Streams

Explaining the Deficit

Tuesday, April 12, 2011

WNYC

Welcome to Politics Bites, where every afternoon at It's A Free Country, we bring you the unmissable quotes from the morning's political conversations on WNYC. Today on the Brian Lehrer Show, Roben Farzad, senior writer for Bloomberg Business Week, explained why the federal debt is so high--and previews what the political debate about the deficit will hinge on.

Despite Friday night's moment of budget agreement, there is more trouble ahead — what to do about the growing deficit.

Congressman Paul Ryan (R-WI), Chairman of the House Budget Committee, has a plan. He recently announced a decade-long plan to reduce this high debt, citing significant cuts to Medicare and Medicaid. In the meantime, in order to avoid default on the Fed's loans, the President is pushing for Congress to raise the virtual deficit roof. Not everyone agrees, and in 2006, he didn't either. When the president was a senator, he voted against raising the deficit ceiling. On Wednesday afternoon, he'll give a "major speech" in which he plans to discuss the 2012 budget and his thoughts on what should be done about the looming deficit.

Solving this problem is a balancing game.

The late 1990's was the last time the government was running surpluses, but the economy was humming along then and we also had higher income tax rates, which were cut when Bush came to office (and extended by President Obama). Roben Farzad of Bloomberg Business Week said there are two pieces to balancing this puzzle.

There's the revenue side of this and that's a euphemism for tax cuts and tax increases and there is the budgetary side of it where you're wondering, gosh, can we cut things here and there to kind of maybe make the spending numerator maybe smaller.

Rep. Ryan's plan is also riding a fine line for a deficit fix, according to Farzad.

He's trying to, I don't want to say have his cake and eat it too, but it's interesting in that it's cutting the top tax rate from 35 percent to 25 percent so already if we've had lower than average historical top marginal tax rates over the past decade, you're going to get even ostensibly less revenue...so can you cut potential revenue coming in and cut spending at the same time and ultimately produce a smaller gap. He claims that he can, to the tune of $2 trillion less in deficit spending than Obama's plan.

Farzad went on to say that the plan doesn't even produce an annual surplus or a balanced budget in ten years.

It produces deficit spending in the next decade, I mean we still have a $16 trillion debt under Ryan by 2021, versus 19 trillion. These people can fudge the numbers by saying, then that's just the multiple of GDP. So, there are a lot of moving parts, there are a lot of inputs that you put in this thing and the devil is certainly in the details.

Debt can be a good thing.

Alexander Hamilton was the first U.S. Secretary of the Treasury. He believed you shouldn't just operate at "break even" but that people should aim to live above their means a little bit. It helps the economy grow.

And that's somewhat been vindicated for all the massive deficits that we're rolling over right now. We have $14.3 trillion and an estimated $19 trillion in ten years, bond yields are ridiculously low, the Chinese still lend to us, people still buy government bonds so we're not being punished by bond vigilantes. Having said that, if there is going to be a game of chicken over the debt ceiling and you see interest rates creep up, that could really make debt payments go up even more.

The Tea Party's role is significant in how this deficit talk plays out.

Congressman Paul Ryan's plan to reduce the deficit carries a lot of cuts the Tea Party favors, cuts that may not have been a part of the debate without them.

The [political] fault lines are here in that the Tea party won a huge victory in the Congressional beat down and when you have someone like Rep. Ryan coming out and touching third rails of government...talking about slashing Medicare, talking about really representing the Tea Party agenda in certain elements, in that you could simultaneously cut the top tax rate and cut spending, you're really forcing the administration's hand. They're king of saying, well we're putting political skin in the game and now we're going to force you to come out and sacrifice some of your fiscal sacred cows.

Current spending breakdown:

Ryan's plan introduces several cuts. Here's Farzad's breakdown of what the federal government spends on the big ones.

Medicare:

On a static level, every year you look at the budget, roughly the stuff adds up to to 24, 30 percent, Medicaid less than Medicare. But Medicare is a huge entitlement and especially because you have the asymmetry of the government coming out there and effectively making a blank check type entitlement and on the other side of that is the private sector where prices have been going up way above the cost of inflation, so the deficits within just that slice every year balloon. So he is at least making an effort to try to get some sort of cut sustainably out of medicare as a block grant.

Medicaid:

Medicaid is less than that. $735 billion of the federal government goes to Medicaid. You have state matching as well.

Military:

Between 20 and 25 percent and that is something that is kind of a sacred cow within Ryan's budget proposal. No Social Security, no defense cuts and that's something that has really retained a third rail status.

One thing that IS running a surplus is Social Security, for now.

Social Security has been in pretty good shape since it came into existence, but the federal government has been borrowing money from this stash for operating expenses. Farzad said, we also can't depend on too much, now that the baby boomer generation is starting to qualify.

That's why it's so murky to look into that crystal ball and say we can count on Social Security surpluses. There are people out there that are saying, the whole system is going to be broke by 2030, so don't count on it as being a nest egg out there, it's going to be a huge drain if certain cuts aren't made, for example lifting the age for Social Security.

The federal government wasn't even supposed to use that money, since it was in a "lock box" for future Social Security needs, Farzad said.

And in corporate America that would be construed as accounting fraud, but Washington goes by its own generally accepted accounting principles.

Guests:

Roben Farzad

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Comments [24]

RALPH STERN from Wantagh, NY

There's a lot of talk about shared sacrifice, but I haven't heard anything about the hugh congressional budget - which I believe is over a billion dollars. Frankly I do not think that being a member of congress should be a career !! There shouldn't be retirement benefits, nor paid health care insurance. It should be short term "service to the country" job. They truly are not to be considered as the ruling class.

Apr. 13 2011 11:25 AM


(When the alcohol takes effect this early in the day, I like to fancy that the WNYC community is the place where ideas like this might succeed.)

Posted by Glenn Reynolds
http://pajamasmedia.com/instapundit/118348/

"SO OBAMA’S PEOPLE ARE TALKING TAX INCREASES AGAIN. Here’s my proposal: A 50% surtax on anything earned within five years after leaving the federal government, above whatever the federal salary was. Leave a $150K job at the White House, take a $1M job with Goldman, Sachs, pay a $425K surtax. Some House Republican should add this to a bill and watch the Dems react.

"UPDATE: Should we also provide that salaries paid to former government officials aren’t deductible for corporations? Or is that going too far? I say: Put it in as a negotiating point!"

(The measure should be enacted quickly. How much of the federal deficit could be eliminated if this was effect in time to capture the post-government incomes of Geitner, Bernanke, Barney Frank, Paul Ryan, John Boehner, etc.)[I'm sure "The-Community-Organizer-In-Chief" will voluntarily comply if someone would mention it to him.]

Apr. 12 2011 12:59 PM

@jrb from NYC:

I nominate you to be the next (pretend) president of the United States.

Of course you have seen the obvious solution:
"Governments produce their own currency,
households don't."

The financial problems are easily resolved by running the printing press 24-7.
(Haven't I heard that Bernanke is already trying that?)

Tea time soon.
Have a nice day : )

Apr. 12 2011 12:06 PM

Whew*!.
"Making it up as we go along"

I was getting concerned until you guest admitted that -
What a relief!

(BTW: Since you've finally admitted that the subject is just as easily dealt with by "Selected Shorts" (http://www.wnyc.org/shows/shorts/), could you all please drop the "affectatious" use of the word "math" when you're referring to the four grammar school operations of addition, subtraction, multiplication, and division.)

Have a nice day : )

Apr. 12 2011 11:16 AM
jrb from NYC

I had to write because I thought your guest did an awful job of framing the discussion, and by implication you did an awful job as well.

This was like a right wing screedfest rather than an actual discussion of facts and physics of finance.

Governments are not households. Governments produce their own currency, households don't.

For governments, economic growth is the only sensible debt reduction strategy. This is just how the math works. Everything else is politics.

Talking about the bond market in the way your guest did is like talking about the universe using the language of the constellations. It simply doesn't represent how the system works.

The Ryan plan is a policy document, not a financial document. Focusing on the financial aspects is to lose the forest for the grass.

Just a terrible segment.

Please, please, try to not do what the echo chamber is doing.

Apr. 12 2011 10:40 AM
Art White from Brooklyn

Come on Brian, if you want to 'explain the deficit' to us rubes have a practicing economist do so not a journalist from a business (ie right leaning) news organization
And also if you want to do your job properly why not present a truly left wing alternative to Ryan. If the only choices you present are soft left to hard right you do us a disservice and are playing into the hands of the plutocrats.

Apr. 12 2011 10:38 AM
janet rackham from New Jersey

For anyone interested in reading where the GOP wants to take us, I suggest David Halberstam's "The Fifties". Conservatives then were trying to roll back the New Deal and return to the good old days before Social Security. The more things change, the more they stay the same.

Clinton raised taxes, we had a surplus and good economic growth. Bush cut taxes, especially for the super rich and borrowed at least $6 trillion to invade Iraq and Afganistan. His claims that a tax cut would create jobs has not proven factual. Obama enacted health care reform to curb one of our biggest costs but was repudiated by the GOP. Now the GOP wants to cut Medicare/Medicaid because it costs too much. Isn't that what Obama tried to address in his health care reform effort?

We need to retrace how we got to this point and spend less time jockeying for political position at the expense of the country.

Apr. 12 2011 10:34 AM

Here's the revenue chart from the government re: tax cut effects:

http://www.usgovernmentrevenue.com/downchart_gr.php?year=1950_2015&units=p&state=US&chart=F0-fed&local=s

Apr. 12 2011 10:31 AM
Susan from NYC


Balancing the budget can be done in three easy steps:
1. Eliminate ALL deductions (that means mortgage, charity, child, state and local tax, business loopholes, etc.) If Congress really thinks something is worth supporting, they will have to appropriate funds for it openly and defend the decision. After all, every deduction someone gets means everyone else pays more, since government must still be funded.
2. Institute a single, progressive income tax that covers ALL income--there is no reason to tax income one does not work for (i.e., capital gains) at a lower rate than income one puts in time and effort to earn. Set these rates to actually cover our obligations. Now that the Supreme Court has recognized corporations as persons with equal free speech rights, tax them at the same rates as persons.
3. Disallow any political contributions from non-constituents--representative government can only function if those in office actually represent those who elected them rather than those with deep pockets. Set representative pay and privileges at the mean for their constituents. The current system breeds distrust and contempt, as our purported representatives ignore their constituents in favor of their corporate paymasters, obscuring their bought-and-paid-for favors with endless, incomprehensible layers of taxes and deductions.

Apr. 12 2011 10:30 AM
Ken from Little Neck

Of course you can cut taxes for the rich, slash spending, and still come out with a budget surplus - if you don't offer any services or assistance to the poor. This, of course, is what many Republicans are aiming for - the rich get richer and the poor can either be menial servants or die on the streets.

Apr. 12 2011 10:28 AM
Anika from Brooklyn

With all due respect to your guest, he is not correct w/r/t China and entitlements. China is currently developing a national health insurance system and they currently do have entitlements for the poor, people with HIV, rural residents, etc. They are also currently debating a national pension system.

Apr. 12 2011 10:27 AM
superf88

re the "China Risk" of China stopping lending...

Here's a little tip -- always bet ON the credit rating of the USA. For the last decade I've laughed at the naysayers and scare-dicats (and George Bush was their leader!) all the way to the bank.

Political risk, supply chain risk, even environmental risk makes USA China (and Japan and the world's) environmental and political bank account. AS LONG AS WE FIGHT TO KEEP OUR WATER CLEAN, OUR NUKES HOLSTERED, AND RULE OF LAW INTACT: We are it folks.

Apr. 12 2011 10:26 AM
amalgam from Manhattan by day, NJ by night

Contingencies based on China are no way to manage the budget.

Mr. Farzad, what about what Lehrer said: Raising the cap income for FICA taxes?

Apr. 12 2011 10:25 AM
Richard Binkele from Tarrytown

Why can't we tax the hell out of the rich? What's the point of having an economic system with no ceiling of profits at the expense of the growing poor and an aging population, of education, health care and other social services. In other countries, they take care of each other.

Apr. 12 2011 10:24 AM
Scott from Lower Manhattan

Instead of talking about the current-situation deficit, why not talk about a target peace-time, full-employment surplus? That is what the budget situation would be like if we did not have war-time or counter-recessionary expenditures and had full-employment revenues coming in given our policies holding steady. That's the real test for sustainability.

Apr. 12 2011 10:24 AM
Bobby G from East Village

Isn't the Republican's goal to shrink the Federal Government until " it can be drowned in a bathtub?"

Apr. 12 2011 10:23 AM
Sam from Williamsburg

Does raising the debt ceiling do anything to domestic interest rates? For example, could it increase the variable interest rate on my student loans?

Apr. 12 2011 10:17 AM
CL from NY

Michelle Bachmann is an uninformed (or deceptive) demagogue, pure and simple. There is nothing "poignant" about her comments. Once again the public is being deluded into thinking that the federal government is akin to a family. That is simply ignorant (and BL should know as much). Families don't set monetary policy and create money. The federal deficit is not trivial, but the so-called Tea Party is merely using the problem as a tactic to slash government, specifically to dismantle the US social safety net. The question of what to do and when to do it with regard to budgetary strategies and the national debt is what should be under serious discussion

Apr. 12 2011 10:16 AM
Peter from New York City

How do the U.S. tax rates for individuals and corporations compare to other countries which purport to have a social safety net?

Apr. 12 2011 10:15 AM
Bobby G from East Village

How did we get here? George W. Bush added $5 trillion to the national debt, and left office with the economy in shambles. How much did Ronald Reagan add to the debt?

Apr. 12 2011 10:14 AM

Exactly how much of the budget is military and/or defence? Compared to let's say, food stamps.

Apr. 12 2011 10:12 AM

Michelle Bachmann is a right wing idiot. Why do you continually quote her? Let's have intelligent discussion rather a hot button one. Where were these Republicans when Bush and Cheney were running up the budget with their wars and tax giveaways to the rich and the Koch Bros?

Apr. 12 2011 10:10 AM

Let’s cut all the corporation welfare (including unneeded defense and security theater) and blue state socialism to aid the red states (ie farm subsidies and roads to nowhere.) then see where we stand

Apr. 12 2011 09:30 AM
JT

When tax cuts for the rich comes up why doesn't the president ever mention that there is no evidence that it has ever helped the economy? It seems that republicans are willing to lie to get what the want (ie that over 90% of Planned Parenthood's work is abortions) but the democrats aren't willing to use facts.

Apr. 12 2011 09:13 AM

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