The Depression, the Deficit Debacle, and the Debt-Ceiling Crisis—Posner

The economy faces a short-term problem, a medium-term problem, and a long-term problem. The short-term problem is the debt ceiling, the medium-term problem is the depression that the economy is still wallowing in (the orthodox description of it as a mere “recession” that ended in 2009 is misleading), and the long-term problem is entitlements for old people—Medicare, social security, and (to a lesser extent) Medicaid, which to a significant degree operates as medigap insurance for many old people. The three problems are intertwined. The third, the long-term one, may well be the most serious. 

The debt ceiling—a dollar limit on debt owed by the federal government, which can be increased only by Congress’s enacting a statute raising the limit—is a dysfunctional method of legislative control over government expenditures.  Without the ceiling Congress could still limit borrowing by the Treasury, but it would have to do so by passing a statute. The existence of the ceiling means that enacting a statute is necessary to permit borrowing above whatever amount was specified as the ceiling the last time it was raised by statute. It is harder to pass a new statute than to defeat a proposed statute, and so a determined legislative faction may be able to extort unreasonable concessions by threatening to block the enactment of a statute raising the ceiling. If the intended victims of the extortion balk, and a game of chicken ensues, the statute may not pass; and if as a result the debt ceiling is not raised, when as at present the government must borrow to have enough money to fulfill its expenditure commitments, very serious consequences can ensue. At present the federal government is spending about $300 billion a month, of which about $83 billion is borrowed. If it cannot borrow that amount any more, because every time it borrows (unless it’s just rolling over a loan) its debt rises, it will be unable to fulfill its spending commitments. It will not default in the technical sense because its tax revenues are sufficient to service the debt, but contractual debt (bonds and the like) is not the only unavoidable expense of the federal government: there are both the normal civilian and military costs of running the government and the huge entitlements on which a significant fraction of the population is dependent. Inability to pay these costs would be de facto insolvency. 

The drastic curtailment of federal expenditures if the debt ceiling were not raised would have a devastating effect on the current very weak economy, because $83 billion in monthly spending cannot quickly be replaced by private spending; it’s not as if $83 billion were being shifted from the government to the private sector. It would mean taking a trillion dollars a year out of the economy. Maybe private foundations would take up some of the slack, but if so they would be diverting money from other recipients of the foundations’ largesse rather than increasing the net amount of cash available for consumption, unless they diverted money from overseas recipients.

There would be some long-run benefits from eliminating further federal borrowing. The benefits would lie mainly in forcing governmental economies and reducing the annual interest expense of the government. Rational-expectations economists would argue that foreseeing lower taxes in the future would stimulate consumers and businessmen to spend more than now. But consumers, investors, and businesses might be held back by uncertainty; and certainly the short- and medium-run dislocation of an already weak economy could be catastrophic. The reduction in government expenditures could not be matched immediately by an increase in private spending, so overall economic activity would plunge. 

The current weakness of the economy cannot be overemphasized. Adjusted for inflation, GDP has fallen since 2007 by 0.4 percent. That means that per capita GDP has fallen significantly because of population growth and that current GDP is almost 10 percent below the GDP trend line of 3 percent a year. There is a better argument for the Fed’s stimulating inflation to reduce mortgage and other consumer debt in real terms than for Congress’s cutting government expenditures. 

An irony in the present situation (and a powerful argument against Republican proposals to lift the debt ceiling for only six months in order to force reductions in government spending that would be necessary to induce House Republicans to support a further increase in the ceiling at the end of that period) is that the actual proposals for debt reduction are meager and probably illusory. Under the deal tentatively agreed upon yesterday the initial cut will be just $900 billion spread over the next ten years, which would amount to only $90 billion a year, or less than 10 percent of the annual deficit in the federal budget. And this is on the assumption that the deficit won’t grow. But it is quite likely to grow. True, if the economy recovers, tax collections will increase because incomes will be rising, and even without increased tax collections the deficit as a fraction of GDP (which is what’s important—not the absolute size of the deficit) will fall. But against this is the likely rapid increase in entitlements, primarily Medicare and social security, as the over-65 population continues its relentless growth. The only measure to slow this increase that seems politically feasible at present is to change the formula for calculating annual social security cost-of-living increases. A sure sign of the phoniness of the rival Democratic and Republican plans to cut government expenditures was that both rely heavily on a crackdown in Medicare “waste and fraud.” 

The deal tentatively agreed to calls for further cuts (or tax increases) of about $1.5 billion, also spread over the next ten years, to be proposed by a bipartisan commission and take automatic effect unless Congress acts—as it could do: it could decide to rescind the cuts. Alterations in social security have been taken off the table; and the only cuts in Medicare that the negotiators are permitted to order are reductions in reimbursement of hospitals and physicians—that will have only an indirect effect on the expense of Medicare, by lengthening waiting time for medical services, and that will create pressure to rescind the reductions. 

As with adjusting the social security cost of living formula, and the successful effort in the 1980s to raise the eligibility age for social security gradually, large-scale reductions in entitlements are feasible only if phased in gradually—which would have to be done anyway in order to avoid a serious jolt to the current weak economy. The problem is that Congress cannot make credible long-term commitments to reduce spending because it cannot bind subsequent Congresses. The problem is exacerbated by the fact that both political parties are much fonder of increased spending than of increased taxes, so there is built-in momentum for increased government debt. The Republican radicals in the House of Representatives recognize this problem and their frustration is understandable, but national insolvency is not an intelligent solution.

Comments

[Jack]

PrometheeFeu? Consider: With the exception of the military budget and the $500 billion we have to pay out in interest on the national debt, 80% of which was ginned up while noted "conservatives" were in the WH (often sans veto pens?) most of our Federal budget is closely related to our 1% population increase, plus, perhaps 2% inflation rate, thus it's fairly predictable that the "cap" will be increased frequently in the future, but perhaps less often than 18 times during Reagan/HW and the seven times it was quietly passed while the last "conservative" was in the WH.

[Jack]

Xavier??? One more question:

"Wake up people. Obama conned you into believing it wasn’t going to cost more. Did you really believe insuring 30 million more, doing away with all of those pre-existing conditions, lowering deductibles, increasing lifetime maximums, and on and on were going to be a gift from…"

.......... What were you planning to do with 'em? Also (and only if you know) is a "pre-existing condition" quite a bit cheaper if the poor bloke IS locked into his job and existing insurance parasite?

BTW did you really hate it when the parasites were mandated to pay out 85% of their gleanings? (Before answering --- it seems that in Minn they pay out 92% and in OR 89%)

[Jack]

RE: Posner's suggestion to wring just a bit more out of SS recipients:

Has Robert Reich made a mistake?

Commentator Robert Reich says there's one way to keep Social Security financially solvent. And it doesn't involve cutting benefits or raising the retirement age.

Robert Reich (Robert Reich)

Commentator Robert Reich says one program gets an undeserved share of the blame for the deficit. And anyway, there's an easy fix.

ROBERT REICH: Social Security is not at all responsible for the federal deficit. Just the opposite. Until last year, Social Security took in more payroll taxes than it paid out in benefits. It invested the surpluses in Treasury bills -- in effect, lending them to the rest of the government.

But now Social Security has started to pay out more than it takes in. So to keep it going, it collects only what the rest of the government is obligated to pay it. This will keep it fully solvent for the next 26 years.

But why should there even be a problem 26 years from now? Back in 1983, Alan Greenspan's Social Security commission was supposed to have fixed the system far beyond then by gradually increasing payroll taxes and raising the retirement age.

The answer is Greenspan's commission failed to predict how much income would become concentrated at the top. Remember, the Social Security payroll tax applies only to earnings up to a certain ceiling that rises with inflation. That ceiling is now $106,800.

Back in 1983, the ceiling was set so the Social Security payroll tax would hit 90 percent of total income covered by Social Security. Today, though, the Social Security payroll tax hits only about 84 percent of total income.

It went from 90 percent to 84 percent because income inequality has widened. Now a much larger portion of total income goes to the top -- almost twice the share they got back then.

If we want to return to 90 percent, the ceiling on income subject to the Social Security tax would need to be raised to $180,000. Do that and Social Security's long-term problem is solved.

So there's no reason even to consider reducing Social Security benefits or raising the age of eligibility. The logical response is simply to raise the ceiling.

Not incidentally, several months ago the White House considered proposing that the ceiling be lifted to $180,000. Somehow, though, that proposal didn't make it into the president's budget.

......... Indeed, Reich explains well more more stats and detail what I've mentioned here before; that THE problem of SS is that ot the income that escaped to WELL over the $107,000 contribution cut off. So far we agree as seems logically irrefutable.

But the solution? Reich suggests raising the cutoff to $180,000. Is that right? That approach is to take another $10,000 out of the pay package of those earning $180,000; a considerable burden on what in many of our cities is hardly a king's ransom. In that income range, where it would be quite a bite, it may well be reason for inflationary "wage discussions" with those who'd likely have some "market power".

At the top 2% level where, by far, has disappeared most of our productivity gains of the last 25 years, the ten grand would hardly be noticed. Instead, it would seem better to raise the amount Reich is shooting for by a smaller percentage sliver extending all the way up. At the same time WERE we really interested in improving our economy and cutting average and lower income folk in on the impressive productivity gains of the last quarter century, we'd be wise to lower the percentage at those lower percentiles, if only that folks MIGHT have enough to pay for the oil price gouging and "go shopping".

What do you think? Could Reich be wrong for once?

[Xavier L. Simon]

Jack, re the 25 percent, for a moment I thought you had me there, that I hadn't been clear enough, but I was: premiums paid by businesses Jack, premiums. Now, if you remember correctly I've never had anything against safety nets for the truly needy so don't go getting on your high moral horse on me. My problems are that (1) the new benefits--now even contraception, what next--are being extended to all, including people that were already doing quite fine out of their own pocket thank you; for these latter it amounts to just another wage or salary increase that business has to pay. And (2) these additional costs come at a time when the economy is in bad shape; the problems of the economy should have been fixed first. Or are the Dems so dense that they can't see the contradiction? They say "look at the mess left us by W" but then go on merrily upping the ante. Wake up Jack.

[Jack]

Xavier -- Thanks for the clarification, and yes I have heard the news about the insurance parasites playing a (politically inspired? greed laden?) 25% or more "preemptive?" round of premium increases despite costs hardly having increased by that amount.

Taking a quick look at contraception costs turned up this article pointing up the practice of "deeply discounting" contraceptives to "health centers" having, apparently, ended in '07 thus (can this be??) increasing the cost of one of the most popular pills from $12 to $50.

"Curious" numbers! Not sure about pharmacists, but retailers try to buy for $60 to sell for $100 and are greatly pleased when they've made a special buy that can be "Keystoned" ie doubled in price. Big box discount stores work on MUCH thinner margins. Assuming the seller made a little from the "deep discount" or at least broke even, it would be tough to explain why the $12 increased to more than $18 - $24.

http://www.nytimes.com/2007/11/22/health/22contraceptives.html

As for the seemingly unjustified "insurance" premium increases being just another salary increase -- I've posted often here about LONG stagnant wages that ARE a major factor in what's left of our once strong economy and balanced budget being on life support with the oxygen tank riding on empty.

If you missed it, I'd urge you to take a look at the 2nd wage graph down and at least mull how those of even median incomes and particularly those of the lower quintiles whose incomes have actually dropped can possibly manage their financial affairs. In this era I tend to assume that most, even those of the anti-choice faction, would rather a young or poor woman not give birth for the lack of being able to afford $12? or $50?? per month for contraceptive pills.

Here...... I guess we get into the area that often divides medical issues between "right" and "left" ie that contraceptive (or other pills) are consumer goods like any other, so if one is in school or otherwise on very limited budgets (as is increasingly common these days) that they'd not have the personal freedoms of wealthier women, or "take their chances?"

As for "costs coming when the economy" has been tanked by wretchedly misguided policy, knee jerk warmongering, negligence of financial sector oversight, the near destruction of the, crucial to our economy, new housing sector --- but generally healthy and rising profits of our corporations including those of the banksters and WS thieves who took off to their newly purchased estates with much of our former wealth, the Democrats have indeed noticed.

However instead of being "dense" it appears that they've more concern for the totality of our community along with what appears to be a much wiser win-win-win view of what needs to be done.

Let's use your insurance provided contraception concern as an example. Like many products there are the much publicized costs of developing and testing any drug that are covered by sales to millions of folks, in this case, women who are steady customers each and every month of the year for decades. Now a Democrat, seemingly with that much wider and longer vision sees not even one "win" if some number of millions of women can not afford the, mysteriously, costly pills.

Now IF we are to believe economic principles ARE at work in the profitable Pharma sector..... making their pills available to all women means a lot more gross biz. With development costs (and the even larger advertising costs) having been covered by their existing sales, the costs of the next 10 million? pills will be little more than having some offshore fab make and package them. Then? dare we hope that the HUGE buying power of the insurance companies will bring down what appears to be exorbitant margins at a faster rate than with the huge oligops preying on individuals of little to no market power?

As for "upping the ante" I'm kinda looking forward to one of our Chicago profs ginning up a pair of essays entitled "Rapidly spurring a near comatose economy via deep cuts to state and federal budgets and throwing folks onto the, already, quite lengthy (and extended) unemployment rolls".

While ending the long (Repub) tradition of "deficits don't matter" is certainly a top priority, it simply can NOT be done in the short, or even interim time frame, and Democrats, bless their wisdom and hearts, ARE as concerned with how THE PEOPLE get through this affair as they are of "making the numbers work" now that Repubs are largely out of power and have returned to their seemingly proper role of being back bench whiners of little vision, and who've turned their HUGE apparatus to making political hay of The Mess and debt ceilings they never even mentioned when they, and Bush where ladling pork at record levels.

In short the fed budget is the fed budget, it's in trouble, the US overall is about as rich as its ever been and THE overarching priority is how does OUR community make it way back? We did so after WWII when the debt was 120% of GDP, our plants had been remodeled almost entirely to war machines and while we still had productive facilities most of what would be our trading partners were living in rubble with lots of NEEDS......... but nothing to spend. What did we do? LEND Europe money and directly helped bring Japan to its feet while paying for the Korean war......... and provided good paying jobs, and homes, for millions of returning vets.

We can do it again, of course the most important factor is that of getting 95% of our folk working at productive jobs again, even if it's on renewing our tattered infrastructure and making us considerably less dependent on costly imported oil, which all may take a while to pay us back. Or so it seems from 60 degrees north.

[Oakley Sunglasses]

Or was it the added court and other costs of medical bankruptcies that's such a side effect of getting sick in the US?

[Xavier L. Simon]

Jack, part of your problem is that you jump so quickly into the trees that you end up missing the forest.  The forest is your point about the "LONG" stagnation of the wage curve. Why do you think that is happening?  Healthcare provides the perfect example. Actual direct wages have been fairly stagnant but only because compensation in other forms has kept going up.  

Here is the huge problem with that, at least for people like me: others are making decisions for me that I rather make myself.  

Contraception is a perfect example. Moreover, because of the way in which it will now be managed they are even telling me what ways of contraception are better. They are giving me a monetary incentive for one but not for another. In fact, if I choose abstinence I will now be paying for others to get the pill and become even freer and perhaps less moral in their sex lives. 

Speak of the wrong incentives to help guide the moral compass of the country!  Are you really for that?

[Jack]

Xavier: Let's jump right to the 2nd graph again. Perhaps a closer look at the magnitudes of soaring rates of wage disparity will put to rest your theory of saddling the struggling "middle" and lower income groups with the entire burden of runaway H/C gouging and "insurance" company inefficiencies and overhead, improves wage inequities anywhere near close enough to provide 80% of our workforce with enough spare dollars to "go shopping".

As for "contraception being the perfect example", it is, but for the purpose of pointing up the lack of community of much of the "ME generation" in general and particularly those attracted to the enhanced ME-ism of the right and even "moderate" country club Repubs who simple don't want to be annoyed by paying their share of the warmongering and financial melt-down costs.

While obsessing over the minutia of $15/ month contraception pills (and the profitable industry it supports) do you think much about what those doing a 15 month "tour" in ever-dangerous Iraq are putting into the pot for something like $35,000/year? Or how you benefit from the even more dangerous profession of our police? teachers? whose average pay of less than $30k are surely subsidizing the educations and daily care of our next generation?

Hillary was right in writing "It Takes a Village". As an exercise try to think of the many examples of community and how many of us put in without "accounting" for what we "get".

As for "am I for that?" Yup! And given the massive upward redistribution of incomes since the whole Gordon Gecko "greed is good" era began (with Reagan?) in 1980, I'd also favor universal H/C that like Medicare-Medicaid and the VA is paid for or subsidized by income taxes that those 20% of families stalled out at a FLATlined $25,000/year might be included and that the burdens of the 40% of families who, somehow, get by on $50k or less, and the future of our nation and democracy is greatly improved by doing at least a little to prevent an even worse, nation destroying consolidation of wealth and political power than we're enduring today.

And you? Do you continue to favor continuing the ALL FOR THE RICH with unaffordable tax bennies to boot, even if it is destroying our economy that's 75% dependent on folks having a buck with which to "go shopping?"

[Xavier L. Simon]

Jack, I see that in the time I've been away the quality of your reasoning and attacks have improved improved markedly. I'll pass the word around to the rich that they better hide. Enjoy your blog; I am sure Prof Becket and Judge Posner enjoy having you around.

[Xavier L. Simon]

PS. I'll even go tell your favorite Massachusetts senator not to keep parking his yacht in Rhode Island to avoid paying taxes, that you found him out and he better run.

[Jack]

Ha! Xavier thanks! But doubt I'm any sort of threat to the fully ensconced rich! You truth is, and I know a number of folks whose income has not been tanked below the $250k range....... that many would not mind pitching in a bit more, even though they didn't favor the expenditures on bombs and warmongering.

Even heard a good suggestion! That of building a web site for volunteering to chip in on the deficits. Remember Ted Turner pitching in a billion to pay our delinquent UN dues? Hey! a few of those and we might NOT have to take away school lunch programs!

Ha! Kerry has married well a couple of times, eh? Well, we're always hopeful of a yacht washing job "trickling down". Doubt many are being built, as in recession they are the first to (attempt) to go...... with few buyers. But hey! with my own nautical skills perhaps I can run seaworthy sailboats to new homes where we seen our petro-dollars or back to Asia where some of them were built?

Good to see you back! Jack

[Fotografia]

Well spoken but can the "us" change course in order to preserve our forefathers heritage (the good parts anyway). And who will lead us in that direction. Certainly not the present gang in Washington. I for one would not like to see us trip up and fall but am worried that is where we are heading.

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[Jack]

Fotografia .......... "The fall took place a while ago" Don't worry too much as we're much closer to the floor now.

[Edward H]

With 30 years in the health care business, here's my take. Obama means well byt Obamacare will end up being about 40% more expensive than advertised. There are better options that involve HSAs and state risk pools that make better sense.

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Depression is very dangerous for human health.

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Maybe the knowledge that the debt ceiling could be a dramatic face-off can help the government try to avoid having to raise the debt limit in the future.

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We are already insolvent--in the sense that we do not have the long-run resources to meet our long-run commitments

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