“In a world in which economic reality mattered to politicians, grandiose spending plans coupled with soaring government debt would pretty much preordain grim tax policy. But we don’t live in that world. In ours, tax and spending proposals are crafted based on their appeal to target audiences of voters, with no regard for balancing books or averting financial catastrophe.”
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“It’s necessary, though probably pointless, to emphasize that neither Trump’s nor Biden’s tax plans come close to paying for the federal government’s anticipated spending spree in the years to come.”
The Real News Podcast – Modern Monetary Theory – A Debate Between Randall Wray and Gerald Epstein The Real News. 2019. https://www.spreaker.com/user/therealnews/the-real-news-podcast-modern-monetary-th Is MMT “America First” Economics? Gerald Epstein. 3 20 2019. Institute for New Economic Thinking. https://www.ineteconomics.org/perspectives/blog/is-mmt-america-first-economics On Modern Monetary Theory
“In 2016, Trump had campaigned on eliminating the national debt in under a decade. Yet by June 2020, the federal budget deficit had reached $864 billion…for just the month. That was more than the entire budget gaps in either 2017 or 2018. By September, the nonpartisan Congressional Budget Office (CBO) was projecting a $3.3 trillion annual deficit in 2020. Federal debt levels, which equaled just 35 percent of the economy in 2007 and 79 percent of the economy in 2019, would reach 98 percent. The CBO had previously warned that persistently high debt and deficits would have consequences: slower economic growth, an ever-increasing share of the budget consumed by interest payments on the debt, and reduced capacity to act should a major crisis arise.
And yet as the virus consumed the nation, even many deficit hawks were recommending more spending, at least in the short term.”
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“In the early ’80s, some lawmakers had come under the influence of a macroeconomic theory that would come to be known as “supply-side economics.” This theory held that tax cuts could, in budget parlance, “pay for themselves” by boosting economic growth so much that the federal government would actually raise more revenue if it reduced rates.
There was some trivial truth to this. Imagine a world in which loaves of bread are taxed at 99 percent. This is a world in which not many loaves of bread are produced or sold and thus not much revenue is raised from the bread tax. Reduce the rate to, say, 50 percent, and you would probably see a marked increase in the production and sale of bread—and higher bread tax revenues as a result. Reduce the tax further, and the bread market would probably expand even more. Supply-side effects are real, but they typically offset only a small percentage of lost revenue.
Some Republicans took this to mean that tax cuts of just about any kind would often, and perhaps even always, result in higher federal revenues. At some point, however, lowering rates does in fact end up lowering revenues. A 0.001 percent tax on bread might unleash a powerful market in artisanal breadmaking. It would probably not produce higher total levels of tax revenue than a somewhat higher rate would.
In reality, this simplistic version of supply-side orthodoxy was not a macroeconomic theory so much as a convenient excuse for Republican lawmakers to give their voters what voters tend to want: tax cuts without spending reductions, i.e., a government they didn’t have to pay full price for.”
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“As with many diets, it worked—for a time. Bill Clinton began his presidency by raising the top income tax rate from 28 percent to 36 percent—an increase, but still far lower than the top rate at the beginning of Reagan’s presidency. And then, following the Republican takeover of Congress, Clinton negotiated with GOP lawmakers to lower projected federal spending—when politicians talk about spending “cuts” they are often referring to reductions of planned future spending—particularly on welfare assistance. Accordingly, the deficit dropped from $203 billion in 1994 to $22 billion in 1997.
Forced to work across the aisle, Clinton and the Republican Congress had done what their predecessors had failed to do: reduce the deficit. Federal spending dropped as a percentage of gross domestic product, which boomed under the first wave of internet-induced investments—the 1990s tech boom. The rapidly growing economy kept voters from revolting, and Clinton framed the budgetary contraction not as a reduction in government services but as an end to federal overreach.
“We know big government does not have all the answers,” he said in his 1996 State of the Union address. “We know there’s not a program for every problem. We have worked to give the American people a smaller, less bureaucratic government in Washington. And we have to give the American people one that lives within its means. The era of big government is over.”
In Clinton’s second term, the already shrunken deficit ceased to exist. By the year 2000, the federal government was running a $236 billion annual surplus. Finally, the deficit problem seemed to have been solved.
The trouble with diets is that even when they work, they’re hard to stick to. That is especially true when the diet must be renegotiated among a rotating cast of 535 lawmakers and a new president every four to eight years.
And so, under President George W. Bush, deficits returned”
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“Simpson-Bowles consisted of 18 people—a bipartisan mix of a dozen members of Congress and six private citizens—tasked with producing a set of recommendations for deficit reduction. There were difficult choices ahead. The committee’s job was to suggest which ones should be made.
The commission was a classic Washington gambit in that, outwardly, it was an attempt to solve a policy problem, but in reality, it was a politically motivated attempt to avoid solving that very problem.
Nominally, the problem the committee was tasked with solving was how to reduce the deficit. But that wasn’t the actual problem it was trying to solve, because since the 1980s the solution had remained fairly obvious: To reduce the gap between outlays (spending) and revenues (taxes), Congress would need to either increase tax revenue, reduce spending, or do some combination of the two. To be genuinely effective, the tax hikes probably would have to hit the middle class and the spending cuts probably would have to hit entitlements.
The actual problem the committee was intended to solve, then, was that, despite occasional protestations to the contrary, neither congressional lawmakers nor the president wanted to do any of this.
In the end, Simpson-Bowles recommended cutting spending and increasing taxes. In particular, it recommended cutting spending on entitlements and raising some taxes on the middle class in order to broaden the tax base.”
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“of course, neither the president nor congressional lawmakers agreed to any of it.”
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“a problem with Congress—is that it can’t tell itself what to do. Not for very long, anyway. The 112th Congress in 2012 has no power to bind the 113th Congress, which means that if Congress in 2013 does not like the instructions passed down from its forebearers, it can tell the 112th Congress to go get stuffed.”
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“Trump, like most Republicans, had run against the federal debt. His promise to eliminate it completely in eight years was deeply unrealistic, backed by no specific plan, and predicated in part on Trump’s confusion of the trade deficit (which measures inflows and outflows of goods between the United States and other countries) and the budget deficit (which measures how much more the federal government spends than it takes in). But it was, at least, a rhetorical concession to the Republican fiscal politics of the Obama years.
In early 2018, House Democrats negotiated a budget deal with Senate Republicans that suspended sequestration caps and authorized $300 billion in spending above previously allowed levels. The particulars were complex, as budget deals often are, but in broad strokes, the agreement was straightforward: Democrats got more funding for domestic spending, while Republicans got more funding for the military. Trump signed the bill, proclaiming, “We love and need our Military and gave them everything—and more.” The bill, he tweeted, would also mean “JOBS, JOBS, JOBS.”
For years, Democrats and Republicans had bickered over budget priorities. With the 2018 spending bill, they resolved their differences—by agreeing to spend more on everything.”
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“What Democrats saw not only in the 2017 tax bill but in the decadeslong deficit wars was that Republicans had found a political advantage in arguing that tax cuts paid for themselves. There was a clear pattern to federal budgeting: Under Republicans, tax rates would go down, spending would increase, and the deficit would rise. Under Democrats, tax rates would rise slightly, spending would hold more or less steady, and the annual deficit levels would decline. The GOP, which had long branded itself the party of limited government and fiscal responsibility, was the party of neither.
To the party’s base, this didn’t just mean that conservatives were hypocrites. It meant they could pursue their priorities without pressure to make concessions or tradeoffs. They had an argument, a rhetorical strategy—or, at the very least, a convenient and self-serving pretext—that insulated them from the understanding of shared pain and shared responsibility.
To rectify that political imbalance, the left—particularly the young, online left, which increasingly favored aggressive spending programs far more expansive than even many lifelong Democratic politicians would dare contemplate—would need a pretext of their own. And they would get it, in the form of Modern Monetary Theory (MMT).”
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“As with supply-side economics, the central insight of MMT is both true and trivial: The U.S. budget is not, strictly speaking, like a household budget or a business budget, because unlike a household or business, the federal government can print its own money. From this single observation, MMT theorists have constructed an entire macroeconomic worldview, which says explicitly that deficits don’t matter and, consequently, the government can and should print money to fund federal spending projects on a massive scale.
In this understanding of the economy, debt is not a constraint; nor are interest rates charged by bondholders. Debt can be paid down with a few congressionally authorized keystrokes on central bank computers generating new dollars. Bondholders will have little recourse but to accept these newly created dollars, because America’s currency is the global reserve.
The only real constraint MMT proponents recognize is inflation, which serves as a signal that there are too many dollars in the economy and that some should be recalled by the government. But inflation has been running low for years.
The upshot of all of this is a belief not only that current deficit levels are sustainable but that they are actually too low. Congress, MMT proponents argue, should be spending far, far more. Fears about accumulating a large national debt should disappear entirely.”
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“The supply-siders had triumphed on the right, and the MMTers were winning crucial battles on the left. The deficit had always been a bipartisan problem. At last, America’s politicians had found a bipartisan solution. Lower taxes. Higher spending. And the biggest deficit ever. Finally, Washington had found its balance.”
“When the federal government’s fiscal year ends on the last day of September, America’s national debt will nearly match the size of the nation’s economy for the first time since the end of World War II, according to projections from the Congressional Budget Office (CBO).”
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“spending under President Donald Trump surged by $937 billion in less than four years—and that was before Congress authorized trillions in emergency coronavirus spending. The Trump administration’s tax cuts, while well-intentioned, also added to the budget deficit because they were not offset by spending cuts. It’s true that Trump inherited a budgetary mess, but he (and the Republicans who controlled Congress during most of his tenure) have undoubtedly made the mess worse.”
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“the main driver of America’s debt problem is the federal entitlement programs—Social Security, Medicare, and Medicaid—which account for about half of all federal spending. In a separate report also released Wednesday, the CBO projected that the federal trust for those entitlement programs will fall by $43 billion in the current fiscal year. The economic downturn caused by the coronavirus pandemic has caused payroll taxes, which fund entitlement programs, to decline. Unless Congress takes action, those trust funds will be exhausted within 10 years, the CBO warns.”
“The annual budget deficit—the gap between government spending and tax revenues—would run about $900 billion in 2019, and it would push beyond $1 trillion every year starting in 2022. Debt as a percentage of the country’s total economy would rise steadily, reaching 93 percent of GDP by 2029, the highest level since the years directly following World War II.
Automatic spending on major entitlements would keep government spending high and make reductions difficult. Interest payments on the nation’s rising debt would become one of the country’s largest spending categories. The persistently high levels of debt and deficits, meanwhile, would serve as a drag on economic growth. Overall debt levels were on track to reach the highest levels in the nation’s history.
All of this was reason to worry. “Such high and rising debt would have significant negative consequences, both for the economy and for the federal budget,” the report warned, with reduced national productivity and total wages plus an increased likelihood of a fiscal crisis. In an emergency scenario, policymakers might be more constrained from responding in the most effective way. Debt and deficits were a modest burden on the economy in good times. And the higher they ran, the more economic risk accumulated.
Again, this was the outlook in 2019, when the unemployment rate was below five percent, when the deficit was projected to run about $900 billion over a 12-month span, when daily viral death tolls and case-count heat maps weren’t posted on major news sites like especially grisly weather reports.
In June of this year, the federal deficit was $864 billion.”
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“the United States is in uncharted waters in terms of both public finances and their effect on the economy. And no one really knows where we’ll go from here.”
“Decades of rising debt and deficits, even under thriving economic scenarios where persistently high deficit levels are unjustified, have left lawmakers across the aisle less willing or able to respond, exactly as budget-watchers have predicted. The debt is not just a drag on the economy. It’s a burden on crisis response, a limitation on the government’s ability to take action in a time of need.”
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“When the Congressional Budget Office (CBO) examined the nation’s long-term fiscal state last year, it offered this dour assessment: Federal debt levels were on track to reach their highest levels since shortly after World War II. On the current trajectory, “growing budget deficits would boost federal debt drastically over the next 30 years,” pushing debt to levels that were “the highest in the nation’s history by far.” Interest payments were set to spike, tripling over the next several decades, and exceeding the total amount of all discretionary spending. Over time, debt service would essentially become its own massive federal program.”
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“What the nonpartisan congressional budget analysts were saying, in their own carefully antiseptic language, was that even if things went pretty well for the economy, the continued growth of federal debt was going to be a big problem. A crisis was brewing, perhaps not immediately, but in the long term.
You may have noticed: Things have not gone well.
As COVID-19 spreads, the American economy is in the midst of the largest freefall in at least a generation, perhaps the most devastating since the Great Depression. Joblessness is at record highs, and financial analysts are predicting that the economy will end up shrinking by as much as 40 percent during the second quarter this year. A sharp drop in health care spending, as people delay elective surgeries and other non-emergency care, has alone managed to trim several points from the gross domestic product. No one has any clear sense of how or when this will end.
As the economy has tanked, Congress has responded with a series of aid packages totaling nearly $3 trillion, all of which have been deficit-financed. This year’s budget deficit is expected to come in somewhere around $4 trillion, nearly the size of last year’s entire federal budget. In April, the U.S. posted its highest monthly budget deficit ever, at $737.9 billion. In 2016, the final year of Barack Obama’s presidency, the annual deficit was $585 billion. In a single 30 day period, the U.S. government ran a bigger budget deficit than any one year outside of the Great Recession and its aftermath.
And this year isn’t over”
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“there is at least a case to be made that this crisis, which is different in both scale and kind from previous economic upheavals, is one that actually justifies some amount of emergency deficit spending, if not the particular bills that Congress has passed: When governments are forcing businesses to close in response to an unforeseeable exogenous event, as well as forcing individuals to stay home from work, some form of recompense is probably justified. It is notable that the Committee for a Responsible Federal Budget, one of the organizations most single-mindedly focused on national debt reduction, has backed deficit spending in this instance.”
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“the relief effort is running up against legislative skepticism—a political constraint imposed by the high debt and deficits that were already locked in before the crisis began.”
“Republicans in Congress, on the whole, no longer care about debt or deficits—at least not in any substantive sense. That’s a problem for a number of reasons, not least that it increases the risk of a debt crisis in the future.
Those same Republicans spent the better part of Barack Obama’s presidency complaining bitterly about the trillion-dollar budget gaps the country ran during his first term, and President Donald Trump promised on the campaign trail to eliminate all federal debt. But since Trump’s election, deficits have increased even faster than expected, and the total federal debt has risen accordingly. That, in turn, is likely to have long-term consequences for both the economy and for the broader politics of debt and deficits.”
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“By 2030, CBO projects the deficit—the annual gap between spending and revenues—will reach $1.7 trillion, which was roughly the size of the entire federal budget in 1999. Rising debt and deficits, the budget office predicts, will coincide with slowing economic growth, dropping from 2.2 percent this year to 1.5 percent a decade from now. The federal government will be borrowing more, and the economy will be expanding at a slower pace. It may not lead to an immediate economic crisis, but the nation is spending and borrowing into stagnancy and decline.”
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“The biggest drivers of long-term debt are Medicare and Social Security, which benefit seniors, many of whom are reliable Republican voters. Trump ran against cutting those entitlements, and although his rhetoric has wavered slightly in recent months, he has not pressed the issue. Republicans in Congress don’t exactly seem eager to tackle it either. (Trump’s 2020 budget proposed reducing some Medicare payments, similar to proposals made by the Obama administration, but would leave the program’s essential benefit structure intact.)
Trump also does not appear to worry much about what happens down the road. When his advisers in 2018 raised the possibility of a future deficit crisis, the president reportedly shrugged it off, saying, “Yeah, but I won’t be here.” Absent some event to force his hand, it’s unlikely that attitude will change.”
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“One possible forcing event would be the election of a Democratic president in 2020, which would almost certainly see the GOP return to its Obama-era complaints about sky-high debt and deficits.
Yet if that were to happen, Democrats would most likely dismiss these complaints as hypocritical—not as honest efforts to enforce needed fiscal restraint but as self-interested attempts to check the opposite party’s agenda. The Democratic primary race, which has prominently featured calls for tens of trillions in new spending, has already provided evidence for this view.”
“Governing requires setting priorities, and that’s never more important than during a crisis. Members of Congress have a political incentive to spend and spend and spend, but there simply isn’t enough money to go around—in fact, we passed that point a long time ago.
“I do believe it makes sense for the government to provide support to businesses and families that can’t make it through this,” Sen. Rand Paul (R–Ky.), who voted against this week’s coronavirus bill, said Tuesday on the Senate floor. “I don’t want to see this massive accumulation of debt destroy this great country.”
Lawmakers would do well to keep one eye on the mounting debt as they consider their next steps.”
“programs for the poor are only a tiny portion of the U.S. welfare state. In fact, the Congressional Budget Office estimates that more than 60 percent of American households receive more in government benefits than they pay in taxes. To get an idea of just how big the American welfare state has become, consider that those transfer payments from the federal government are equal to 34 percent of all wages and taxes in the U.S.”
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“The largest transfer programs are the middle-class entitlements, Social Security and Medicare. In addition, a large portion of the third biggest entitlement program, Medicaid, actually goes to the middle-class elderly and disabled individuals, not the poor. Those three programs alone now make up more than half of all federal spending.”
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“we need to understand that, in practice, when an individual pays Social Security taxes, none of those taxes are set aside for that individual’s benefits. Rather, they are used to pay benefits to those who are currently retired. Social Security is merely a transfer payment from workers to retirees. In that sense, it operates exactly the same as any other transfer or welfare program.”
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“Many individuals will receive more than taxes paid plus a reasonable amount of interest on those taxes.”
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“according to the Social Security system’s trustees, the program faces a future shortfall of more than $43 trillion7 (measured in discounted present value over an infinite horizon—that is, if the government put away $43 trillion today and earned 3 percent interest on those funds, it would have enough money so that, combined with payroll taxes, it could pay all future benefits). Unfortunately, however, the federal government doesn’t have an extra $43 trillion. As a result, there is simply no way that Social Security can pay future benefits without a massive tax increase.”
“Prominent conservative groups are refusing to criticize Republican lawmakers and President Donald Trump for the massive spending package, and polling shows fewer than 1 in 10 Republican voters disapprove of the measure’s passage.
That tells you something about the current state of the conservative movement. When the last Republican president signed the $700 billion Troubled Asset Relief Program (TARP), otherwise known as the 2008 bank bailout, polling from Gallup found that fewer than half of all Republicans supported it. When President Barack Obama signed the American Recovery and Reinvestment Act, the $833 billion stimulus passed in the wake of the last economic collapse, only about 30 percent of self-identified conservatives approved, Gallup found.
Now, we’re spending a whole lot more money with a whole lot less opposition.
As Reason Editor at Large Matt Welch put it last week: “There is no more politics of fiscal prudence in America, just a competition to see who can wag the biggest firehose.””
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“If fiscal conservatism still held any cache among Republican lawmakers, voters, and activists, there would have been an outcry about President Donald Trump and Republicans in Congress inflating the deficit to record highs over the past three years. It wasn’t all that long ago that grassroots conservatives were toasting the toppling of high-ranking Republicans for lesser slights.”