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The Budget Compromise: Congress Creates a Rube Goldberg Doomsday Machine

Author: L. Randall Wray  ·   ·   › Share This Print

Don’t you feel relieved? After weeks of threats, hostage-taking, and other forms of deficit terrorism, our two political parties have finally “compromised” on what was always a foregone conclusion. (As I write, we still await the Senate vote—but it looks like a done deal.)

Washington got what it wanted—a down payment on destruction of the last remnants of progressive policy. Soon, it will be 1929 all over again. We can make believe that the New Deal and Great Society programs never existed, and go back to the good old days when it was every “man” for himself. To hear Michelle Bachman tell it, we might want to go back to the even better old days before the Civil War when men were for sale, leading to more stable families living in slavery on plantations run by benevolent slave masters.

Superficially, the spending cuts don’t look like much. The grand compromise cuts $21 billion next year from a budget of $3.7 trillion—sort of like foregoing one Big Mac from your annual food budget. In spite of all the talk about needing to take the medicine now, rather than kicking the “deficit crisis” down the road, Congress adopted a plan to kick that can right down the interstate.

It might make you wonder what the fuss was about.

All sides expressed their displeasure, as they held their noses and voted for the putrid heap of a plan. That is pure political theater, of course. Republicans fear a backlash from the fringe right that wanted immediate elimination of all social spending. Democrats fear a backlash from working Americans—the 70% or so who vehemently oppose any cuts to Social Security, Medicare, and Medicaid. And so both sides say they hate the plan, but under the circumstances it was the best that could be secured.

And both sides agree that the looming fiscal crisis still looms. So they have created a Rube Goldberg machine to do what they know they cannot: the bill contains automatic triggers and across the board cuts that take effect if Congress cannot ram through cuts to so-called entitlements.

I do not want to go deeply into the details, but here is a quick summary. The bill contains $1 trillion in cuts, spread over coming years. It creates a bipartisan committee that is supposed to find another $1.5 trillion to cut by Thanksgiving; Congress must vote on the recommendations by Christmas. If all that fails, $1 trillion across the board cuts will take effect. In return the debt limit is raised by $400 billion now, and another $500 billion later. Congress can vote to stop the debt limit hikes, but the President can and will veto such a vote—letting Congressional weenies save face.

Finally, by New Year’s day Congress must vote to send a balanced budget amendment to the states; if they vote to do so, Obama can ask for a $1.5 trillion increase to the debt limit; otherwise he can ask for only $1.2 trillion. Congress gets to vote on that increase, too, but Obama gets to override that, too! (Don’t you love the way each milestone coincides with a national holiday?)

Are you still following? All of this is designed to allow Congress to shirk its job, of course—to build a Rube Goldberg machine to accomplish what our elected wieners (sorry, Anthony, you saw it coming) know would hurt them in the next election.

Here is the Beltway’s fantasy. The US government is running out of money. The main cause is the “entitlements”—all those deadbeats expecting hand-outs from Washington. Alan Simpson, co-chairman of the President’s previous deficit commission, put it this way: “We’ve reached a point now where it’s like a milk cow with 310 million tits! Call when you get honest work!”

I want to be clear. This is not a partisan position. Everyone in Washington accepts it—from the progressive think tanks to the nuttiest free marketeers; from the politicians to NPR’s reporters; from Pete Peterson’s hedge fund cronies to organized labor. All present a unified front against budget deficits—particularly those due to “infinite horizon” deficits that result from “entitlements”.

If we project Social Security benefit payments and payroll taxes through infinity, and subtract revenues from spending, we get a big deficit number. If we then project Medicare spending and tax revenues through infinity we get an even bigger number. Tens of Trillions of dollars.

And so we need that Rube Goldberg doomsday machine that cannot be stopped by human hand. It all kicks in automatically to slash entitlements because we know that neither voters nor their representatives will act to avert fiscal catastrophe that will sooner rather than later bankrupt the US government.

Budget deficits as far as the eye can see do sound mighty scary. They might even sound unsustainable to the untrained. But there are so many things wrong with such a calculation that it is difficult to know where to start. In previous posts I have dealt with deficits, debt, and the debt limit from other angles. To put it simply, a sovereign government that issues its own currency can never face an affordability constraint; it cannot run out of its own money. The trillion-dollar platinum coin proposal that I discussed helps to drive that point home.

I will not go further into the affordability issue today; here I will address the long-term projections of deficits, and the possibility of dealing today with deficits that might occur in the distant future.

Let us begin with Medicare because that one is all too obvious. It is critical to note that Medicare’s infinite horizon deficits result from the assumption that healthcare expenses will rise faster than national production and income. Forever. That cannot happen. It will not happen. As Herb Stein says, unsustainable processes won’t continue.

The problems with such a projection are not unique to Medicare. Every firm in the country that provides medical insurance will go bankrupt if the projections prove correct. Every household in America will go bankrupt. It will not happen. It is a silly exercise in stupid projections. Yes, we must and will do something about healthcare costs. Looking at Medicare, alone, is of no help whatsoever.

We need fundamental reform of the entire system. We need what every other developed country in the world has: single payer. We need more government, not less. Medicare is not the problem, it is the solution. Medicare for all.

What about Social Security’s infinite horizon deficits? First, the whole exercise is wrong-headed. Let us say for a moment that a half century down the road the US will find that (current law) promised benefits resulting from Social Security (and Medicare) cannot be met out of (current law) taxes. What can we, now, do? Cut benefits now? Raise taxes now? Why?

Today, there is no problem—revenues and expenditures are approximately in balance (indeed, until the recession hit, wiping out revenues, the program ran a huge surplus).
Today’s seniors have worked for thirty or more years, paying taxes, working hard, maybe saving a bit on their own, with the expectation that they could have a decent retirement in 2010. The deficit hawks want to tell them it was all a lie? Government will default on its promises? No way—it will not happen.

More probable is a cut to future benefits, something the doomsday machine can be programmed to do. We will tell today’s young people that their benefits will be lower in, say, 2050, than what their grandparents are receiving today. Why? Because today’s infinite horizon projections show future deficits.

Really? Let us say we pass such a law. Will it reduce benefits a half century from now? Tomorrow’s policy making is going to be bound by today’s decision? Get real—today’s Congress cannot tell our grandchildren’s Congress what to do.

In 2050, policy makers will react to the democratic demand of voters to provide for seniors. Projections will—with certainty—prove to be wide of the mark. Maybe they will be overly optimistic; more likely they will be overly pessimistic. In any case, we cannot bind policymakers of the future.

We can, purely for today’s silly budgeting procedures, reduce future benefits and raise future taxes. Why not go whole hog—mandate elimination of Social Security benefits in 3050, but raise the payroll taxes on that date. No more entitlements for seniors in 3050! Mandate government investment in Soylent Green factories instead! Now, discount the stream of revenues and expenditures back to today.

As a pure accounting procedure, we can eliminate the infinite horizon deficits. All is fine and dandy, job well done, no “unfunded entitlements”, deficit hysterians can stop hyperventilating. We have pushed the decision about caring for tomorrow’s elders into the distant future—something that we have no control over, anyway. Maybe youngsters in 3050 will decide to support them; maybe they will decide to eat them. It is not our concern and there is nothing we can do about it.

What about raising taxes now, on the supposition this could relieve burdens fifty years from now? Sorry, it does not work that way. Here’s the idea. Social Security runs surpluses (as it has done since the early 1980s) used to buy government bonds. When, it runs deficits in the future, it sells those back to Uncle Sam to cover the shortfall. But Uncle Sam must then either raise taxes or run a deficit in the rest of its budget to cover the purchases of bonds from Social Security.

What would happen if Social Security does not run surpluses now? Then in the future, to the extent that Social Security runs a deficit, Uncle Sam will raise taxes or run a deficit to cover it. Do you see any difference? No. Today’s Social Security surplus makes no difference at all for the overall budget stance tomorrow. It just accumulates claims on the US government—like a husband owing the wife—an internal accounting procedure.

Simpson claims that Social Security recipients are little more than new born calves, seeking to suckle the teats (he says tits, apparently confusing his cow with his wife) of our hard working cows down on Wall Street, who’d like to destroy Social Security so they could manage and lose retirement savings in the next big bubble.

Now, wait a minute. About three quarters of all Social Security recipients are retirees—those who have worked hard all their lives, contributing to American production. They gave us the living standard we now enjoy. Since 1935, government has held out the promise to all workers: work hard and long and you will enjoy a decent retirement. How can we possibly compare that to suckling the teats (or tits) of 310 million cows? The other quarter of recipients are dependents—widows, children, and people with disabilities. Is the metaphor appropriate?

Social Security, Medicare, and Medicaid—the greatest remaining New Deal and Great Society programs—together comprise our most important safety net. Indeed, Social Security has contributed more than any other government program to poverty reduction, and it is the most important source of income for the majority of American seniors. It is an intergenerational promise, our most important one: if you work hard during your working years, tomorrow’s workers will take care of you in your old age. And if you should become disabled or should die, your co-workers will take care of you or your family. And if you can survive to age 65, you finally get decent health care coverage.

To be sure, such a promise is precisely that—no more, no less. We cannot hold future generations to such a promise. But we can sure as heck protect Social Security, Medicare, and Medicaid today from those who want to dismantle it.

Make no mistake. The President as well as both houses of Congress are solidly aligned to gut these programs. That is what the Rube Goldberg machinery is all about.

It is time to get out the pitchforks to destroy the doomsday machine Washington is creating for us.

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Benedict@Large • August 2nd, 2011 at 8:10 pm

Randy,

I just learned that Joe Liebermann has teamed up with some other Senator to create a plan to cut Social Security in order to maintain defense spending. Warren Mosler has previously mentioned that he has spoken with Lieberman about MMT, and that Joe fully understands it. I find it odd then that Joe would now be presenting defense and Social Security as being in conflict for limited dollars, as Joe certainly understands that dollars are not limited.

Warren had further said that although Joe did understand MMT, he wasn't willing (for whatever reason) to advance its ideas in Congress, but that is a far cry from deliberately working to hurt a large constituency with bad economics, which is what it appears Joe now intends to do. Am I missing something here?

Xuan • August 2nd, 2011 at 9:34 pm

Years of socialization to conservative ideologies (thanks to the media machine) have made people gone mad. I cannot believe senior citizens who are saying they worry about losing their Social Security but at the same time think there should be cuts to social services. The average Joe's who are upset at bank bailouts but also think the latest HHS's decision to end co-pays for birth control pills will bankrupt our country. I saw bumper sticker other day that reads, "PAVED ROADS: Another fine example of unnecessary government spending." Really??? Are there no sacred cows left?!!?

I'd like to think the 2012 election is around the corner & we can vote out every member of Congress. But I am probably just day dreaming.

Econundertow • August 2nd, 2011 at 9:45 pm

Hi!

Mr. Backassward, here!

In my world, everything appears in reverse: back- assward!

From the perspective of my world the US healthcare 'system' is really a rating agency. This is because any treatment I might receive for any condition will not keep me alive long enough for me to pay for it. This is the message that the system's high costs suggest. Treatment is never cost effective, its NPV is negative..

This is why your citizens should do whatever necessary to stay away from doctors: quit smoking, watch the diet, practice firearm safety, etc. I would only go to a doctor with a knife sticking out of my back.

As for 'Social'. the back-assward view has it as a form of bribery to encourage older workers to retire and leave employment opportunities for younger workers. Younger workers are more energetic, ask for less pay and tend to be healthier. Unfortunately, the perverse economy constantly devalues all workers! New hires cannot even support themselves, much less large numbers of retirees. Without a valuable bribe, the older workers hang onto their jobs until they die of decrepitude, meaning an increase in unemployment that never goes away.

The best, most productive workers are unable to find employment. There are also knock- on effects: new workers are saddled with massive aggregate debts in the form of student loans that cannot be repaid along with aggregate inability of any workers to afford/sell housing.

Another problem is your species' fixation on automobiles: it seems to me that your government is willing to sacrifice everything including lives and prosperity in order for persons to continue to sit idly inside machines in gigantic jams, Unfortunately, you are currently running out of petroleum. In the opinion of an ass, your ongoing petroleum shortage — not debt — is the reason your planet's economy is collapsing. A few more years of 'driving' machines and the survivors of your race will all be subsistence farmers.

Mr Backassward is now going to go back to his home planet. We made different decisions than did you humans. Like you, we had a lot of petroleum but used it to develop interplanetary space flight. After a thousand years of study and engineering we have a nice planetary empire. Our newest ships are beginning to explore the galaxy. Meanwhile, our home planet is an Edenic garden with no — ugh! — machines permitted, only art, music, love, family and nice clothes.

You dudes? I feel sorry for all of you.

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Will the donkey and the horse come back, and will we still find cartwrites like the one who lived at the bottom of the hill to District C police station ?

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