Ezra Looks Over There At the Debt-to-GDP Ratio
Ezra Klein did a piece yesterday offering the conventional deficit dove position on deficits and debt. Here's a commentary on it.
Gallup's survey of voter preferences for closing the entitlement gap is incomplete It suggests the options on entitlements are like a second-grade arithmetic problem: You can either add stuff (tax increases) or subtract stuff (benefit cuts). What's missing is the option you learn about in high school: growth.
Well, actually, both Gallup and Ezra assume that “the entitlement gap” is a problem. Gallup tells the people they can solve it, by cutting or taxing further to pay for entitlements. Ezra tells people that we can also grow the economy, and that doing so is the better choice. But neither considers the possibility that “the entitlement gap” isn't of any importance because 1) Government spending on entitlements is a political choice we make in order to provide financial assets to certain groups, and 2) taxation is also a political choice we make for another reason, and that there is a connection between the two operations only in our mistaken and foolish belief that we must tax to pay for entitlements, when the truth is that we must tax for only two reasons. First, to make Americans need our fiat currency, and second, to prevent or contain inflation depending on circumstances. So, our choices aren't just cut benefit benefits, or raise taxes, or grow our economy. They also include ignoring the gap between spending and tax revenues, including the entitlement gap itself, because we can afford to pay for entitlements for as long we care to without becoming insolvent, regardless of tax revenues.
No one cares about the size of a country's debt. People care only about how big it is in comparison with the rest of the economy. That's why economists and rating agencies watch the debt-to-GDP ratio: $1 trillion in debt will crush an economy that produces only $500 million every year, but it's meaningless for an economy that produces $20 trillion a year.
Rating agencies are not important for Governments sovereign in their own currency. Ezra, Gallup, and mainstream economics all need to learn that. The ratings agencies can only have influence on the interest rates the US pays on its Treasuries if we want to them to have such influence. The Treasury and the Fed together can target and maintain the interest rate they please, whatever the agencies say. The Japanese have proven that empirically, but there are studies that explain why this is the case, like this one.
Also, whether or not people look at the debt-to-GDP ratio, this ratio is of no importance in affecting the sustainability of the US Government's capability to continue spending on entitlements or anything else. However high or low this ratio is, the US Government has the same authority to spend what it needs to spend on entitlements, or anything else. Fiscal sustainability is not measured by this ratio. Nor is it in any way constrained by its size.
Again, the Japanese have proven that, since their public debt-to-GDP ratio is currently three times what ours is. But apart from that empirical evidence, the Federal Government, has the constitutional authority to spend money on entitlements by marking up non-Government sector accounts. That's just a bare fact of monetary operations and Treasury-Fed authority. This authority may be constrained by Congressional rules or spending appropriations. But such constraints are a matter of Congressional choice. They don't establish that the Government (including Congress) doesn't have the ability to pay for anything it ought to pay for. All they mean is that Congress doesn't choose to have the Executive spend, and, in the act of spending, create the necessary money.
Our problem, put simply, is that our debt is growing faster than our economy. A lot faster. But you can't solve that by cutting spending or raising taxes. Those options will buy you time, but nothing more than that. Think of it this way: If you've got $1 trillion in debt and it's growing at 10 percent a year, you can cut $80 billion -- a huge cut in one year -- and be back to $1 trillion in debt by the next year. What matters is the growth rate, not the number.
The problem here is Ezra's “you.” He seems to think that “you” or “I” or any standard organization, or State of Local Government are all like the Federal Government, so we can think about the effects of cuts in the Federal Government's budget in the same way we think about cuts in our own. But the Federal Government is different from you and me, and from the banks, and even from sub-national Governments in the United States.
The difference is that the Federal Government is the issuer of the currency; the rest of us are its users. When we spend, that doesn't add any financial assets to the non-Government economy. But when the Federal Government spends it does add assets. Similarly when the Federal Government cuts spending it places fewer financial assets into the non-Government sector, and when it raises taxes it actually increases the financial assets it destroys.
In addition, since the Government always has the same power to issue currency whatever its debt may be, it really doesn't matter if it owes $1 Trillion in debt, or $920 Billion in debt, or $10 Trillion in debt or $20 Trillion in debt. Regardless of its debt level, it can still spend what it has to spend to meet its obligations or enable Americans to solve whatever problems America has, because it is unconstrained in its ability mark up accounts to fulfill public purposes.
On the other hand, if you or I have $1 Trillion in debt, and you cut $80 Billion of that debt in one year, you actually have saved money and reduced debt to $920 Billion. Then when your debt increases by 10% your debt will be $1.012 Trillion. If you hadn't saved the $80 Billion, it would be $1.2 Trillion. So, you or I, or anyone else except the Federal Government has increased their financial assets by saving $80 Billion. But the Federal Government doesn't increase its financial assets by saving $80 Billion, because since these assets can be created as needed, the notions of decreasing or increasing Government financial assets just don't apply. All the Government does when it 'saves', by taxing or nor spending, is to withdraw, or fail to add, financial assets to the non-Government sector.
That means the best way to solve your deficit problems is simple, at least in theory: Increase how fast your economy is growing. A one percentage point increase in your economy's growth rate is equal to about $2.5 trillion in new revenue over 10 years (not to mention it means you don't need as much social spending, as more people have jobs). To put that more concretely, whether we grow at 2 percent and 3.5 percent over the next 10 years means more to the deficit than whether we extend all of the Bush tax cuts or none of them.
This, of course, is a valid point if you're concerned about the deficit in the first place. But, once again, as long as we are nowhere near full employment we don't have to be concerned about the deficit at all. It is not a real problem, however much the deficit hawks, and deficit doves like Ezra would like to make it so. This is not to say that the growth issue is not an important one. It is. But the reason why it's important is that we want full employment, and intact families, and an increase in real wealth, and good health care, and lower poverty rates and crime rates, and a more well-educated, longer-lived and happier population, and a clean environment, and other public purposes, and not because economic growth will reduce the deficit and the debt-to-GDP ratio, which is an unimportant side effect of healthy growth.
The second best way to solve deficit problems is slow down how fast debt is growing. The big driver there is health-care costs, and so the honest answer on our debt problems is that we either need to wait and see how well the cost controls in health-care reform work, or we need to strengthen those cost controls and then wait and see how they work. . . .
Here Ezra is calling attention to the projections about “the entitlement gap” which clearly show that the primary cause of it is rapidly increasing in health care costs. These costs are a concern, but not because of the deficit or debt problem. For the much more important reason that the rapid increase in health care costs has already created an unbalanced economy in which a much greater percentage of national spending goes to health care than in other comparably developed nations with more universal coverage and better results than ours.
Just to provide two examples, Canada spends 2/3 of what we do as a proportion of its GDP, has higher life expectancies, lower mortality rates, and better results on most international health care indicators. Taiwan spends about 1/3 of what we do on health care as a proportion of its GDP. Both countries have universal coverage, spending a fraction of what we do. And Taiwan's citizens have unrestricted choice in providers and visit medical practitioners an average of 14 visits per year (so much for rationing). Both Canada and Taiwan have Medicare for All systems. In fact, one of the models for Taiwan's program was our own Medicare system. Medical costs in both nations are increasing, as they are here. But the rates of increase are lower than they are for Medicare here, and much lower than the cost acceleration in our private sector.
Our health care sector is just not producing enough “real wealth” in the sense of better outcomes for most Americans, given the proportion of resource allocation we devote to it. It is extracting financial assets from the rest of the country at a rate that has increased since the passage of the so-called health care reform. The future outlook is for more rapid increases in health spending than spending in other areas of the economy, making the health care proportion of the economy even more unbalanced from a public purpose point of view than it is now. So for a reasonable balance to be restored, we badly need controls on health care expenditures.
Finally, Ezra talks about “the honest answer” to our debt and deficit problems being in health care cost controls. But he doesn't really mention “the honest answer” to the real problem of devoting too much of our national economic activity to a health care industry that is extracting financial assets from the rest of the country, and making us a less democratic country. That honest answer is not to implement the inconsequential cost controls in the health care reform bill, which will do little to change the proportion of economic activity that goes to health care. It is, instead, to get rid of the present system of extractive private health insurance companies and replace them with Medicare for All. If we do that, the Government will be able to negotiate costs with both the providers and the drug industry, and, as happened in other countries with either Medicare for All, National Health Care, or highly regulated private systems, this will rapidly bring costs down as a proportion of economic activity, most probably with a great improvement in health care outcomes. Ezra doesn't provide this “honest answer” because first, he's focused on the irrelevant question of reducing Federal deficits, and second, as part of the “village” he will only talk about “answers” that he believes have some hope of being implemented in the current political context.
Unfortunately, such answers aren't “honest answers” to the problem of health care expenditures. Honest answers may be politically feasible or not. They are what they are. On the other hand, the politically feasible answers are not made honest because they are feasible. They also are what they are, and they may not solve any worthwhile problems.
In this case, Ezra's “honest answer” just creates an illusion that we are doing something to solve a serious problem, when what we are really doing is making slow incremental progress toward solving an illusory problem, namely keeping the Federal public debt-to GDP ratio below some arbitrary level yet to be set. This is not the kind of progress we need.