I’m generally a Gretchen Morgenson fan, since she’s one of the few writers with a decent bully pulpit who regularly ferrets out misconduct in the corporate and finance arenas. But when she wanders off her regular terrain, the results are mixed, and her current piece is a prime example. She also sometimes pens articles based on a single source, which creates the risk of serving as a mouthpiece for a particular point of view. And the one she chose to represent tonight is one that is in no need of amplification, that of the Peterson Foundation’s well-funded campaign to gut Social Security and Medicare.
The Peterson Institute paper she relies upon, by former Fed and Treasury economist Joe Gagnon and Peterson Institute research associate Marc Hinterschweiger, is about the government deficits and the need to take Serious Measures to get them under control, which of course means reducing entitlements, in particular Social Security and Medicare.
We’ve written before about some of the Peterson Foundation’s efforts:
For those who did not catch wind of it, the Peterson Foundation, which has long had Social Security and Medicare in its crosshairs, held a bizarre set of 19 faux town hall meetings over the previous weekend to scare participants into compliance and then collect the resulting distorted survey data, presumably to use in a wider PR campaign. It’s important to keep tabs on this propaganda effort, since its big budget (the Foundation has a billion dollars to its name), means it will keep hammering away on this topic. But it appears that they overestimated how much public opinion expensively produced and stage-managed presentations can buy.
The brazenness and ham handedness of these so-called “America Speaks” sessions, which have garnered well deserved criticism on the Internet, is probably due to at least two factors: deluded confidence that the average person will fall into line when a confident and well-credentialed presenter makes a pitch and a stunningly naive belief that aggressive efforts to manipulate opinion and mislabel it as polling would not be called out.
The paper does make this disclosure:
The Peterson Institute undertook this project at the request of the Peter G. Peterson Foundation, which is a completely separate entity.
The two organizations are broadcasting the same message, that looming deficits must be dealt with via entitlement cuts, so the lady is protesting way too much in trying to depict them as independent. And in case you doubt that the paper itself is advocating cutting entitlements, this is its recommendation on page 2:
Accordingly, we propose that budget cuts currently being planned should be implemented in 2013-2015 and that additional budget cuts should begin in 2016, although there is some scope for additional cuts in Japan starting in 2014. In addition, reaching agreement soon on long-run changes to curb retirement and medical costs even partially could send a signal to markets that advanced governments are prepared to deal with a problem that threatens to become more serious in the next two to three decades.
Let’s now turn to the Morgenson piece. It does not question the economic model used, which projects that if the economy remains at or near trend after 2015 (when growth is assumed to have normalized), that the budget deficits remain constant as a percent of GDP (sports fans, this is guaranteed to make debt levels blow out). It would have behooved her to check the Peterson numbers against the the Medicare trustees and CBO forecasts. The latter shows Federal debt to GDP stabilizing at a bit over 75% of GDP, below the 90% level that Carmen Reinhart and Kenneth Rogoff deem to constitute a drag on growth (note we don’t buy their analysis; it mixed gold standard countries with currency issuers, plus there are examples in their data set where the causality went the other way: debt levels grew because growth was lousy).
It also stunningly shows the howler of the Eurozone showing improvements in debt to GDP ratios as a result of the austerity programs being implemented. The examples of Latvia and Ireland have demonstrated that austerity measures have worsened debt to GDP ratios, dramatically in both cases, and the same deflationary dynamics look to be kicking in for Spain.
The article repeats the hoary cliche that deficit cuts must be made to “reassure the markets” as in appease the Bond Gods. Gee, how is that working out in Europe, the Peterson Institute’s obedient student? From Bloomberg on Friday:
European confidence in the economic outlook weakened for a third straight month in May as the region’s worsening debt crisis and surging commodity costs clouded growth prospects.
An index of executive and consumer sentiment in the 17- member euro region slipped to 105.5 from 106.1 in April, the European Commission in Brussels said today. Economists had forecast a drop to 105.7, the median of 27 estimates in a Bloomberg survey showed.The euro-area economy is showing signs of a slowdown as governments toughen austerity measures to lower budget gaps as investors grow increasingly concerned that Greece may default, while oil-driven inflation squeezes household incomes. European manufacturing growth slowed this month….
And another article in the New York Times tonight seems almost annoyed that investors aren’t reacting as Gagnon and Hinterschweiger insist they must, by worrying about bond risk:
In mid-April, Standard & Poor’s placed United States debt on negative watch, saying there was a one in three chance that over the next few years it would actually downgrade the Treasury’s pristine triple-A rating. The agency cited concerns about the ability of Congress and the White House to agree on a plan to reduce the budget deficit.
On May 16, the Treasury hit its statutory debt ceiling — the point at which the government cannot borrow more money without Congressional action. But Congress didn’t act….
Has this melodrama shaken the bond market? Not a bit.
Since April 18, the prices of Treasuries haven’t fallen. To the contrary. They’ve risen while yields, which move in the opposite direction, have plummeted. On Friday, the 10-year Treasury yield dipped as low as 3.05 percent, its trough for the year. Despite a mounting debt burden and a dithering government, Treasuries have rallied.
Morgenson covers the same argument, and uses the rationale that Japan and Europe look worse than the US. The facts don’t line up. If investors were reluctant purchasers of Treasuries, you’d see them sticking to the short end of the yield curve.
This suggests that investors increasingly recognize (as we have suggested) that we are in a re-run of sorts of 2008 (hopefully without the September-October fireworks), of a liquidity-induced commodities bubble leading to inflations fears when the deflationary undertow is stronger. Cash and high quality bonds are the place to be in deflation.
There are other canards in the paper that Morgenson simply parrots, for instance, that having a lot of countries in debt at the same time in unusual. Huh? Big wars produce that outcome, just look at the 1815, and the period after World War I, which culminated in the Great Depression. Oh, and the concern about “financial repression” meaning “the transfer of wealth to a debtor government”. Earth to base, private sector debt in the US is way way larger than government debt. And the transfer that led to the increase in government debt, and is also reflected in the failure to write down and restructure private sector debt, is a transfer from taxpayers and investors to banks.
Now some readers will be very unhappy by now, since taking issue with the austerian party line is treated an endorsement of no-holds-barred government spending. But this discussion ignores the fact that we have capitalist not acting like capitalists in virtually all advanced economies.
The reason most people don’t like government deficits is that they are assumed to crowd out private sector borrowing, thus discouraging business investment. But companies in the US, even in the last expansion, were net savers. That pattern has taken hold in advanced economies, even in many emerging economies ex China, since the mid 2000s, and some as early as the late 1990s. Andrew Haldane, the director of financial stability for the Bank of England, confirmed that companies and investors are taking an excessively short-term perspective, which is leading to underinvestment.
In simple terms, the household sector always wants to save. If the business sector also perversely wants to save, then government needs to take up the slack and deficit spend, otherwise wages and GDP will contract (if you run a big trade surplus, you can escape that conundrum, but that isn’t germane for the US). If GDP contracts, debt to GDP gets worse, not better. Conversely, when the economy is strong and the business sector is borrowing to expand operations is when the government sector should run a surplus.
But the idea of government spending has become anathema in the US, despite plenty of targets (start with our crumbing infrastructure). The banks got first dibs on the “fix the economy” money in the crisis, and continue to balk at measures that would shrink a bloated and highly leveraged banking sector down to a more reasonable size. Evidence already shows the size of the banking sector is constraining growth, yet a full bore campaign is on to gut social spending out of a concern that sometime down the road the size of the government sector will serve as a drag on the economy. In addition, the banksters need to preserve their ability to go back to the well the next time they crash the markets for fun and profit. So the attack on deficits is financial services industry ideology, packaged to make it look like it’s good for the little guy. We have too many people who should know better like Morgenson enabling it.