By Dean Baker, a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. Originally published at Beat the Press
Apparently the paper is confused on this issue since it headlined a front page piece on the budget, “Trump budget sets up clash over ideology within G.O.P.” The article lays out this case in the fourth paragraph:
“He [Trump] also set up a battle for control of Republican Party ideology with House Speaker Paul D. Ryan, who for years has staked his policy-making reputation on the argument that taming the budget deficit without tax increases would require that Congress change, and cut, the programs that swallow the bulk of the government’s spending — Social Security, Medicare and Medicaid.”
Most of us recognize Donald Trump and Paul Ryan as politicians who hold their jobs as a result of being able to gain the support of important interest groups. It really doesn’t make much difference what their political philosophy is. Contrary to what the NYT might lead us to believe, this is not a battle of political philosophy, it is a battle over money.
On this score the NYT also gets matters seriously confused. First of all, it is wrong to describe Social Security, Medicare, and Medicaid as “the programs that swallow the bulk of government spending.” Under the law, Social Security can only spend money raised through its designated taxes, either currently or in the past. For this reason, it is not a drain on the rest of the budget unless Congress changes the law.
Medicaid would also not rank among the three largest programs. The government is projected to spend $592 billion this year on the military compared to $401 billion on Medicaid.
The claim that Paul Ryan is concerned that these programs would “swallow the bulk of government spending” directly contradicts everything Paul Ryan has been explicitly advocating for years. Ryan has repeatedly put forward budgets that wouldreduce the size of the federal government to zero outside of the military, Social Security, Medicare, and Medicaid. (See Table 2 in the Congressional Budget Office’s analysis.) It is difficult to understand how a major newspaper can so completely misrepresent a strongly and repeatedly stated view of one of the country’s most important political figures.
The piece is also somewhat misleading in telling readers:
“Social Security, health care and net interest now comprise nearly 60 percent of all federal spending, and that figure is expected to soar to 82 percent over the next 10 years.”
One of the main causes of this “soaring” is the projection that interest rates will rise sharply over the next decade. There are three points worth noting on this issue. First CBO has been repeatedly wrong over the last six years in projecting that interest rates will rise. While CBO may turn out right this time, it is certainly worth pointing out its past track record on this issue.
The second point is that the interest rate is a policy choice by the Federal Reserve Board. In effect, CBO is projecting that the Fed will decide to raise interest rates substantially over the next decade. Again, this may prove right, but it is important for readers to realize that the rise in interest payments would be due to a policy decision by an agency of the federal government (the Federal Reserve Board), not some inevitable economic outcome. The Fed would presumably raise interest rates to combat inflation, which has not been a problem for the last decade.
The third point is that, in contrast to much doomsaying in the media, interest payments as a share of GDP are near a historic low. After deducting the money rebated by the Federal Reserve Board ($90 billion a year), interest payments are now roughly 0.8 percent of GDP. This compares to more than 3.0 percent of GDP in the early 1990s. Of course even that debt burden did not prevent the 1990s from being a very prosperous decade.
It is also worth noting that whole focus on deficits and debt is misplaced if the issue is the future commitment of economic resources. Much government action imposes costs on the economy without taxation. An obvious example is when the government privatizes an asset like a road or the airwaves. The holders of these assets will effectively be imposing taxes on the public, but they won’t be described that way.
The most important type of hidden tax in this vein is patent and copyright monopolies. These government-granted monopolies often raise the price of the protected items by several thousand percent above the free market price. The amount of money at stake is enormous. In the case of prescription drugs alone the gap between the monopoly prices and the free market price is close to $360 billion a year, almost 2 percent of GDP.
This is more than twice the size of the interest burden on the national debt. While those who want to cut programs like Social Security and Medicare might want to focus on government debt and deficits, anyone really concerned about the burdens the government was imposing for the future would be putting these monopolies front and center.
The NYT also misrepresents the nature of the conflict over the programs that might be cut as a generational issue:
“In effect, Mr. Trump appears determined to take sides in a generational struggle between older, sicker Americans who depend on the entitlement programs, and their younger, poorer counterparts whose livelihoods are shaped by the domestic programs likely to see steep cuts.”
This generational description is wrong on many counts. First, since generations of families often live together (which is especially true with poorer families) cutting Social Security payments would directly hurt tens of millions of low income children. Medicaid also disproportionately benefits both children and seniors. If this program is protected in the Trump budget then it will help both groups.
Also, as a practical matter, few Republicans advocate large cuts for current beneficiaries of programs like Social Security and Medicare. They generally advocate cuts that will hurt future generations, like the millennials. In effect, they are proposing cuts to these programs that will hit today’s young, but not until they are older. It is difficult to see how this would be siding with the young in a generational battle. (It would be possible to reduce the costs of the health care programs by going after the excessive rents of pharmaceutical industry, the medical equipment industry and doctors, but few politicians, reporters, or economists seem to even want to talk about this possibility.)
Basically, Trump seems to have opted to protect universal programs with broad-based support while targeting programs that can be identified as helping poor people of all age groups. Trump’s actions are easy to explain as a political tactic even if they don’t fit any obvious ideology.
30 comments
Comments are closed.
National debt for the US is a political red herring. Far more influential on a nation’s economic well-being is personal debt – which in the US is quite high.
The patent issue is inarguably hurting our economy when it comes to the pharma industry (and iPhones), but there seems to be little stomach for a debate on how to stop the gouging – and medical spending is hurting everyone. If patents were limited to say 5 years, then new drugs would probably hit the market at very high prices to begin with.
Price controls seem to most people to be uncapitalistic unless it is our pocket being picked. Taxation, on the other hand might be a solution. What if there was a windfall profit tax on Pharma to restrain the currently tsunami of greed? After all, healthcare is the only legalized extortion in the USA – pay up or suffer and die. All the other wealthy countries have socialized medicine. We only have it for the poor – Medicaid – which as you point out is about 2/3 the entire DOD budget! That is huge, and I do not mean that Trumpily.
We have effective price controls, and taxation on gasoline. Taxation of corporations has met effective resistance (multinational shell game). Ultimately the money for government comes from printing (and amortizing it by sending the bulk of it overseas) or thru taxation. Ordinary people don’t have the means to resist taxation like corporations do.
So governments survive on the forbearance of their over-taxed ordinary people, and sovereign funds buying vast amounts of new money thru Treasuries. But direction comes from the Elite … this is a disconnect. At some point the ordinary people, and the sovereign funds will revolt.
Issuing paper money (credit) from the Treasury, doesn’t change fundamentals, it only cuts out the middle man, and removes a means of plausible deniability for Congress.
+1.
I work in the private sector and we use MMT-type analysis all the time. Granted, we don’t call it that but my company – oddly to me – firmly embraces this as a more plausible working model for government spending and the economy in general than past neoliberal models. Its important to keep educating people about the myth of taxation funding government spending. I can sense a groundswell moment (in the future) when average people begin to debunk the deficit hysteria but it starts with debunking the taxation funding myth.
Agree 100%. See: Monetary Sovereignty
The problem is that even Stephanie Kelton was unable to convince Bernie Sanders to tell the truth. So he lost credibility when he tried to explain where his “Medicare for All” plan would find the money.
He told a lie because he believed the populace is too stupid to understand the truth. That was the end of his plan.
See the Ten Steps to Prosperity
You expect her to charge into the national media with all that? They’d rip her to pieces. It’d be like a stupid, low-iq bully making fun of someone for being ‘stupid’, but they’d shred her all the same. And pundits like Krugman would pile on.
Personally I think liberals are a bigger obstacle to MMT that conservatives are. Liberals will do the opposite of whatever conservatives do. If conservatives spend, liberals become budget hawks. Conservatives are stupid enough to convince them of practically anything.
The US has underinvested in its people and infrastructure for 40 years. You can’t do that and remain a First World nation, but the rich are totally checked out. They refuse to pay a dime to maintain the country that made them and which protects their grotesque hoards of treasure. The .1% completely own government. Their Ivy League lackeys control the national discourse. They install zombie-eyed granny starvers like Paul Ryan as Speaker of the House. And so we get temper tantrums about a woman kneeling on a couch and mentally deranged pablum about Social Security in our nation’s newspaper of record. It’s like the 1930s got acid reflux and burped out Mark Censorberg and Donald Effing Trump instead of FDR.
Trump looks too dumb to spend the kind of money we need to in order to make a difference — he clearly has no clue what to do about health care. We needed a leader, we got a manager. That means the only thing that might disrupt the global elite is a huge war. Maybe if we all insert our fingers into our mouths we’ll vomit up a bioengineered plague instead. I bet there are unemployed, rage-filled grad students with $150k in loans working on it as I type. Yeah, let’s strip Medicare and Social Security from people who never even had a chance, who will never be able to afford kids or a house.
More fake news from the economic illiterates at the failing New York Times.
The Interstate Highway System was was started in 1956 when the top marginal tax rate was 90%. It can’t happen now.
Yes, it can happen now. The US government cannot run out of US dollars. If it needs money it hasn’t collected in taxes, it can either borrow it, or simply legislate it into existence. Not doing either of those things isn’t a necessity; it’s a choice.
Here’s an interesting experiment: Go to Wikipedia’s page about government spending. It contains a table of government spending as a percentage of GDP. Notice that you can sort by clicking the headers.
So…in spite of the widespread notion that U.S. government spending is at “drunken sailor” levels, compared to the size of the economy, the U.S. ranks 46th in the world, between Argentina and Luxembourg.
Remove 11% of that spending to normalize military with the rest of the world (and still spend more than twice what the Chinese do) and the U.S. is between Namibia and Bhutan!
Gosh, I wonder why Flint has a third-world water system!
(Note: Wikipedia cites the Wall Street Journal and Heritage Foundation as the sources for the table, and compares per-capita spending–also low–with other economies)
Attributed to Mark Twain: “It’s easier to fool people than convince them they’ve been fooled.”
Time to stop comparing the US to Europe. A more accurate comparison would be to Brazil.
I was thinking Mexico, but point taken.
Yes it is about money distribution. The reasons behind NYT misrepresentation are also clear: they are players in this money game and want their part. Interestingly they completely miss the military thing.
” It is difficult to understand how a major newspaper can so completely misrepresent a strongly and repeatedly stated view of one of the country’s most important political figures.”
NYT is Wall St.’s hometown newspaper. heh.
A lady friend of my mom’s was visiting São Paulo in Brazil and while waiting at a red light in her rental car with her left hand hanging out of the window a couple of thugs in a motorcycle rushed by and chopped her ring finger off with a machete and left with finger and rings…so we are not Brazil levels of crazy yet…
“First of all, it is wrong to describe Social Security, Medicare, and Medicaid as “the programs that swallow the bulk of government spending.”” — Dean Bonkers
It depends on how budget categories are aggregated, but a common pie chart rendering looks like this:
Soc Sec, Unemployment & Labor comes first at 33% of the total; Medicare & Health second at 27%; Military third at 16%. The first two at 60% of the total constitute “the bulk” of federal spending, exactly as the NYT said.
“In contrast to much doomsaying in the media, interest payments as a share of GDP are near a historic low.”
Quite so. Over two hundred years of economic history demonstrates that US interest rates are cyclical, in a generational pattern. They go from low single digits to nearly 20%, and back again. They’ve done it several times.
So WHY, with an explicit target of 2 percent inflation (which has already been overshot by CPI), would we plan on historically low rates forever, when it clearly isn’t going to be the case?
One imagines that after a freakishly warm winter at the Bonkers’ house, Dean exclaims, “Yay! We don’t need to budget for fuel oil no more. It’s gonna be warm forever!”
I don’t think Dean should be in charge in budgeting. But it would fun to drop acid with him. ;-)
+1 also important to understand this pie chart understates government spending on the military. Our nuclear program is funded partially out of the state department, for example. I am not an expert here, but I would guess that real military spending is probably underestimated by a couple hundred billion at least.
Here is an attempt at honest accounting:
http://www.pogo.org/straus/issues/defense-budget/2016/americas-1-trillion-national-security-budget.html
Oh and half of it is slush funds:
http://www.pogo.org/straus/issues/defense-budget/2016/pentagon-admits-half-of-war.html
Yeah, but SS funds itself, it really shouldn’t be part of government spending in that chart or anywhere else as government spending. It’s part of the deception.
Nothing funds anything else when it comes to government spending, for some reason Dean remains unable to make the MMT jump.
There is X amount of money removed from the economy via taxes, then X amount of money coming back in via gov spending (including social security). These are both policy decisions, with no causal or financial relationship necessary between them. The only constraint is inflation, which has never been a problem for the US.
The entire “debt problem” is not only a manufactured crisis but totally false as a point of basic logic.
People are unwilling to relinquish the “debt problem” has more to do with politics I think. If taxes don’t fund spending, then how to justify making the middle class pay such a high tax burden, when it would be far better to remove money by taxing the rich, whose money (these days, anyway) is almost 100% idle. They’re hoarding.
Also, the rich can remove money from the economy just as taxes can, can’t they? When Apple sits on 4 billion and does nothing with it (except shelter it) for years and years, it may as well not exist, right? All the huge companies are doing this …
This basic line of reasoning – the federal debt is a “manufactured crisis” or fiction (more or less) – is frustrating since we know the US gov pays out billions of dollars of interest each year to (mostly) the wealthiest individuals, foreign governments, and most powerful corporations.
I’m not sure if the following quote is entirely accurate, but I found this via a quick google search:
In 2015, the U.S. spent $223 billion, or 6 percent of the federal budget, paying for interest on the debt. In recent years, interest rates have been at historic lows. As they return closer to normal levels, the amount the government spends on interest will rise substantially.
This $200 Billion could be used to reduce taxes on working people, or create jobs for the un- and underemployed. Personally, I’d rather see the money spent on job creation or tax reductions rather than sending those funds to (mostly) very wealthy elites.
Until the US starts printing money itself and bypasses the 3rd party debt system, I think it’s disingenuous to assert that the federal debt isn’t an issue affecting taxpayers who send money via taxes to the government each year.
But Social Security is currently completely self funded, as the trust fund + current revenue flowing into social security covers all benefits.
Even under the doomsday scenario projections, the Social Security can cover the benefits at 80%.
The political posturing against Social Security is similar to having sympathy for a bank that resists a depositor attempting to withdraw their cash.
A comparison to military expenditure would be valid if previous generations had established a large government security portfolio to help pay for future military expenses.
But that is not the case.
https://www.ssa.gov/oact/STATS/table4a3.html
For the most part, almost any discussion on NC regarding finance or economics can be quickly confirmed, denied, debunked or even illuminated to the point of a reasonable conclusion by referring to .gov web pages with a plethora of data.
If you click on the above site you can clearly see the Social Security Trust Fund which includes monies for the disabled, not only the retirement age crowd, is in surplus and has been in surplus for decades and has been growing in the amount of the surplus for decades as well. As a matter of fact, the surplus doubled from 2001-2008 when George W. Bush was in the WH and even during the disaster of the economic global collapse of 2008, the Barack Obama years of 2009-2016 also saw a massive increase in the dollar amount of the surplus, going from $2.54 Trillion to $2.847 Trillion. With all of the lousy wage growth, wage suppression, low minimum wage in the $7/hr range, the trust fund still managed to increase by almost $300bil. And that includes a massive influx into the rolls of disability ahead of the usual time of retirement, 66, or even early retirement, 62.
No doubt, the day the trust fund busts through the $3Trillion mark, President Trump will declare victory over poverty and promises kept by him for the huuuuuggggggge success of his economic policies. The truth of the matter is, Tip O’Neill and the dems crafted a genius reform in the 1980s as part of one of the last great bi-partisan works of government when Reagan was president. Some of the DEATH TO TAX CULT say the republicans were snookered and say, never again, I’m talking to your Grover! Sad : (
Because 200 years of U.S. history has been 200 years of extracting resources from a once brimming-full continent. Automatic Earth has posted a reminder.
Please, show us the generational pattern of interest rates and explain when and how much will rates increase.
This is a math issue now, not political. Anyone who has been reading local and state budgets/CAFR’s can see it. Debt is being issued (in my state anyway) to fund budget gaps, locally municipalities have been deficit spending for years, over a decade in some cases. The YoY increased in both bond issuance and debt servicing is astonishing. To be fair, at least the powers that be rolled over most of the debt when money was cheaper, before The Fed slightly raised rates, but I’m still skeptical on who is being served if The Fed raises rates again. I’d argue The Fed won’t, just because they have to see what we see, or, they truly are serving the few.
As for Medicare, last years Treasury statement states $595 billion, but the line item down further, “Total–Centers for Medicare and Medicaid Services” is $1.4 trillion, that’s a problem. Take a look at budgets and how much money is dedicated to the program and then run the YoY increases. The COSTS of these programs have a terminal velocity date, which is the only unknown. Since most of those who voted this paradigm into place in the name of profiteering, I doubt we’ll see a solution over the next few years.
Eat cake anyone?
https://www.fiscal.treasury.gov/fsreports/rpt/mthTreasStmt/mts0916.pdf
Perhaps worth pointing out that Dean Baker started his longstanding Beat the Press blog with the specific purpose of pointing out factual errors in WaPo and NYT reporting about economics. MSM malfeasance didn’t start with Trump.
The over the top hysteria, however, may be new.
The reaction of our coastal elites to Donald Trump reminds me – strongly – of the Reagan right wing’s reaction to the election of William J. Clinton. In 1992, their sneering, snarling fury was a thing to behold. It was similarly sourced in the belief that Clinton had acquired something that they were entitled to – the Presidency. They had jack in the legislatures and state government back then, just like Dems have jack now. The thing is, they were at the beginning of a long, slow uphill climb to power. I doubt the Democrats are anywhere near that well-positioned.
They may be lucky in their opponents, however. Trump’s boys really seem to have the bit in their teeth; they’re running wild with all kinds of lovely little plans to bring back the good old days. Ignoring drug price gouging, handing out sweetheart toll road contracts, harassing U. S. citizens at border crossings, bringing back the war on pot, enhancing opportunities for “civil” asset forfeiture……. yeah. That will bring about some Republican Rapture real fast.
I’m no economist, but I’m really put-off by Baker’s blithe hand-wave about interest rates. Greenspan wrecked the economy when ZIRP was instituted to fund W’s tax-cuts for the rich and wars-without-end. Government payments on interest are only “near a historic low” because rates have been set uneconomically low.
The vast majority of people who will depend on savings and pensions, funded by interest payments on safe investments, have been taxed of virtually all their income under ZIRP. Meanwhile, ZIRP has not only funded idiotic levels of government borrowing used to transfer wealth to cronies in the Military-Industrial Complex, but also the use of leverage to loot entire industries and of asset prices to loot people’s need to shelter and educate their children.
Trump and Ryan are simply engaged in interest-group theater. They will continue policies that transfer wealth to the Military-Industrial Complex, Big Pharma, and FIRE — just like their predecessors did. They will threaten Social Security only to then do what they can get away with without angering the tiny plurality of voters needed to stay in power.
Has Congress ever had qualms about using the SS fund to pay for spending elsewhere in the budget? I’m sure if needed they would re-write the laws so it could draw from the general fund, rather than risk the wrath of angry senior voters. The idea of the fund being “separate” has always been more marketing gimmick to win over conservative voters than anything resembling a real lock box.