OK, let’s talk about the debt and the deficit — but let’s have a serious, adult, conversation. Here are some suggested rules for this road:
We need to talk about our national debt as a fiscal policy matter, not as a political propaganda talking point.
#1. One of the crucial points we need to acknowledge is that we were involved in two very expensive wars between 2000 and 2013. We racked up some significant debt during military operations in Afghanistan and Iraq. The military endeavors in Afghanistan have been, and continue to be, exceedingly expensive:
“The fact remains, however, that if the CRS and OMB figures for FY2001-FY2013 that follow are totaled for all direct spending on the war, they reach $641.7 billion, of which $198.2 billion – or over 30% – will be spent in FY2012 and FY2013. This is an incredible amount of money to have spent with so few controls, so few plans, so little auditing, and almost no credible measures of effectiveness.” [CSIS]
The removal of American forces from Afghanistan will curtail future expenditures, but the debt remains. Whether we like it or not, we have to pay for both the direct expenditures for military operations, and we have to allocate funds for indirect costs which we may reasonably expect to incur. There will be Veteran’s benefits to distribute, survivors’ benefits, and other VA services.
Although we are no longer a significant military presence in Iraq, the debt for our military actions and “reconstruction” is still on the books. As of March 2013, the Iraq war cost $1.7 trillion which should be added to another $490 billion in benefits owed to Iraq War Veterans. [Reuters]
However convenient it may be to run on about “out of control” and “rampant” spending — it is absolutely necessary to be honest about the major elements included in the total indebtedness — and we cannot honestly discuss our national debt without acknowledging its major components, such as the wars in Afghanistan and Iraq.
At some point the national discussion must answer the question: How do we pay down what we owe for these wars without jeopardizing the promises we made to the men and women we sent to fight in them?
Secondly, we need to address the issue raised in the CSIS report, i.e. how we account for and administer our military expenditures? There have been several attempts to improve Pentagon auditing, but the situation remains alarming. The Defense Contract Auditing Agency, which is supposed to prevent over-payments, fraud, and abuse is in disarray.
The DCAA has a budget of $573 million, and a backlog of 24,000 audits. This means that at the rate it is operating it cannot clear its backlog until 2016. [BusinessIns] Note, it isn’t that the Pentagon doesn’t want to audit its contracts, it is that with current personnel and resources — it can’t. Audits in 2011 (the last year for which figures are available) the DCAA recouped about 9% of the $128 billion in costs it audited. If we apply the 9% rate to the current backlog of $574 billion we could expect to recoup some $54 billion. [BusinessIns]
Therefore, another question we need to raise when discussing “waste, fraud, and abuse” in a significant portion of our national expenditures is: Have we allocated the resources necessary to perform the audits imperative to the reduction of wastefulness? It makes precious little sense to argue for either a reduction or increase in allocations to the Department of Defense unless we are willing to provide the necessary fiscal oversight of those allocations.
#2. There needs to be an agreement as to what does and does not contribute to national indebtedness, especially in terms of earned benefit programs.
First, while we may argue about the philosophy underpinning the Social Security program, there is no argument about how it is funded. The Social Security Administration explains why some have been confused about the “debts owed to the SSA”:
Most likely this question comes from a confusion between the financing of the Social Security program and the way the Social Security Trust Fund is treated in federal budget accounting. Starting in 1969 (due to action by the Johnson Administration in 1968) the transactions to the Trust Fund were included in what is known as the “unified budget.” This means that every function of the federal government is included in a single budget. This is sometimes described by saying that the Social Security Trust Funds are “on-budget.” This budget treatment of the Social Security Trust Fund continued until 1990 when the Trust Funds were again taken “off-budget.” This means only that they are shown as a separate account in the federal budget. But whether the Trust Funds are “on-budget” or “off-budget” is primarily a question of accounting practices–it has no effect on the actual operations of the Trust Fund itself. [SSA] (emphasis added)
From 1984 onward the Social Security Administration was empowered to hold special issue securities which are non-public securities, not available on the commercial market, that can be redeemed as the SSA determines it needs in order to make its revenues meet the amount of benefits to be paid. In short, it was the Reagan Administration’s intent that there be a “savings account for the trust funds” to address the retirement of the Baby-Boomers, and the increased number of beneficiaries who would be eligible for benefits.
While it might be advisable to decrease the need for the Social Security Administration to dip into its Special Issue reserves, it cannot be rationally argued that the SSA contributes in any significant way to the national debt.
There are alternatives to decreasing benefits, the most common being an increase in the earnings cap. The current contribution and benefit base is set at $113,700 meaning that all income above that level is not subject to taxation. [SSA]
“Currently, earned income in excess of $113,700 is entirely exempt from the 6.2 percent payroll tax that funds Social Security benefits (employers pay a matching 6.2 percent). 5.2 percent of working Americans make more than $113,700 a year.” [NYT] (emphasis added)
When the Congressional Budget Office released its report on Social Security in July 2010 (pdf) altogether too many focused on the problems sections and insufficient attention was paid to the options the report presented. There was, for example, Option 6, removing the cap:
Under this option, Social Security’s total revenues would increase by about 0.9 percentage points of GDP in 2040, or by about 18 percent relative to current law. This option would improve the 75 year actuarial balance by 0.9 percentage points of GDP and would extend the trust fund exhaustion date beyond the 75 year projection period. As a result, payable benefits would be higher from 2039 onward, especially for people born later. This option would primarily affect taxes paid by high earners. (emphasis added)
When we discuss options regarding the “reform” of earned benefits (“entitlements” if you will) ALL the options should be on the table — including the removal of the regressive cap on income subject to the Social Security taxes. [See also NYT]
There’s nothing intrinsically wrong with discussing “entitlement reform” as part of future budget and funding planning. However, there is something very wrong about assuming that all such ‘reform’ be borne by the 95% of the U.S. population who are to accept reduced benefits, for the benefit of the top 5% of income earners. A person earning an adjusted income of $1,000,000 annually isn’t paying any Social Security tax on $886,300 of his or her income; the equivalent of 16 people who earn the U.S. median wage of $54,000.
Those wishing a fuller account of the elite assault on earned benefits should read, or review, Thomas B. Edsall’s excellent commentary in “The War on Entitlements,” NYT, March 6, 2013.
#3. We need to factor in the impact of the recession. There’s really no way around this:
“Including all the stimulus spending, tax cuts, bank bailouts and automatic stabilizers, the Great Recession will add about $4.2 trillion to the federal deficit by the time the economy has fully recovered in 2016, based on back-of-the envelope calculations using figures from the Congressional Budget Office and the congressional Joint Tax Committee.” [MarketWatch]
Or we could review the report from the Dallas Federal Reserve, and the Recession looks even worse if we look at total costs to the overall economy : “Last month, the Federal Reserve Bank of Dallas published a staff paper estimating the costs of the 2007-2009 financial crisis. The conservative estimate came out at 40 to 90 per cent of 2007 output, roughly US$6 to US$14 trillion.” [INET]
Recessions reduce income, reduced income reduces tax collections, reduced tax collections reduce government revenue, reduced government revenue increases debt.
If “tax reform” is advocated as a way to recoup the losses from the Great Recession, then we need to move beyond the Supply Side Hoax. The notion that lower taxation would lead to more government revenue, was then — and is now — a theory in search of reality. From the “been there, done that” corner:
“Supply-side economics starts from the generally accepted economic insight that tax policy can influence private-sector decisions by changing the incentives to work and invest. But supply-side acolytes take this relatively mundane observation to an extreme conclusion. They argue that lowering taxes for people, especially for those who have a lot of money to invest, will always lead to better economic results, and furthermore, that lower taxes is the single most critical intervention the government can undertake to stimulate growth.
This assertion—that lower taxes for the rich will lead to improved economic results—is testable. Of course, pure natural experiments in economics are few and far between, but over the last 30 years the United States alternated between economic policies that were heavily influenced by supply-side ideas, then were not, then were again. This variation allows us to compare economic performance in the various eras. If proponents of supply-side theory are correct, then the supply-side eras should outperform the non-supply side era. But that’s not what happened.” [CAP]
Reduced to a single chart we can see the results of the Supply Side Hoax applied to the U.S. public debt.
It would follow from this that the “No New Taxes” (aka Supply Side Mantra) line makes a lovely and enticing slogan, but the application of the policy hasn’t resulted in better levels of investment growth, significant gains in productivity, better overall economic growth, better employment numbers, more income for the middle class, or better wages for working Americans. These are all associated with increased federal revenue levels, we would obviously benefit from adopting a more realistic pro-growth tax policy than simply adhering to the narrow “no taxes = pro-growth” incantations from the Supply Siders.
When the push runs into the shove, a discussion of tax policy in regard to the reduction of the national debt should realistically incorporate the means why which federal revenues can be increased, without exacerbating the already serious level of income inequality, stagnating wages and salaries, and burdens on the American middle class.
If we’re truly serious about discussing the means by which we are to address the level of the national debt, then pontificating and nibbling around the edges of the 15% of the Federal Budget which concerns non-defense discretionary spending doesn’t suffice. Are the advocates of cutting the food assistance programs really trying to convince us that they are taking important steps to curtail federal spending when those programs comprise some 0.24% of the federal budget? [InteractiveCP]
There are, indeed, some very serious questions to be answered when the question of the National Debt is raised: Not is sound bites and slogans, but in sound economic thinking and earnest efforts on behalf of working Americans.