Joe Firestone: Dear Dr. Krugman – Please Let Me Explain

By Joe Firestone, Ph.D., Managing Director, CEO of the Knowledge Management Consortium International (KMCI), and Director of KMCI’s CKIM Certificate program. He taught political science as the graduate and undergraduate level and blogs regularly at Corrente, Firedoglake and Daily Kos as letsgetitdone. Cross posted from New Economic Perspectives

Paul Krugman can’t explain why the deficit issue has suddenly dropped off the agenda. He says:

. . . quite suddenly the whole thing has dropped off the agenda.

You could say that this reflects the dwindling of the deficit — but that’s old news; anyone doing the math saw this coming quite a while ago. Or you could mention the failure of the often-predicted financial crisis to arrive — but after so many years of being wrong, why should a few months more have caused the deficit scolds to disappear in a puff of smoke?

Why indeed are they so quiet? Could it be because the deficit hawks have succeeded in getting the short-term result they want, which is a likely deficit too small to sustain the private savings and import desires of most Americans, and also because the political climate is such right now that they cannot make progress on their longer term entitlement-cutting program until after the coming elections have resolved the issue of whether there will be strong resistance to such a campaign if they renew it? Let’s look at the budget outlook first.

Here’s CBO projecting deficits of 3.0% of GDP this fiscal year, followed by 2.6%, 2.8%, and 2.9% for fiscals 2015, 2016, and 2017. Those deficits are mostly smaller than Warren Buffett’s and the Eurozone’s favorite deficit target of 3.0%. They are the same too small deficit targets that have prevented the Eurozone’s PIIGS from responding effectively to the crash of 2008, and the prolonged depression and astronomical unemployment rates which have engulfed them since. When one considers that CBO’s projections are usually too conservative when it comes to projected deficits, so that the reality of these is likely to be smaller, as it has been regularly, for the past few years, then it’s even more apparent that Peter G. Peterson and his other austerian friends have gotten where they want to go for the time being.

Nor are there any other major influences in Washington, DC advocating higher deficits. Even “progressive” groups and politicians always talk about “pay fors” and offer 10 year deficit reduction plans that envision deficits averaging far less than the 3% target.

So, the deficit hawks have already gotten to their short – term goal. Their long – term goal of hollowing out the social safety net has met with increasing resistance over the past four years. And the resistance is strong enough that the Democrats have no stomach for bipartisan compromises cutting Medicare or Social Security for the present.

The deficit/debt hawks now need a breather. They needed to go into wait-and-see mode to see what the elections of 2014 produce.

If they produce the right mix of tea partiers, and Republican and Democratic debt hawks. They may be able to produce a new “Grand Bargain” early in 2015 before 2016 election pressures become intense, and the influence of Hillary Clinton’s candidacy on Democrats in Congress becomes too great. I say this not because I think that Clinton will necessarily oppose any such bargain in the long term; but because such a bargain would be risky for her candidacy and the Democrats in the run-up to the elections of 2016.

So, from my viewpoint I don’t think the time is propitious for the deficit/debt hawk forces to keep pressuring for entitlement reforms and a long-term solution to their favorite, and non-existent, financial problem of excessive public debts in fiat sovereign nations like the United States. And I think they know that.

Instead, it is a good time for them to regroup and plan their next attack on entitlements. That will come under cover of the Republicans’ next debt ceiling attack, which is a good possibility for March of 2015.

So, I see the Peterson forces beginning to beat the drums again towards the end of the year and build up the intensity of their appeals from January to March. I don’t see a strong move to cut entitlement spending in the lame duck session, since there will be no debt ceiling cover then to generate leverage heavy enough to get Democrats to accept part of the blame for cutting entitlements.

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  1. washunate

    “…a likely deficit too small to sustain the private savings and import desires of most Americans…”

    The problem is not in the aggregate. It is in the distribution.

    1. MyLessThanPrimeBeef

      You’re absolutely right – it’s the distribution.

      Moreover, with money-creation by the people spending it into existence, instead of government spending it into existence (it’s a tough job and so let’s not abuse our servants, correction, public servants) we can finally put a stop to imperial adventures behind ‘government is not a household.’

      Imagine, if the Fed is only allowed to buy the people’s securities, then, the more the people borrow, the more savings the government can have.

      That’s just a fancy way of saying, the more the people create money out of thin air, the more savings the government can have!

      So, we ask, why can we create money through the people spending it into existence?

      The people, meaning those beings that public servants like politicians answer to.

      Why don’t we create money through the people spending it into existence?

      How many people would like that?

      1. hunkerdown

        It’s a neat pet theory, but doesn’t address the problems of distribution or allocation. The greedy are still likely to come out ahead, and likely to exploit differential resources into a private power structure.

    2. Calgacus

      The problem is not in the aggregate. It is in the distribution.

      Its not about either, but “aggregate” is perhaps closer than “redistribution” – which usually incorporates an essential part of the plutocratic narrative – the ludicrous idea that what is absurdly characterized as government “intervention” can’t increase the aggregate, and in particular, what goes to the 99% – as a universal win-win, free lunch. Wray says “predistribution, not redistribution”. MMT is neither pro-growth nor de-growth, but a-growth. Although it would naturally cause enormous growth right now – the same way that escaping from prison increases freedom.

      The wealthy as a class actively and continually sabotage production, economic growth, progress in science and technology and thought. Violently prevent the lesser people from supporting themselves. Let the rich could keep their usually ill-gotten gains. Just prevent them from attacking and robbing everyone else, above all by the insane social phenomenon called unemployment.

    3. Joe Firestone (LetsGetitDone)

      Right, it’s also about the distribution. However, the economic and political power of the 1% ensure that a disproportionate amount of the aggregate net private savings will go to them. Meaning that the 99% will certainly be in a net savings position that is negative when the deficit is only 3%.

      1. washunate

        Professor, that’s where we disagree. It is not also about the distribution. It is solely about the distribution.

        The US possesses enormous net wealth. The only question is how the resources are allocated.

  2. TimR

    Remind me again… I know the ostensible reasons the Pete Petersons want to cut debts and deficits (their propaganda reasons), but they don’t all really believe that at the top, right? They understand the US has run deficits most of its history, and that a sovereign government is different from a household. So what are they really after in damaging the long-standing business-as-usual procedures (which can be debated of course, but not along their propaganda lines)? I assume the Pete Petersons have some class angle in it naturally, but they do have financial stakes in the private sector, and throwing a wrench in the gears of the economic system would seem to harm them as well as the public?

    1. NotTimothyGeithner

      There are transcripts of the whole event around Mitt Romney’s 47% remarks. There are a good deal of fascist-types out there, but Mitt Romney’s “gaffe*” was the probably the most intelligent thing uttered.

      *I actually don’t consider Romney’s remarks a gaffe. The rest of the video was so full of insipid conversation Mittens was merely just trying to string together appeasing words to the big money donors.

      The MOTUs of today are just as smart as the MOTUs of yesteryear. Computers haven’t made them smarter.

    2. James Levy

      I think they believe that crippling government’s ability to do anything and be seen as useful helps them privatize everything in the long run, and if the economy is tanking, gobble up those privatized assets at rock-bottom prices (along with the assets of ordinary people desperate to unload homes, stocks, bonds, and precious metals). These men have such an awesome cushion that they can watch the economy go down by a third and not fear losing it all themselves. Unless the entire system collapses, they in fact can come out ahead by gobbling up distressed assets at the trough of the market. This they did during and after the 2007-9 collapse. And they can always get the government, which the denigrate and try to delegitimize in normal times, to ride to their rescue when the system seems endangered (which it was for a few weeks or months in 2008-9). So they take risks and try to scare everyone into cutting the deficit at the worst time.

      1. TimR

        Maybe that’s it.. Seems like they must have a lot of time on their hands if that’s all they’re after. Maybe they’ve got some more sinister master plan even than that behind it all? I don’t know. If I were them I’d take craazy’s advice and watch Lorde videos (or whatever he recommends, I forget) and drink red wine and (not that I’d know) quaaludes…

    3. Benedict@Large

      It’s not about when the Social Security pays out its last dollar (which is what they are saying), but rather when it pays out its first dollar. THAT is what they want to avoid. You see, we can talk about there being a trust fund and all that, but in order to pay out from that fund, revenues have to be diverted from the general fund first. Every single dollar that comes out of the SS trust fund must first be put back into that fund, and that takes money the rich wanted to play with away from them. The rich cannot abide by that, and so they are effectively telling us that there is no trust fund; that FICA was always and only just a tax.

      1. Ben Johannson

        SS doesn’t come from general revenues. When administration makes payments a securities account is debited and reserve accounts are credited. That’s why the fund consists of Treasurys, they’re dollar balances.

    4. Joe Firestone (LetsGetitDone)

      First, it doesn’t harm them to the same degree. So, second, they’re interested in the exacerbation of inequality as a result of holding the economy back. Some people have always been interested in killing democracy and replacing it either with aristocracy or oligarchy. The more they put most people in a subordinate position, the better they like it, especially when they have so much power that the law doesn’t apply to them. And third, the Peterson types are not for things like Government shutdowns or disruptions of the government. That’s just the tea partiers. The Petersons are just for squeezing the frogs more and more each year with small deficits, and they think the can cushion further crashes by using the Central and bank and inadequate fiscal stimuls programs like the one passed in 2009.

  3. psychohistorian

    Social Security Insurance is not an entitlement and I am offended that Joe Firestone buys into the ongoing misrepresentation of it as such in his otherwise insightful reporting.

    1. Linden

      “Entitlement” in this context is a legal term of art, and it’s accurate. People who want to destroy Social Security have seized on it as a word they can imbue with unsavory connotations.

      1. Ben Johannson

        Yeah, an individual’s right to receive a benefit provided by law. So how is SS not an entitlement?

    2. Joe Firestone (LetsGetitDone)

      I’m sorry you’re offended. I embrace the word “entitlement.” It means my SS is a matter of right! And I’m willing to fight and die for my rights. How about you?

      The word “entitlement” has been poisoned by the right wing and the gutless so-called liberals and progressives who would not defend it. Americans have entitlements. Here is what we are entitled to: and what we should fight for

      and don’t youor anyone else forget it!

  4. TheCatSaid

    “Entitlement” is a word being used by those who want to dismantle or privatize SS as a word now imbued with negative connotations. The word is used to imply that many people (lazy? undeserving?) feel “entitled” to a free handout at the taxpayers’ expense. (This would put recipients in a category similar to Reagan’s fictional “welfare queens” feeling “entitled” to government support.)

    SS is not an “entitlement” in the inaccurate “handout” context, because eventual recipients have paid into those funds–they are not a free handout by government, it’s people getting their own money back.

    From a literal standpoint, people are indeed “entitled” to receive their SS benefits since they had paid into SS during their working lifetime. The word “entitlement” has been used to deliberately frame SS as something negative, and to mislead as to the source of the funds.

      1. Lambert Strether

        Hmm. I don’t think of the Bill of Rights as a set of entitlements. An entitlement can be granted or taken away by regulation or statute. A right requires a Constitutional Amendment. The bar is higher for the second for a reason, is it not?

        1. Joe Firestone (LetsGetitDone)

          I understand your point Lambert. But, I wonder if you get mine?

          When something is a right of someone; then that person is entitled to get what the right asserts. In FDR’s second bill of rights the rights to social security and a basic standard of universal health care are asserted. Therefore are entitled to what those rights specified, not because we paid into SS or Medicare, but because SS and a decent standard of health care are rights of every American citizen, the fruits of which, Social Security and Medicare for All, all are entitled to.

          I don’t claim that these entitlements are honored by our Government now, though SS is honored in part. What I claim is that the Government owes us these and the other guarantees in the second Bill of Rights, and that we ought to collect on that debt. Not apologetically, but proudly and assertively, and woe to any benighted 1% who attempts to stop us from getting what we’re owed. That is the kind of rhetoric we need. Not the rhetoric that that SS is not an entitlement by right, but is something to which we are entitled because we earned it.

          That last was FDR’s first justification for SS, But the Second Bill of Rights came later, and therefore should be viewed as superceding and replacing his earlier rationale.

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