Cutting the federal budget and reducing federal spending in the middle of a depression, as both President Obama and the Republicans are insisting need to be done, is a bad idea. Doing it by cutting benefits on Social Security, Medicare and Medicaid is a really, really bad idea.
How bad an idea is slashing the budget in the middle of a depression? The fact that German Chancellor Angela Merkel is pushing the idea for the United States should tell us all we need to know. Severin Weiland reports in Was Deutschland von Obama erwartet Spiegel Online 07.11.2012
Priorität, auch im Blick auf die weltwirtschaftlichen Auswirkungen, hat aus Sicht der Bundesregierung das hohe Staatsdefizit in den USA. Kanzlerin Merkel und ihre Strategen erwarten von Obama, dass er endlich den Haushalt des Landes saniert. "Schuldenfinanzierte Politik ist an ihr Ende gekommen, das weiß man auch in den USA", sagt Außenminister Guido Westerwelle (FDP). "Obama muss zeigen, dass er das Defizit in den Griff bekommt", unterstreicht der CDU-Außenpolitiker Philipp Mißfelder.Angela Merkel, whose economic policy ideas have a very strong affinity with Paul Ryan's, is encouraging Obama to focus on deficit-cutting. Given what's happening to the countries in European following Angie's directions, her and Guido's support for the idea should be enough to make every Democrat including Obama running screaming away from the notion.
[From the viewpoint of the [German] federal government, also with an eye to the world economic effects, the priority is the high government debt in the USA. Chancellor Merkel and her strategists expect from Obama that he will finally clean up the national budget. "Policy financed by debt has reached its end, people know that also in the USA," says Foreign Minister Guido Westerwelle (FDP). Obama must show that he can get a grip on the deficit," emphasizes the CDU foreign policy specialist Philipp Missfelder.]
But there is an endless amount of ways you can slice and dice projections about deficits, some better than others - which I would hope would be obvious, but with the Republicans' War on Math, who knows if that obvious? And the opponents of Social Security, Medicare and Medicaid would much prefer that we all get caught up in slicing and dicing of how to reduce the federal deficit, and not ask the questions: Isn't it a bad idea to cut federal spending in the middle of a depression? Isn't it a seriously terrible idea to cut benefits on Social Security, Medicare and Medicaid?
Brendan Greeley gives us a metaphysical pitch in Step Away From the Fiscal Cliff Bloomberg Businessweek 11/08/2012
Although Republicans and Democrats persist in making it seem like bringing spending in line with revenue is some form of particle physics, there's actually no mystery to the calculations. The money will come out of the nation’s $2 trillion entitlement programs. It will come out of the Pentagon's $680 billion budget. And it will come from tax increases. There will be plenty of arguing over what to cut. There’s no arguing where the money is.Unwinding the metaphysics down to real-world content:
... But let's make the calculation easy, and cut it all — the whole federal government aside from the Pentagon and entitlements. Fire every one of the 2.8 million federal employees, close the buildings they work in, and eliminate the government services they provide and ... you wouldn't even get the budget-cutters a third of the way toward eliminating the annual federal deficit. What's more, since the projected growth in costs over the next decades comes almost entirely from entitlements, the amount that goes to the rest of government will become an even smaller part of the problem in the future.
"The money will come out of the nation's $2 trillion entitlement programs": only if public resistance isn't strong enough to stop Obama and the Republicans from doing it. Writers like Greeley use "entitlements" when they want to fudge the fact that what they are saying is, let's cut benefits on Social Security, Medicare and Medicaid.
There is no immediate budget problem. If we had an aggressive stimulus program to speed up the recovery rather than cuts to slam the economy back into recession, the projected deficit would rapidly decrease. And Greeley's formulation assumes that the cuts he's talking about wouldn't cause a new recession and delay the full recovery from the depression by years more. When the cuts do have those undesirable effects, the projected deficits will grow.
It's a common trick of Social Security opponents to lump it together with Medicare and Medicaid, as Greeley does here by using "entitlements", and say that humongous growth is projected. In the real world, Social Security projected shortfall years from now can be easily avoided by lifting the income cap on the payroll tax. The projected costs of Medicaid and Medicare are tied to general health care cost rises. But more recent data is suggesting that the rise is no longer as steep as previously predicted. (Dean Baker, Is the Budget "Crisis" History? Truthout 10/29/2012)
The deficit is an accounting entity, even though I know the Republicans want to nullify accounting along with biology and mathematics and several other branches of science. The combined public and private deficit or surplus will equal the trade deficit or surplus. It's an accounting identity. As in 1 + 1 = 2. It's not determined by whatever new reality is created each weekday by every word that proceeds from the mouth of Rush Limbaugh. Dean Baker describes it this way (Budget Deficits and Trade Deficits: NYT Reporters Do Not Understand National Income Accounting CEPR 11/04/2010):
... there is a relevant accounting identity which is always true. The trade surplus is equal [to] net national savings. This means that if we have a trade deficit, then net national savings must be negative. The implication of a large trade deficit is that either public savings must be very low or negative (i.e. a large budget deficit) and/or we must have very low private savings. There is no possible way around this accounting identity.Since the dollar is the world's reserve currency, other countries hold dollars, which has had us running a chronic trade deficit since people now receiving PhD's and completing their medical residencies were the proverbial gleams in their parents' eyes, i.e., 1976. So since the trade balance is in chronic deficit, the sum of public and private net expenses has to be negative as well.
This means that if the U.S. has a large trade deficit, as it currently does, then it must be the case that either households have very low saving or the country has a budget deficit. At the peak of the housing bubble, private saving was very low, since households spent based on their housing bubble wealth. Now that much of this bubble wealth has disappeared with the collapse of house prices, saving has moved back toward more normal levels. This means that to sustain the same level of output, the budget deficit must rise. There is no way around this identity.
We current have households paying down debt (debt counts as savings in national income accounting) so that their spending relative to saving has dropped, and corporations have been building up cash. If there were massive investments and spending being made by the private sector far in excess such that net savings in a given year became negative, the total public sector would go into surplus. It's accounting, not magic, so there are real-world functions that make that happen. More investment and spending brings more jobs that generally stimulates the economy, generating more tax revenues and decreasing automatic countercyclical public spending like unemployment insurance.
Homey metaphors about gubment tightening its belt, or thinking that if we just slash spending and raise taxes will eliminate deficits and reduce debt, are two of those things that seem obvious because they are said so often. But they are more in the nature of metaphysics than accounting.
Tags: angela merkel, austerity economics, fiscal cliff, grand bargain, medicaid, medicare, social security