Tom Weisskopf Talk on Budget Crises and Debt Myths

U-M Professor (Emeritus) of Economics Tom Weisskopf provided an outline of his talk given at the 3/28/13 WCAT Forum “Fighting Back Against Austerity in Michigan, Part 2: Protecting Community Services”.

Tom Weisskopf talk @ WCAT forum, March 28, 2013

0. Introduction: an onslaught of fiscal struggles

2010: The “National Commission on Fiscal Responsibility and Reform” (Simpson-Bowles)

2011: The Raising-The-Debt-Limit crisis of 2011, which generated the sequester plan
to scare Congress into making alternative cuts in Federal Government Spending

2012: The “Fiscal Cliff” negotiations, which postponed the sequester to March 2013,
preserved the Bush tax cuts except on very high incomes, & ended the payroll tax cut

2013: Congressional agreement to let the sequester reduce Federal spending by $85 b. in FY 2013

I will be glad to answer questions later on about these continuing fiscal struggles; but I want to talk now about the driving force behind them: the “GREAT AUSTERITY WAR” (Jim Crotty).

1. Why such determination to push AUSTERITY ?

— Ostensibly because of the fear of rising US national DEBT, stoked by DEFICIT HAWKS
(not just Republicans, Simpson-Bowles, Peter Peterson, et al.; also at times Obama)

The national DEBT – at any given time – is the sum of all past annual federal budget DEFICITS (e.g., excesses of Federal Government. spending over Federal revenues) minus any Federal budget surpluses.

So the DEBT goes up with budget DEFICITS and comes down with budget SURPLUSES;
In most years there have been DEFICITS, hence increases in U.S. national DEBT.

Conventional wisdom holds that the Government should balance its budget, not raise national DEBT.
“We must live within our means.” — Obama (in summer 2011)
“We have a moral responsibility not to spend more than we take in.” — Romney (summer 2012)

N.B.: Obama finally changed his tune in 2012, but the Republican stranglehold on Congress (via majority in House, filibuster in Senate) has kept THE AUSTERITY WAR going.

2. Do DEFICITS and growing DEBT really matter ?

The deficit hawks argue that “The U.S. national DEBT at the end of 2012 was 16+ trillion dollars — more than $50,000 per citizen. We will have to pay off that DEBT, so each of us is really $50,000 poorer than we realize.”

Wrong! No country ever pays off all of its national DEBT, because carrying that DEBT can cause a problem only if the burden on taxpayers to service the DEBT becomes too onerous. That burden in any year depends on the amount that must be paid out by the Fed. Government to service the national DEBT relative to the size of the national economy – (DEBT service payments)/GDP.

Bear with me for a few minutes as I mention some figures…

DEBT service payments are the product of (1) the part of the national DEBT held by lenders outside of the US Government (i.e., by private US. citizens, foreign citizens & Governments, and the Federal Reserve System) and (2) the average interest rate paid by the US Government on the outstanding DEBT.

Consider the year 2012: US GDP and US total national DEBT were roughly $16 trillion. But roughly $5 trillion of the DEBT was held by the Soc. Sec. System and other parts of the Federal Government. This $5 trillion did not impose any repayment burden on taxpayers; the Government in effect repaid itself to service it. So the burdensome part of the U.S. national DEBT amounted to about $11 trillion ~ 70% of GDP. At the average interest rate of a little over 2% in 2012, US DEBT service payments came to roughly a quarter trillion $, which was just 1.5% of US GDP.

This is a lighter DEBT service burden than in almost any of the last 30 years, when the burden averaged 2.5%. And it constitutes just under 6% of total Federal spending – the lowest figure since the end of World War II.

3. A brief look at US Federal Government DEFICITS and DEBT (since WW2)

Years of budget SURPLUS: 9 years between 1945 & 1969; afterwards only 1998-2001.

So in almost all years since the 1960s the US national DEBT has been rising.

The DEBT increases were greatest under Presidents Reagan & G.W. Bush – in both cases due to big tax cuts (mainly for the rich) and big increases in military spending (not needed)!

Budget SURPLUSES resulted in significantly declining DEBT only in the late Clinton years – thanks to tax increases in the early 90s and strong economic growth in the late 90s.

Republicans allow national DEBT to rise, then demand that Democrats do something about it!

Government DEFICITS surged under Obama from 2009-12, mainly because of the economic crisis – which automatically reduces Federal Government revenues and raises Federal Government spending. In addition, the Obama STIMULUS legislation – designed to boost economic growth – both cut taxes and raised Federal Government expenditures in 2009 and 2010, helping to limit the depth of the crisis.

Since 2011 a fiscal policy of AUSTERITY has replaced STIMULUS, so Government spending & public sector employment at all levels have been steadily declining – more than ever before (except at the Federal level right after WW2). And the Federal deficit has been coming down!

The DEFICIT HAWKS who insist on cutting taxes, and cutting Government spending even more, are clearly not that interested in reducing the national DEBT, because a policy aimed at that objective would call for higher taxes and faster economic growth.

What the AUSTERITY WAR does accomplish – and the real reason most of its proponents are waging it – is to “starve the beast” of government…at the national, state and local level. “Starving the beast” may be good news for the 1% whose taxes get lowered, but it’s bad news for the economy and for most of us – since government provides indispensable services.

4. Why DEFICIT spending – adding to US national DEBT – is actually desirable now

When the US economy is in recession, priority should be given to reducing unemployment and raising the rate of utilization of productive capacity, which will raise GDP and thereby also help to reduce the burden of DEBT service payments. What is preventing this from happening now is not the growing national DEBT, but a lack of overall demand for the goods and services the economy is capable of producing.

The Federal Government is uniquely well-placed to provide needed demand STIMULUS, which it can do precisely by spending more than it taxes – for example, by distributing funds to state and local governments and public institutions so they don’t have to keep shrinking their activities and laying off workers. This means running a larger Federal budget DEFICIT in the short run; but it makes it easier to manage the national DEBT in the long run.

For future generations of Americans there are much bigger threats than higher national DEBT. For one thing, the threat posed by global warming, with consequent sea level rises and ever-greater intensity of storms and droughts, which will significantly reduce economic growth and impair the quality of life. For another, the threat of underfunded public infrastructure – schools, roads, bridges, airports, waterways, communications, etc. – that will retard the capacity of the US economy to provide needed goods and services.

Bequeathing a higher national DEBT is far less of a problem for our children and grandchildren than bequeathing a world whose climate has been compromised by global warming and a country whose infrastructure has deteriorated for lack of public investment.

5. But isn’t there a real long-run DEBT problem ?

There are ultimately limits to the use of fiscal STIMULUS. US taxpayers will suffer if the part of the national DEBT held outside the Federal Government rises to a level where the Government can’t borrow at a reasonable interest rate – as has happened in some European countries in recent years.

This tends to happen only when the ratio rises well above 100%. That is not going to be a problem for the US (with a ratio now of about 70%) – unless GDP growth slows significantly in the coming years, as it has in many European countries pursuing AUSTERITY policies.

In the long run the US Government will face a real DEBT problem if the rapid rate of growth of Medicare and Medicaid costs cannot be significantly slowed down. (This is much more of a problem than the modestly rising costs of the Social Security System).

So the real key to avoiding US DEBT problems is to undertake fiscal STIMULUS now and fiscal AUSTERITY later – only when GDP is much closer to its potential and when unemployment is down. The AUSTERITY needed then can be achieved by improvement in the US system of medical care – it’s by far the most inefficient and costly among the world’s rich countries – and by higher taxes on the rich.

6. What are the key US Government economic decision points looming ?

— the next DEBT limit increase (this summer)

Will Obama be able to resist demands from Boehner to cut Federal Government spending by the amount of the DEBT limit hike?

— FY 2014 budget (this fall)

What kind of budget will we get?

  • The Ryan (severe AUSTERITY) Budget,
  • the Murray (mild STIMULUS) budget, or
  • the Congressional Progressive Caucus “Back to Work” (strong STIMULUS) budget ?

Unless we can change the political climate, we’re most likely to get
a continuation of the status quo – medium AUSTERITY:

  • limited cuts in Social Security, Medicare & Medicaid funding;
  • bigger cuts in educational, social service, research and infrastructural funding.

WE’VE GOT TO DO BETTER !!!

One thought on “Tom Weisskopf Talk on Budget Crises and Debt Myths

  1. Pingback: Tom Weisskopf on Budget Crises and Debt Myths | Washtenaw Community Action Team

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