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Tuesday, February 7, 2012

President Obama and the National Debt

In both its news article ("Obama Makes Populist Pitch") and its editorial ("The State of His Policies") about President Obama's State of the Union speech, the Wall Street Journal omitted two revealing errors in the text of his speech. The president said, "Take the money we’re no longer spending at war, use half of it to pay down our debt, and use the rest to do some nation-building right here at home." Later in the speech he said, "Do we want to keep these tax cuts for the wealthiest Americans? Or do we want to keep our investments in everything else –- like education and medical research; a strong military and care for our veterans? Because if we’re serious about paying down our debt, we can’t do both."
But a government that is running deficits cannot pay down the debt. All deficits - large or small - increase the national debt. The only way the federal government can pay down the debt is to generate an annual surplus and use some or all of the surplus to reduce the debt. President Obama has never proposed and never will propose a surplus budget. His 2011 budget plan showed annual deficits and therefore annual increases in the national debt each year from 2012 to 2021. Does the president believe lower deficits will reduce the debt? If so, he needs a primer on the national debt.

Tuesday, January 17, 2012

Austan Goolsbee: What National Debt?

Austan Goolsbee, in a Wall Street Journal op-ed, (“Washington Isn’t Spending Too Much”, 1/6/12), reveals a core flaw in his approach to fiscal policy: not once does Mr. Goolsbee even mention the national debt of $10 trillion. He ignores the lethal impact of higher interest rates on the federal budget when interest rates return to typical levels. Interest payments on the national debt will consume over 30% of federal revenues when interest rates increase 4% (400 basis points) over CBO’s optimistic projections. He waxes on about federal spending and tax revenues as percentages of GDP yet whatever these percentages and whatever the debt/GDP ratio, the debt interest must be paid in cash. If CBO’s 2011 annual forecast turns out to be correct, the U.S. will spend $5 trillion on national debt interest payments in 2012 – 2021. If interest rates return to typical levels, the U.S. will spend $10 trillion on interest payments in 2012 – 2021 and by 2021 interest payments will be the largest item in the federal budget – larger than Social Security, larger than Medicare, and larger than defense. Mr. Goolsbee claims the fiscal crisis will be “…much easier to address if the economy were growing again.” Yet in the last 40 years, Washington has run 27 deficits in years when GDP grew by 5% or more. Mr. Goolsbee says the 2012 election “…should lay out each candidate’s fiscal grand bargain and growth strategy.” But we already know President Obama’s fiscal grand bargain and growth strategy: his 2011 budget plan, submitted when Mr. Goolsbee was chairman of Obama’s Council of Economic Advisors, called for the national debt to almost double by 2021. Is that why Mr. Goolsbee did not mention the national debt?

Wednesday, November 23, 2011

Polls vs. Pols

Yesterday’s online National Journal reports on their new poll. Their headline reads:

“Poll Shows Public Opposes Sequestration”

“Sequestration” means the automatic cuts resulting from the committee’s inability to reach an agreement. Here is their summary of the poll results:

“Opposition to proceeding with the automatic cuts was widespread in the poll. They were opposed by three-fifths of whites, and nearly two-thirds of minorities; at least 57 percent of every age group; and 58 percent of independents, 66 percent of Democrats and 62 percent of Republicans. The only exception to the pattern: Whites with at least a four-year college degree split almost evenly on whether the cuts should go through.”

And here is the National Journal’s polling question that yielded the poll results:

“As you may know, if the super committee does not meet its deficit reduction target by the deadline, Congress has set rules requiring large automatic cuts on defense and domestic programs. If the committee fails to meet its target, do you think these automatic cuts should go into effect or that Congress should take action to stop them?”

This question is misleading. The “automatic cuts” cannot by any stretch of a non-Washingtonian imagination be described as “large” or as “cuts”. But somewhere over 99% of Americans who are not members of Congress naturally assume the “large spending cuts” are large cuts from current spending levels. In fact, the total annual automatic cuts are small and only reduce the increases in annual spending. They do not reduce total annual spending – total annual spending increases every year. Ask an uninformed public a misleading question and what do you get: misleading poll results. The problem, of course, is that however flawed the polls are, they carry a lot of political weight that can be thrown around come election time by those who seek to exploit the public’s ignorance about the national fiscal crisis.

What is to be done? We need a new poll. We need a new poll that is not misleading - a new poll that gives the American people candid, realistic choices and in so doing guides the politicians to act in a manner that reflects informed public opinion. Absent informed public opinion, the 2012 election will be decided by debates about the wrong issues. The winners will have a mandate to address the wrong problems.

What fiscal choices do you suggest the new poll should offer? Here are mine, but undoubtedly you can recommend better ones by using this blog’s Comment feature.

“As you may know, the super committee did not meet its deficit reduction target by the deadline. Which of the following steps should Congress take to address the federal government’s financial crisis?

(1) Continue to increase both federal spending and the national debt each year in hopes that (a) the US economy will improve each year so that tax revenues will increase but (b) interest rates will remain at the current unusually low levels. If interest rates return to normal levels, the interest payments on the national debt will increase from the current 10% of tax revenues to 25% - 30% of tax revenues. If you choose (1) and if interest rates return to normal levels, the interest payments on the national debt will be larger than all Social Security payments, larger than all Medicare payments, larger than defense spending and larger than all other federal spending combined by 2021.

(2) Reduce current federal spending in the years 2013 and 2014 by 3% - 5% to get to a balanced budget in 2014. In 2015 – 2017, reduce federal spending by 2% - 3% to generate budget surpluses and apply the surpluses to reductions in the national debt. If tax revenues are lower and/or interest rates are higher than those expected by the Congressional Budget Office, the spending cuts will have to be larger.”

The spending cuts I have used in (2) are higher percentages than those in the Gradual Plan.

If there is anyone who thinks (2) above is as or more misleading than the National Journal’s poll question, please offer a Comment. How can we improve (1) and (2)? It is not easy to craft poll questions that are viewed as “non-misleading” and “fair and balanced” by all sides. Perhaps we should have two elections in 2012. The first election would decide the poll questions. The second election will choose the “winners”. I write “winners” because unless informed voters choose the winners, the winners will not be in office for very long. We will lurch election after election from one party to the other. Today far too many voters are clueless about the nation’s fiscal problems. Until the polls provide the voters with sound questions and realistic choices, most pols will choose and frame the issues for self-benefit. An uninformed electorate allows the politicians to choose and frame the issues and then chooses the most persuasive answers to the wrong questions. That is how we have come to where we are. It does not have to be this way.

So, which national news organization will step up and conduct the new poll?

If none, which national group will do so?

If none, is there not one American billionaire or multi-millionaire who will fund the new poll?