When the rhetoric of Peter Peterson scares so called Democrats into submission
Original art by ©priceman
Despite coming to some understandings with some of my critics, it nevertheless appears that in my last diary on this subject I brought out a few diarists’ and kossacks’ inner condescension about Medicare and the budget. They tell me all about how the boomers are coming! They tell me condescendingly “in ways even I can understand” how it is “just common sense” that we need to be aware of the dire consequences of this development with regards to Medicare's future.
That's funny. Why? This type of fear mongering and budgetary ignorance on Medicare and Social Security was definitively demolished by economists James K Galbraith, L. Randall Wray, and Warren Mosler in this paper:
Protecting the Budget From Intergenerational Warriors
In recent years we have been subjected to a rising cacophony of nonsense about a looming financial crisis. No, we are not referring to the current, very real, meltdown of private financial markets. Rather, we are told, future unfunded entitlements will bankrupt our government as the baby boomers retire. Social Security and Medicare are the main source of what former Comptroller General David Walker has called the “super subprime crisis.”
Social Security and Medicare have always had enemies, closely allied to private insurance companies who would like the business, and to fund managers and others who would profit from privatization of the associated revenue streams. But recently, these enemies have been given a boost, and a claim to respectability, by the creation of “intergenerational accounting,” an economic method that purports to calculate the debt burden our generation will leave for future generations. This Policy Note assesses intergenerational accounting and related aspects of what we call “the accounting campaign against Social Security and Medicare.”
These enemies of Social Security and Medicare now have more of a say than you or I with this new Super Congress coming up. It also doesn’t hurt that many of their memes and false premises are accepted by a lot of people here on Daily Kos, some well meaning but misinformed, others willfully ignorant in order to defend whatever Democrats and the white house support like the sellout Super Congress in the sellout debt ceiling deal that never should have happened.
This is what happens when "New Democrats" accept Peterson memes on Social Security and Medicare as we see the President and many Democrats in Congress are doing even if it’s “Yeah, but not now!” Neoliberal propaganda pervades not only most of academia (especially the Chicago School where Austin Goolsbee and many of the President’s economic advisors come from) as we have seen in Inside Job but also it has sadly perverted accounting standards in general.
It’s important to understand that Intergenerational accounting relies on budgetary myths and fables like anyone on this site who uses it, well meaning or not. For them to reference it condescendingly while insulting others who call it out for what it is, is really a sad state of affairs when it comes to actual accounting reality.
In intergenerational accounting, federal government revenue and expenditure streams are compared over very long periods—even over infinite time. “Deficit gaps” are then used to measure the financial burden of these commitments, and therefore the alleged solvency or insolvency of the government. Discounting the sum of the differences back to the present permits infinite sums to be translated into very large, but finite numbers. The results, amounting to tens of trillions of dollars, are headline-grabbing and scary-looking. Evidently this combination makes them irresistible. Even the Board of Trustees of the Social Security Administration began ago to dabble in such arithmetic several years ago.
Now the Federal Accounting Standards Board (FASAB)1is proposing to subject the entire federal budget to such accounting.
Basically this paper outlines rather well what I’ve written about numerous times and yet I keep hearing the stupid crap about “how the federal budget needs to get its finances in line like a family budget.” This economic and budgetary stupidity emanating from the President on this and even more sadly now, the FASAB, is the greatest threat to our Social safety net. This piece will explain it to you in undeniable detail.
I recommend reading the entire paper for full info on all of these intergenerational budgetary myths prevalent everywhere with all projections, even a lot of CBO projections that are heavily relied on.
Do the FASAB Exposure Drafts Recognize the General Principles of Federal Budget Accounting? The reporting proposed by the two exposure drafts does not appear to recognize the fundamental differences between public and private budgets. There are numerous problems in the drafts. Some of the most basic principles of accounting are neglected. Key terms are left ill-defined or undefined. Projections are misused. Unjustified policy prescriptions are slipped into the drafts in the guise of accounting standards. And revenues are matched to spending for parts of the federal budget, notably Social Security and Medicare, in ways that have no economic justification.
A Basic Principle: Liabilities and Assets.
The FASAB drafts are intended to be "statements of financial condition" for “the government” and for "the nation." These two concepts – government and nation -- are not interchangeable. To use them interchangeably, as the exposure drafts do, is a source of confusion.
In our understanding, a statement of "financial condition" is, in general, a balance sheet. These are constructed with two columns: one for liabilities, and the other for assets. This very basic principle is no different for the public sector, and for the nation as a whole, than it is for private sector accounting.
The "nation's financial condition” – a term used repeatedly in the exposure drafts -- is a combination of the financial condition of the government and that of its citizens. Yet the proposed "federal financial reporting" contains no mention of the assets that correspond to the liabilities that would be reported when accounting for “the nation.” For example, it would treat the obligations of the Social Security system as a liability. That same Social Security benefit liability is, of course, an asset to the public. The Social Security wealth of the current population is just as real as the liabilities that support it. Yet nowhere is this Social Security wealth reported or even remarked on. Put another way, a transfer program, from one group of citizens to another, via the government or otherwise, merely transfers resources. It does not increase or diminish them. This is an economic reality, and a financial statement for “the nation” should reflect it.
No, I’m afraid giving into these scary future projections based on these general accounting flaws in that these aforementioned liabilities and assets are not accounted for with Social Security benefits (and that SS is a transfer program) or Medicare, is not “just common sense” as I was told dismissively. It actually makes no sense at all if one understands real accounting standards and the federal budget like all federal programs transfer or not.
One cannot speak of finance, economics, or the ability to speak of solvency at all without reading into assets and liabilities and accepting a budgetary framework that identifies both of them. Here’s another fact many might now know, but must learn regarding the economic and budgetary history of this nation:
Ill-defined Terms: What is a “Budgetary Resource”?
The proposed reporting speaks of “budgetary resources.” The apparent concern is that the federal government operate within the “budgetary resources” available to it. Specifically the drafts are concerned that budgetary resources be sufficient to “sustain public services and meet obligations as they come due.” But there is no clear definition of what “budgetary resources” means.
If what is meant is “tax revenue,” the definition is totally inappropriate. As we have stated and demonstrated above, the government does not need tax revenue sufficient to match spending in order to “sustain public services and meet obligations as they come due.” This is obvious: the government almost never has sufficient tax revenue for that purpose. (It has run significant surpluses for only seven very brief periods in the history of the nation, each of them producing a depression or a recession.) This is why we have a national debt to begin with. Yet the US federal government has never, in 233 years of operation, lacked for “budgetary resources” sufficient to “sustain public services and meet obligations as they come due.” This is also obvious, insofar as the federal government has never defaulted on its obligations, including making all interest payments on its debt.
Spending is not revenue constrained. Historically when we’ve had a balanced budget(only 7 periods in our history), it led to a depression or recession or it generated the factors that led to one soon after. And yet we still hear deficit fetishist nonsense from this administration and a lot of other people in their defense, whether well meaning or not. They just don’t understand the federal budget or economic history.
So personally it’s a little hard to take such condescension on Medicare from people who don’t understand this.
Here our point is a matter of accounting: the asset of payroll tax revenues to the government is just a liability to the working population, just as the liability of future benefits is an asset to the public. In both cases, the books balance, between the public and the private sector – taken together, “the nation.” And if the public's books taken alone don't balance, it merely means that the private sector's books, taken alone, don't balance either: the deficit of the one is the surplus of the other. There is nothing alarming about this. Just as the public debt can be eternal, and need never be paid off, a net debt position for Social Security and Medicare can likewise be eternal as well, since the government’s net deficit is balanced by the nongovernment sector’s net surplus. Spelling out the balance sheet in full for “the nation” would be good financial reporting practice. And in this case, it would usefully reduce the scare-content of claims that focus on liabilities without acknowledging the corresponding assets.
You can get mad at accounting reality if you want to. After all, I know accounting fantasies can look good in a speech whether from Bill Clinton or Barack Obama, but only this truly counts as actual accounting reality. Scare monger Medicare claims of any type, especially the type I laid out visually for you above via 20 TRILLION are nothing to take seriously. These fantasy liabilities without assets, real accounting standards do not make and across the board too.
For instance:
Arbitrary, Capricious and Misleading Time Horizons
The FASAB’s proposed time horizons are also problematic. They are so long, that they will involve making assumptions that are, in the nature of things, impossible. An example is the assumption of current Medicare forecasts that health care costs will continue to rise indefinitely more rapidly than nominal GDP, so that the share of health care in GDP rises without limit. While the focus of the exposure drafts is on implications for the federal budget, the effect on the private sector would be worse. In the limit, there would be few or no resources left to produce food, shelter, industrial goods or education, and the health care burden on households and firms would become intolerable. This cannot happen, therefore it will not happen. Stein’s Law applies: when a trend cannot continue, it will stop.
No understanding of the issues is gained by a procedure that necessarily incorporates unrealistic assumptions of this type. Since the time horizons are arbitrary, the present value of future “liabilities” can be blown up to any size, simply by changing time horizons and discount rates. Most readers of the proposed budgetary documents are unlikely to be aware that the exercise is purely arithmetic in this sense.
For Social Security and other permanent programs, what matters for long-range projections are demographics, technology and economic growth.7 Financing is virtually irrelevant. If by 2083 everyone is over age 67, no financing scheme will allow us to meet our commitment to let people retire at a decent living standard at age 67. This, however, is most unlikely. Indeed, all plausible projections of demographic trends show only gradual and moderately rising real burdens on those of normal working age in terms of numbers of dependents (aged plus young) per worker. The OASDI part of Social Security currently moves less than 4.5 % of GDP to beneficiaries and that rises to about 6.5% over the next 75 years. On one hand, this is a significant increase, but on the other, similar shifts have occurred in the past without generating economic crisis or intolerable burdens. And it still leaves over 93% of GDP outside OASDI.
Basically this sums it all up though you should read the entire paper yourself as it is well worth it.
In short, it serves no useful purpose to project financial shortfalls for Social Security and Medicare into a far distant future, and no purpose whatever to revise those programs today on the basis of such projections.
snip
The notion that there is some “unfunded liability” amounting to tens of trillions of dollars is hogwash. There cannot be any “underfunding”. The US government always has the operational ability to make all payments as they come due, and, we note, could do so even if through some strange accounting mistake or trick one concluded that government liabilities exceed private assets.
This is where all the scary predictions regarding Medicare are coming from and they are all built on a shaky foundation of deficit fear mongering and budgetary ignorance involving intergenerational fantasies.
Don't play that game. Demand that our politicians don't play that game either. The future of Medicare, The New Deal, Social Security, and our entire social safety net depend on demanding real accurate budgetary knowledge and sound demand side economic policies.
Keynesian fiscal policies that are allowed to be actually Keynesian also depend on rooting out this kind of deficit fear mongering. Only then will we reach full employment which equals a jobs recovery, the only real recovery.