Tuesday, March 27, 2018

"America's Debt Disease" - Blame Huge Tax Cuts And Defense Spending!

Let's concede that pointy -headed economists, especially those who totally missed predicting the 2008 credit meltdown and financial crisis, are about the last who should be railing about "America's debt disease".  This is because their fancy models typically  come up short, and fail to process the importance of increasing tax revenue and limiting "defense" spending.

As Paul Waldman in a recent NY Times piece put it:

We all know there’s really no such thing as a Republican “deficit hawk” — they pretend to care deeply about the deficit when there’s a Democrat in the White House so they can restrain spending and hamstring the economy, but when there’s a Republican in the White House, all that goes right out the window. Sure, some ultra-conservatives complained about this bill on the grounds that it raises the deficit, but they all voted for the GOP tax plan."

One would have hoped economist Martin Feldstein might have processed this before writing his op-ed 'Reagan's Cure For America's Debt Disease'- ironic given that Reagan was the one who hurled this nation into debtor status in the first place.. That was in the 80s when he enacted huge supply side tax cuts combined with lavishing $2.2 trillion on defense spending - including rubbish like the SDI - with no tax revenue to pay for it. See e.g.


 Ever since then defense spending, actually corporate welfare for defense contractors, has been sucking up lever larger fractions of the budget. e.g. examine this graph for 2013;

This is despite the fact the Pentagon budget- barely 2 weeks ago-  just got handed another $80 billion until September in the new spending bill.  Also, let's bear in mind that the Pentagon still can't account for $1.2 trillion from 2002. (According to former defense analyst Chuck Spinney when he appeared on an episode of Bill Moyers 'NOW').  With the latest largesse, the U.S. now has spent more $ than the next 8 nations combined on defense, as opposed to the next seven. So the problem is excessive military spending. Reduce that dramatically,  and also increase taxes, and you have a nation more like Germany with budget surpluses -  as opposed to massive debt and deficits -and increased social spending capacity, e.g.


Feldstein insists instead that military spending:

"will contribute relatively little to the increased debt and is a long overdue correction to a military budget that had become dangerously low"

Which is laughable balderdash, since most  $ that isn't defense contractor welfare is wasted anyway, e.g.

Feldstein then turns his deficit reduction guns on Social Security and Medicare, viz.:

"Between 2018 and 2027  Social Security outlays are projected to grow by 1 percent of GDP and Medicare by 1.4 percent of GDP. Together they would account for the entire 2.4 % rise in the deficit as a share of GDP. Cutting their growth in half would reduce the 2027 deficit from 5.2% of GDP to 4 % of GDP. That would start to shrink the future debt ratio  from more than 100 percent of GDP back to today's 76 percent. That isn't good enough but it's a shift in the right direction."

Well, it would also mean reducing millions of seniors to a cat food diet, and also forcing sick seniors to beg for charity or 'Go Fund Me' pages to get basic health care.  (Feldstein's solution for slowing Medicare growth is to pay higher premiums including for inpatient and outpatient visits. For Social Security he wants to raise the full benefits age to 70 from where it is now, and also "pass a law that automatically raises the age for full benefits as life expectancy improves."    But he's somewhat gracious and is willing to "make some exceptions for those in strenuous occupations."

But this is all so much codwallop because first, of all, he never mentions how Reagan himself - and Bush Jr. later- used Social Security monies as a foil to reduce the apparent cost of military spending. This has been by consistent raiding of the Social Security Trust Fund which right wing nuts and libertarians insist is a figment of the imagination. If it is  figment, then why has the gov't take nearly $2.7 trillion from it?  That's some "fictitious" money right there?

But of course in their lexicon it only becomes a "figment" when we demand the raided money be paid back.

Let's also note that the canard that the military budget is "small relatively as a percentage of GDP", may appear so but that it has more than doubled since 2000, from 2.4 % of GDP to 4.9%. has meant pain for many. This uptick in GDP percentage led former Pentagon Analyst Chuck Spinney (the same person who exposed the unaccounted for $1.2 trillion) to remark that the increase was nothing less than "a war on domestic programs, including Social Security and Medicare".

This blatant codswallop is also repeated in another WSJ Op-ed  ('Why America Is Going Broke', Feb. 22, p. A17)  by Hoover Inst. toad John F. Cogan, who has the audacity to write:

"Surprising as it may seem, the share of GDP spent on national defense ...is no higher today than it was seven decades ago."


"The contrast between the long term increase in entitlement spending and the long term decline in defense spending reflects the profound transformation of the federal government's priorities from providing for the nation's defense to redistributing income."

If this horse manure is true, and defense spending is in such regression, perhaps Cogan can explain how the U.S. now spends more on defense than the next 8 nations combined - including China and Russia.  The fact is he bloody well can't because he's peddling conservo think tank bull piffle. Like Feldstein, he wants American seniors - those that aren't in the one percent- to be reduced to a cat food diet.

Apart from the false "entitlements are eating up the budget" narrative,  the solution to saving Social Security is to simply remove the payroll tax cap, e.g.


It emphatically will NOT "require records levels of taxation and debt" as Cogan claims (ibid.)

Social Security's cap on taxable wages is now a ridiculous $118, 500 a year despite the fact many people with income much greater are receiving it. Eliminating it would resolve nearly all Social Security's funding problems, many arising from the erosion of its payroll tax base, owing to rising wage inequality. (E.g. as more and more earners bypass the $118,500 threshold they no longer need to contribute to the payroll tax.)

By Feldstein's own admission (par. 4, 2nd column) shrinking future deficits could indeed be accomplished by a tax increase, but which he claims is "economy damaging" which is nonsense. It's nothing of the sort. As economists James Medoff and Andrew Harless observed in their excellent book, The Indebted Society, 1995, p. 84, 'Let Them Eat Cake',

"high tax rates are associated with higher productivity growth"

There is a consistent and strong relationship. By contrast, for the years when Arthur Laffer's supply side dogma held, productivity retreated by more than 30% and debt exploded- exactly the opposite of what we've been sold.  Indeed, an analysis of the Bush tax cuts by The Financial Times (Sept. 15, 2010), p. 24 showed them to be a failure, not achieving what was promised, e.g. these cuts ushered in "the weakest decade in U.S. postwar history for real, non-residential capital investment".

The FT analysis also observed that during each decade from the 1950s to the 1990s, growth in real gross non-residential investment averaged between 3.5 percent and 7.4 percent a decade. During the 2000s it averaged a mere 1%

The FT analysis on Bush Jr's tax cuts was among the most devastating, showing once and for all supply side bunkum doesn't work. It is among the "dead ideas" Matthew Miller wrote about in his book 'The Tyranny of Dead Ideas'.  To repeat the same nonsense as with the recent GOP-Trump tax cuts - while expecting a different outcome - is to endorse again the definition of insanity as articulated originally by Einstein.  It also means we won't  soon eradicate the nation's debt disease. This is given we already know damned well the source of it, but economists like Mart Feldstein - for whatever reasons  - won't go there.

Methinks Marty Feldstein and John F. Cogan need to crawl out of their isolate enclaves and  go back to school and re- learn that increasing taxes is the answer for the budget surplus economy, along with drastically cutting back on defense contractor corporate welfare..

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