Peterson/CBO Beat for Austerity Goes On!
Recently, I've been writing about oligarchs advocating for entitlement cuts and austerity. I've discussed attacks on entitlement benefits for the elderly from Abby Huntsman (of MSNBC's The Cycle) and Catherine Rampell (a Washington Post columnist), both the children of well-off individuals. These posts have come in the context of the English language release of Thomas Piketty's Capital in the Twenty-First Century, and the more recent pre-publication release of a study by Martin Gilens and Benjamin I. Page using quantitative methods and empirical data to explore the question of whether the US is an oligarchy or a majoritarian democracy. They conclude:
”What do our findings say about democracy in America? They certainly constitute troubling news for advocates of “populistic” democracy, who want governments to respond primarily or exclusively to the policy preferences of their citizens. In the United States, our findings indicate, the majority does not rule -- at least not in the causal sense of actually determining policy outcomes. When a majority of citizens disagrees with economic elites and/or with organized interests, they generally lose. Moreover, because of the strong status quo bias built into the U.S. political system, even when fairly large majorities of Americans favor policy change, they generally do not get it.”
With this as a backdrop, today I want to de-construct a recent statement by Michael A. Peterson, President and COO, of one of the centers of American oligarchy, the Peter G. Peterson Foundation (PGPF), and the son of the multi-billionaire Peter G. Peterson, commenting on the CBO's Report earlier this month, on its updated budget projections for 2014 - 2024.
Michael Peterson begins his commentary:
"CBO's report shows that the current period of declining deficits is a temporary phenomenon. In fact, our deficits will begin rising again in just two years — and that’s before the major long-term drivers of our debt kick in. . . . “
If there's a recession due to the Federal Government's attempts to cut rather than increase deficits, we may get rising deficits due to the appearance of a serious recession. This statement of Peterson's assumes that Federal deficits are bad and that declining deficits or even surpluses are good. But this only betrays either his lack of understanding of basic macroeconomics, or his blatant dishonesty.
This isn't rocket science. Divide the economy into two sectors; the Government sector and the non-Government sector. In any time period dollars flow between these sectors. There are only three alternatives: more dollars can flow from the Government sector to the non-Government sector (that's a Government deficit and a non-Government surplus); more dollars can flow from the non-Government sector to the Government sector (that's a Government surplus and a non-Government deficit); an equal amount of dollars can flow in both directions (that's a balanced budget and a net gain of zero for both sectors).
So what's best for the domestic private sector (you know, the constituents Congress is supposed to be accountable to)? Well, the non-government sector can be divided into the domestic private sector and the foreign sector. In the United States, we have perpetual trade deficits where more dollars flow from the private sector and the Government sector to the foreign sector than flow in the other directions. So, given this reality, unless we think its better to have the domestic private sector running a deficit rather than making money (having a surplus), we ought to be clear that it is best not only for the private sector to have a surplus relative to the Government, but also for that surplus to be big enough that it makes up for the private sector deficits relative to the foreign sector.
But, of course, that means it is best for Congress's constituents for the Government to be running a deficit at least big enough to create that private sector surplus. In fact, it is best that the deficit be big enough to support full employment among those constituents so that everyone who wants a full-time job at a living wage can get one. That last is not just about the size of the Government deficit, but also about spending Government money in the right way, rather than on things that will have only small pay-offs in creating jobs.
But still, the fact remains that we need deficits and that CBO's projections that the deficits will be rising again may be good news for the economy rather than bad news that Peterson should be worried about. On the other hand, if we did anything to further reduce the deficit to a level below the CBO projections, then that may well be bad news for the economy that contra-Peterson we ought to be doing everything to avoid.
But what about that public “debt” Peterson refers to? Well, he looks at the debt as the accumulation of deficits and surpluses over time, which is why he's worried about the increasing deficits CBO is projecting. But, I'm afraid he's conflating two different things, and also assuming that the public debt will be harmful to the US.
Unlike the accumulation of deficits and surpluses, the debt subject to the limit is the value of outstanding US debt instruments at any time. That number can be equal to the accumulation of deficits and surpluses, provided the deficit spending of the Government is always accompanied by its selling debt instruments subject to the limit matching the amount of deficit spending it will do. But this isn't a necessary condition for running a deficit.
Deficit spending can be accompanied by selling debt instruments that aren't subject to the limit such as consols. In addition, deficit spending can be accompanied by seigniorage revenues, or sales of Federal assets. Seigniorage can even be used to pay down old debt without issuing new debt.
So, over time we can create a situation where the net accumulation of deficits is less than the debt subject to the limit. We can even create a situation where there's no debt subject to the limit outstanding, but where we have new deficits every year to add to the accumulation of private sector nominal wealth.
So, if Peterson is really so worried about the debt subject to the limit, why doesn't he start advocating for using platinum coin seigniorage or consols to pay down or pay off the debt, rather than advocating for spending cuts and/or tax increases?
”. . . Interest costs alone will be a staggering $5.8 trillion over the next 10 years, becoming the third largest 'program' in the federal budget, crowding out important investments in our own future.”
CBO's projections always reflect the immediate past experience. If the past is one of low deficits and/or surpluses then CBO projections are likely to overshoot in the direction of lower deficits and surpluses and lower interest costs; but if the opposite is true, then CBO overshoots in the direction of higher deficits and higher interest costs. The past few years have been ones in which CBO projections consistently overshot what actually happened to our deficits, and so did their estimates of interest costs.
For example, looking at CBO budget projections on interest costs (p. 5) for the period of 2011 – 2020 published in March 2010, we can match these with actual results. Here are the 2010 projections for 2011, 2012, and 2013 in billions of dollars: 244, 298, and 365. And here are the actuals: 227, 220, and 221. In each case CBO overshot the interest costs. For 2011, they were 7.5% too high; for 2012 they overshot by 35%; and for 2013 the overshoot was 65%. Notice that the percent error increases for each year after the projection. The mean percent error for the three years where we have actuals is 36%.
CBO develops new projections at least twice per year, so, there were new projections on interest costs in 2013 covering the period 2014 – 2023 which included the 7 year period from 2014 – 2020. Assuming for a moment that these projections are right on the mark, so that they turn out to be the actuals for 2014 to 2020, and comparing them again to CBO's 2010 projections for 2011 to 2020, the projection errors, taking CBO's own 2013 projections for 2014 – 2020 as actuals, are all overshoots: 2014 94%; 2015 96%; 2016 85%; 2017 69%; 2018 54%; 2019 47%; and 2020 44%. In summary, assuming CBO has no more overshoots from now until 2020, the mean percent error of their 2010 projections would still be 60% even including the first three years where the percent errors might be expected to be smaller. Applying this analysis to Peterson's $5.8 Trillion in additional debt over the next decade and assuming that CBO's projection accuracy hasn't increased since 2010, one can see, if one really thinks that the size of the debt increase is important, that the additional debt may amount to no more than $3.6 Trillion.
I also hasten to add that the assumption that the actuals for 2014 – 2020 will not deviate from CBOs 2013 projections for 2014 – 2020 is very unlikely to match what will happen, because CBO will probably continually overshoot interest costs, both because it habitually underprojects government tax revenues and also overprojects interest cost,s unless there is a sudden turn in the trajectory of the economy. In which case it does the opposite, as it did in 1999 when it projected surpluses as far as the eye could see.
So, if stagnation continues for the next 7 years which is certainly a good possibility given the drive toward austerity in both parties, then the chances are good that CBO's current 2014 – 2020 will also turn out to overshoot the size of the deficits, the size of the interest rates, and so the interest costs (provided the austerity policies don't crash the economy first). The truth is that neither the CBO nor Peterson have a clue about what those interest costs will be, because they have no reliable and valid method to project them. What they are attempting to do is to engage in debt terrorism so that they can cut domestic discretionary spending and entitlements in the service of the oligarchy and its long-term plan to increase inequality.
Apart from all this however, neither Peterson nor CBO understand that even if their debt projections were right on the money that would still not impact the Government's ability to continue to deficit spend on programs that can create full employment and a vital economy that serves all of us. The reason why is that for nations, like the United States, with non-convertible fiat currencies, floating exchange rates, and no debts in currencies they do not issue, neither levels of debt nor interest costs effect fiscal sustainability.
What does affect it is starving the economy with austerity budgets that result in the decay and destruction of manufacturing and industrial capacity, infrastructure, and skill and knowledge capability of one's young and working population, because this will reduce one's short-term potential to produce goods and services which, in turn, then limits the Government's capability to use its fiscal capacity to deficit spend without creating inflation.
”To solve this problem for the long term, we must address the fundamental drivers of our debt, which are high and rising health care costs, an aging population, and an inadequate tax system. The good news is that solutions exist and we still have time to put a plan in place that will strengthen our recovery and build a solid fiscal and economic foundation for America in the decades ahead."
Peterson is right about this, but not because there is any debt problem. Instead, it's because we need health care for everybody that drives insurance company profits and overhead out of the system, as well as a tax system where everyone pays taxes according to their ability to pay, so we can decrease the amount of inequality in the United States. Inequality is killing our democracy and creating a modern feudal system filled with oligarchs, plutocrats, and kleptocrats. We need to end that.
In the areas of health care, specifically, we need enhanced Medicare for All as quickly as we can get it. That will take care of Peterson's rising costs for both public and private sectors, though I suspect not in the way he would like. It will also allow everyone who wants it to get health care without financial hardship, which is, after all, the point of reducing costs.
”CBO’s Updated Budget Projections 2014-2024 includes the following key findings:
– CBO reports that deficits will grow in 2016, and we’ll be back to trillion dollar annual deficits in just 8 years, stating “if current laws do not change, the period of shrinking deficits will soon come to an end. Between 2015 and 2024, annual budget shortfalls are projected to rise substantially — from a low of $469 billion in 2015 to about $1 trillion from 2022 through 2024 — mainly because of the aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt... cumulative deficits during that decade will equal $7.6 trillion if current laws remain unchanged."
The intellectual dishonesty of the PGPF and Peterson is truly striking. It's true that if CBO projections hold from 2015 – 2024 that the deficit over the period will equal $7.6 Trillion. But the intellectual dishonesty comes in where the Petersons, who frequently point out that deficits are too high as a percent of GDP, completely ignore the GDP baseline when it doesn't suit their deficit terrorist purposes.
According to the current (2014) CBO Budget Report, the cumulative 2015 – 2024 GDP projection is $224 Trillion. So, the projected $7.6 Trillion deficit is 3.4% of GDP for the decade, hardly a profligate number. In fact, if the United States continues to run a 3% of GDP trade deficit, which is very likely, that leaves only 0.4% of GDP surplus (profit) for the domestic private sector over the 10 year period. If that's what happens, it will ensure that more and more Americans lose more and more wealth, because the big corporations and the 1% will surely have the economic and political power to ensure that they get that 0.4% surplus, and more, while everyone else gets progressively worse and worse off.
Also, becoming alarmed over the $7.6 Trillion figure is even more disingenuous in light of the interest cost projection of $5.8 Trillion. That means CBO is saying that only $1.8 Trillion of the cumulative deficit is due to other deficit spending. So, that leaves only 0.8% of cumulative GDP due to Peterson's other causes of the cumulative deficit; you know the “. . . aging population, rising health care costs, an expansion of federal subsidies for health insurance” he cites, whereas the interest alone accounts for 2.6% of cumulative GDP, by far the most serious contributor to Peterson's non-existent debt problem.
Apart from this disingenuousness, however, all of this is a red herring because the problem isn't that the deficit is too high. It is that it is far too low for our economy, and that if things develop this way we will surely have stagnation and a further move toward inequality. If the overwhelming majority of Americans who were hit hard by the Great Recession want to import 3 to 4% of GDP more than we export, and also want to save 6% of GDP to repair their balance sheets and provide for their families, then the Sector Financial Balances model tells us that we need to run continuous deficits of 10% of GDP per year to create and maintain full employment, and also that we have to deficit spend on high fiscal multiplier programs as well.
That implies that the $7.6 Trillion cumulative deficit projection Peterson is alarmed about is a bad joke, and if that projection turns out to be $5.4 Trillion due to the CBO's likely overshooting of interest costs, then the joke would be even worse. Given the expected growth we'd have in GDP if we created and maintained full employment over that 10 year period, we'd need something on the order of a $30 Trillion cumulative deficit to make that happen. If any politicians begin taking creating full employment seriously, I wonder how the Petersons would like those apples?
”-- Interest payments will rise from $227 billion in 2014 to $876 billion in 2024, representing a percentage of GDP that CBO reports “has not been reached in the post-World War II era."
This statement is not quite true, and its significance is way overblown. Interest payments in 2024 are $876 Billion as Peterson says. But projected GDP is $26,830 Billion. So, interest as a percent of GDP is projected at 3.265%.
In comparison, interest costs as a percent of GDP in 1991, was 3.279% according to CBO data, slightly higher than the 2024 projection. In addition, between 1985 and 1997 net interest was 3.000% (within rounding error) or above each year with the exception of 1994 when it was 2.909%. Guess what, the Republic survived for that 13 year period. Also, it is by no means certain that the net interest in 2024 will be anywhere near 876 Billion. If CBO has overshot the real number by 100% we may well be looking at half that amount (see just below) and then we'd be only be looking at net interest of 1.565% of GDP.
“-- CBO reports that this level of “high and rising debt would have serious negative consequences. Federal spending on interest payments would increase considerably when interest rates rose to more typical levels. . . .”
First, interest rates can't rise to “more typical levels” unless the Fed and the Treasury allow that to happen. The market doesn't control US interest rates. The Federal Funds rate is a policy variable which can be set and maintained by the Federal Reserve. As long as the Fed keeps that rate near zero, and the Treasury uses primarily or only auctions of 3 month securities, the interest rates on those securities will only be a bit above that near zero rate. Longer-term securities will bring the average interest up somewhat giving us an overall interest rate similar to what we've been experiencing in the past few years. But, the bottom line is that interest rates on Federal debt cannot rise unless the Fed wants them to.
Second, if the interest costs, which can never really become a fiscal sustainability problem for the Treasury, becomes a political sustainability problem, then the Treasury can always stop issuing debt, and also pay down debt while deficit spending, using platinum coin seigniorage. So, Treasury can reduce interest costs and eventually eliminate them, simply by stopping debt issuance. In short, this problem of Peterson's and CBO is a faux problem.
”. . . Moreover, because federal borrowing would eventually raise the cost of investment by businesses and other entities, the capital stock would be smaller, and productivity and wages lower, than if federal borrowing was more limited. . . .”
Again, this is just not true. Businesses can always borrow if they are creditworthy, because banks can create deposits when they make loans, without using reserves they already have. They can get the reserves they need to meet fractional reserve requirements, after they've made the loan and created their deposit. There's no way that Federal borrowing can impact this process and “crowd out” bank creation of new money.
Debt instrument sales, if great enough, can drain reserves from the economy, alright. But if that happens, then the Fed can simply buy back the securities and push reserves back into the economy. Also, the option of deficit spending without selling debt instruments is always available to the Treasury, so this “crowding out” is yet another faux problem, a tool used by the deficit terrorists at PGPF and CBO to scare the rubes.
”. . . In addition, high debt means that lawmakers would have less flexibility than they otherwise would to use tax and spending policies to respond to unexpected challenges.”
Nope, sorry PGPF. This assumes that the market for Treasury Securities can dry up. But that won't happen if the choice is to buy the securities or earn less or no interest at all on one's dollar reserves.
The Treasury actually sells its securities at auction to specially selected dealers. The dealers don't even have to use their own money to buy the securities, since the Fed will lend them the necessary reserves to buy the securities, and then, if necessary, buy the securities themselves later.
”. . . Finally, high debt increases the risk of a fiscal crisis in which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates."
Again, this assumes that the bond market has the power to determine the Treasury Security interest rates, or to force the Treasury to borrow at high rates, or to borrow at all. But as outlined above, none of these things are true.
Interest rates are a policy variable under control of the Government (ncluding the Fed); and the power of the Fed to hit its target FFR is overwhelming. Any in the market who buck the Fed's efforts to hit its target rate by holding reserves will suffer losses. Then given a target FFR, short-term Treasury Security rates don't have to be much higher than that, since any premium is a gain for people having reserves and looking for a safe place to park them.
If in an extreme case, markets get spooked and think there is a chance of default on Federal debt, then the Treasury can resort to seigniorage to show that it can always cause the Fed to generate credits that Treasury can use to repay all debts. Once this is demonstrated even once, it will be clearer than ever that there is no chance of default by the Treasury on repayment of its debt.
So, finally, the scenarios being constructed by the PGPF and their allies in the CBO are not just mistaken, but fictional, based on false views about how our fiscal and monetary systems work. CBO projections are worthless as a guide to the future, and PGPF's interpretations of them are always further exaggerated to embellish the deficit terrorist/austerian story.
Peterson and CBO aren't talking fiscal responsibility. They're talking the ultimate in fiscal irresponsibility, which is using myths and fairy tales to pursue and defend policies that create and maintain a stagnant economy, and at the end of the road, when the 99% become so poor they can no longer sustain the minimal level of demand needed to maintain the stagnation, a recession or depression.
This nation would be a better place if the PGPF closed down and if the CBO were shut down with it. We don't need a budget analysis agency whose projections are very close to worthless and whose models are based on illusions that have been refuted by the facts time and again over the past 20 years. Such an agency only serves as a focus for faux debates in Washington DC, where people use its results in a cynical and selective way to support their prior policy preferences.
(Cross-posted from New Economic Perspectives.)