people should only see governmental deficit spending once in their lifetimes - twice, if something really bad happens. We should be working toward that end, to make this a reality. Otherwise, we should be both operating within our means, and working to reduce operating costs where feasible.

Amazing: I think BRussell and I might actually be in agreement on this one.

[gwrjr33]

Originally posted by lee vieira:
<STRONG>
Really? That's interesting, considering that Fed fund rates during the '80s (our time of highest deficit spending) varied from about 5% to 17%, spending most of the time in the 7-10% range.</STRONG>

Nice try. That 17% interest rate came at the beginning of the Reagan years - long before the debt had been run up. As the debt rose rates actually dropped.

More later. I just got in and I'm too tired right now.

[Scott_H]

Everything I read tells me that this "lock box" idea is total crap. There is no "lock box". There is no saving for the future obligation because the future obligation is too huge for any "lock box" to make a dent.

Where the does the SS surplus go? Government bonds. Who sells those? The Government. Who's buying them for the SS "lock box"? The Government. Who pays the interest on the bonds? The Government. Where does that money come from? Taxes. Who�s going to pay that? Future generations. Who�s going to pay for SS when the boomers retire? Future generations.

Where's the sense in that?

[nonhuman]

Originally posted by Scott_H:
<STRONG>Where the does the SS surplus go? Government bonds. Who sells those? The Government. Who's buying them for the SS "lock box"? The Government. Who pays the interest on the bonds? The Government. Where does that money come from? Taxes. Who
s going to pay that? Future generations. Who
s going to pay for SS when the boomers retire? Future generations.

Where's the sense in that?</STRONG>

Wait, I'm confused. The government is selling bonds to itself and paying for the interest with tax money? So basically they're just collecting taxes so that they can pay the interest they owe themselves on the money that's theirs that they invested in themselves... Why don't they just collect taxes and not bother with all that extra crap that doesn't actually do anything?

[lee vieira]

Originally posted by gwrjr33:
<STRONG>

Nice try. That 17% interest rate came at the beginning of the Reagan years - long before the debt had been run up. As the debt rose rates actually dropped.

</STRONG>

What 'try' would that be? Even if you completely discount the super-high rates of the very early Reagan years, both nominal and 'real' interest rates, even after they dropped, were still higher during the years of our worst deficits (mid-to-late '80s) than they were during times of surplus. That's already been explained.

A fair complaint one could make about the huge (and brief) interest rate spike very early in the Reagan years is that it was largely an attempt by the Fed to squeeze the high inflation that was then present out of the economy, and not really about deficit spending. And I would agree with that, both because the Fed back then explicity said that that's what it was trying to do, and because inflation is obviously a factor in setting interest rates.
But, this also debunks your argument that rates dropped while deficit spending accelerated-- they did, but only for a very short time, and only because the inflation factor was at work.

The problem for your argument is that even if you measure from the time we got inflation under control after the interest rate spike, US interest rates during the time of our highest deficits are still quite a lot higher than they were during times of surplus. A 7-10% nominal rate is still lots higher 3.5-6.5% nominal, and 4-6% real is still higher than 0-4% real.

So I guess fail to see what exactly is a 'nice try' here

--lee

[lee vieira]

Originally posted by Scott_H:
<STRONG>Everything I read tells me that this "lock box" idea is total crap. There is no "lock box". There is no saving for the future obligation because the future obligation is too huge for any "lock box" to make a dent.

</STRONG>

Yes, the future obligation is huge...I've said this repeatedly, and it's a cause for alarm.

But...would you rather face that big obligation with the national debt paid off, or would you want to face it with $3 trillion in debt, and the govt paying $150 billion per year in interest payments on that debt?

It's kind of like the difference between being in a fight, and being in a fight with one arm tied behind your back.

--lee

[gwrjr33]

Originally posted by lee vieira:
<STRONG>
The problem for your argument is that even if you measure from the time we got inflation under control after the interest rate spike, US interest rates during the time of our highest deficits are still quite a lot higher than they were during times of surplus. A 7-10% nominal rate is still lots higher 3.5-6.5% nominal, and 4-6% real is still higher than 0-4% real. </STRONG>

The fact remains that rates didn't track with the size of the deficit as you are implicitly conceding here with your aside about how the Fed used high interest rates to kill inflation. There are a lot of factors at work and simplistic arguments that high levels of debt=high interest rates fail to consider the far larger role that the global capital markets play in setting rates. During the 90's with the collapse of the Asian economies a lot of money poured into the safe haven of the U.S. This played a role in the price of money here as well.

[Scott_H]

Originally posted by lee vieira:
<STRONG>

Yes, the future obligation is huge...I've said this repeatedly, and it's a cause for alarm.

But...would you rather face that big obligation with the national debt paid off, or would you want to face it with $3 trillion in debt, and the govt paying $150 billion per year in interest payments on that debt?

It's kind of like the difference between being in a fight, and being in a fight with one arm tied behind your back.

--lee</STRONG>

Well we can do two things. Play book keeping tricks and use the SS surpluss to buy bonds to "save" the money. Or use to reduce the debt. We do that by buying bonds back from people. What's the difference? There's one, I guess, but it's slight and little more than a book keeping trick either way.

[lee vieira]

Originally posted by gwrjr33:
<STRONG>

The fact remains that rates didn't track with the size of the deficit as you are implicitly conceding here with your aside about how the Fed used high interest rates to kill inflation. </STRONG>

Mmm...no, I was merely being intellectually honest and stating the truth: that other factors are involved. And so they are. But that doesn't mean that deficit spending doesn't lead to higher interest rates.

Think of a sports analogy: Height alone does not guarantee an NBA career. Other things matter: hand-eye coordination, strength, vertical leap, agility, mental toughness, etc. But all other factors being equal, gee, it sure is nice to be taller than the other guy. There is a cause-effect correlation between height and an NBA career, even though other factors come into play.

The fact remains...once inflation was brought under control by the Fed, both real and nominal interest rates in times of surplus were lower than they were in times of massive deficit spending.

<STRONG>There are a lot of factors at work and simplistic arguments that high levels of debt=high interest rates fail to consider the far larger role that the global capital markets play in setting rates. During the 90's with the collapse of the Asian economies a lot of money poured into the safe haven of the U.S. This played a role in the price of money here as well.</STRONG>

Well, I'm glad that you agree with me that there are other factors at work; but it puzzles me that while acknowledging that, you seize upon the most simplistic correlation of a very brief timeframe to bray about how rates fell while the deficit was rising, when its obvious that the overriding factor in that timeframe was the Fed's inflation-fighting efforts, and that longer-term trends seem to support the deficit-interest rate link. Curiouser and curiouser.

And while I don't deny that capital flight plays a role in the price of money, even if you throw out the Asian financial crisis period, guess what? Yup, surplus interest rates are still lower than during the big-deficit years.


--lee

[lee vieira]

Originally posted by Scott_H:
<STRONG>

Well we can do two things. Play book keeping tricks and use the SS surpluss to buy bonds to "save" the money. Or use to reduce the debt. We do that by buying bonds back from people. What's the difference? There's one, I guess, but it's slight and little more than a book keeping trick either way.</STRONG>

Whatever gets the national debt off our backs faster

And while the difference in approaches may seem slight, come now...surely you know what happens over the long-term between having a T-Bill, CD, or whatever pay a 3% rate, and one that pays 4%? Short-term, the difference is slight, long-term, its huge.

--lee

[Scott_H]

Originally posted by lee vieira:
<STRONG>

Whatever gets the national debt off our backs faster

...
--lee</STRONG>

Okay so then we should use it to buy back bonds. Everyone agree? GOOD! Go to Congress!

[BRussell]

Originally posted by Millennium:
<STRONG>Amazing: I think BRussell and I might actually be in agreement on this one.</STRONG>

We mustn't be trying hard enough.

But I'm on the verge of believing Scott's & gwr's idea that having a surplus is basically pointless. What I still don't get is why paying down the debt isn't a good idea, if it can reduce the interest payments that eat away at the budget. Wouldn't it be better to have either lower taxes or increased spending on important stuff, than just wasting it on interest payments?

[abo]

Sorry to be the pessimist/realist in all this, but no matter what you do about the budget (balance it or spend huge gobs of money) and no matter what you do about interest rates (Greenspan can lower them to zero), the economy is still going to go down. For their own political benefit, the Clinton/Rubin/Reich team allowed a bubble economy to develop. This made many feel rich and all cozy and warm inside, but it was a fake, and we're all going to pay the penalty. The stock market is sending forth the signals, and it would already be a Hell of a lot lower except that many still believe that there has to be a rebound because 20% annual returns are somehow natural. They haven't begun to sell, like deer caught in the headlights. Now the housing market will begin to tank (already the case in Silicon Valley...).

[davesimondotcom]

I don't think that deficit spending is a good idea, but I don't think that is what Reich's point is. I think what he is saying is that the preoccupation with the "surplus" is out of control. It is more responsible to be closer to a zero than to run a surplus or deficit.

Basically, those who are blaming the "massive" tax cut for the use of 9 billion dollars of the social security surplus (it's not a "trust fund") are being disingenuous. The fact is that Messers Gephardt and Daschle have spent that "trust fund" every time in the past.

Think about it this way, when there is a "surplus," it's like giving my wife a higher credit limit on her card. She spends it. The Congress will spend it. But what they really should do is refuse it and send it back to those of us who earn it.

In a family's budget, when the income goes down, like when I was laid off, sacrifices have to be made. We don't eat out as often. We cut our subscriptions to magazines and to premium channels on TV. So the economy has effected every aspect of our lives.

Meanwhile, the Federal government considers it a "cut" when they get more than last year but not as much as they asked for. Agencies aren't cutting back. When was the last time you heard of a massive Government worker layoff? When was the last time you heard of the Feds "restructuring" for greater efficiency?

The simple fact is that what both Republicans and Democrats want is to promise people more give aways to get more votes. However, the dirty little secret is that we PAY for all the give away programs. Sure, they say that the "rich" will have to pay "their fair share" but it comes down to all of us who pay taxes. So when you get "free" prescription drugs for your over 65 mother - it's the same as if she had you pay for them. You just pay it in a different way, through your taxes.

What needs to be kept in mind is that money in the public sector gets spent and circulates. It stimulates the economy. Money in the "surplus" just sits there. It does nothing to help you or me get a job or pay our bills.

[gwrjr33]

Originally posted by lee vieira:
<STRONG>
Well, I'm glad that you agree with me that there are other factors at work; but it puzzles me that while acknowledging that, you seize upon the most simplistic correlation of a very brief timeframe to bray about how rates fell while the deficit was rising...</STRONG>

You're the one who first chose the time period.

<STRONG>... when its obvious that the overriding factor in that timeframe was the Fed's inflation-fighting efforts, and that longer-term trends seem to support the deficit-interest rate link. Curiouser and curiouser.</STRONG>

Which is to say the link that you see between interest rates and the size of the deficit is not at all obvious.

<STRONG>And while I don't deny that capital flight plays a role in the price of money, even if you throw out the Asian financial crisis period, guess what? Yup, surplus interest rates are still lower than during the big-deficit years.</STRONG>

Throw out the Asian financial crisis and you still don't have a region that is in the same shape economically that it was during the 80's. Your argument is that the deficits we ran created a competition for funds that drove up rates. Well how about the competition for capital that came from a Japanese economy that grew dramatically all through the 80's? This same economy stopped growing (for all intents and purposes) in 1989. It's true that much of their capital was formed by completely out of whack domestic real estate values in Japan and Japanese rates have been at or near zero for years. But still, capital that is locked up in investments that realize no return is still capital that's unavailable to others and the numbers we are talking about easily dwarf the effects of all but the largest deficits we had.

For example, Japanese automakers which kept building factory after factory all through the 80's have been attempting to lose excess capacity for years now. Actually, all automakers are trying to do this. That's why Daimler bought Chrysler, BMW bought Rover, GM bought Volvo and Saab, Ford bought Jaguar and increased it's stake in Mazda and Renault took a stake in Nissan. The last thing the world needs is another auto plant. Guess what that does to the competition for capital? And that's just one sector. It's true that tech took up some of the slack but how many tech companies used IPOs instead of bank loans and how many others used the sky high valuation of their stock as a private currency to buy up other companies? And it is also true that China also has taken up some of the slack with it's demand for capital. But China's economy is nowhere near the size of Japan's...

Lots and lots of variables... All of them, IMO, of more concern than the size of our deficits...

[ 09-04-2001: Message edited by: gwrjr33 ]

[zigzag]

I can't pretend to understand fiscal policy as well as some of you - it has always seemed like a shell game to me - but I do have a couple of things to say that might be of interest:

1) Is there anything to the argument that government debt is appropriate insofar as it represents borrowing for the capital (as opposed to operating) budget? The premise being that large governments are like large corporations, and even the most sensible corporations use debt for capital expenditures (e.g. building and infrastructure, etc.). I'm not advocating one way or the other, but the fact that there may be two budgets - capital and operating - never seems to enter into the debate. Is it relevant? Anyone?

2) I've heard wealthy WWII-generation businessmen say "If you want to live like a Republican, vote like a Democrat." Meaning that it's governemnt spending as much as anything that creates economic opportunities. I'm not necessarily advocating, I just think it's an amusing concept.

[lee vieira]

Originally posted by gwrjr33:
<STRONG>


Lots and lots of variables... All of them, IMO, of more concern than the size of our deficits...

</STRONG>

Well, you're certainly entitled to your opinion...I can't argue with that.

All I can say is that a great many economists disagree with it, that's all

-- lee