Opinion

David Cay Johnston

Fact-free fiscal farce

By David Cay Johnston
August 2, 2011

By David Cay Johnston

The author is a Reuters columnist. The opinions expressed are his own.

The Washington debate over whether to voluntarily default on the U.S. government’s obligations revealed a serious political ailment in Congress: mass economic amnesia.

Just 11 years ago, Republicans insisted budget surpluses were bad for the economy, while Democrats told us surpluses would make the economy flourish. Al Gore said pay off the federal debt; George W. Bush said cut taxes so people would have more money.

During the Bush years Democrats decried the red-ink budgets, while Republicans assured us that no real harm would come from a $5 trillion borrow-and-spend spree.

Yet last weekend it was the other way around. The Democrats described a few more years of deficit spending as vital to making up for massive loss of jobs, while Republicans warned that any more red ink would destroy America as we know it. Feeling confused? You should be. And maybe, like the Beijing government, you see the checks-and-balances the framers of the U.S. Constitution put in place to provide sound government replaced by farce.

There is a cure for bad political posture. Just dose yourself with the best elixir ever for manufactured crisis: facts. The posturing in Congress having stretched any sense of reality beyond recognition, here are 10 facts that would have informed the debate on Capitol Hill and can certainly inform your understanding of the federal fiscal follies:

COUNT TO 10
1. No sovereign government with monopoly control of its currency can go broke in its own currency. Since the Constitution gives Congress a currency monopoly it is axiomatic that talk of our government going broke is nonsense unless we have a revolution, in which case federal bonds won’t be worth the electrons used to keep digital track of them.

2. Gross federal debt today is up 250 percent from when President Bill Clinton left office, and up 35 percent from when President George W. Bush left office, but the government’s blended average interest rate has fallen 54 percent since Clinton and 22 percent since Bush, suggesting that the bond rating agencies’ warnings about the chances that federal debt will be serviced as promised are as reliable as their estimates of the likelihood that all those mortgage bonds would be Triple A investments.

3. Had America stuck by the tax-and-restrained-spending policies of President Clinton, and his budget projections proved reliable, the government today would have no debt. Instead it would have a surplus of $2.1 trillion, or nearly $7,000 per American.

4. President Obama’s first budget, for fiscal 2010, that began on Oct. 1, 2009, had a smaller deficit than President Bush’s last budget, which promised a $407 billion shortfall, missing the mark by only a trillion dollars.

5. Those Wall Streeters President Bush bailed out in his final days continue with their risky bets because, being too big to fail, they sense Washington is ready to bail them out by swapping their red ink for government black ink, a belief reinforced with campaign contributions to make sure the government spends little on banking regulators.

BOTH POLITICAL PARTIES
6. President Obama’s original budget ended a host of Bush-era devices that understated budget deficits, while at the same time laying out a plan to cut the deficit he inherited by half, partly by raising taxes on the top two percent of earners, but the Republicans most worried about red ink worried even more about taxing billionaires too much.

7. Federal budget deficits as far as the eye can see would be significantly smaller but for Obama acquiescing to Republican demands to extend the temporary Bush tax cuts for all and Democrats, who also rely on rich donors, meekly going along with it.

8. Federal individual income tax revenues in 2010 were smaller than in 2001, the recession year when the Bush tax cuts began. Revenue was down by $330 billion or 27 percent. Because America’s population keeps growing, income taxes per capita fell 32 percent from $4,310 per American to $2,910, making it harder still to balance the budget.

9. Healthcare costs rose just 3.9 percent in 2010, the smallest annual increase in modern times, according to the federal Center for Medicare & Medicaid Services actuary, while by 2020 the Affordable Care Act (what critics call Obamacare) will add just a tenth of one percentage point to healthcare costs while adding 30 million more Americans to health insurance rolls.

10. The deal to avoid voluntary default calls for squeezing Medicare and Medicaid spending even more while making sure the richest among us enjoy lower tax rates than the middle class do. A result will be more luxuries at the top, while pushing 40 percent of hospitals toward bankruptcy, though not until 2050 when about 40 percent of Americans living now will be beyond any benefit from hospital care.

Both political parties contributed to our federal debt. Manufactured crises like the debt ceiling vote mask the real issue, which is our desperate need for prudent policies that create broad prosperity by taxing, spending and managing debt for the good of country, not party.  (Editing by Howard Goller)

Comments
16 comments so far | RSS Comments RSS

Excellent article, and of course the ‘logic’ of it all, as you indicated, is that the GOP caters to the corporations, not the people. What a farce indeed!

Posted by w.burton | Report as abusive
 

Good article, however, if you want to emphsize facts, then you should say that the proposed tax increases are on those making $250,000.00 ($200,000.00, $150,00.00 ?) not the $1,000,000,000.00 that you and others seem to throw around so much. Also, I would like to point out that the vote is about extending the debt ceiling, which if not done is not necessarily the same as a default. Lastly, when speaking of a government surplus, it would be more accurate to say a projected surplus, since there is a high likelihood that our politicians will spend any possible amount of money collected in taxes on goodies for their constituents to help their election campaigns. It would be helpful to the debate if the journalists on all sides would refrain from taking such liberties with the facts, so that your readers could understand better what is going on far away in D.C.

Posted by zotdoc | Report as abusive
 

Thank you but as we all know the debate is not centered on the facts, but ideology.

Posted by seattlesh | Report as abusive
 

You nailed it! I recall the positions of the two parties exactly as you have spelled them out. I am always amazed at how easily people seem to forget the obvious. And we aren’t talking a generational distance, either. It’s only been about a decade.

And may I add one more point? The 2 trillion in ‘cuts’ that have been agreed to merely negates the 2 trillion spent on the unnecessary war in Iraq. If not for that fiasco our debt situation would be far better.

Posted by IntoTheTardis | Report as abusive
 

1. true—we can print our way out of debt and REALLY damage our credit rating

2. another explanation might be the global savings glut Bernacke has mentioned on numerous occasions.

3. the events of 9/1/01 caused us to spend significantly on two wars, one probably justifiable, the other one not.

4. republicans don’t like to hear it, but w’s spending contributed heavily to our current situation.

5. I agree with the moral hazard argument being made here. Unfortunately, the banks occupy a very unique role in our economy, you may not like it, but if you let ‘em fail (and I’m usually for letting stuff fail) the collateral damage to the economy will be high.

6. raising taxes in a recession/weak recovery is always a bad idea. Small business is a huge engine in job creation and lots of small businesses are started/owned by wealthy people.

7. see point 6.

8, 9, and 10. we have a fundamental decision to make. we spend money like a socialist country with lots of social spending programs, but we tax like a country with limited government social programs. We need to decide which one we want to be. I vote for low tax and a smaller scope of government as I think the economy works better in that scenario.

For the short term, we need to ramp up/ramp down these changes as we’ve become Keyensians addicted to lots of government spending. cutting it off all at once would be a problem, but we do need to scale it back over time. The old rule that says reasonable deficits are okay during lean times BALANCED by surpluses in go-go times still makes sense to me.

Posted by jambrytay | Report as abusive
 

What?

No mention of who was in control of congress during the years that the deficit balooned?

Are you saying that the President writes all the spending bills and the house and senate just get to vote on them?

If so, when did that change in how our government is structured occur?

The last thing I knew, Congress writes and passes all spending and the President can choose to veto, sign, ignore, with a possible congressional override of vetos and ignores.

If your only going to throw things on the President in power, then what about O’bamas $4.2 “bump” in the deficit since January 2009?

And what other President ever added $4.2 trillion to the deficit in just slightly over 2 1/2 Years?

Posted by bobw111 | Report as abusive
 

@seattlesh has it right, its all about ideology. Do we believe the private sector will get us out of this mess, or do we think that Government must play a role. @jambrytay seems to think that socialism gets in the way of the free market. I would just like to remind the free market idealogs that an unregulated free market:

1. Regulations would have prevented the great depression.
2. Deregulation lead to this horrible recession.
3. China grows over 10% a year in a blend of free-market and central-government control.
4. America’s growth in the 1950′s and 1960′s was largely funded by Government policy and programs that taxed the rich at over 50%.
5. Bush’s tax cuts have not created jobs and may have contributed to off-shoring.

Since the private sector with all the tax cuts, still is ineffective at producing a recovery, it is time to recognize that Government has an important roll to play. The rich are getting richer and the poor are getting poorer. Isn’t that fact cause enough to question our blind faith in the free market? I think it is time for a reasonable approach to the situation based on sound economic principals and facts – not ideology.

Posted by LEEDAP | Report as abusive
 

to LEEDDAP-

1. wrong, business cycle will always be with us in some form; it’s not a linear animal.

2. wrong, multiple causes.

3. china starting from such a low place 20 yrs ago economically, all they can do is grow. you’re comparison is like comparing growth rates of a start-up v. an established company.

4. it’s not just about tax rates, it’s about the change in tax rates and the impact that has on forward looking business planning.

5. if you don’t like offshoring, stop demanding cheaper, faster, better when you shop. companies are just doing what the consumer is pushing them to do. over the long haul (the correct lens to judge economic performance) the % of families in the lower income group has dropped i.e. poorer households are becoming middle class households.

Posted by jambrytay | Report as abusive
 

David, David, David — come on, who controls the budget? Congress? Then let’s see your pie chart percentages re-done to reflect who was ACTUALLY in control of the budget by political PARTY, not President. FYI – From 1981-89 Democrats controlled the house when Reagan was President, as well as when George W. was President.

As for growth of national debt by “percentage”, would you quantify that number in dollars, and also state it by who was in CONTROL of the budget.

Yes, David the “facts” can prove anything. Please have the integrity to re-post your blog with who was ACTUALLY in control of the budget, and then re-state your arguments.

Posted by elusivesolution | Report as abusive
 

A very good piece indeed!

Some of the contributors, seem to aim at the houses instead of blaming the president of the day in the building op of earlier deficits…and indeed look at the current situation …, do we see any of President Obama’s ideas in this solution…no….he had to give in to because of the blackmailing … from the side of conservatives in politics. In the current situation his ideas would have been far better for the country.

Have the Democrats been street fighting for their cause in the past, like the right wingers have done this time?..no, there was reasonable for and against and, generally speaking, an intelligent political climate also from the elephant’s side. Things have changed for the worse in a terrible way since the rise of the tea party.

Regrettably we all in the West seem to be going insane because of this crisis, look at Europe, that, with a far better running economy, is still being pushed over the brink by financial manipulators like Standard and Poor, Moody’s and the like, after all these companies are paid by investors, who, WANT TO MAKE MONEY, at any cost (for the people) and that all because also there populist run the anti progressive show.

Of course the big problem in economics is not the deficit in the budget, which is only a consequence of other far more important factors, the non ability for lots of people to make a decent living.

I wrote down earlier on the discussion about the difference in opinion between economists:

“Is not there a conflict of interest between business economy (outsourcing…cheapest location for labor)/financial economy (profit for the shareholder) and the national (social) economy.

The latter demanding proper wages, based on our level of cost, allowing us to buy goods…that are currently made by our companies on foreign shores?… Hence, the impossibility of significantly creating jobs out of QE?

Was the problem of a high tech and liberalized future probably overseen when Reaganomics started to grab hold of the economic thinking?

In that period China was still an isolated country, Russia was badly governed, Brazil was more or less a banana republic….this all changed since the end of the Reagan era, big milestones 1989 (Eastern European and Russian “revolutions” 1995 opening up of China and since of course India has to be added as well and so has Brazil.

Reallocating exported jobs (good example of money made by workers outside the country working for American companies…I-Pod, I-Mac) would actually need stronger government, more jobs to create more jobs, because effective change must be “promoted”
i.e.

1)Import tariffs of 50-100% on the production (FOB) price of imported too cheaply produced goods (difference in wage level of up from 3:1) produced for home based as well as for competing foreign companies . (countries’ traditional produce should be exempt) and ban the lobbying on behalf of outsourcing businesses. (In an ideal world all lobbying should of course be banned.)

2)Only in case the low wage countries increase the salary’s for industrial workers substantially (25%) per year (Fordism), in order to create more home consumption…this tariff should be reviewed.

3) Investment in solar energy and, for instance, desalination plants to recreate fresh water. Solar energy would strongly help to improve our trade balance. (no import of oil) and would create a lot of profit making jobs

4) Re-introduce reasonable taxation for the very high earners. (quit often these profits result from profits, made on outsourcing/ boundaryless thinking, or financial manipulation of other men’s earnings)

5) Create new industries cradle to cradle for instance. And invest more in our existing advanced technology base, space techniques for instance.

Posted by Checksbalances | Report as abusive
 

@ jambrytay
Marxuist way, Marx is still very popul;ar in China, he has helped them a lot…his analyses were always right butb until the current Chinese way of supporting their people his ideas have always been interpreted incorectly.

The government there strongly promotes (with the support of the IMF)low inflation (maximum 10%)

At a salary difference of 1:10 that means that if our incomes stand still, it would still take at least 25 years for them to come along side this country…Can we wait that long?

Posted by Checksbalances | Report as abusive
 

Just…wow.

It is one thing to have a debate about spending, the size of government, etc…

But no, facts can NOT be used to “say anything.” Facts are FACTS.

For those trying to blame Congress for the Bush tax cuts of 2001 and 2003…they are called the “Bush tax cuts” for a reason! That was HIS fiscal policy. They were passed by the 107th & 108th Congresses, respectively. BOTH of these Congresses had REPUBLICAN majorities. These are all FACTS. Look it up if you doubt me–it’s information that is very easily attainable.

So, since the Bush tax cuts, passed at the same time we were waging two wars!!–created the deficit in the first place (and that is a FACT–look it up), it is indeed Republicans who created the deficit–and Vice-President Dick Cheney (a REPUBLICAN) who said “Deficits don’t matter.”

It IS a fact that Republicans have only recently gotten religion on deficits.

Oh, and one more thing–who was President when they had to add an extra digit to the National Debt Clock, because the number got so huge it wouldn’t fit on the old one?? One guess. (Look it up!)

Posted by Unintended | Report as abusive
 

The goal of ‘every’ politician is REELECTION, ‘every’ interest group IS selfserving to the exclusion of ALL! The ‘only’ way to facilitate this ‘cabal’ in these times of instant information? Muddy the waters! AMERICA, you can’t clean up the water till you get the pigs out of the creek!!!

Posted by sfrmyk | Report as abusive
 

Sorry, I missed a bit when pasting:
Wrong,

It will take ages for us to be competitive with China again.

They work in a way that capitalism (our capitalist greed)supports communism, in fact they handle their economy in a proper Marxist based way, Marx is still very popular in China, he has helped them a lot…his analyses were always right, but until the current Chinese way of supporting their people, his ideas have always been interpreted incorrectly.

The government there strongly promotes (with the support of the IMF and our..multi nationals’.. low cost/high profit attitude) low inflation (maximum 10%)

At a salary difference of 1:10 that means that if our incomes stand still, it would still take at least 25 years for them to come along side this country…Can we wait that long?

Posted by Checksbalances | Report as abusive
 

All good facts, analysis and argument… but, thank goodness we have enough Tea Party members in Congress to stop the rush to a huge increase in the debt limit, demand equal or greater reductions in spending, and get this country refocused on managing our budget. The budget battle is right around the corner. We have a representative Congress and for the first time in a long time, it brought enough of a third point of view representation to cause this Government to try and redirect it’s out of control growth and spending addiction toward a more fiscally responsible direction.

Posted by Anonymous | Report as abusive
 

The author weakens his argument by including Obama in his numbers. Actually, by doing so, he furthers the Tea Party argument about this President’s spending.

According to his chart, Obama has added 26.4% of federal debt in a little over two years while GWB added just 8.4% more than Obama’s debt in EIGHT years.

In addition, all spending is appropriated and issued by Congress, not the President. It seems that if you look at the chart, the highest percentage amount and dollar amount increases occurred during the democrats majority rule of congress (during Reagan and GWB terms).

Posted by gooms | Report as abusive
 

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