From the National Academy of Social Insurance (Beyond the Bad Economy: Jobs, Retirement, Health, and Social Insurance):
January 21, 2010,
National Press Club, 529 14th Street, NW, 13th Floor Ballroom, Washington, DC 20045, United States
Member and Associate $ 400.00; Non-Member $ 550.00
THURSDAY JANUARY 21:
10:15 a.m. Opening Keynote: The Bad Economy and Social Insurance. Steven Pearlstein, The Washington Post
10:45 a.m. Session I: What is the Impact of the Recession on Social Insurance? Eric Rodriguez, National Council of La Raza (Moderator). Dean Baker, Center for Economic and Policy Research. Jennifer Klein. Iris Lav, Center on Budget and Policy Priorities. Mark Levitan, New York City Center for Economic Opportunity.
12:30 p.m. How Should We Think About the Public Debt? Lisa Mensah, Initiative on Financial Security of the Aspen Institute (Moderator). Bradford DeLong, University of California, Berkeley. Maya MacGuineas, The New America Foundation
In June 2007 the S&P Composite was at 1500 and a ten-year 5% coupon $1000 U.S. Treasury bond sold for $990. By March 2009 the S&P was at 800 and ten-year 5% coupon $1000 U.S. Treasury bonds (would have) sold for $1170. This great wheeling of asset prices—45% cumulative loss on risky equity and 23% cumulative gain on safe debt—is a collapse in the risk tolerance of the market, a grand flight to safety as nearly everybody tried to dump the risky parts of their portfolios and scramble into safe assets.
Such large movements in asset prices matter to everybody. Financial markets sent the real economy signals that all risky investments should be avoided, and all risky organizations should be shrunk. And the firms of the real economy responded by firing people.
Since at least 1825—when Britain’s canal speculation-driven bubble collapsed, and when Robert Banks Jenkinson Second Earl of Liverpool begged Bank of England Governor Cornelius Buller to do something—governments have responded to such collapses in risk tolerance. Households feel poor and stop spending and businesses stop investing and shrink operations because risky asset prices have collapsed as investors scramble for safety. The government tries to fix the situation by making more safe assets and expanding the demand for risky ones:
- Guarantee private debt to turn risky assets into safe ones.
- Nationalize troubled institutions to turn dodgy liabilities into gilt-edged ones.
- Buy long-duration and other risky assets for cash.
- Reduce the demand for safe assets by eliminating any expectations of nominal deflation.
- Print up a huge honking extra tranche of new safe assets—government bonds—by bringing forward in time government spending and postponing taxes.
There are limits to these policies. The feckless bankers who caused the problem have leveraged positions in risky assets—and benefit enormously from policies that raise their prices. Knowledge that there was a Bernanke put last time will encourage future irrational exuberance. Governments that buy up so many assets that they own banks and companies are unlikely to run them well. If too many risky assets are generated the central bank then faces the task of somehow withdrawing them before we replace our depression problem with an inflation one. The huge honking tranches of bonds printed up have to be amortized. And if you print up so many extra bonds—run such huge honking deficits—that you crack the Treasury bond’s status as safe asset then you have not raised but instead reduced the supply of safe assets, and moved into a world in which the only well-performing asset classes are sewing needles, bottled water, and ammunition.
We Need Bigger Deficits Now...
With that as background, I have two things to say. First: we need bigger deficits now. Unemployment is at 10%. The U.S. government can borrow for thirty years at an expected real rate of 2.12% while leaving bondholders holding 100% of inflation risk. Over the past 30 months the private market has swallowed an extra $2.9 trillion in U.S. Treasury debt—from $4.9 to $7.8 trillion—without that extra debt having moved Treasury interest rates up at all. Commit $1 of real cash flow to debt amortization and you can raise $40 today if you are the U.S. government selling into the Treasury market—and only $15 if you are an S&P 500 company. If you have any trust in price signals at all, right now they are yelling at us that the government should be raising more money on financial markets and spending it.
And there is no sign in financial markets that we are close to the edge of America’s debt capacity right now. And our reserve army of the unemployed is larger than the U.S. armed forces at their World War II peak.
We Need Smaller Deficits Later...
Second, we need smaller deficits later for a value of “later” equal to “soon,” as in “before 2015.” CBPP wants to stabilize the debt-to-GDP ratio in normal times. But we have to do better. We need the debt capacity to run large deficits in extraordinary times: World Wars II, Marshall Plans, bribing the Chinese to build nuclear rather than coal-fired greenhouse gas-emitting power plants, paying to move the population of Bangladesh to Alberta and build them places to live there, and fighting depressions are all things that all for large deficits, and if your debt-to-GDP ratio is stable in normal times you won’t have the debt capacity to do so.
Getting smaller deficits later for “later” equals “soon” is going to be very hard. America needs to make two political decisions: (i) How large a social insurance state do? (ii) How to get reasonable value for that portion of our health care system that is financed by the government? If we don’t make these decisions, global capital markets will at some point make them for us in ways that none of us will like.
For thirty years we have by and large been unable to make these decisions. Our governance structure has been broken: the unbalanced Reagan (as opposed to Ford) Republicans—some thinking that large unfunded tax cuts would force spending discipline on congress, some thinking that large unfunded tax cuts would unleash a huge economic boom, rather more thinking that promising lower taxes and more spending would get them jobs and après nous le deluge. The round-the-bend Gingrich (as opposed to Darman) Republicans, who developed the strategy of create-gridlock-and-blame-the-other-party and rode it to power. And now, as a health care bill that is Mitt Romney’s plan moved to the right attracts zero Republican votes, Republican Republicans—for there is no longer any sane faction in either Republican caucus.
At the moment our health care system spends twice as much as other countries for worse outcomes. We have a 6.9% of GDP CBO baseline fiscal gap. And virtually everybody expects the members of congress to decry our fiscal future and then turn around and vote overwelmingly to reject PAYGO and increase the fiscal gap by an extra 2.5% of GDP: doc fix, AMT fix, R&D tax credit, middle class-tax cut that plays the same role in the aftermath of the inauguration of a president that the solidii to the Praetorian Guard played in the aftermath of the inauguration of a Roman Emperor.
If we had not had George W. Bush installed as President over Al Gore in 2001 by a vote of 5-4—of our fiscal gap, 1.2% is Medicare Part D enacted in those days when as Senator Hatch says “it was customary not to pay for things,” 1.4% is to amortize Bush-era deficits, 0.7% for the expansion of a military the aerial portion of which appears to increase rather than reduce the number of recruits to Al Qaeda. I sometimes want to close my eyes, tap my heels together three times while saying “there’s no president like Gore,” open them—and be on a planet in which we have a 3.6% of GDP fiscal gap and are at the edge of a stable debt-to-GDP ratio.
Maya Needs to Give Us Some Answers...
We need to climb out of this box. I don’t know how we are going to. And I have already talked for too long.
So I am going to stop.
And I am going to demand that Maya come up with sensible, possible, effective institutional reforms and policy initiatives—things that will rescue us from nearly thirty years of collective national budget folly.