So You Want to Reduce the Budget Deficit?
November 9th, 2009 . by economistmom
Have you ever thought you could be WAY more fiscally responsible than our politicians are? Go ahead and test yourself on the Concord Coalition’s new online version of our “Principles and Priorities” exercise, now re-dubbed the “Federal Budget Challenge.” As was true with the old fashioned hard-copy exercise, the options you can choose among in the now-electronic version are a subset of the budget options estimated by the Congressional Budget Office.
“Principles and Priorities” has always been intended for classroom and community use, to encourage communication, collaboration, cooperation and compromise among individuals (students, citizens) who work in groups to come to agreement about a set of hard choices. Typically the participants come away from it realizing it’s not so easy to substantially reduce the deficit without giving up some things one would rather not have to give up–that just cutting out the “waste, fraud, and abuse” doesn’t actually “cut it.”
The new online version allows website visitors to try their own individual hand at reducing the federal budget deficit, and in the process serves as a simple online yet “hands on” tutorial on fiscal responsibility. Give it a whirl, but please try to make your policy choices honestly. We hope to keep track of which budget options seem to get the most support from those who participate in this online “game.” We hope that the public, the press and even some politicians will give it a try and learn where the biggest “levers” to get a grip on this huge fiscal challenge lie.
David Wessel of the Wall Street Journal already beat me to blogging on this!
UPDATE 11:20 am Tuesday: Oh, and yes, there are still some technical glitches, and there will be revisions of both style and substance, so please let me hear from you about how you did and what you learned from doing the exercise. Concord will appreciate any feedback you can provide as to what you do and do not like about the exercise, what was useful/helpful and what was not. (Thanks to those who have already commented.)
How very disappointing. I just took the “budget challenge” and was very disappointed to see very little in it on what I would call real entitlement reform. The ideas contained within were “hatchet” ideas. Raise the retirement age, make everybody pay more etc. There were very few scalpel ideas (means testing).
In addition, there was nothing in there on other subsidy programs (e.g., farm supports) that could make a material difference. While that did not make it in there, the $2 billion Amtrak subsidy did. A strange set of choices indeed.
It’s quite interesting to take the test as it clearly reflects the biases of the people who constructed it. Since the budget problem is horribly complex, it is almost impossible to represent it fairly. That said, the Concord test clearly embraces some policies (tax increases) over others (entitlement reform) and leaves other elements (the bulk of nonmilitary discretionary spending) completely untouched.
In any event, I found it interesting but you realize the policy predilections of the people who put the test together.
By the way, there are some factual errors in the explanation of certain elements. For example, the discussion of deductions doesn’t take into account the phase out of deductions which is real (I assume the math to generate the impact does do this).
As another example, the argument is made that “many economists” have determined that a $1/gallon tax on gasoline is optimal. That’s totally fine but what about state and local taxes that, were the Federal excise tax $1, would raise the total tax well above that amount in some cities (like Chicago).
Actually as I go back and look at it again, the most interesting thing to do with the test is to read the commentary about the various options. It’s quite interesting to compare the language between choices. Neutral it is not.
the options you can choose among in the now-electronic version are a subset of the budget options estimated by the Congressional Budget Office.
This limitation makes the exercise useless. Balancing the budget requires radical cuts in spending and radical changes to the tax system. None of the necessary major steps have ever been scored by CBO.
Next10 constructed a similar calculator for California. As in this exercise, they tilted the options heavily toward increasing taxes. One of the options that Next10 does offer, at the very top of the survey, is a spending increase disguised as a spending cut. It’s an expansion in Medicaid coverage that is absurdly scored as SAVING $900B due to unspecified future cuts in medical costs that would prove politically impossible to maintain, as we have already seen on a smaller scale with the “doc fix”.
This exercise needs serious spending cut options like means-testing Social Security and Medicare, cutting all government benefits by 10% or by 20%, dropping federal aid to the states, or reducing or eliminating government assistance to illegal immigrants. Another interesting option would be to copy Europe by passing a law that children born here of non-citizens do not automatically become citizens.
What’s the point of an exercise that offers you a choice to increase taxes by 20% but no choice to cut spending by 20%? Obviously, the point is to influence you to support tax increases. That’s Next10’s game, and it always has been.
Diane, you said it best at 9:09 in your NPR interview: “At the Concord Coalition we are for exactly the size of government that our society is willing to pay for.” In other words, Concord is unique in seeking to reflect public opinion, not direct it, providing information rather than advocacy.
Next10 is not an honest broker, and Concord devalues its non-partisan brand by partnering with them.
It does make me wonder if anyone has a plan that would even theoretically balance the budget.
FYI, NYT coverage of the game http://economix.blogs.nytimes.com/2009/11/10/think-you-can-balance-the-budget/
There are only two ways to cut the deficit: Increase federal taxes and/or reduce federal spending. Both reduce the amount of money in the economy.
Serious question: How does reducing the amount of money in an economy help that economy grow?
2nd serious question: At what deficit or debt level will the federal government be unable to pay its bills?
3rd serious question: In what year(s) did large federal ddeficits have an adverse effect on our economy.
P.G.,
I think you should get a basic macroeconomics textbook. I don’t mean that snarkily. It’s a serious suggestion. I think reading up on macroeconomic fundamentals would answer a lot of your questions and correct your apparent misconceptions. Also, see http://concordcoalition.org/issues and http://cboblog.cbo.gov/?p=328 and check out at least the Summary and Chapter 1 of http://www.cbo.gov/ftpdocs/102xx/doc10297/06-25-LTBO.pdf
To briefly address your questions, in order:
1) First, unless we go nuts printing money, deficits don’t eliminate the need to pay for what we spend, they only defer payment (and add interest expense). Second, as debt (particularly as a percent of GDP) grows, it puts upward pressure on interest rates, which has a negative impact on economic growth over time (look up “crowding out effect”). Deficits often (I’d say even usually) do have a very short-term stimulative effect (i.e., grow the economy in the very short term), but at the expense of economic growth over the middle and long-term (because of the crowding out effect).
2) See that CBO blog to which I linked above. On our current course, at some point it seems we would literally be unable to even service our debt even if we didn’t spend a dime on anything else, but the more relevant point is that long before such a point, continuing on our current course would do great harm to the economy. If we continued current fiscal policies for another 20 years (or tried to do so), interest rates on our debt would go up tremendously (due to threat of default or of printing money — “monetizing the debt” — to try to inflate away some of the debt), which would harm the economy greatly, as well as require even greater tax increases and spending cuts.
3) Assuming you are asking a historical, empirical question, you are, of course asking about a counter-factual — how much better the economy would have been without X level of deficits. Needless to say, a lot of factors affect economic performance and it’s hard to isolate one variable and quantify it as a factor, but what’s important here is that economists would generally agree that running the deficits that are projected for the next decade and more would have very large adverse impact on our economy.
As a note, I’m not an economist, but the above is just basic stuff.
“ . . . deficits don’t eliminate the need to pay for what we spend, they only defer payment (and add interest expense).”
You are confusing the creation of deficits with the creation of money. Deficits are created when the federal government creates unlimited T-securities out of thin air, backed only by full faith and credit, then sells them. Deficits became obsolete in 1971, when we went off the gold standard, which was done for the express purpose of giving the government the power to create unlimited money directly, also out of thin air, and also backed only by full faith and credit. The two processes are identical – equally prudent — except one requires three steps and one requires only one step. I predict one day we will create money directly, which will eliminate all debt (as well as the Concord Coalition).
“Second, as debt (particularly as a percent of GDP) grows, it puts upward pressure on interest rates, which has a negative impact on economic growth over time (look up “crowding out effect”).”
Wrong for three reasons:
1. The debt/GDP ratio is meaningless. Worse than meaningless, it’s misleading. “Debt” measures the net debt created by the U.S. government in the last 200+ years. GDP measures the value of goods and services produced this year, only. In economics, most recent measures are more meaningful than older measures. But debt doesn’t distinguish between a deficit of 50 years ago and a deficit of this year. Japan’s debt/GDP ratio is near 200. Ours is near 100. Russia’s is below 10. What does that tell you about our respective economies? Nothing.
2. If debt put an upward pressure on interest rates we would expect to see that effect in real life. Yet, historically we don’t. The highest interest rates since WWII came at the end of the Carter administration (to cure inflation), a time a relatively modest deficits. Then when Reagan had record-setting deficits, interest rates went down. Further, there is no historical relationship between interest rates and economic growth. The reason: For every borrower there is a lender. What benefits one group hurts the other. Both are equal parts of our economy.
3. “Crowding out”is a myth. There is no mechanism for increased debt (aka “money creation”) to reduce the availability of lending funds. On the contrary, increased debt increases lending funds. Today we are increasing debt for the very purpose of increasing lending funds.
“Deficits often (I’d say even usually) do have a very short-term stimulative effect (i.e., grow the economy in the very short term), but at the expense of economic growth over the middle and long-term (because of the crowding out effect).”
Do you have any historical proof of this? I’ve seen none.
“If we continued current fiscal policies for another 20 years (or tried to do so), interest rates on our debt would go up tremendously (due to threat of default or of printing money — “monetizing the debt” — to try to inflate away some of the debt), which would harm the economy greatly, as well as require even greater tax increases and spending cuts.”
History says otherwise. Twenty years ago, in 1989, the Gross Federal Debt was about $3.2 trillion. Today it’s about $12 trillion – a 275% increase. During the same period, GDP rose from $5.4 trillion to $14 trillion, a 159% increase. During that period interest rates averaged about 4% — 0% today – and tax rates are lower today. If we exactly duplicate that record for the next 20 years, the so-called debt (actually, money created) will reach $45 trillion and the GDP will be $36 trillion, and interest rates will continue to average about 4% and tax rates will continue to be lower.
Hopefully, by then we’ll have stopped borrowing, and begun to create money directly, thereby eliminating debt concerns.
“Needless to say, a lot of factors affect economic performance and it’s hard to isolate one variable and quantify it as a factor . . .”
You are correct, though one factor seems historically more important than others: Total debt (i.e., money) supply.
“. . . economists would generally agree that running the deficits that are projected for the next decade and more would have very large adverse impact on our economy.”
Actually, there is a large group of economists who disagree. They are called “Chartalists.” I recommend you go to http://www.moslereconomics.com/ and click on “The 7 Deadly Innocent Frauds.” You will learn some very interesting things.
“As a note, I’m not an economist, but the above is just basic stuff.”
I am, and what is considered “basic” one year often is disproved the next.
P.G. Garber,
Sorry, but about 2/3 through your comment I stopped reading, because you are so confused on the fundamentals — and so confidently and probably obstinately insistent on your invalid assumptions — that I’m not going to take more time to try (most likely with close to zero chance at any progress) to disabuse you of all your erroneous premises and reasoning. Maybe someone else will be more patient and generous with his/her time.
I always am sorry, but never surprised, when an admitted non-economist finds himself, ahem, “too busy” to debate economics.
I recognize however, it’s far easier to parrot the Concord line than to discuss the possibility they may be wrong.
I assume you did not go to “The 7 Deadly Innocent Frauds” at http://www.moslereconomics.com, because you are too busy and also are positive you will learn nothing there. Right?
I took the bait and checked out Garber’s website. It appears to argue that it’s OK for the government to run any deficit it wants and just print the money. The only consequence is some inflation, a small price to pay for higher employment and economic growth.
Weimar Germany demonstrated where that path leads. Inflation starts slowly, but accelerates inexorably. Before very long, investors and then the public refuse to conduct transactions denominated in rapidly depreciating currency. Without a viable medium of exchange, the economy crashes. The political consequences often include loss of freedom. This is why real economists label such a policy unsustainable.
The author of that website studiously ignores the history of where his ideas lead. He belongs in a university somewhere with the Marxist professors. These theorists think of the public as mindless automatons who would never try to evade government policies that harm them. They need to take a course in game theory.
Nice theory, but where is the inflation? Haven’t had much since 1980, and that came during modest deficits. Meanwhile the gross debt has grown something like 1500%.
More recently, during monster deficits and 0% interest, the concern was about deflation.
By the way, hyperinflations like Germany’s, Brazil’s, Italy’s et al, were caused by many factors, the least of which was deficits.
The author of that website is one of America’s more brilliant economists, and cannot be written off by “just print money.” You should read it again, with an open mind.
When theory disagrees with fact, better re-think the theory.
P.G.,
Just for laughs, what is your bottom line implication? If it’s not “Don’t worry about deficits, no matter how large they are projected to grow, because all we have to do is just print money”, then say what it is.
P.G.
To me, this discussion reminds me of climate change models. The data is poor and the models have weak fit so we have two choices, run the risk of the theory being wrong or not. On this one, I don’t see the costs of bringing the budget into balance as sufficiently drastic to incur the increased risk of default or hyperinflation. You may believe otherwise and I certainly cannot prove when the risk accelerates beyond the point of no return, but then again, neither can any of us.
So it’s simply a question of how much risk we are willing to incur. If you’re right, I’m where I was before. Let’s end all taxation. If you’re wrong, you’re going to be wrong big. Since managing to reasonable balance is possible, I strongly favor that route.
SteveinCH,
You think there are no costs to increased taxes or reduced federal spending? How about our poor health care, crumbling infrastructure, bad schools, excessive taxes, bankrupt states, Social Security problems, poverty, joblessness and homelessness, 2nd rate Internet service, NASA financial squeeze, insufficient disease research and repeated recessions?
All these problems relate to lack of money and could be reduced or eliminated if we didn’t have the unreasoning fear of deficits. Look at the twisting and turning with the health care bill — all due to unnecessary budget constraints. We tie our own hands.
As for default and hyperinflation, where are they? If Mom were right, surely the monster deficits we have incurred in the past 30 years should have been enough. This year and next, the deficits will exceed $1 trillion. Where is the default and hyperinflation?
Mom predicts disaster if we run big deficits, so we run big deficits and the disaster never comes. She is the cult leader who says the world is going to end. She leads her flock to the mountaintop to await the end of the world. When the sun comes up the next morning, the flock follows her back down the mountain, and listens to the next prediction.
When will the flock step back and think, “If what my leader predicts never occurs, why do I continue to follow her?”
Brooks, my bottom line is: “Keep increasing money creation until we reach an agreed upon target inflation — say 5% (?) — at which time increase interest rates” — which is what Volcker did in 1980. (Inflation is cured by increasing the demand for money, i.e. raising interest rates.)
I’d begin with the same rate of debt growth in the next 30 years that we had in the last 30 years. That would give us a debt of about $170 trillion in year 2039, and an average deficit of about $5 trillion.
My very first step would be to eliminate FICA and T-securities. The government would support Social Security and Medicare. Rather than creating more T-securities from thin air, the government would create money from thin air. Same process, but it eliminates the misleading notion of “debt.”
That would help address all of the above-mentioned problems.
I really wish you folks would read “The 7 Deadly, Innocent Frauds” with the spirit of wanting to learn. You already know what Mom has to say. It’s time to listen to another voice.
So P.G.’s “solution” to our projected enormous, unsustainable long-term fiscal imbalance is:
Keep increasing money creation until we reach an agreed upon target inflation — say 5% (?) — at which time increase interest rates…Rather than creating more T-securities from thin air, the government would create money from thin air
Yeesh.
You folks are cynics, and I mean that in a good way. It’s smart to be cynical about theories.
For instance, I am cynical about doctors who are on the payroll of drug companies. I assume you are, too. Their opinions about that company’s drugs are suspect. They are, in essence, medical prostitutes.
Similarly, Concord and its employees depend for their livelihoods on promulgating a certain economic philosophy. Even if they’ve discovered their theories are wrong, they would not admit it, else they all would lose their jobs.
It’s difficult to be open minded, when your life depends on being close minded.
In contrast, I’m retired. I can say and believe what I wish. I assume you too, are free to be open minded.
So I encourage you to consider the motivations of any information source. Ask yourself, “Are these people being paid to say what they say, and if so, why should I trust them?”
Brooks, I answered your question. Rather than “Yeesh,” and other forms of sneering and insults, why not discuss facts? You say the debt is “unsustainable.” What makes it so?
Or are you, like Mom, on the Concord payroll?
SteveinCH, you seem interested in polite discussion. What do you think of eliminating T-securities? … How do you feel about creating money directly, also out of thin air and also backed by full faith and credit? This would eliminate the borrowing step.
Let me presume to rudely step in, as I had personal exchanges with Mosler himself over this in the olden days, and so am familiar with the notion here.
I’ll say that for a guy who’d tell you right up front that he knew more than all the experts in the world — he used to tell a story about how he had to patiently explain the “Paradox of Thrift” to Larry Summers, as Summers looked on incredulously, which I have no doubt Summers did! — Warren was really quite a friendly and entertaining … um, what’s the word?
Hey, I see he tells the story on his web site too!
(To be clear, the govt obviously could eliminate borrowing and federal debt just by raising taxes/cutting spending enough — but the idea here is to print money instead to pay the govt’s bills while spending generously.)
Governmental borrowing is a relic of the gold standard days, and no longer necessary. Great news! Wow.
And yet, not a single government in the entire world has realized that. Nor has a central bank, a Nobel Prize economist, or even a single textbook. Not in all the decades since the end of the gold standard days.
And Reinhart & Rogoff tell us that since 1970 — well after the end of gold standard days — there have been more than 35 governmental defaults on domestic debt payable in the government’s own currency. (Remember Russia, 1998?)
Very strange that is. What’s the reason, do you think? Considering how much would be gained from eliminating all the cost of debt by all — politicians, governments, textbook writers who would sweep up sales and prizes from publicizing this great good news, the voting citizenry — it is strange indeed that no one has run with that idea.
Especially since it’s not a secret — it’s been on the Internet for years! Mosler himself was telling me this a decade ago on usenet!
Think how unlike human nature it is for so many people to so unanimously pass on such a massive free lunch. What could the reason possibly be? (Apart from the silly notion that it might be not true, don’t even consider that.) What’s your explanation?
Hmmm… Let me try to divine what you may be imagining here: “Money is a commodity. Like all commodities, it’s value is determined by supply and demand”. No problem. Supply up with demand down = inflation. OK so far.
But your follow-up is very odd: “The reward for owning money is interest. Therefore, to prevent or cure inflation, the government must increase the reward for owning money, i.e. increase interest rates”
Interest is payable in money, of course. So you are saying that when people have more money than they want to hold — their demand for money is falling because they already have too much, more than they want — your idea is to give them yet more money on their money!
Do you similarly think that the way to get a drowning man to increase his demand for water is to throw a bucket of at him — if that doesn’t work turn a hose on him?
No, please — it’s reality check time:
Remember, “money is a commodity — price determined by supply and demand”. By the same token, the interest rate is the *price of borrowed money*, determined by the amount available to be borrowed and demand for borrowing.
Now, how does the government increase interest rates? By restricting the supply of money. The Fed sells T-bills (usually) through open market operations to the public, which sends its money to the Fed (and thus out of circulation) in exchange, reducing the money supply, ceteris paribus. Restricted money supply, less to borrow, higher interest rates!
Could the law of supply and demand work any more clearly?
So your proposal boils down to: governments no longer need to borrow or tax like in the gold standard era because:
1) To pay their bills they can just print all the money they want “out of thin air” without limit, while at the same time
2) They can restrict the money supply from growing, to keep the supply of money from growing relative to demand, to prevent inflation.
So all they have to do is: grow the money supply as much as they want by printing money without restriction to pay bills AND not grow the money supply, perhaps even reduce it, to keep supply of money from exceeding demand, at the same time!
Gee whiz, why hasn’t any government, central bank, Nobel economist or textbook writer ever thought of that idea?
Um, no. The government does not control demand for anything (apart from Abrams tanks and other such things it purchases for itself.)
The government can increase the growth of the supply of money (such as by printing it) or restrain the growth of the supply of money — but unless you have some new idea for how to do both at the same time…
I’ll add one more point: When a government “prints money” to pay its bills as you suggests, it pays with “high powered money” that is multiplied by the bank deposit iteration process to considerably more than the payment amount.
This is how when they printed money to pay their bills (including national debt, as long as it retained any value) Weimar Germany produced 30,000% inflation, Yugoslavia million-percent inflation, Zimbabwe billion percent inflation, and Hungary an inflation percentage number beyond naming, with 26 zeros in it.
Yes, if only these nations had maintained higher, positive real interest rates by not zooming up their money supplies by printing money to pay their bills, not letting their money supplies rise relative to demand, it wouldn’t have happened!
A major concession on your part! You don’t know why the whole world acts why it does.
Maybe you should try to find out — before you insist again that you do know more than those who disagree with you, while admitting you don’t know what they know.
“I don’t know why the whole world acts and thinks like it does — but the fact remains that I know the entire world is wrong.”
A bit of conceit there on your part, eh? Not impressed by Occam’s Razor (if one disagrees with the entire world, who is most likely to be wrong is …? )
“If the entire world disagrees with me, then the entire world must be wrong! For I have a bachelors degree and started a small car company”. Ah, yes, I remember the word that described Mosler…
Do you believe in “cold fusion”, P.G.? That’s a wonderful promise of a free lunch too, and the entire world certainly doesn’t disagree with it any more than it does with the ideas you are pushing. So why wouldn’t you?
Well there’s mine, and you are welcome.
I am sure I have offended certain individuals, but the fact remains. I have made several attempts to introduce methods that will save the taxpayers over $200 billion tax-dollars every year, create jobs in every state and offer many other advantages, once implemented. My question is … why won’t anyone investigate my claims?
Maurice/ P.G. Re:
My question is … why won’t anyone investigate my claims?
Again, why do you imagine nobody has investigated your claims???
With more than 30-odd countries from Russia on having been forced to default on their domestic debt since 1970, wouldn’t the most reasonable thing for you to think be:
“Gee, every one of those countries must’ve thought it would be great to just print money to pay their debt rather than default, and have been sorely tempted to do it.
“Surely they all investigated the possibility of doing it — yet they didn’t. I wonder: what was their reason for not doing it?”
If everybody has investigated the claims you’ve made and unanimously concluded they are wrong, but you don’t know the reason why … well, then you don’t know something pretty important.
“I cannot tell you why another nation might prefer to default on its debt. I can’t even explain our own government’s foolish actions.”
When you can tell why and explain how come the whole world disagrees with you, you’ll be at the start of something.
Until then, you are just ever so modestly saying, “I don’t know why the whole world disagrees with me and am not going to bother to find out, because I know they are all wrong”.
Now, my pet peeve is why won’t anyone investigate cold fusion? It would give us such a huge free lunch for us all, why won’t anyone investigate it?
Oh, wait, they have.