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January 06, 2013 12:41 PM Simpson and Bowles, “spending problem” voodoo economics ignores the lack of “crowding out”

By Samuel Knight

Alan Simpson and Erskine Bowles - co-founders of the corporate lobby Campaign to Fix the Debt - were on Meet the Press this morning. I couldn’t drag myself to watch it because I am sick and tired of hearing every oligarch’s favorite lackeys argue that the national debt is a reason to gut the welfare state. Which is exactly what they were doing this morning:

“Yes, the president has taken some steps forward on the entitlement programs, but has he done enough? Absolutely not,” Bowles said.

But they and their disciples couldn’t be more wrong. The U.S. government has no “spending problem” from a macroeconomist’s point of view. Of course, the country can’t indefinitely continue to borrow more than it earns, but the idea that we must somehow tackle debt by cutting spending — and do it right now — is voodoo economics of the highest order.

For spending to be an immediate problem, it would have to be problematic. And the primary reason that government spending is problematic is due to “the crowding out effect.”

I could find some haughty economist to quote on the issue, but for simplicity’s sake here’s Wikipedia:

“…crowding out is a phenomenon occurring when expansionary fiscal policy causes interest rates to rise, thereby reducing investment spending.”

Yet interest rates are rock bottom and aren’t expected to rise anytime soon, and demand for U.S. Treasury bonds remains high.

Thus, government spending appears to be having no averse effect on financial markets, which, according to Treasury yields, actually seem to think that lending the U.S. government money is a wise idea. The debt “crisis” is only caused by a “spending problem” when one considers government spending to be an issue from an ideological standpoint.

If Simpson and Bowles were serious about tackling the debt without completely undermining the economy, they’d advocate higher taxes on those that can afford to pay more. Corporations are awash with cash, and capital is taking a larger slice of the pie than ever. But aggregate demand is lagging, and to undermine social safety nets would further weaken it. Sound economic policy would, therefore, have the rich finance deficit reduction — if it must be done in this fragile economy.

Samuel Knight is a freelance journalist living in DC and a former intern at the Washington Monthly.

Comments

  • Ron Byers on January 06, 2013 1:43 PM:

    Simpson and Boyles are posterboys for the one solution fits all problems crowd.

    Once upon a time we faced run away inflation and crowding out. At that time their solution was the right one. Sadly they were actively involved in the economy in those days. They learned their lesson about excess government spending. Times change but that is the only lesson they ever learned. They are like the carpenter who tries to use his hammer to saw wood because all he knows how to do is hammer.

  • RepubAnon on January 06, 2013 1:48 PM:

    The important thing to remember is that there are, in essence, two economies in the US: the economy for the 0.1%, and the economy for the rest of us.

    The 0.1% are doing quite nicely - salaries are up, prices and inflation remain low, 55 acre estates are reasonably priced.

    For the rest of us, things aren't so good. For those of us lucky enough to have jobs, salaries remain flat or are falling.

    The obvious answer is to raise taxes on those who can afford it, and prop up the economy so the rest of us can find work. Unfortunately, the answer we're being force-fed is the exact opposite.

  • iyoumeweus on January 06, 2013 1:58 PM:

    FISCAL CLIFF COMPROMISE AND A PATH FORWARD
    This is what political compromise, cooperation and coordination looks like. Yes, we lost about 800B in revenue over 10 years, but revenue is always an on- going effort. I do not understand why in a nation that preaches marriage, couples and families; we reward unmarried, single individuals. I would rather it had been 200K and 400K, but compromise is compromise. But look what we obtained! A tax increase on the very, super, mega and ultra rich and a rise in the Estate Tax both of which can be changed in the future, an extension in emergency unemployment insurance, plus securing America’s Opportunity, Child and Earned Income Tax Credits. Included is an extension of the Production and Investment Tax Credit for the renewable energy industry and the Energy Star Tax Credit for consumers purchasing major appliances; as well as, a Doc’s and milk fix and several corp. ‘goodies’ which both parties love and lobbyist protect. Remember there is no such thing as permanent but the safety net was not further reduced and Medicaid, Medicare and Social Security left unchanged. Thinking we could get a better deal from the next Congress still controlled by rabid Tearepublgop is wishing for horses.
    CORPORATION AND BUSINESS TAXES
    A. Eliminate all corporation taxes on profits which are paid out to shareholders but tax dividends as income
    B. Tax all corporate advertisement at a rate of 50% ie.: for every $1 spent on advertising $.50 goes to government
    C. Tax all corporate lobbying and campaign contributions at 100% ($1 for $1)
    D. Tax all bonuses over $10,000 at a rate of 45%
    E. Tax all penalties, fines and punitive forfeiture at 25%
    F. Tax all profit not paid out as a dividend to shareholders at a rate of 15%
    G. All legitimate business expensive can be declared as a deduction except those in items b –e.
    H. Impose a special tax on the profits of all corporations and businesses which out- source jobs, build manufacturing, research and development facilities abroad and keep all or some financial accounts in foreign nations.
    I. The following loopholds shall be closed: 1) “active financing” tax deferral for financial firms [this exception for foreign source income allows multinational financial firms to avoid tax on their worldwide income by allowing these firms to establish ‘captive’ foreign financing subsidiaries], 2) dividend deduction on foreign source income earnings from U. S. controlled foreign subsidiary corporations, incorporated overseas [enables firms to avoid repatriating foreign earnings] and 3) the debt tax shield [deductibility of corp. debt interest payments for foreign firms].
    BUDGET CUTS
    • Cut farm subsidies by 30%.
    • Cut military budget by following the recommendations of the Sustainable Defense Task Force report which targeted cuts in: strategic capabilities, conventional forces, operational expenses, procurement strategies and eliminating unnecessary weapons systems. There is broad agreement that savings can be had without sacrificing national security. Estimated to be $100 B/yr
    • Eliminate all subsidies for fossil fuels including production credits and charge all petroleum companies full price for all well inspections.
    • Eliminate all subsidies on corn ethanol.
    • Reduce and eliminate the outsourcing of jobs to private firms which traditionally have been done by the Federal government or the military.
    • Increase fees on all Federal lands used for: lumbering, grazing, mining and other for profit activities. In some cases a percentage of the profit may be negotiated to protect the people’s interests.
    INFRASTRUCTURE LOAN BANK
    The ILB would be funded at $300B to start and added to in increments of $50B to $100B per year until fully funded at $1T. Any elected unit of government may barrow from

  • Mimikatz on January 06, 2013 2:06 PM:

    Simpson and Bowles don't want to cut spending. How many times does this have to be said? As someone said in the previous thread, they aren't opposed to spending, they just have different priorities. They want defense spending to remain high and corporate breaks to remain. Cutting SS and Medicare and pensions is now the only way to do that because that's where the money is. Of course we could cut defense and corporate welfare and raise the SS wage cap but they don't want to do that.

  • esaud on January 06, 2013 2:16 PM:

    Simpson and Bowles both have cruelty problems.

  • c u n d gulag on January 06, 2013 2:16 PM:

    To give Simpleton and Bowel-movement some cover, once you've declared an austerity position publicly, or any feckin' idiotic thing, and been praised and lauded for it by the politicians and their sycophantic DC Villager crowd, the real moneyed-powers-that-be, and the cowardly, compiant, and complicit MSM, none of whom has a single hair-follicle in this game, whereas a good chunk of the working riff-raff have their private parts on the choppping-block, it's awful tough to admit, no matter how much empirical evidence is presented by more knowledgeable people, that YOU WERE FECKIN' WRONG IN THE FIRST FECKIN' PLACE!!!!!!!!!!!!!!!!

    And, Lord forgive, and the Flying Spaghetti Monster knows, that apologies for being wrong, are less common than Sasquatch sightings in the Sahara.

    Since when has there been a photon or quark, let alone an ounce, of accountability from any of the above mentioned people?

    Politicians, knowingly and routinely break their Constitutional oath to work for "We the people," and, instead, take loads of campaign contributions (and personal ones) from lobbyists, and special dis-interested-in-the-public-good groups, to work for them, and still get reelected by using wedge issues to split the people, instead of uniting them.

    Political and economic "Experts," who are constantly wrong, never lose their punTWIT positions.

    MSM reporters ignore news, while covering politic's and every other thing in the world as either a 'He-said/She-said" talking head's debate, or a "People Magazine" light news feature - when even the dead kids in CT seem more like tiny celebrities, than dead victims of a madman, in a country awash in semi-automatic guns and ammo clips which would have shamed a Chicago gangster in the Roaring 20's, and made Patton envious, in his charge to Berlin.

    We are one feckin' fecked-up country!

    While the rich sing their own praises, and get applauded by sycophantic politicians, pnbTWIT's, and others in the MSM, the rest have to sing for their supper, and hope someone thinks they're worth sparing a dime for - which will soon be the minimum wage, if the rich have their way.
    I'm surprised Ann Coulter hasn't told us to, "Just Shut-up and Sing!"

  • jjm on January 06, 2013 3:19 PM:

    Look, the ONLY thing that Republicans care about doing is this:

    1) they don't care one whit about debt and deficits

    2) they DO care to try to trick democrats and Obama into 'cutting' 'entitlements' so that

    3) they can run against them, a la Romney/Ryan, claiming the Democrats cut SS or Medicare, and the GOP should be voted back because the GOP 'would protect them'

    4) Then, once they are back in power, they can actually devastate these programs, a la Ryan's 'budget'

  • bleh on January 06, 2013 4:01 PM:

    Honestly, where DID you get the silly notion that "facts" and "logic" matter in this situation?

    Serious People are Thinking Seriously about Serious Matters and participating in Serious Discussions to form a Bipartisan Consensus for Serious Action.

    All this chatter about "data" and "history" and all that just gets in the way of the Bipartisan Consensus that America needs to move forward again.

    Silly blogger. Really. Get serious.

  • joanneinDenver on January 06, 2013 4:27 PM:

    S&B conveniently forget to mention (and the talking show moderators don't embarrass them by bringing it up) that their committee did not win the approval of the number of members necessary to go forward with the recommendations.

  • Keith M Ellis on January 06, 2013 5:25 PM:

    Putting aside the very, very real conservative hypocrisy on deficits and debt, where the debt-fear really is a facade for the true goal of dismantling the safety-net (and which undoubtedly does figure, at least in part, in the centrist obsession with debt); I do very strongly believe that there's a contingent, mostly centrists, who genuinely and deeply are opposed to debt in precisely the same vague-but-intuitive-certainty way that many (most?) voters are.

    That is, most people think that the correct comparison is to an indebted household, have an intuitive dislike of debt, and therefore just feel sure in their bones that deficits and increasing national debt are inherently "bad". I feel certain that many people commenting here from the left have at times spoken out against the debt on exactly this basis (almost certainly during the Bush era as the debt ballooned rapidly). There's no reason to believe, sadly, that your average congressman is any more informed about this. And because they reason pretty much like most people reason, it doesn't really matter that there's macroeconomic arguments against this view, it doesn't matter that there's no empirical evidence for this view (at the very least, right now, in this economic context). People just "know" these things and it's certain that some portion of congresspeople just "know" this, too.

    It's not really about any specific plausible mechanisms by which deficits and debt could cause imminent calamity — many of these folks are certain there must be one.

    This being the case, you can't combat these Very Serious People simply on the basis of a macroeconomic argument, or on the basis that they must be hypocritical and/or have hidden motives. There's a synergistic interaction between the believers in the political and pundit class and the opportunistic hypocrites, and the naive believers in the general public. A strongly self-reinforcing interaction. I'm pessimistic that it could ever be possible to make the debt-worriers irrelevant; I think they will always and everywhere have influence (as has proven to be the case worldwide).