The Federal Deficit Mess—Posner

On August 2, even if the ceiling on federal debt is not raised the government will not yet be in default in a technical sense. It will not be able to borrow, but it has enough money coming in each month from collection of federal taxes to service its debts. Without borrowing, however, it will not have enough money to pay noncontractual obligations in full, such as government salaries, and entitlements such as social security, Medicare, and Medicaid, and a host of subsidies. No doubt before the political and economic damage becomes too severe, the Republican radicals in the House of Representatives will relent and the ceiling on borrowing will be raised. Before that happens interest rates may rise, and stay higher, because of doubts about the basic competence of American government. Those doubts, plus the higher interest rates they engender, may deepen the current economic downturn, which in turn will reduce tax collections, increase transfer payments, and in both respects increase the federal deficit. 

Why Republicans prefer flirting with failing to raise the debt ceiling by the August 2 deadline to accepting the deal tentatively worked out between President Obama and Speaker Bohner to cut federal spending over the next decade by $3 trillion and increase tax revenues (by reducing or eliminating various deductions and credits) by $1 trillion over the same period (a total reduction of the budget of $400 billion a year--roughly 10 percent) is a deep mystery. No doubt much of the proposed spending decrease and tax-revenue increase would prove to be fictitious, or at least speculative, because based on predictions. But it could put in motion a serious movement to reduce the deficit. It would show that spending was not sacrosanct or increased tax revenues anathema. 

The opposition to increasing revenues seems based on concern that higher government revenues reduce pressure for reducing spending; and that is true. Yet what is happening in the states undermines that concern. The deficit states are in the approximate position that the federal government will be on after August 2 if the debt ceiling isn’t raised. The states can’t borrow their way out of insolvency, yet their response has not been just to raise taxes; it has been a combination of raising taxes and cutting spending. If the Democratic Administration agreed to increase tax revenues by one dollar for every three dollars in spending reductions, that would seem to be a good outcome from the Republican standpoint. 

One problem is attributable to Obama, though it is not a fault of Obama. Obama resembles such Presidents as Nixon and Clinton in the following respect. They are what the political scientist Stephen Skowronek calls practitioners of “third way” politics (Tony Blair was another), who undermine the opposition by borrowing policies from it in an effort to seize the middle and with it to achieve political dominance. Think of Nixon’s economic policies, which were a continuation of Johnson’s “Great Society”; Clinton’s welfare reform and support of capital punishment; and Obama’s pragmatic centrism, reflected in his embrace, albeit very recent, of entitlements reform. The resemblance between Nixon and Obama is, surprising as this may seem, particularly close. Nixon was a bête noir of the Left and Obama is a bête noir of the Right, in both cases based on their activities before they became President (Nixon’s red-baiting, Obama’s community organizing). But Nixon as President was, and Obama is (or is willing to be, under political pressure), a centrist President. That infuriates the opposition by stealing its thunder, and so provokes a powerful reaction. For the Republicans to have acceded to the Obama-Bohner plan of heavy spending cuts and light tax increases would have conceded the political middle to Obama. 

It’s not actually obvious that the current $14 trillion federal deficit is too large, or that the federal government is too large. The problem is that the aging of the population and the growing cost and efficacy of medical technology (technology responsible in part for the aging of the population) portends dramatic increases in federal transfer payments, which may cause the deficit to grow faster than the economy. What is important is not to reduce the deficit but to keep it from growing faster than the economy. Not that that’s easy to do. The growth of the deficit could be slowed (perhaps to zero) by a combination of lower spending, higher tax revenues, and faster economic growth. The problem with the first two measures is that they probably would reduce economic growth in the short term, by reducing people’s disposable income; so even if annual deficits fell, the total deficit as a percentage of GDP might not fall—for it is not at all clear what can be done, even aside from political obstacles, to increase the average annual GDP increase of about 3 percent. Total entitlements spending plus interest on the federal public debt account for about two-thirds of the federal budget. If this component of the budget grows by 5 percent a year (and the rest of the budget is flat) while the economy is growing by 3 percent a year, the deficit as a whole will grow faster than the economy (because 5 percent of 67 percent is 3.35 percent). Hence the urgency of entitlements reform--which cannot however be legislated by August 2.

Comments

[Alvin]

Judge Posner,

Did you mean $14 trillion federal DEBT? Or $1.4 trillion federal DEFICIT?

Great blog. I always look forward to reading it on Sundays.

I also love reading your judicial opinions - I learn a lot from them. Your recent Schreiber Foods opinion was a good one. I like how you went into detail about the nuances of the economic loss doctrine, including your various examples and exceptions to the rule. The other judges, except Easterbrook, don't do that.

[Alvin]

Judge Posner,

Sorry, off-topic, again. Your Schreiber Foods opinion reminded me a lot of your other recent opinion regarding the learned intermediary rule in the area of pharmaceuticals.

The guidance you provide in those opinions is especially helpful to lawyers who work with manufacturers of (patented) products selling to wholesalers/middlemen who then sell to retailers or consumers.

[Chuck Matthews, SPHR]

Your Honor,

Thanks for a great article; much appreciated. There are many costs that should be cut. It's a shame that the folks we elected can't work this out.

On a separate note and as a previous posted stated, thanks for the eloquence you exercise when crafting judicial opinions. I read every opinion published by the 7th Circuit.

[Thomas Rekdal]

If Judge Posner is right, and leaders of the Republican party are spurning potential reductions in the deficit of some $400 billion a year, it is indeed mysterious that they are declining the deal. It is somewhat less mysterious why Tea Party sympathizers in the House would do so. They are less concerned about the survival of the party than the survival of the country. From their point of view, nothing serious will be done without a crisis, and a crisis now will be less ruinous than a crisis later.

They may even be right about this. Is is it really believable that interest rates will go up in a world embarked on massive deleveraging? Will the bond market really be demoralized by the first serious effort to come to grips with our unsustainable debt? This seems far from clear to me.

In a game of "chicken" (and, let's be honest, that's what this contest is) "victory" (so to speak) goes to the player willing to stake it all. That would be the Tea Party. So I would expect a default, unless the President blinks.

One final option the President may have is simply to disregard the debt ceiling law and order the Treasury to continue borrowing. No doubt some officials would resign rather than break the law, but Obama could keep firing them until he finds someone willing to carry out his orders, much as Nixon did with Cox and Ruckelshouse. This would elvate the crisis to include the threat of impeachment, and throw everything into the court of public opinion for resolution.

Maybe that's where it belongs anyway.

[an observer]

Poser writes:

"Why Republicans prefer flirting with failing to raise the debt ceiling by the August 2 deadline to accepting the deal tentatively worked out between President Obama and Speaker Bohner to cut federal spending over the next decade by $3 trillion and increase tax revenues (by reducing or eliminating various deductions and credits) by $1 trillion over the same period (a total reduction of the budget of $400 billion a year--roughly 10 percent) is a deep mystery."

That a federal judge would write such a lie is deeply troubling. It is not more a mystery than why we fought the Civil War (slavery)

It is no mystery at all, any more than it is a mystery why Bachmann resigned from her fundamentalist Lutheran church (which happens to be very anti Catholic) just a days before announcing.

Conservatives in general and Republicans in particular are sick sick puppies. They have either or both of two agendas. Foremost, a desire for personal power. Look at the culls offered as leaders in the last 15 years (Bush, Gingrich, DeLay, and Phil Gramm) (demos have had one as well Edwards) Second, a willingness to destroy the Country and its people to regain control over others and approximate the conditions of slavery as much as possible

Their current favorite (Perry) advocates succession and was a card carrying member or fellow traveler of The Southern League.

The Republicans have had all year to propose something about the debt ceiling---tax bills have to originate in the house. That no bill has even been offered (let alone moved forward) shows exactly what they are about.

[Andrew_M_Garland]

Judge Posner,

You refer to:
=== ===
[edited] the deal tentatively worked out between President Obama and Speaker Bohner to cut federal spending by $3 trillion and increase tax revenues by $1 trillion over the next 10 years".
=== ===

If Obama wanted that deal, and it had any specificity, would you expect Obama to have released (even an outline) in writing? Can you link to it? It does not exist to my knowledge.

The nonspecific "deal" you refer to would increase taxes immediately, and reduce spending later. Deals like that have been made before, but the spending does not go down. What assurances do you have that it will be different this time? I trust Team Obama to be dilligent about raising taxes, and to flagrantly disregard any decrease in spending. Of course, "obstructionist" Republicans could cause another crisis in the future by complaining about any failure to decrease spending. And, against what baseline would that decreased spending be counted?

That is why Obama should have offered, and should offer now a written plan, setting out the needed details.

Do you actually trust a president who has described our actions in Libya as merely a "kinetic engagement", not a war or hostility needing review by the Congress?

You write:
=== ===
No doubt much of the proposed spending decrease and tax-revenue increase would prove to be fictitious, or at least speculative, because they are based on predictions. But it could put in motion a serious movement to reduce the deficit. It would show that spending was not sacrosanct or increased tax revenues anathema.
=== ===

So, it seems that you want any deal, even if "fictitious, or at least speculative", as a symbol of what might be done in the future. We have the "serious movement" now. Any deal should be based on non-fictious, enforceable, and clearly understood quantities and methods, now. Waiting risks a huge financial upheaval, much bigger than Obamas threat that he will cut off grandma as part of any plan to pay the interest on the debt.

The credit rating of the US depends on our ability to pay debt and interest, not on our ability to pay government employees and support government programs. Cutting out part of goverment would enhance our ability to pay back the debt and interest, and would calm credit markets

Our choice is to cut government now, understood as government payroll and programs. If not now, then there may be no choice in the future about cutting payments to grandma.

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[Jim]

Your Honor:

Did you say that there is some doubt about the competence of the federal government? Really?

[TANSTAAFL]

To say that Obama resembles so-called "third way" politicians like Nixon, Clinton, and Tony Blair is a simply fantastic claim that ignores the radical agenda Obama and his henchmen are pushing on the United States of America (i.e., environmental fascism, federal government takeovers of broad swaths of the private sector, etc.). Drawing such inapt historical parallels is defining deviancy down--way, way down.

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On August 2, even if the ceiling on federal debt is not raised the government will not yet be in default in a technical sense. It will not be able to borrow, but it has enough money coming in each month from collection of federal taxes to service its debts. Without borrowing, however, it will not have enough money to pay noncontractual obligations in full, such as government salaries, and entitlements such as social security, Medicare, and Medicaid, and a host of subsidies. No doubt before the political and economic damage becomes too severe, the Republican radicals in the House...

[George O'Har]

Judge Posner,

You don't get Obama at all. You really believe he is proposing serious cuts? Are you kidding? When someone as smart as you gets fooled so easily, folks like me start to despair. Are you using MSNBC as a source? [or are you simply carrying reasonableness so far that Jonathan Swift would use you for a ball?]

Obama is not budging. Smoke and mirrors, judge. I'm a fairly regular reader of this blog, and see things your way on many issues. You are positing a false equivalance between Obama and the Republicans (no matter how checkered they may be). Most unfair, Judge. Obama is a hoax (3rd way? Huh?),an intellectual lightweight and consummate fraud. Get the wool out of your eyes, please.

[NEH]

It's all about power and ideological slant and not about Macro-Economics and the Government Budget. If the House of Representatives does not reach a compromise by August 2nd, we can kiss any type of recovery goodbye. In fact, it may very well drive us into a Depression that would be far worse than the one classfied as "Great". Most don't seem to realize that an Economy is driven by not only the individual consumer, but by Business and the Government as well. It's this simple, take Government out the equation and the Economy folds - end of discussion...

Furthermore, if the Federal Government defaults on its obligations then its interest rates will rise dramatically driving the deficit even higher. So where is the expenditure reductions that the Republicans are calling for? The big three elephants in the room are, one interest on the debt. Two, defense and national security spending. Three, Entitlement Programs. By cutting two and three to the bone will not solve anything if number one spikes due to a default.

Perhaps, the Republican Party has become a greater threat to the well being of the Nation than bin Laden and Al Qaeda or even the Nazi party and Adolph Hitler...

[NEH]

Oh, BTW, What happened to the pictures of the authors at the top on the header line? Software problems?

[PoorerButHappier]

It is mostly up to those of you guys left working to service the debt. I retired to a very modest life in Costa Rica at 47 a few years ago and, in retrospect that was already too late. Way too late.

Knowing what I know now, knowing how much of my efforts would have been harvested to service the national debt and support the lives of indolent people and the bureaucrats they elect, I wish I’d been a hippie driving a VW and enjoying life all along. Its never too late though. So good luck to the heroes working back home.

Have fun, muchos besos,

PoorerButHappier

[Christopher Graves]

The Tea Party plan would be good if passed. There has to be some sort of enforcement provision such as Gramm-Rudman had or a Balanced Budget Constitutional Amendment. But the left won't go along with these proposals because they are socialists--they like Soviet-style governmental programs managed by their elites funding their clients who continue to vote the elites back into power. The left levies high taxes to pay for these programs as they diminish their bourgeois opposition.

The problem with closing tax loopholes now is that they would be closed before reforming the overall tax code. That is a problem because a big part of being able to lower everyone's tax rates is closing these loopholes. Indirectly, closing these loopholes now without lowering tax rates would amount to a tax increase on all of us.

What we need is to reform Medicare & Medicaid so that people pay more out of pocket for routine medical care, thereby forcing them to shop around for the best price. Encouraging people to bargain for lower prices would lower medical costs without lowering quality. As long as non-catastrophic care is paid by third-party payers such as Medicare, Medicaid, and even private insurance, people have no incentive to pay attention to price. Doctors and hospitals realize that reality and continue to jack up the prices-hence higher spending on Medicare and Medicaid accompanied by higher taxes and deficits. The average person pays approximately $145,000 in Medicare taxes during the course of his lifetime. But he collects approximately $600,000 in Medicare payments during the course of his lifetime. Something has to give.

[R.A.]

"Their current favorite (Perry) advocates succession and was a card carrying member or fellow traveler of The Southern League."

Well, if Republicans are as bad as you say they are, shouldn't you welcome the idea of succession of the most conservative states?

[Thomas Rekdal]

I could not agree more with the policy position Christopher Graves outlines in his comment on 7/18/11. But there is a great difference between the best policy and the best achievable policy. Tea Party sympathizers (of whom I am one, at least as a fellow traveler) are probably strong enough politically to block any budget arrangement that is utterly anathema, but not strong enough to impose a solution. The center-left is probably equally strong. So some accommodation obviously must occur. But their position on the non-negotiable aspects of the welfare state seem to me to be utterly unclear. Current negotiations behind closed-doors over raising the debt ceiling are totally opaque to mere mortals, despite what Posner and Becker have to say. So I look forward to a long, nasty fight. August the 2nd is just the beginning.

[an observer]

R.A.

No, for exactly the same reasons that Lincoln fought the Civil War.

Observer

[NEH]

Observer, How True! As ole Pogo was want to comment on numerous occasions involving the American political-economic scene, "We have met the Enemy and he is us". Perhaps the great American genius for compromise will prevail yet again, but then it may not prevail and if it doesn't, there will be "H" to pay...

[PoorerButHappier]

Having reneged on its successful but aberrant recipe of self-determination and self-reliance, and reverting to the common worldwide norm of voter driven mandatory collective economic management, the lights are irreversibly dimming in the once great empire of individual freedom.

The American voter moths have finally seen the light of the welfare state, and will fly towards it just like the many-many moths before them.

There will be many inconsequential distractions along the way, but the rise of the developing world and the de-facto downgrade of relative American prosperity, will be the defining changes of the early 21st century.

It is enlightening to watch all that unravel from Asia.

[R.A.]

"No, for exactly the same reasons that Lincoln fought the Civil War"

"Exactly the same reasons"? Well, above you said that the Civil War was over slavery, so do you fear conservative states would enslave people if they left the union? If you're worried about blacks, perhaps you would advocate for really conservative states with homogenous populations like Idaho and Wyoming to leave the union?

Saying that Republicans have "a desire for personal power" and seek to “regain control over others” and then faulting them for wanting secession is sort of a contradiction, isn’t it? What is more indicative of desiring political power: wanting to separate from people you don’t get along with or being willing to kill in order to keep the other side within the same union?

[Jim]

Humans just cannot seem to learn from experience or from history. Too bad. And our "leaders" are certainly not going to help them.

[Jack]

Posner has it right this week. Exactly; the DEBT there now was there before, and before and before, when these same grandstanders raised the DEBT "ceiling" 7 times, nearly every year to cover the DEBT amassing policies of the Bushies.

NO amount of pouting and grandstanding is going to make the DEBT disappear or get the least bit smaller, and especially not when we've been left with the near Depression triggered by governmental negligence while the entire financial sector became corrupted and finally crashed.

No, as with all extreme debt before the way "out" is that of gradually lessening the deficit such that the DEBT becomes smaller relative to (hopefully!) increasing GDP. One here laments "revenue enhancements now" and "cuts later". Well, of course, dramatic cuts to this tender "recovery???" (of increasing unemployment) would be foolish.

Truth is any revenue side changes will be "later" as well........ remember both working folk and (some!) corpies pay taxes AFTER having posted quarterly or annual profits.

And....... Prof Posner? Surely you know the answer to this one:

"Why Republicans prefer flirting with failing to raise the debt ceiling by the August 2 deadline to accepting the deal tentatively worked out between President Obama and Speaker Bohner to cut federal spending over the next decade by $3 trillion and increase tax revenues (by reducing or eliminating various deductions and credits) by $1 trillion over the same period (a total reduction of the budget of $400 billion a year--roughly 10 percent) is a deep mystery."

............ Because Boehner, who's not as bad a guy or as irrational as he at first appears, does not have control over the 'bagger set who've (counter to the Constitution) taken a "not tax" pledge to the silly, false god elected by no one, Grover Norquist.

And Ha! Posner seems fairly relaxed about incoming tax revs paying coupon clipping bond holders while stiffing "noncontractual obligations in full, such as government salaries, and entitlements such as social security, Medicare, and Medicaid, and a host of subsidies."

Haha! Yeah, about two weeks into that game, Posner, Boehner along with a host of wet behind the ears, newbie teabaggers will find that the word "contractual" covers a lot more than the fine print on a Treasury note.

Let's see.......... shortly after no SS checks? No Medicare checks? and zip for those desperadoes reliant on Medicaid comes the bankers looking for mortgage payments, an army of medical pracs who, despite the whining, really do appreciate the billions from Medicare and M-aid.

One here "thinks" these fools are "saving a country" at cost of what remains of the "GOP", ha! you'll quickly see that both will be further destroyed.

[Jack]

Chris? "The average person pays approximately $145,000 in Medicare taxes during the course of his lifetime. But he collects approximately $600,000 in Medicare payments during the course of his lifetime. Something has to give."

......... Doubtful. And in regard to "something has to give", Ha! what is "wrong" with Medicare/Mediaid is also wrong for our entire H/C system.......... 17% of GDP while doing a spotty job of covering ALL of our citizens IS too expensive regardless of the means of extracting that sum.

It's "puzzling" that so many "conservatives" who'll haul out their tattered "uncompetitive" card if some low paid group gains a buck an hour, seem never to whine about the uncompetitive aspects of the US paying nearly double what our advanced competitors pay to cover all of their citizens........ often with slightly better outcomes.

Oh and an arithmetical joke! Ha-ha! some Repubs would like to "raise the Medicare age of eligibility". Ha! now think what that would do: The Medicare population would be older and likely "sicker" and have paid in for fewer years.... with the result being that of Medicare per patient costs being higher....... perhaps "saving" nothing at all.

How about those in their mid-60's left out? .......... and having to hang on to some job that would rather ease them out "for the benefits". And....... of course with those who "should be on Medicare" being added to "insurance" pools of younger folk....... those costs would surely rise.

See? NO way to duck it. IF "it" costs 17% of GDP we have to find ways to pay the bill........... and that flies directly in the face of stagnant and declining wages for working folk. Back to the drawing table? or magic room?