–How the debt-hawks would “save” Social Security and Medicare

The debt-hawks are to economics as the creationists are to biology.

The Committee for a Responsible Federal Budget proposes the following steps to “save” Social Security and Medicare. The CRFB projects the indicated 10-year federal savings (more correctly, “increases in payments by you”). If the numbers are correct (big “IF”), here are the implications:


“Increase Cost-Sharing” Government pays $150 billion less. Americans will pay $150 billion more for our health insurance.

“Enact Medicare Malpractice Liability Reform”
Government pays $60 billion less. Americans will be limited as to what we will receive in the event of serious negligence by a doctor or hospital.

“Limit Tax Exclusion on Employer-provided Health Care” Government receives $250 billion more from all employees. This is a $250 billion tax increase for working people.

“Increase Medicare Eligibility Age to 67” $60 “savings” for federal government. We will have to buy private insurance for two additional years – our older years when private insurance is most costly.

“Strengthen the Independent Payment Advisory Board ((PAB).” Government “saves” $30 billion. “Strengthen” is a euphemism. The purpose of PAB is to reduce federal payments for drugs and medical procedures. We Americans will pay $30 billion more.

Social Security:

“Use ‘more accurate’ measure of inflation to calculate cost-of-living adjustments.” Government pays $140 billion less. “More accurate” is a euphemism meaning, “more restrictive.” Result: We’ll receive lower benefits.

“Slow the growth of benefits for middle-and high income earners” Government pays $25 billion less. Remember how the Alternative Minimum Tax was only supposed to affect “rich” people? This proposal eventually would penalize nearly all Americans.

Raise the retirement age to 68, then increase it further, based on life expectancy. Government savings: $? Social Security already pays you nothing if you die before retirement, and not even a living wage if you live after retirement. Now they want to raise the retirement age, so we receive less, and receive it later.

Increase FICA by another 1% for anyone making more that $56,000 per year.
Government savings: $? Since you pay 7.65% and your boss pays another 7.65%, that “little 1%” amounts to an 6.5% FICA tax increase.

Thus, does the mistaken belief that Social Security and Medicare will go bankrupt, erode our quality of life. The federal government is a monetarily sovereign nation, which means it cannot go bankrupt. It can produce unlimited money to pay debts of any size. Similarly, Social Security and Medicare never can go bankrupt, nor can the Department of Defense, Congress, the Supreme Court or any other federal agency. No agency of the federal government can go bankrupt.

Debt-hawks wrongly believe FICA pays for Social Security and Medicare. It does not. FICA could be eliminated, and this would not affect by even one penny, the federal government’s ability to support these federal agencies.

Even the most obtuse debt-hawk recognizes the ability of the federal government to create enough money to pay any bill of any size. So what is the concern? It all boils down to fear of inflation. But, since we went off the gold standard, inflation has not been related to federal deficits (See: INFLATION), and inflation easily is prevented and cured by interest rate control. So in brief, debt-hawks prefer the absolute surety of great harm to us today, because they have the unreasoned, unsubstantiated fear that maybe, possibly, perhaps we sort of might have some unknown degree of inflation at some unknown time in the theoretical future.

Organizations like the CRFB do great harm, by supporting unnecessary limitations on Social Security and Medicare. And that’s not all. Their grim calls for austerity, their unreasoned fear of inflation, has limited the government’s ability to cure this recession, costing millions of people their homes, their livelihoods and their happiness. Debt-hawks claim fiscal responsibility, when in fact they are the most irresponsible people imaginable, prescribing bitter snake-oil cures for real economic problems.

My only hope is that when these debt-hawks personally need help from Social Security and Medicare, the limitations they have supported make benefits unavailable to them. And I hope this recession causes them the great grief they have caused the rest of this nation. That would be justice.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity

–Salary for attending school, III

The debt hawks are to economics as the creationists are to biology.

The following article reinforces the posts, Salary for attending school and Salary for attending school, 2nd paper:
U.S. goes from leading to lagging in young college graduates

By Daniel de Vise
Washington Post Staff Writer
Thursday, July 22, 2010; 6:07 AM

The United States has fallen from first to 12th in the share of adults ages 25 to 34 with postsecondary degrees, according to a new report from the College Board.

Canada is now the global leader in higher education among young adults, with 55.8 percent of that population holding an associate degree or better as of 2007, the year of the latest international ranking. The United States sits 11 places back, with 40.4 percent of young adults holding postsecondary credentials.

The report, to be presented Thursday to Capitol Hill policymakers, is backed by a commission of highly placed educators who have set a goal for the United States to reclaim world leadership in college completion — and attain a 55 percent completion rate — by 2025.

The campaign mirrors President Obama’s quest to reclaim world leadership in college graduates by 2020, although it gives the country five more years to get there. The Commission on Access, Admissions and Success in Higher Education set its goal in December 2008, seven months before Obama’s American Graduation Initiative.

“I don’t think what we’re saying and what the president’s saying are that different,” said Gaston Caperton, president of the College Board, the New York nonprofit agency responsible for the SAT and AP tests.

The United States ranks somewhat higher, sixth, among all nations when older adults are added to the equation, according to the report, which Caperton said would be the first of many annual reports charting progress toward the 2025 goal.

But the report focuses more heavily on younger adults, who are feared to be the first generation in the modern era that will be less well-educated than their parents.

Educational attainment has risen gradually among 25- to 34-year-olds in recent years, according to census data, with the share holding associate degrees or better rising from 38.1 percent in 2000 to 41.6 percent in 2008, the latest figure available.

The report is tailored to state leaders and ranks states by college completion among young adults. The District of Columbia ranks higher than any state, with 62.2 percent of 25- to 34-year-olds holding postsecondary degrees. Maryland ranks 12th among states, with a 38.6 percent completion rate; Virginia ranks 17th, with a 36.5 percent rate.

The commission is urging state and national leaders to pursue a 10-part “action agenda,” which recommends such initiatives as universal pre-kindergarten for low-income families, better college counseling and dropout prevention, and streamlined college admissions, all of which might raise college completion rates. The group is led by William E. Kirwan, chancellor of the University System of Maryland.

“We have a real, objective way every year to look at every state and see how they’re doing,” Caperton said, “and we’re doing this with legislators all over the country.”

Rodger Malcolm Mitchell

No nation can tax itself into prosperity

–Even Paul Volcker doesn’t get it.

An alternative to popular faith

If even Paul Volcker doesn’t get it, how can the man in the street hope to understand — unless the man in the street is willing to look at the facts and Volcker isn’t?

“5/19/2001: STANFORD, California (Reuters) – Europe’s debt crisis shows the risks for the United States if it does not get its budget deficits under control, former Federal Reserve Chairman Paul Volcker said on Tuesday. ‘If we need any further illustration of the potential threats to our own economy from uncontrolled borrowing, we have only to look to the struggle to maintain the common European currency, to rebalance the European economy, and to sustain political cohesion of Europe,’ Volcker said.
[…]The U.S. budget deficit hit $1.4 trillion in 2009, roughly 10 percent of the economy. The White House projects the deficit this year will reach $1.6 trillion. The large deficits have evoked comparisons to Greece. But in a speech to the Stanford Institute for Economic Policy Research in California, Volcker said the United States differs from that country and other small European countries whose credit markets have come under speculative attack. Unlike those countries, the United States benefits from well-established currency and credit markets that are considered safe havens in times of financial turmoil.
[…]’There are serious questions, most immediately about the sustainability of our commitment to growing entitlement programs,’ said Volcker, who heads an outside panel of experts advising Obama on the economy”

Here is Paul Volcker, who of anyone, should know better, saying the difference between the U.S. and European countries is we have a well-established currency. No, Mr. Volcker, the difference is we are a monetarily sovereign nation and the EU countries are not. And that difference makes all the difference.

Somehow, the fact that we are running trillion-plus deficits, with none of the problems the EU nations are experiencing, doesn’t seem to penetrate Mr. Volcker’s skull. He has the debt hawk’s “It-hasn’t-happened-yet-but-I’m-sure-one-day-it-will” mentality, rather than the scientist’s “It-hasn’t-happened-yet.-I wonder-why” mentality.

Mr. Volcker, the reason “it” (inability to service national debts) happened to Greece, but not to the U.S., is simple: The U.S. has the unlimited ability to pay its bills, merely by crediting creditors’ bank accounts. EU rules prevent Greece from doing this. Either Mr. Volcker truly doesn’t understand the difference, which would be remarkable, or he has been paid to adopt a debt hawk agenda that forces him to close his eyes to basic fact.

Anyone who says Greece’s problems foreshadow similar problems for the U.S. either is ignorant of the facts or a liar.

And by the way, for those debt hawks who keep warning us that deficits cause inflation, we’re running the deficits, but: “5/19/2010: WASHINGTON (AFP) – US consumer prices fell for the first time in 13 months in April, the government said Wednesday as analysts warned of the risk of deflation in the world’s largest economy.” Isn’t it inconvenient the way facts seem to get in the way of wrong opinion?

Rodger Malcolm Mitchell

No nation can tax itself into prosperity

–Nonsense from the Committee for a Responsible Federal Budget

An alternative to popular faith

Demonstrating the bankruptcy of the typical debt-hawk position, here are excerpts from a long Email I just received from the Committee for a Responsible Federal Budget, a leading anti-debt advocate.

The current fiscal path of the United States government is unsustainable. For the past forty years, our debt-to-GDP ratio has averaged around 40 percent. This year, it is projected to exceed 60 percent, the highest point since the early 1950s. […] By the end of the decade, debt is projected to be 90 percent of GDP, approaching our record high of around 110 percent after World War II. Things will deteriorate further as the Baby Boom retirement accelerates. Ten years later, the debt is expected to be well over 150 percent of GDP. By 2050, it is projected to be over 300 percent and still heading upward.Though they claim the “fiscal path is unsustainable,” they project all the way to 2050. The lowest (since WWII) Debt/GDP ratio of about 35% came 70 years earlier, at 1979-1980, the end of the Carter administration, which also was the time of the highest inflation


Deficits vs inflation thru 09

[…]It is not at all clear how exactly such a crisis would unfold – what would prompt it or how it would play out. A crisis could occur as soon as this year, or decades from now. It could begin inside or outside the country. The crisis could be dramatic or gradual. It could come from an economic or another financial shock, or even a political surprise.In short, “We don’t know when; we don’t know how; and we don’t know what. Otherwise, we’re sure.”

Experts agree that we will be in a crisis when we can no longer service our debt obligations. However, we will probably never face this scenario.This is the first time I ever have heard a debt hawk make this admission, which the author repeatedly forgets, later in the Email.

There are a number of different crisis scenarios: Scenario 1: The Gradual Crisis – We stay the current course and try to muddle through. Our massive borrowing leads to less capital available for productive private investment, which lowers economic growth.Federal deficit spending adds money to the economy. There is no mechanism by which added money can reduce the supply of capital.

Increasing debt service payments – particularly when interest rates return to normal – squeeze out other areas of the budget. The steady crowding out of government spending on programs that boost the economy, such as spending for education, infrastructure and innovation, will hurt our competitiveness.This crowding out only can happen in a debt-hawk world, where deficits are restricted, either by tax increases or by reduced spending – a self-fulfilling prophecy.

Scenario 2: The Political Risk Crisis – Political calculations trump risk threats. […] As a result, more budget resources are shifted from children to seniors, and from investment in programs boosting future growth. […] creditors lose confidence in U.S. fiscal management. Our creditors increasingly demand large risk premiums on purchases of their debt, sharply lower their purchases of our debt, or, in the worst case, stop buying our debt if the shift occurs suddenly. Credit ratings agencies lower our sovereign credit rating.This neglects the simple fact that since the end of the gold standard, in 1971, the federal government no longer has needed to borrow its own money. Rather than borrowing by creating T-securities out of thin air, then selling them, the government can and should create money directly, and omit the borrowing step.

Scenario 3: Catastrophic Budget Failure – An abrupt crisis occurs. […] at some point financial markets or foreign lenders decide we are no longer a good credit risk, possibly due to debt affordability concerns.Debt affordability? Didn’t you just say,” Experts agree that we will be in a crisis when we can no longer service our debt obligations. However, we will probably never face this scenario.”

“[Creditors] stop buying our debt securities or demand dramatically higher interest rates due to increased perceived risk. […] In the extreme case, the U.S. may not be able to borrow at any interest rate.” Creditors concerned with hyperinflation or even default will not buy U.S. debt.” As we said, the U.S. no longer needs to sell debt. Issuance of Treasury securities could end today, and this would not change by even on penny, the government’s ability to spend.

“Scenario 4: Inflation Crisis – Higher debt is managed through inflation. […] Under strong political pressure, the Fed […] does not raise interest rates despite signs of increasing inflationary pressures. […] Fiscal consolidation will require spending cuts that will hurt safety net programs. Business investment incentives will disappear and tax rates will rise, as policymakers search for revenue. Household taxes rise and government services are reduced.Wait. Isn’t that exactly what you are preaching – spending cuts and tax increases?

Scenario 5: External Crisis -A dollar or trade crisis leads to a fiscal crisis. When the economy recovers in a few years, our current account deficit (which had narrowed during the recession) resumes widening to record levels. […] Capital inflows slow abruptly as investors see better risk-return opportunities elsewhere, decide the risks of the U.S. market are too high […] A sudden stop in lending lowers the dollar, increases inflation and interest rates[…]A widening of the current account deficit means dollars leave the U.S., which if anything, would be anti inflationary.

Scenario 6: Default Crisis – A series of events lead to a default.Once again, you already have said the U.S. will not default.

“[…] Our need to pay higher interest rates increases debt service and crowds out public and private spending. […]Higher interest rates increase the amount of money in the economy which facilitates private spending.

[…}A new administration defaults or attempts to renegotiate our debts. Burned creditors stop buying U.S. debt or demand onerous interest premiums.[…]Again, defaults? You’ve already discussed this impossibility.

Countries that have sufficient domestic savings to finance their debt are less vulnerable than those that must attract considerable foreign capital – such as the United States.Totally false. The U.S. does not service its debt with savings. It creates money, ad hoc, to pay its debts.

“[…] Our large trade deficit outlook is considered unsustainable and a likely crisis flash point.”You already have admitted U.S. has the unlimited ability to service its debts. So what do you mean by “unsustainable”?.

Some top economists argue that the U.S. can “afford” even more debt awhile longer because its debt service will still remain quite manageable. They also expect that the United States can avoid adjustment longer than fiscal policy norms might suggest because the dollar is the world’s reserve currency.The debt service is manageable, not because the dollar is the world’s reserve currency, but rather because the government has the unlimited ability to pay its bills, and does not need to borrow.

“While certain countries are often cited to show that high sovereign debt ratios can be sustained without crisis (Italy, Belgium, Japan now), these countries – unlike the United States – can finance their debt through their substantial domestic savings.Government debt is not financed through private savings. You and I do not pay federal debt with our savings.

Many governments facing similar circumstances to the United States over the next generation have tried to avoid fiscal adjustment by running higher inflation to reduce their debt burden. Though appealing, this strategy hurts the economy and its citizens (particularly those on a fixed income).There ever is a reason for a sovereign nation, in control of its money, to reduce its debt through inflation.

The entire premise of the Committee for a Responsible Federal Budget is that buyers of T-securities control the fate of the U.S., when in fact, the U.S., as the creator of dollars, no longer needs anyone to buy T-securities. This lack of understanding would be amusing were it not for the fact that the government acts on these beliefs.

One of the reasons we have been so slow to exit recession, is the government’s timid stimulus responses. The too little / too late, initial $150 per person mailing two years ago was restricted by debt fear. A $1,000-$2,000 per person mailing at that time, would have ended the recession.

Rodger Malcolm Mitchell