What’s Wrong With a High Deficit?

Martin Feldstein is on the warpath about the federal deficit in an op-ed in the Wall Street Journal:

To avoid economic distress, the government either has to impose higher taxes or reduce future spending. Since raising taxes weakens incentives and further slows economic growth—worsening the debt-to-GDP ratio—the better approach is to slow government spending growth. Defense spending and nondefense discretionary outlays can’t be reduced below the unprecedented and dangerously low shares of GDP that the CBO projects.

That the federal government deficit (the difference between income and spending) has increased should not come as a surprise to anyone. It’s been in all the papers. Sadly, Dr. Feldstein never explains why a big deficit is a problem. This is the closest he comes:

The higher long-run debt-to-GDP ratio would crowd out business investment and substantially reduce the economy’s growth rate.

but that’s not true. Since the federal government is a monetary sovereign federal deficit spending is not in competition with business for capital. The government doesn’t borrow from banks. It just issues itself more money. Paying interest (largely to itself) is a policy rather than requirement.

You know what is in competition with businesses for money? Paying interest on reserves, a policy the Federal Reserve began in 2008 in reaction to the financial crisis and which I can only characterize as evil. It means that banks can make money without bearing any risk. It discourages lending (that used to be the business that banks were in). What should have happened is that the federal government should have stepped in and closed insolvent banks. That is the way that capitalism is supposed to work. What we have is the socialization of losses and the privatization of profits.

The present level of the deficit already exceeds the growth in the economy, not a sustainable condition, so we do need to restrain the deficit.

There are also critical flaws in Dr. Feldstein’s proposed solution—raising the Social Security full retirement age to 70. The first is that most Americans aren’t college professors or bankers. People who perform physical work which includes not just factory or construction workers, miners, and truck drivers but the fastest-growing labor categories like the hospitality industry and low-wage hospital work just get tired. Their bodies wear out. And employers are aware of it. It’s increasingly difficult to be allowed to work past 60 let alone to 70.

The second is that, given the differences in life expectancy and income by race, it’s a racist policy.

The third is most damning. The Social Security actuaries have already told us that would not be enough.

The real increase in entitlement spending to which Dr. Feldstein must turn his attention is health care spending.

16 comments… add one
  • Gray Shambler Link

    “Their bodies wear out. And employers are aware of it. It’s increasingly difficult to be allowed to work past 60 let alone to 70”
    Aging is an eye opener. I always did wear out. But I used to recover.
    I did heavy manual labor until 65, and the last four years were very hard. I don’t think the younger generation has any obligation to support me, and I could even make an economic case for eliminating SSI and medicare. My usefulness is done, but, as long as the checks keep coming…

  • sam Link

    “I could even make an economic case for eliminating SSI and medicare.”

    Let’s see it.

  • Gray Shambler Link

    Stop the payments and balance the budget.

  • sam Link

    And how would that prevent the immiseration of the elderly?

  • Guarneri Link

    “Since the federal government is a monetary sovereign federal deficit spending is not in competition with business for capital.”

    That’s true, but there are other costs. The way the Fed/government has facilitated this is by keeping interest rates low. Savers have been hosed. Asset bubbles have been created. Talk about evil.

    The paragraph starting with “You know what is..” is just so true, and a blight on the national policy history.

    I know you have always been an advocate for manual laborers, but I’m not so sure. For perhaps 25 years my career consisted of 3-4 day per week travel, airplanes, crap motels, stress, late nights and early mornings. Run here, dash there. Always on. Vacations that were 80% work, or no vacation at all. The proverbial 18 hour days, plus many, many weekends. I used to watch people who simply shut down at 5pm, while I knew my day was only 2/3rds over. It takes its toll. Physically, mentally and emotionally. To be honest, I don’t see too many construction workers etc getting as beaten up. Back in the steel mill days I saw more arduous jobs – brutal heat in the summer, cold in the winter, sucking smoke in the BOF shop and of course shift work.

    Now I’m basically 80% retired, only episodically engaged with Firm matters. A long philosophical argument can be had on whether it was worth it. But I’m not sure the glorification of manual labor holds up to scrutiny.

  • My intention is not to glorify manual work. Merely to point out that there’s still a lot of it around and tailoring policy to suit white collar workers (and the professionals among white collar workers at that) would be a dreadful mistake. A lot of docs, lawyers, accountants, and architects can work until they’re 70 (many do). A blue collar worker not so much.

    I also think that we need to get our heads around the idea that different people have different abilities. There are some people who, regardless of training, will never become computer programmers. It isn’t just laziness that keeps everyone from being a physician or an engineer. Different people have different aptitudes, learning modalities, capacities, and capabilities. Our economy needs to be suited to the people we have.

  • Jimbino Link

    @sam

    Nobel Laureate Milton Friedman made the defintive case against socialist programs like public education, SS, Medicare and Obamacare in his “Free to Choose” book and TV series, though he left room for supporting true safety-net programs like Medicaid, Food Stamps and even guaranteed minimum income. There’s not much more that needs to be said on the topic.

  • sam Link

    I suspect I have the advantage of you, having spent some hours in conversation with Dr. Friedman. A very nice man, but, I came away thinking him naive as regards the human heart and the corrupting power of greed.

  • Guarneri Link

    You came away wrong, sam. Friedman had no illusions whatsoever about the heart or greed. In fact this understanding was the centerpiece of his philosophy. He, unlike the naïve, understood that everyone thinks the OTHER GUY is the greedy one, and will use his or her influence, especially political, to bend the rules in their favor to correct this perceived injustice. Better to not give that power to government to be in turn imposed on individuals at the expense of liberty.

    This view is expressed in umpteen hours of interviews, speeches and guest spot all still available on youtube.

  • sam Link

    He was naive in supposing that the wealthy would not use their power to bend the government, any government — or better, to create a government — that would act in their interests. History is one my side, not his.

  • TastyBits Link

    Somebody has stolen our beloved @Jimbino. Milton Friedman was a breeder. A fact the real @Jimbino would know.

  • Guarneri Link

    He had no such illusions, Sam. You are just making shit up now. He knew the rich like anyone else would attempt to exert influence through govt. but he didn’t fall for the suckers trap of deciding the govt therefore had a claim on property, or would wisely regulate. How’s the FAA been doing protecting us from Boeing? And it was the WSJ, not the SEC, who exposed the Theranos scam. And why is Elon Musk getting his electric cars subsidized…….?

  • Gray Shambler Link

    “immiseration of the elderly”
    Can’t help that. Money just helps keep us alive and prolongs misery.
    “glorification of manual labor”
    I enjoyed what I did, but my body is a lesser thing now, and there is a point at which I’ll stop scuttling around like an arthritic crab to earn my keep, homeless or no.
    And yes we did smile and shake our heads with commiseration at the managers we knew and liked who couldn’t get time off or lay down their phones.
    I never wanted to be in charge, and I suspect I’d have done poorly anyway.

  • Roy Lofquist Link

    “It seems to me that I’ve heard this song before”. Catchy tune. It’s been on the Billboard Top 40 for more than 70 years that I can remember. Other Chicken Little stories; Coming Ice Age, Alar, DDT, Hole in the Ozone, Acid Rain… come and go but “The National Debt” is a hardy perennial.

  • steve Link

    “I know you have always been an advocate for manual laborers, but I’m not so sure.”

    I think Dave has it right. I suspect my hours have been similar, except that I have also had to work nights (meaning I worked 24-30 hours straight). But if I screwed up a knee or hurt the back I could still work, I just limped into the hospital at 5:30 AM or limped out at midnight. Then when you hit your 60s, it all gets harder, but especially the physical stuff. It gets harder to move patients around (they are fatter which doesn’t help) and then the fine detail work gets more difficult (working on infants). At 65 I think I can do the mental part of the work for a long time yet, but the physical is catching up, and my physical labor is not all that demanding. Trying to do heavy labor with all of the accumulated aches and pains? I would certainly try if I needed the job, but I am betting an employer would rather have a younger person.

    Steve

  • Gray Shambler Link

    Steve: My wife’s had at lot of trips to the ER, I mainly sit in the worry chair but I’m always watching. I notice how young the Doctors and nurses are, and I realized at some point, they need to be. Eyesight, hearing, hand-eye co-ordination, reflexes. Like you, I’m 65. Age doesn’t disable you completely, but it’s a stealthy thief.

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