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.






