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« Lies, More Lies & Richard Fuld: Lehman's Fraudulent Dick | Main | Song: Brother, Can You Spare Some F.R.A.U.D. - The Federal Reserve's Accounting Unit - The Dollar »

The Grand Budget Compromise Cuts A Measly $21B From Next Year's Budget Of $3.7 TRILLION - Congress Creates A Rube Goldberg Doomsday Machine

By Randy Wray, Professor of Economics at the University of Missouri-Kansas City and Senior Scholar at the Levy Economics Institute of Bard College.

Source - EconoMonitor

Don’t you feel relieved? After weeks of threats, hostage-taking, and other forms of deficit terrorism, our two political parties have finally “compromised” on what was always a foregone conclusion.

Washington got what it wanted—a down payment on destruction of the last remnants of progressive policy. Soon, it will be 1929 all over again. We can make believe that the New Deal and Great Society programs never existed, and go back to the good old days when it was every “man” for himself. To hear Michelle Bachman tell it, we might want to go back to the even better old days before the Civil War when men were for sale, leading to more stable families living in slavery on plantations run by benevolent slave masters.

Superficially, the spending cuts don’t look like much. The grand compromise cuts $21 billion next year from a budget of $3.7 trillion—sort of like foregoing one Big Mac from your annual food budget. In spite of all the talk about needing to take the medicine now, rather than kicking the “deficit crisis” down the road, Congress adopted a plan to kick that can right down the interstate.

It might make you wonder what the fuss was about.

All sides expressed their displeasure, as they held their noses and voted for the putrid heap of a plan. That is pure political theater, of course. Republicans fear a backlash from the fringe right that wanted immediate elimination of all social spending. Democrats fear a backlash from working Americans—the 70% or so who vehemently oppose any cuts to Social Security, Medicare, and Medicaid. And so both sides say they hate the plan, but under the circumstances it was the best that could be secured.

And both sides agree that the looming fiscal crisis still looms. So they have created a Rube Goldberg machine to do what they know they cannot: the bill contains automatic triggers and across the board cuts that take effect if Congress cannot ram through cuts to so-called entitlements.

I do not want to go deeply into the details, but here is a quick summary. The bill contains $1 trillion in cuts, spread over coming years. It creates a bipartisan committee that is supposed to find another $1.5 trillion to cut by Thanksgiving; Congress must vote on the recommendations by Christmas. If all that fails, $1 trillion across the board cuts will take effect. In return the debt limit is raised by $400 billion now, and another $500 billion later. Congress can vote to stop the debt limit hikes, but the President can and will veto such a vote—letting Congressional weenies save face.

Finally, by New Year’s day Congress must vote to send a balanced budget amendment to the states; if they vote to do so, Obama can ask for a $1.5 trillion increase to the debt limit; otherwise he can ask for only $1.2 trillion. Congress gets to vote on that increase, too, but Obama gets to override that, too! (Don’t you love the way each milestone coincides with a national holiday?)

Are you still following? All of this is designed to allow Congress to shirk its job, of course—to build a Rube Goldberg machine to accomplish what our elected wieners (sorry, Anthony, you saw it coming) know would hurt them in the next election.

Here is the Beltway’s fantasy. The US government is running out of money. The main cause is the “entitlements”—all those deadbeats expecting hand-outs from Washington. Alan Simpson, co-chairman of the President’s previous deficit commission, put it this way: “We’ve reached a point now where it’s like a milk cow with 310 million tits! Call when you get honest work!”

I want to be clear. This is not a partisan position. Everyone in Washington accepts it—from the progressive think tanks to the nuttiest free marketeers; from the politicians to NPR’s reporters; from Pete Peterson’s hedge fund cronies to organized labor. All present a unified front against budget deficits—particularly those due to “infinite horizon” deficits that result from “entitlements”.

If we project Social Security benefit payments and payroll taxes through infinity, and subtract revenues from spending, we get a big deficit number. If we then project Medicare spending and tax revenues through infinity we get an even bigger number. Tens of Trillions of dollars.

And so we need that Rube Goldberg doomsday machine that cannot be stopped by human hand. It all kicks in automatically to slash entitlements because we know that neither voters nor their representatives will act to avert fiscal catastrophe that will sooner rather than later bankrupt the US government.

Budget deficits as far as the eye can see do sound mighty scary. They might even sound unsustainable to the untrained. But there are so many things wrong with such a calculation that it is difficult to know where to start. In previous posts I have dealt with deficits, debt, and the debt limit from other angles. To put it simply, a sovereign government that issues its own currency can never face an affordability constraint; it cannot run out of its own money. The trillion-dollar platinum coin proposal that I discussed helps to drive that point home.

I will not go further into the affordability issue today; here I will address the long-term projections of deficits, and the possibility of dealing today with deficits that might occur in the distant future.

Let us begin with Medicare because that one is all too obvious. It is critical to note that Medicare’s infinite horizon deficits result from the assumption that healthcare expenses will rise faster than national production and income. Forever. That cannot happen. It will not happen. As Herb Stein says, unsustainable processes won’t continue.

The problems with such a projection are not unique to Medicare. Every firm in the country that provides medical insurance will go bankrupt if the projections prove correct. Every household in America will go bankrupt. It will not happen. It is a silly exercise in stupid projections. Yes, we must and will do something about healthcare costs. Looking at Medicare, alone, is of no help whatsoever.

We need fundamental reform of the entire system. We need what every other developed country in the world has: single payer. We need more government, not less. Medicare is not the problem, it is the solution. Medicare for all.

What about Social Security’s infinite horizon deficits? First, the whole exercise is wrong-headed. Let us say for a moment that a half century down the road the US will find that (current law) promised benefits resulting from Social Security (and Medicare) cannot be met out of (current law) taxes. What can we, now, do? Cut benefits now? Raise taxes now? Why?

Today, there is no problem—revenues and expenditures are approximately in balance (indeed, until the recession hit, wiping out revenues, the program ran a huge surplus).
Today’s seniors have worked for thirty or more years, paying taxes, working hard, maybe saving a bit on their own, with the expectation that they could have a decent retirement in 2010. The deficit hawks want to tell them it was all a lie? Government will default on its promises? No way—it will not happen.

More probable is a cut to future benefits, something the doomsday machine can be programmed to do. We will tell today’s young people that their benefits will be lower in, say, 2050, than what their grandparents are receiving today. Why? Because today’s infinite horizon projections show future deficits.

Really? Let us say we pass such a law. Will it reduce benefits a half century from now? Tomorrow’s policy making is going to be bound by today’s decision? Get real—today’s Congress cannot tell our grandchildren’s Congress what to do.

In 2050, policy makers will react to the democratic demand of voters to provide for seniors. Projections will—with certainty—prove to be wide of the mark. Maybe they will be overly optimistic; more likely they will be overly pessimistic. In any case, we cannot bind policymakers of the future.

We can, purely for today’s silly budgeting procedures, reduce future benefits and raise future taxes. Why not go whole hog—mandate elimination of Social Security benefits in 3050, but raise the payroll taxes on that date. No more entitlements for seniors in 3050! Mandate government investment in Soylent Green factories instead! Now, discount the stream of revenues and expenditures back to today.

As a pure accounting procedure, we can eliminate the infinite horizon deficits. All is fine and dandy, job well done, no “unfunded entitlements”, deficit hysterians can stop hyperventilating. We have pushed the decision about caring for tomorrow’s elders into the distant future—something that we have no control over, anyway. Maybe youngsters in 3050 will decide to support them; maybe they will decide to eat them. It is not our concern and there is nothing we can do about it.

What about raising taxes now, on the supposition this could relieve burdens fifty years from now? Sorry, it does not work that way. Here’s the idea. Social Security runs surpluses (as it has done since the early 1980s) used to buy government bonds. When, it runs deficits in the future, it sells those back to Uncle Sam to cover the shortfall. But Uncle Sam must then either raise taxes or run a deficit in the rest of its budget to cover the purchases of bonds from Social Security.

What would happen if Social Security does not run surpluses now? Then in the future, to the extent that Social Security runs a deficit, Uncle Sam will raise taxes or run a deficit to cover it. Do you see any difference? No. Today’s Social Security surplus makes no difference at all for the overall budget stance tomorrow. It just accumulates claims on the US government—like a husband owing the wife—an internal accounting procedure.

Simpson claims that Social Security recipients are little more than new born calves, seeking to suckle the teats (he says tits, apparently confusing his cow with his wife) of our hard working cows down on Wall Street, who’d like to destroy Social Security so they could manage and lose retirement savings in the next big bubble.

Now, wait a minute. About three quarters of all Social Security recipients are retirees—those who have worked hard all their lives, contributing to American production. They gave us the living standard we now enjoy. Since 1935, government has held out the promise to all workers: work hard and long and you will enjoy a decent retirement. How can we possibly compare that to suckling the teats (or tits) of 310 million cows? The other quarter of recipients are dependents—widows, children, and people with disabilities. Is the metaphor appropriate?

Social Security, Medicare, and Medicaid—the greatest remaining New Deal and Great Society programs—together comprise our most important safety net. Indeed, Social Security has contributed more than any other government program to poverty reduction, and it is the most important source of income for the majority of American seniors. It is an intergenerational promise, our most important one: if you work hard during your working years, tomorrow’s workers will take care of you in your old age. And if you should become disabled or should die, your co-workers will take care of you or your family. And if you can survive to age 65, you finally get decent health care coverage.

To be sure, such a promise is precisely that—no more, no less. We cannot hold future generations to such a promise. But we can sure as heck protect Social Security, Medicare, and Medicaid today from those who want to dismantle it.

Make no mistake. The President as well as both houses of Congress are solidly aligned to gut these programs. That is what the Rube Goldberg machinery is all about.

It is time to get out the pitchforks to destroy the doomsday machine Washington is creating for us.



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Reader Comments (4)

They need the money for weapons to use against US!

6 Creepy New Weapons the Police and Military Use To Subdue Unarmed People

Aug 3, 2011 at 5:44 PM | Unregistered CommenterLiberatedCitizen
Even if they pass and ratify a balanced budget amendment, so what? They don't follow the Constitution anyway. More show for the sheeple.
Aug 3, 2011 at 6:02 PM | Unregistered Commenterj r
Everybody in the world knows what’s going down, but nobody has any power to stop the rogue USA Government. The debt ceiling is irrelevant. It was too late when Ronald Reagan left office with his massive debt. Since Reagan, the USA Federal Government has been a member of the, "living dead." There are no words in the English language to describe this level of sadness.

“In 2011 Dennis Blair, previous director of national intelligence, mentioned that 17 Americans have been killed on U.S. soil by terrorists in the 10 years since 9/11 — 14 of them in the Ft. Hood massacre. Meanwhile, auto accidents, murders and rapes combined have killed an estimated 1.5 million people in the past decade. “What is it that justifies this amount of money on this narrow problem?” WHAT ABOUT THE LIVES OF THE 1.5 MILLION? WHAT IS THE TSA DOING ABOUT THAT?

The only thing Bush proved by invading Iraq was that Sadam was a great leader. Just look at the place then, and compare it to now. Bush and his cronies will go the warmonger way of Hitler and his henchmen. Think of how great the USA and the world would be today if the US never had a military of any kind. All that money could have been used to build a Utopian society. Is the USA run by a secret satanic society? The level of stupidity of the USA leaders over the last nearly 100 years is so incomprehensible, I cannot think of any other explanation for the blatant and widespread insanity. Where does the USA go in the next 20 to 50 years? There is only one course, and it has been played out a thousand times in recorded history. The 50 states will divide up to become separate countries, or groups of states will join together where it is in their benefit. The federal government with their warmongering ways, and all their debt, will go the way of the Romans and their debt. I hope the people around the world can understand that the citizens of the USA are in no way connected to the people who control the country, and do not like or approve of the USA leadership any more than any of the other USA’s victims on the planet. Two long articles are posted on the site: facebook.com/garydonoliver
Aug 3, 2011 at 6:21 PM | Unregistered CommenterGary Oliver
It just goes to show, never send a mewler to do a cost accountant's job. And don't put stock in a guy that wears a cod-piece or gets light-headed and giggly every time he sees a sweaty soldier.

Side note: Did I see Tim Geithner hanging around the Bush neocons when they worked as a group for Senator Henry Jackson in Seattle back in 1982? I know I did. 3 or 4 times he dropped by the Mike Lowry for Senate campaign.
Clinton ran Arkansas' governor 's interference duty for Bush Mena business. For this reason, Clinton was a shoo-in for the Governor's office at that time. This business has moved to Venice, Florida and elsewhere. This would indicate George H.W.Bush has continuously controlled the White House. Bush 41 is occasionally seen at the White House. And this would further substantiate my claims of the 'coin of the realm' being removed from the U.S. by Wall Street antics and QE-2 being sent to Europe and being 'repaid' in, what? More bloody derivative , useless scrip!!??
Israel is a cold blooded board game using peoples' lives. The looting of America and the overthrow of Mexico with the Bush family gaining control of Mexico's silver and oil after they and the CIA turn on the drug gangs (post-overthrow) built up by Bush and 'come here, boy Obama' free enterprise?? Then America dies as congress mewls into the sunset? These scum balls deserve America's wrath, not me. TV CFR bullshit and lies have become America's ethos. Nice work. I wish I worked around smart people.
Aug 3, 2011 at 11:51 PM | Unregistered CommenterHoward T. Lewis III

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