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The celebrations around the country haven't even been cleaned up yet and it's already starting, talk about the need for Obama to do a "Grand Bargain." You know, the one where we cut Social Security, Medicare and enact other awful things from the Simpson-Bowles recommendations. Here's Bill Burton, former White House spokesman and co-founder of the SuperPAC Priorities USA Action, talking about it. And if you've watched any cable news today you've also heard various Democratic surrogates like Ed Rendell talking about it.

Thankfully we had Occupy to change the conversation late last year, but the DC beltway establishment still demands its Grand Bargain.

So I wanted to start out by busting some myths about it. But to do that I simply want to quote an email sent out by economist Dean Baker. I felt like it was just useful to have these facts more publicly accessible. He's someone you should be following as this develops. He's got a blog at CEPR. And you can follow him on twitter.

1. The budget deficit is not “out of control”.

There is enormous confusion about the nature of the country’s deficit problem. There is a widespread belief that there has been a longstanding problem with large budget deficits. This is simply not true. It is easy to show that the large deficits of recent years are a result of the downturn in the economy following the collapse of the housing bubble.

* The budget deficit in 2007 was just 1.2 percent of GDP.

* In January of 2008, before it recognized the impact of the collapse of the housing bubble on the economy, the Congressional Budget Office projected that the deficit would remain near 1.0 percent of GDP through 2011.

* The deficit was projected to turn to a surplus in 2012 after the expiration of the Bush tax cuts.

* The country could run deficits of this size literally forever. The debt to GDP ratio was actually declining.

This situation changed in 2008 because of the downturn caused by the collapse of the housing bubble.

* This led to a sharp fall in revenue as taxes fell in response to the fall in output and employment.

* It also led to an increase in expenditures for items like unemployment insurance and food stamps.

* In addition, there were tax cuts and spending measures taken to directly counteract the downturn, such as the payroll tax cut and the stimulus package.

The combination of automatic stabilizers and deliberate stimulus measures fully explain the large deficits of the last four years.

* There were few permanent changes to spending or the tax code that would add to the deficit on an ongoing basis.

* If the unemployment rate were to return to the pre-recession level of 4.5 percent and we eliminated the tax and spending measures designed to sustain the economy through the downturn, we would again have modest deficits of a size that could be sustained indefinitely.

2. The “fiscal cliff” is not a cliff at all.

The term “fiscal cliff” and the discussion around this impasse have fundamentally misrepresented the problem facing the budget and the economy. While there have been projections from the Congressional Budget Office and others showing that the tax increases and spending cuts scheduled to go into effect on January 1, 2013 can push the economy back into recession, these projections are showing the impact of failing to reach an agreement by the end of 2013.

* The projections assume not only that no deal is reached by January 1, but also that no deal is reached over the course of the year. In other words, we would not be subject to a higher tax rate for a few weeks or a month, these models examined what would happen if we paid taxes at higher rate for a full year and also saw spending cut for the whole year.

* As a practical matter, if the end of the year deadline is not met it only means that people will be subject to higher withholding beginning on January 1, 2103. No one would feel anything until they saw their first paycheck of 2013.

* Furthermore, if Congress and the president seemed about to reach a deal, which would eliminate much of the tax increase, then most people would be able to anticipate getting back the extra taxes in their next paycheck. In this case, the impact on spending and the economy would be minimal.

There is even less cause to be concerned about the spending side of the cliff.

* The sequester applies to appropriations, not actual outlays. Some of the money appropriated in 2013 may not be spent for years into the future.

* As a practical matter, there is no reason for the government to do anything to curb spending in January if it appears that a deal is likely to be reached that would lead to levels of spending that are higher than provided for in the sequester.

* This means that if Congress and the president take a month or two to work through an alternative to the sequester, the pace of spending need not be affected.

As a practical matter, it is always desirable to reduce unnecessary uncertainty and the resolution of the tax and spending debate creates certainty. But there is no reality to the idea that the end of the year presents a deadline of any consequence. It really doesn’t matter whether a deal is reached on December 28th or January 8th, the impact on the economy will be almost exactly the same.

Originally posted to terminal3 on Wed Nov 07, 2012 at 01:55 PM PST.

Also republished by The Democratic Wing of the Democratic Party.

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Comment Preferences

  •  Very important points, plus Social Security (2+ / 0-)
    Recommended by:
    Odysseus, Sunspots

    Here is how Social Security relates to current budget thinking---

    ---In 1981 Reagan and the Congress realized that the country needed to plan for the bulge in retirements of the baby boomers--people born soon after WWII.  They set up the Greenspan Commission.
    ---The Greenspan Commission made recommendations including that increased Social Security payroll taxes be collected and invested in a trust fund.  This was passed and made law in 1983.
    ---The trust fund invests in the safest security in the world, U.S. treasury bonds.  This means that the Social Security trust fund has been loaning money to the general fund, and receiving interest until the day when the bonds need to be redeemed to pay for the baby boomers' retirements as originally planned.
    ---Redemption...that's the rub.  Where will the money come from to redeem the bonds?  Cut spending (let's get Fox News on board for that!).  Raise taxes (wash your mouth out before you piss off the job creators).  Or some of both in a grand bargain?

  •  Do you know when the lame duck session begins? (0+ / 0-)
  •  You redeem the bonds (3+ / 0-)
    Recommended by:
    Roger Fox, Odysseus, Sunspots

    by creating money.  That's why its called a fiat currency.  The economy needs spending and stimulus to get going, not austerity, which historically has not worked.  

    Washington should print more now and spend it.  Inflation can be managed, since the underlying value in the economy is there.

    •  Can you give us some examples where ... (0+ / 0-)

      creating "money" out of thin air has worked?  No theories, actual examples ... the more the better.

      "Two things are infinite: the universe and human stupidity, and I am not sure about the universe." -- Albert Einstein

      by Neuroptimalian on Wed Nov 07, 2012 at 05:30:31 PM PST

      [ Parent ]

      •  What are you asking? (0+ / 0-)

        All fiat money is created out of thin air.  

        Politics is the art of the possible, but that means you have to think about changing what is possible, not that you have to accept it in perpetuity. Notes on a Theory

        by David Kaib on Wed Nov 07, 2012 at 07:28:16 PM PST

        [ Parent ]

        •  Yes, it is. (0+ / 0-)

          Show us how doing so has "worked" on a large scale to save a sinking economy without any major downside like inflation.

          "Two things are infinite: the universe and human stupidity, and I am not sure about the universe." -- Albert Einstein

          by Neuroptimalian on Thu Nov 08, 2012 at 07:39:16 AM PST

          [ Parent ]

          •  You're question doesn't make any sense (1+ / 0-)
            Recommended by:

            Money is created every day.  All money in the world today is fiat money. Are you asking whether monetary policy can end a recession without leading to inflation?

            Interesting to to call inflation a major downside.  Some inflation would be healthy, and mass unemployment is far more destructive - if you care about the people over financial institutions.  

            Politics is the art of the possible, but that means you have to think about changing what is possible, not that you have to accept it in perpetuity. Notes on a Theory

            by David Kaib on Thu Nov 08, 2012 at 03:45:00 PM PST

            [ Parent ]

  •  Can someone please explain to me (0+ / 0-)

    why during the Bush years, it was widely accepted as true here and on the left that the deficits run up by Bush were a bad thing?

    Something really strange happened when Obama was inaugurated. All of a sudden, Republicans decided that deficits were bad and some Democrats decided they weren't. It was like opposites day or something.

    Now, the stimulus program was necessary no matter what because of the mess we were in. And of course I don't agree with any of the Republicans' ideas about spending cuts. But the idea that the deficit is not a problem at all and that we don't need to address it...sorry, that's just crazy talk.

    •  Was it widely accepted here (0+ / 0-)

      than any and all deficits were bad?  Baker isn't arguing deficits don't matter. He's arguing about what the sustainable levels. are.  To the extent you are concerned about longer term deficits, they're all about health care costs so none of the alleged deficit fixes will address that.

      Politics is the art of the possible, but that means you have to think about changing what is possible, not that you have to accept it in perpetuity. Notes on a Theory

      by David Kaib on Wed Nov 07, 2012 at 07:26:49 PM PST

      [ Parent ]

      •  Let's separate two things (0+ / 0-)

        Some deficit spending is worth while (e.g., the stimulus) because it was needed and unavoidable. Other deficit spending is bad (e.g., the invasion of Iraq).

        However, once you have the deficit, it doesn't matter what created it. You have to consider the costs of carrying it. As Bill Clinton pointed out in his convention speech, right now interest rates are low; but when they go up (as they will eventually), interests costs from carrying a deficit of this size will be unsustainable. You don't want to have to try to deal with bringing down the deficit to more manageable levels at that point, because the things you would need to do then would be drastic. No, better to begin to deal with it now.

        •  This is not what I'm talking about (1+ / 0-)
          Recommended by:

          Baker's argument was about the sustainable levels of deficit, not in opposition to deficits.  

          Beyond that, lack of growth creates deficits, and any effort to deal with it now (other than addressing health care costs or taxing at the top brackets) will lead to less growth. It simply isn't true that sustainability is solely a product of interest rates - that's only half of the transaction, and the less important one at that.  We grew out of our debts after WWII, and could do it again, if we weren't pushing anti-growth austerity policies.

          Politics is the art of the possible, but that means you have to think about changing what is possible, not that you have to accept it in perpetuity. Notes on a Theory

          by David Kaib on Thu Nov 08, 2012 at 03:40:12 PM PST

          [ Parent ]

  •  What is the link to the Dean Baker (0+ / 0-)


    The spirit of liberty is the spirit which is not too sure that it is right. -- Judge Learned Hand, May 21, 1944

    by ybruti on Wed Nov 07, 2012 at 04:00:53 PM PST

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