The ‘Obama debt’ fallacy

By Lawrence Summers
November 5, 2012

Writing on behalf of the Romney campaign, my friend Mike Boskin has responded to my column from last week that argued that in a number of areas of economic policy, President Obama has the superior vision. Boskin condemns what he refers to as “Obama debt” and argues that Governor Romney has a better plan that he asserts offers “a superior alternative of balanced budgets.” While I was not writing on behalf of the Obama campaign and my piece had a much broader focus than budget deficits, several responses are appropriate.

First, Boskin is correct in noting that current budget deficits and rates of debt accumulation cannot be maintained indefinitely, and that stabilizing and ultimately reducing the debt-to-GDP ratio is important if all sorts of economic horrors are to be avoided. This is a point of agreement between the two candidates–not a basis for choosing between them.

Second, Boskin blames the current high level of deficits on President Obama’s policies, but that is hard to square with the facts. When President Clinton left office in 2001, we were paying down the national debt at the rate of several hundred billions of dollars a year with budget surpluses. Since that time the Bush administration moved the United States substantially into budget deficits with large tax cuts, major military commitments to wars in Iraq and Afghanistan and a new prescription drug entitlement ‑ all undertaken without offsetting expenditure reduction or increasing revenue. Beyond these decisions, the largest factor in the current level of deficits is the worst economic downturn since the Depression ‑ a downturn that began under President Bush. People will debate the merits of President Obama’s stimulus measures ‑ though I think their positive effect on growth and employment is quite clear ‑ but this debate matters little. Government employment has been contracting, and the debate over stimulus has largely faded.

Third, Boskin blurs the facts on who has been constructive with respect to deficit reduction. In addressing the Simpson-Bowles plan, he neglects to mention that the plan was dead on arrival when presented in November 2010 because of the implacable opposition of House Republicans, led by Paul Ryan who voted against the plan within the commission. It has long been clear that President Obama is prepared to reach an agreement based on the underlying principles of Simpson-Bowles. But that has not been possible because Congress is unwilling to raise revenues in addition to cutting expenditures. Governor Romney seems to share this resistance, having vowed that he would not accept even $1 of revenue increases for every $10 of expenditure cuts.

Fourth, in asserting that Governor Romney has a plan to balance the budget, Boskin is blithe, to say the least. Relative to current law, Romney has committed to a 20 percent tax rate reduction that independent observers calculate as costing $5 trillion over 10 years; defense spending increases in the $2 trillion range; and preservation of President Bush’s tax cut for the top 1 percent of taxpayers that costs $1 trillion. He has said nothing about how this is to be financed other than referencing loopholes for high-income taxpayers. Unfortunately, as independent analysts have repeatedly pointed out, there are not nearly enough loopholes. Even if he closed all tax credits and deductions for high-income taxpayers, he could not offset the cost of his high-income tax cuts, let alone the cost of his entire program. And this is before any consideration of the cost of balancing the budget.

Only the election can stop this kind of back-and-forth argument. This campaign has offered a superb contrast of the economic approach of President Obama and Governor Romney. Obama is carrying on the approach pursued by President Clinton. Romney would go back to the tactics of both Presidents Bush. The results of the two approaches in terms of economic growth, job creation, government debt and virtually every other economic statistic speak for themselves.

PHOTO: U.S. President Barack Obama speaks at a campaign event at Fifth Third Arena at the University of Cincinnati, November 4, 2012. REUTERS/Larry Downing

13 comments

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The current deficit is NOTHING compared to what the deficit was right after WW2 (as a percentage of GDP). We have been fighting two wars for a decade and are still fighting one. The US has also been spending over a trillion dollars to rebuild two countries. We survived the WW2 deficit, I am sure we will survive the minor one (compared to 1945) that we are in now.
Romney is drooling to think that me might be able to step in and claim he is responsible for the current recovery which is still in progress.
Apparently a lot of people were not in the US prior to 2009, or they would know what it was like then, and how much better we are off now.

Posted by americanguy | Report as abusive

@americanguy: Perhaps the USA was only able to pay down its massive war debts so quickly because the USA was the only industrialized country that hadn’t been smashed to pieces by 1946 (so that US industrial production then overwhelmingly dominated a world economy with overwhelming demand).
~~~
QUESTION 1: WOULD IT BE SAFE to repeat this debt experiment in modern economic circumstances, with a globalized economy based on a diverse market of competing industrialized nations, where production capacity increasingly exceeds intrinsic demand, and where this trend is expected to continue into the future?
QUESTION 2: WOULD IT BE MORAL to get into debt now, to the same extent as our grandfathers did in WWII, merely to maintain our current oil-economy-based standards of living for a few more years, rather than to overcome an existential threat?
~~~
ANSWERS on a postcard… (I somehow missed your answer on the other thread!)
~~~
RE: Your other point:
“Apparently a lot of people were not in the US prior to 2009, or they would know what it was like then, and how much better we are off now.” — You may personally be better off, but looking at a wider range of economic numbers, I personally conclude that the lessening severity of the recession is an illusion, paid-for with more debt.

http://www.taxpolicycenter.org/taxfacts/ displayafact.cfm?Docid=200

15–16% federal taxation by GDP,
24–25% federal spending by GDP.

These numbers have hardly budged during Obama’s presidency, and while BushII created a lot of this problem, we didn’t know how bad it was during his tenure; yet now we DO know just how bad BushII was, Obama is doing almost NOTHING about it. If Obama had been serious about this problem, he would have used his veto more; but instead, he has used his veto LEAST rate of any post-civil-war president excepting only James Garfield (assassinated after just a few months in office)!!!
http://en.wikipedia.org/wiki/List_of_Uni ted_States_presidential_vetoes

Obama’s priorities have been instead: spending more money on pet projects. Instead of REAL CHANGE, Americans have got from Obama a continuation of BushII-era policies; where the president might as well don a Santa hat and dole out money to all his favorite voting constituents; except that they do this in ways that maintain the appearance of legitimacy. His near-total lack of restraint over congressional spending is blowing out the deficit, and instead of fixing what he CAN control, he is giving us EXCUSES.

Lawrence Summers writes:
> “stabilizing and ultimately reducing the debt-to-GDP ratio is important if all sorts of economic horrors are to be avoided”
— If I was a bank manager and a customer walked into the bank asking for a loan which they “ultimately” intended to repay at some nebulous future date (rather than starting RIGHT AWAY to pay down the loan/mortgage), I would tell them they should go away and come up with a better plan.

Posted by matthewslyman | Report as abusive

I’ll cut and paste too, in reply to Matthew:

2000-2008: two wars NOT funded by taxes or bond drives, but started at the same time new tex cuts are established; go-it-almost-alone in Iraq hurts U.S. business overseas on top of the war costs to the federal economy. Medicare part D may be the largest non-competitive government health program enacted, why no price competition or volume discounts like VA programs? Finally, 1/2 Trillion for TARP and the auto bailout. Then Pres. Bush (43) steps down.

2009-2011: stimulus about 1/2 Trillion including tax cuts; over this time Obama cuts deficits 1.7 Trillion to 1 Trillion in a steep downward trend. Continued tax cuts contribute to annual deficits, even so, they shrink each year under Obama.

Romney-Ryan-Norquist-Rand plan is to ignore son-of-Simpson/Bowles ‘sequester’ and spend $2 Trillion on defense (more of the same ships for new opponents’ high tech and low tech weapons to target, not research into new and better weapons and defenses — Lindbergh correctly advised the latter in the late 1930′s and early 1940′s), and give away Trillions more in tax cuts for millionaires and ending estate taxes on multi-million lottery-sized inheritances. It’s a Bain like move to cash out now, but we’re not talking about a struggling company, we’re talking about our whole country.

Yes debt is bad, but it’s a lot less bad at zero percent financing, as Suzi Orman might say. Debt at such low interest is not the priority, and can take 2nd place after recovery and jobs stimulus. We need to grow the economy and reduce deficits in parallel, not repeat the 200-2008 policies by adding more tax breaks for Romney’s peer group while shortchanging government-funded research, education and infrastructure.

The GOP plan is cutting off long term investments with big payoffs to instead cash out for short term gain. That’s worse that slowly but surely tackling the deficit as Obama is doing during the recovery.

Intransigent GOP House won’t raise any revenue, that’s why Obama’s deficit / debt reduction is slowed. If Romney-Ryan are elected, suddenly the balanced budget moves – like removing 2004 tax cuts from highest brackets – will be OK with GOP House? I doubt it.

Obama’s focus on STEM and education or training in new technologies are the closest thing we have for a plan to recreate the post-WW2 boom when American know-how, as well as American manufacturing, were leading exports and drivers of our economy. Better to stick with that approach for 4-8 more years than see if we recover by starting another neocon war, with more tax cuts…

Posted by Decatur | Report as abusive

Decatur – you have stated the obvious. Too bad more Republicans don’t listen to reason. Mitt, appropriately known as “Bush on Steriods” will destroy this country. The only sensible way to reduce the deficit is with a balanced plan. You can’t reduce the deficit with more tax cuts and additional defense spending. I’m praying that Obama is re-elected and Democrats still control the Senate – after tomorrow.

Posted by weneedchange | Report as abusive

@Lawrence Summers: I’m linking to the original article you’re replying to, because it’s scrolled off the front page of Reuters Opinion links:
http://blogs.reuters.com/great-debate/20 12/11/02/the-consequences-of-obamas-debt  /

@Decatur: Where are you getting your figures from? They don’t agree with independent data:
http://blogs.reuters.com/great-debate/20 12/11/02/the-consequences-of-obamas-debt  /
I answered your point on the other thread — sorry if this is getting a little confusing (to cut this short I’ll refer you there where you first made your remarks, instead of cutting and pasting my reply and continuing this game of comment tennis!)

Posted by matthewslyman | Report as abusive

@weneedchange: You’re right in all the principles you have stated (although it will take time to see whether your predictions come true). Someone needs to tell Grover Norquist it’s high time to stop it off with his crusade to abolish taxation!
15–16% federal taxation by GDP,
24–25% federal spending by GDP.
As you have suggested, these two numbers MUST be moved closer together FROM BOTH DIRECTIONS, if the USA is going to reduce future economic pain. I have demonstrated, using publicly available data (from taxpolicycenter.org, bls.gov, oil price data etc.) that the optimal proportion of federal taxation by GDP is over 18% in the USA in the modern era post 1977 (perhaps as high as 21%—22%, if you extrapolate from my scatter plots). My study is entitled,
“Reaganomics and prudent taxation”, and is reachable via a search on Google.

OTOH, how is Obama better than Romney on the deficit (when taking into account the mysterious deductions Romney promises to eliminate; and when you take into account Obama’s actual record of NOT regulating congressional pork effectively)? Obama just isn’t a credible counterbalance for vested interests in Congress. He’s got too many of his own vested interests to protect, and he’s apparently too nice to use his veto. I don’t think he’s a villain, but I do think he’s fallen in love with big borrowing & spending along with many American voters. I think you’re all getting addicted on the “stimulus”. China might just as well have you all hooked on opium! (We all know how that went for them, 200 years ago.)

Take a look at some broad-based economic graphs to see how real the current economic recovery is:
http://slyman.org/m_politics/US-Economic -Indicators-graphs-1950-2011-wide.png
— Unfortunately, it appears that the current blip of “recovery” is a sham, created artificially by the continued injection of Chinese money. The US government (White House and Congress, collectively) has been papering over the cracks instead of fixing the problems (what they are paid to do).
You’re in for some real pain unless you get some integrity and backbone in the White House. The Presidential veto is not something to be embarrassed about or avoided; but rather, is part of the constructive genius of the American political system!

Posted by matthewslyman | Report as abusive

@Decatur: Oops! I posted the wrong link to you… Here it is…
http://www.taxpolicycenter.org/taxfacts/ displayafact.cfm?Docid=200
Thanks for your patience!

Posted by matthewslyman | Report as abusive

I’ll just put in a few things that come to my mind in case it has any value and/or validity.

Most of the developed world are on opium.
matthewslyman above has it right. China injects their real wealth into the developed world, giving the mass in these countries a standard of living that is much higher than their appropriate actual supply capability(ie their worth). China buys their debt, to ensure smooth debasing of these country’ currency (cook the frog slowly, the frog won’t notice).

It also damages China, because the Chinese capitalist elites are still running the show. The CCP is fooled by them. They keep advising the CCP to keep currency low so they can export. But it really helps the business owner class. Chinese business owners don’t innovate, don’t create new things. They only do things that other people have done (solve known problems) at cheaper cost.

Keeping wages low for workers helps MOSTLY just the business owners, so China doesn’t compete by making better things (work smarter). China competes globally by pressing their own workforce (make them work harder) and sell to the world cheaper stuff.

Keeping currency low depresses real wage (at global level) for Chinese workers (I thought they understand Marx’s stuff), it helps the Chinese business class sells more stuff, increase their profit. This is the classical exploitation case. So the business owners in China will get richer, inequality there will grow.

Letting wage in China rise will create less jobs for the Chinese, that is a problem. Without things to do and an income stream, the Chinese mass might do another deadly peasant uprising. But they cannot compete by working harder forever. Working smarter should be the way.

I read that some of them say letting real wage to rise (by having the currency rise) cause Japan style stagnation. That’s nonsense, Japan’s GDP per capita was already too high (the second biggest amongst major economies), even higher than Germany. Japan stagnated because there was not much room left (Japan reached the technological limit on the variety of things they can produce and sell, and there were only so many people in the world with money to buy their stuff).

There are multiple problems in the current global system which affect lot of countries not just the US. I seriously doubt who’s at the helm in the US can actually make a material positive difference because the problem is structural all over the world. Having said that, an idiot at the helm making wrong radical change can easily make a material negative difference if not a real disaster.

Anyway I will list all problems in order of seriousness:
1. The underclass (and possibly some middle class) mindless and thoughtless reproductive behaviour.
2. Moral decay everywhere, too many scammers and cheaters who contribute little, has little value yet demand all the privileges. You can’t really make progress when so many people are hell bending on back stabbing another for immediate gain.
3. Overspecialization everywhere, so the workers know his task extremely well but little else. This inflexibility reduces the worker bargaining power (they can’t change job for ex), helps the owners get more leverage, and get richer and richer.
4. Entitlement complexity of the mass and its political representation even in practically developing country (eg Greece)

Now, as Franklin says “Any fool can criticize, condemn and complain. And most fools do”. Finding solution is hard, identifying problem is much easier.

I propose
1. Education, so everybody becomes self-aware of their worthiness and contribution to society and thus have appropriate reproductive behaviour.
2. Education so people become aware of the importance of good ethics and being righteous. Some minimal level of welfare is also needed so people don’t become too desperate and trash the ethics code. It’s a vicious negative feedback loop when a jerk does something bad, gets the reward and excites others to do the same.
3. Allow workers more flexibility. For example, with the intellectual property law in IT right now, even if the worker does something in his OWN time with his OWN equipment, the company can still CLAIM it. This is UTTERLY non-sense and also stymies the creation of really “quality, profitable and sustainable” start-ups (in my opinion, the vast majority of startups in Silicon Valley are not quality and sustainable ones with good revenue and business model). Most people don’t want to take too much risk (like quitting a decent job to start his own company), so allowing the workers to still work for someone else to have a sense of financial security while bootstrapping his own ideas, his own company will encourage the creation of many new businesses.
4. Education so people understand, the living standard and lifestyle they should have should be decided by their level of contribution, the uniqueness of their talents not the circumstances of their birth or other kind of lottery.
5. Stop thinking that overt redistribution of outcomes will make things better.
6. Every country stop trading with China if they refuse to play by the rule and let the real wages of their worker rise. It’s work smarter, not harder.

Posted by trevorh | Report as abusive

Why is it that the same people who claim our money is backed by nothing are the same people crying over the debt? As if the US has never had anything but the Federal Reserve. As if they never confiscated gold before, or set maximum working hours to cure unemployment, or that there never was a Bank of the United States in the control of Congress.

That’s the thing about laws written by the “Might Is Right” country. It can undo anything and tell the rest of the world to take a hike. I know how it sounds but we do it every day. Stop worrying about the debt and realize that the system is what it was designed to be which is a fear mongering vacuum for wealth. If it ever collapses, the Congress will simply cancel the Federal Reserve Act, assign the debt to them by accusation of fraud, institute a new centralized bank and currency and be done with it.

The debt is just a tool for a government without a conscience. They don’t operate on the same “honor your debts” principle that we are taught to believe. Get over it people.

Posted by LysanderTucker | Report as abusive

The truth that Americans refuse to face as seen from Der Spiegel, a highly respected German news source.

———————————————

11/05/2012

Destroyed by Total Capitalism America Has Already Lost Tuesday’s Election

A Commentary by Jakob Augstein

Cleanup after debris following Hurricane Sandy in the Queens borough of New York.

Germans see the US election as a battle between the good Obama and the evil Romney. But this is a mistake.

Regardless of who wins the election on Tuesday, total capitalism is America’s true ruler, and it has the power to destroy the country.

The United States Army is developing a weapon that can reach — and destroy — any location on Earth within an hour.

At the same time, power lines held up by wooden poles dangle over the streets of Brooklyn, Queens and New Jersey.

Hurricane Sandy ripped them apart there and in communities across the East Coast last week, and many places remain without electricity.

That’s America, where high-tech options are available only to the elite, and the rest live under conditions comparable to a those of a developing nation.

No country has produced more Nobel Prize winners, yet in New York City hospitals had to be evacuated during the storm because their emergency generators didn’t work properly.

Anyone who sees this as a contradiction has failed to grasp the fact that America is a country of total capitalism.

Its functionaries have no need of public hospitals or of a reliable power supply to private homes.

The elite have their own infrastructure.

Total capitalism, however, has left American society in ruins and crippled the government.

America’s fate is not just an accident produced by the system.

It is a consequence of that system.

Obama couldn’t change this, and Romney wouldn’t be able to either.

Europe is mistaken if it views the election as a choice between the forces of good and evil.

And it certainly doesn’t amount to a potential change in political direction as some newspapers on the Continent would have us believe.

A Powerless President

Romney, the exceedingly wealthy business man, and Obama, the cultivated civil rights lawyer, are two faces of a political system that no longer has much to do with democracy as we understand it.

Democracy is about choice, but Americans don’t really have much of a choice.

Obama proved this.

Nearly four years ago, it seemed like a new beginning for America when he took office.

But this was a misunderstanding.

Obama didn’t close the Guantanamo Bay detention camp, nor did he lift immunity for alleged war criminals from the Bush-era, or regulate the financial markets, and climate change was hardly discussed during the current election campaign.

The military, the banks, industry — the people are helpless in the face of their power, as is the president.

Not even credit default swaps, the kind of investment that brought down Lehman Brothers and took Western economies to the brink, has been banned or even better regulated.

It is likely the case that Obama wanted to do more, but couldn’t. But what role does that play in the bigger picture?

We want to believe that Obama failed because of the conservatives inside his own country.

Indeed, the fanatics that Mitt Romney depends on have jettisoned everything that distinguishes the West: science and logic, reason and moderation, even simple decency.

They hate homosexuals, the weak and the state. They oppress women and persecute immigrants. Their moralizing about abortion doesn’t even spare the victims of rape. They are the Taliban of the West.

The Winner Makes No Difference to Europe

Still, they are only the symptom of America’s failure, not the cause.

In reality, neither the idealists and Democrats, nor the useful idiots of the Tea Party have any power over the circumstances.

From a European perspective, it doesn’t matter who wins this election.

Only US foreign policy is important to us — and Obama is no dove and Romney no hawk.

The incumbent president prefers to wage his wars with drones instead of troops, though the victims probably don’t care if they’re killed by man or machine.

Meanwhile, despite all the criticism, his challenger says he wouldn’t join Israel were the country to go to war with Iran because the US can now no longer afford such a thing.

In any case, it is wrong to characterize Republicans as the party of warmongers and Democrats as the party of peace — or even to call the latter a left-wing party at all.

After all, it was Democratic presidents Harry S. Truman, John F. Kennedy and Lyndon Johnson who started the wars in Korea and Vietnam.

Republican presidents Dwight D. Eisenhower and Richard Nixon ended these wars.

And Ronald Reagan, who Europeans see as the embodiment of both the evil and absurd aspects of American politics, was a peaceful man compared to the standards we have since become accustomed to. He only ever invaded Grenada.

The truth is that we simply no longer understand America.

Looking at the country from Germany and Europe, we see a foreign culture.

The political system is in the hands of big business and its lobbyists.

The checks and balances have failed.

And a perverse mix of irresponsibility, greed and religious zealotry dominate public opinion.

The downfall of the American empire has begun.

It could be that the country’s citizens wouldn’t be able to stop it no matter how hard they tried.

But they aren’t even trying.

———————————————-

Notice the “key” to what is ailing this nation lies in this comment:

“The political system is in the hands of big business and its lobbyists. The checks and balances have failed.”

This election is totally meaningless unless the American people are willing to do something about a system completely corrupted by the system itself.

It doesn’t really matter who wins. The American people will lose, because the “game is fixed”.

Posted by Gordon2352 | Report as abusive

For those interested in reading the original article, here is the link:

Total Capitalism and the downfall of America

http://www.spiegel.de/international/worl d/commentary-total-capitalism-and-the-do wnfall-of-america-a-865437.html

What is not mentioned, but only hinted at, in the above article is that much of the “big business and its lobbyists” is related to our massive “Military/Industrial Complex” — for which we are about to sacrifice our Social Security and social programs, since it has now grown so large and ravenous that it needs to continue to feed at the expense of our elderly and poor.

Our continued massive spending on our current course of aggressive militarism — no one really knows how much at this point because much of the real cost is hidden in the “volunteer military” concept — has consequences:

This article describes the rise of Chinese militarism, due to the collapse of the US economy as a result of the greed of the US wealthy class (the US “elite” in the article above), which has given China a chance to become the world’s next superpower.

China seeks role in world as second superpower

http://www.spiegel.de/international/worl d/global-ambitions-china-seeks-role-in-w orld-as-second-superpower-a-864358.html

Posted by Gordon2352 | Report as abusive

In summary, it is people like Mr. Summers who are the problem. They have NO interest in telling the American people the truth about how desperate our situation really is, which is why I included the above two articles for an “unbaised” view of this nation as it really is.

Unfortunately, as the first article in Spiegel indicates, the American people “aren’t even trying” to curb the excesses of the wealthy class which continue to grow exponentially worse daily.

Posted by Gordon2352 | Report as abusive

@Gordon2352: The first Spiegel article is interesting. It’s a German article about America today… But you could interchangeably read the opening paragraph as the start of an American article from around 1987–1988, about the Soviet Union!!!

Posted by matthewslyman | Report as abusive