If Stiglitz wants to counter Rubin's policies that all to the good, but how about looking at the 800 lb gorilla? It's not the wars, its the overall military spending.

Neither political party is willing to address the issue. In fact both are pushing for more military spending. When the wars end most likely spending won't decrease much then either, there will be a need to restock all the materiel being expended currently.

Rubin and the neo-cons want to shrink social insurance programs. They use faulty projections to scare people into thinking there is an impending disaster, but this isn't true.

Other advanced societies get along with military budgets which are a small fraction of ours. They then can use the government revenues for social programs. They also get all the raw materials they need, they just pay for them. Why do we need 750+ military bases. Does this ensure a supply of oil?

The federal deficit is on the order of $500 billion, the military budget is on the order of $650 billion. And people still want to talk about tweaking tax policy...

Here's a nice graphic to show where our taxes go:

Federal Pie Chart

--- Policies not Politics
Daily Landscape

Deficits, accumulated debt, misuse of debt... 

Oh it is current priorities (the WAR) that is the problem... Who would of thought that? 

What we need to do is rebuild our economy, and while leftist proponents of globalization might not like to hear it, it means rebuilding our manufacturing base. It means supporting and subsidizing family farms. We do not have to accept globalization based on third world standards. That doesn't help the poor in the third world, it's corporate welfare.

Once we've grown our economy, we have to pay off the debt, in a slow and steady way. We also have to eliminate tax cuts to the wealthy, we have to for example, end social security and medicare for the wealthiest.. they do not need their incomes and healthcare subsidized.

We also need to bring back tariffs and levies on the importation of goods. We also need to impose a tax on American corporations who manufacture overseas (they, as well as the rest of the world rely heavily on American consumption). We also need to levy taxes on foreign nationals who own businesses here and seek to evade paying American wages and evade American workplace laws by relying on importing workers through visas.

We have to get tough, and start calling the bluff of corporations and foreign governments and nationals who are attemptin their own empire building on the backs of suffering American worker's and taxpayers.

of course this is one view. another view, which I actually find compelling, is that Americans shold simply take advantage of the trade deficits to become more dominant than ever.

that is, if imports are really produced more cheaply abroad-- then businesses in the US can snap them up and build the next generation economy very cheaply.

the protectionism you suggest might actually make things worse because nobody actually knows how healthcare will be delivered to the growing population of eldery and we really need to improve our medical technology so medical care becomes less dependent on labor.

unfortunately, I see some economists worrying because they didn't realize how much knowledge would be lost when manufacturing operations went over seas.

but, at least initially, they thought that Americans should be designers not producers since being higher up on the food chain was a better place to be-- but now we see that everybody wants to be on top.

So America can win the war and solve all it's problems by just printing more dollars and flooding the markets with US Treasury IOU's?

Take a look at the recent budget proposed by the Democratic Progressive Caucus--ie, check out the link from this piece whereing we heap praise.  They go after wasteful defense spending in a way that's way beyond the industry standard, which is not at all...

Isn't the key control? When Clinton and Rubin came to office it looked like the deficit was permanently out of control. The bond market showed that it would and could punish other nations by driving up their interest rates to impossible levels. The U.S. escaped that kind of punishment because not only has it never defaulted on its debt but it is provides the world's reserve currency and is the most power economy on the planet.

The budget does not need to be balanced but to some extent be countercyclical. Not only would this help support or remove demand but it woudl by its very nature show that the government is in charge of the deficit not the other way around.

However the one question might me about the coming need for funds for both Social Security and Medicare. Back in the 1980s Reagan, based on the Greespan-Moynihan Commission, passed the largest tax increase in history. This money was largely to have Baby Boomers to prepay their own retirment. To some extent Bush has pulled a bait and switch. Boomer prepayments have helped disguise the transfer of money from FICA payers to Treasurey interest collectors. If defictis aren't pared won't Boomers have had their taxpayments converted for used not intended by this large tax increase?

Daniel A. Greenbaum

Tax me now or tax me later. Better yet!  Don't tax me; tax my children.

I agree re control, balance and countercyclicality.  In fact, the problem with the Bush deficits--not today's, which are small relative to GDP, but tomorrow's (assuming he gets his tax cuts extended)--is that they are 'structural,' meaning that even with the economoy growing at full tilt, deficits will rise--that's what happens what you cut revenue and ignore spending obligations.

RE Soc Security. it's true that we borrow the surplus in the trust fund and spend it today, but I don't think most analysts view that as a bad thing in and of itself--one branch of gov't lending to another.  Of course, if you waste the money, that's another thing.

I think it's widely agreed that the Soc Sec fiscal shortfall is not necessarily a problem.  One quarter of the war, the Bush tax cuts for the top 1%, and raising the salary cap--all of these could make up most of the 75-yr shortfall.  Hth care entitlements...now that's also another story.

Prepayment was always a bad idea . . . low and moderate income boomers were snookered into regressive taxes on the false claim that their social security taxes were being put aside.

While there was some propaganda to that effect, sophisticated analysts back in the early 1980s never expected to see the FICA surpluses we've experienced lately. They were used to very high inflation and very low productivity growth. And they were trying to solve a political problem that can only be addressed once each twenty years or so.

The Greenspan-Moynihan Commission members expected that the COLA increases would, within twenty years, not only outrun FICA receipts but would exhaust the trust funds built up over that time frame. But due to higher productivity, a decrease in inflation, and a reduction in unemployment -- all taking place in the Clinton years -- their expectations didn't come to pass.

If we want to blame anyone for failing to handle the changed situation it should be Gore and the Democrats. In 2000 we should have been promoting a big middle class tax reduction; instead, we called for a "lockbox."  Dumb idea.

SeeDee
Bernstein: "...I haven't spent enough time looking into this, was whether he's dealing successfully with the corruption of leadership in some of these countries."

Yeah, and not just in 'other countries'.

When it comes to dealing with corruption, has anyone 'looked into' the huge amounts of corrupt contracting procedures RE funds spent in the Iraq war? Has anyone REALLY 'looked into' the corrupt Pentagon bribery exposed by the Abramoff investigations?

When it comes to fiscal matters, should Federal budget gurus simply add a certain percentage as an allowance for crooked spending by the various Federal (and State) programs, and increase taxes as necessary to fund such skull-duggery.

This has got to be one of the most one sided looks at the whole issue I have seen in a long time. There is a whole list of things you are not considering that go in the face of this argument, such as the high cost and debt of medicare which pays for medicine for a lot of people who can afford it on their own, a lot of military spending is on medical for vets, and disability pensions, we have massive debt including unfunded liabilities for Federal employees that are bigger than the social security debt, etc, etc. This idea that we can just wave a wand and say all this debt isn't going to affect is insanity. The Bush tax cuts for the wealthy mean, what, $200 billion a year in taxes? I am all for restoring those tax breaks for the wealthy but we have a huge budget problem that is getting worse that restoring the Bush tax cuts isn't going to come close to fixing. This seems more like liberals wishing for more programs and spending and working backward from there. Pretty scary. Are you sure this is the reality party?

Re: The point of his comment was you don't reduce deficits in weak economies-

The economy of the early 90s was weak-- remember the recession of 91?
Now I agree that we should not make deficit reduction the be-all and end-all of Democratic policy. Nevertheless, I don't agree with anyone who says we dare not rescind the Bush tax cuts lest we sink the economy. That's just BS served up on a silver platter, and this is almost the last website I'd expect people to be boosting GOP talking points.

By Jared Bernstein | bio

What’s the magnitude of the deficit relative to GDP (it’s now a very manageable 2%)?

It seems I've been hearing people refer to
"the percentage of GDP" for years, but no one has ever explained how this comparison is relevant to every day living.

Explain to me, as though I'm a 10 year old, why comparing anything to the GDP is meaningful to me.

What does "2% of GDP" mean to me in relation to the price of a loaf of bread. To the cost of medicine, to the cost of electricity.

When I pay my local taxes does some item's relation to the GDP mean anything to the check I'm writing to my township?

If the payments on the federal deficit
are "X" % of GDP, how does that directly affect me? Do I pay more....or less, for everyday products if the deficit payments are 2% as compared to 3%?

You missed the key point: the too-often mindless focus on austerity by both parties has blocked precisely the way forward, which I think is in sync with where you want to go:

"These two options have crowded out the third: raise the revenue we need to support that which will make our economy and country stronger."

The agenda is not to have everything you want for free: it's to get us outside the restrictive set of current options:

1) cut taxes, raise spending--let the kids worry about it (GW Bush)

2) cut taxes, cut spending--conservatives, including the R candidates for pres

3) raise taxes on some people, cut spending and balance the budget--many D's.

4) (and this is the one that's off the table): raise the resources we need to solve the problems we face

I agree--that's the smart way forward.  The point is to not to abandon fiscal discipline (as the current regime has done) for the very reasons you say.

The other point is not to automatically assume that S10 billion spent on deficit reduction is your best option, if a) the economy's weak, and b) you're forgoing need inverstments.

Don’t you realize that raising the payroll tax and cutting income taxes is the equivalent of setting aside money?

If that allowed the rich to get richer, their assets are invested in some store of value that can be more easily taxed in the future. When the payroll tax no longer meets the obligations to retirees in a few years, the treasury now has an obligation to make up that shortfall with the progressive income tax which the rich will pay a disproportionate share of, effectively recovering the money “set aside” by a higher than needed FICA tax.

The alternative would have been a steep hike in the FICA taxes on the baby boomers children to meet their retirement, rather than shifting some of that burden onto the boomers themselves. Would that seem fairer to you?

I think this is a recipe for economic stagnation and an over all lower standard of living. Now you may think that that may result in a more economically just society, but you should be aware of what you are doing.

Almost any financial rule : balanced budget, deficit as a % of GDP , debt as a % of GDP can be useful as a reminder that there is some level of deficit that would be harmful. In principle there is no limit to the number of good things we'd like the government to do which the private economy is never going to . But there's no such thing as a free lunch so in practice there is some point at which removing money from the citizens will result in  them  doing fewer of the good things they can do which the government ,sadly , can't. Only the government is ever going to e.g. create a workable health system but also only a "Bill Gates" is going to e.g. find a cure for cancer . Off the thread but there's an analogy , I'm almost certainly the only user of TPM who believes that Wall Street's emphasis on quarterly results is healthy . In principle there's no limit to the number of good things in which a corporation can invest but in practice none of them will be successful unless it can pay its bills , every quarter.

Right, flavius.  And from where I sit in DC, the debate has moved from "there's some point at which pubic borrowing crowds out private investment" to "any level of deficit spending is harmful."

Beware reductionist economics!  Such "rules" are almost always wrong ("minimum wages kill jobs" "tax cuts pay for themselves" "deficits crowd out private investment" etc...)

Yes FICA and Income taxes are fungible. In exchange for higher FICA you got an obligation for the income tax to help pay your benefits in a few more years when there is not enough FICA tax.

The FICA tax would have to be raised even more in a few years if there was not an obligation from general revenue. Would that be fair? You have to realize that in a collective system, it’s not all about you. Yes you would have more wealth today had your FICA tax been kept low, but your children would have to pay more out of their paychecks to pay your benefits. That sounds selfish to me.

You are not alone.

If you haven't already, read "In an Uncertain World" (by Bob Rubin). Rubin recounts a debate between him (a quarterly reporting skeptic) and Sandy Weill (a quarterly reporting junkie) after the former joined Citigroup.

Rubin felt quarterly reporting unduly encouraged short-termism. Weill argued that it delivered corporate discipline. Where they agreed is that the market can place undue importance on meeting analysts' targets. But as I recall, Rubin became more sympathetic to Weill's position.

This is the problem with making FICA apply to uncapped incomes. It is why Moynihan always opposed to income testing to receive benefits. He wanted to make sure Social Security had the broadest base of political support possible. It is aggravated by the fact that benefits are a bit tilted to the less wealthy.

Daniel A. Greenbaum

Interesting point about polling, but it seems to me to reinforce the Clinton/Rubin balanced budget position.

If you argue you will run a deficit, you have to convince the electorate (whilst fighting oppo spin) that it won't be a deficit of the "exploding" variety. Personally, I think you run a serious risk of losing control of the agenda if you are labelled as the deficit candidate. If you could guarantee an honest debate about deficits, you'd be okay, but you might as well live out your life hoping to win the lotto.

I'm sure Rubin is telling whoever listens to him that you should run promising to balance the budget. When you get to the White House, just say: "Holy crap, the fiscal situation we've inherited is way worse than the Bushies led us to believe. So here's our five year plan to get back into the black, and we are looking forward to working with Congress in getting there."

That seems sane to me. Getting bogged down in wonkish fiscal policy arguments before election day just strikes me as political madness.

I think we agree. My concern, though, is that given how easy it is to borrow and how hard it is to exercise discipline in spending, any argument in favor of deficit spending will only perpetuate today's poor management. If we need $10 billion for a valuable program, shouldn't we try first to raise the money by cutting waste and resort to borrowing only once we've trimmed the fat? Even if the economy is weak and we want the stimulus that can come from borrowing, it still makes sense to spend our borrowed dollars as efficiently as possible. Right now, I think creating efficient government is a far bigger priority than stimulating the economy. While the economy may be anemic, I don't think it needs life support. Without a more efficient government, however, I don't think we'll ever be in a position to address the crises that loom in our future as medical, retirement, and energy costs continue to rise.

I've come to view your posts with a distinct sense of pleasure. They're a nice little treat for a dilletante economist like myself.

I just read John Kenneth Galbraith's biography and I'm amazed at how little has changed. However, one thing has: Democrats as deficit hawks.

Back then, Keynes was a novelty and considered heretical by the old guard. However, the New Deal opposition wasn't really based on deficit worries - after all there were payroll taxes for Social Security. Instead, the Conservatives just didn't like the principle of the whole thing - providing retirement security and/or unemployment insurance - just seemed like bad form.

But yes, even then it was even harder to pass the WPA type programs which weren't 'paygo-ed' with payroll taxes.

One more fun fact. You know how wingnuts love to say that it wasn't Roosevelt, but 'war' that lifted the economy out of the depression - and that the New Deal "didn't work."

Well, guess what? Come 1936, with unemployment reduced from 25% to 14% all the Republicans were saying it did 'work' and that it was time to end this recovery madness. They decided to 'paygo' - with conservative Dems aboard, they passed a more austere budget, thereby ruining the recovery and violating every rule of Keynesian economics.

Oh, and by the way, the WWII spending and employment worked exactly the way the New Deal WPA type programs did - just employed people building airplanes instead of Hoover Dam.

OK, one more - all of corporate America fought tooth and nail against total mobilization and war footing - even after Pearl Harbor. GM saw no reason to stop making cars. They also predicted peril with rationing and price controls - the peril never happened.

WWII is not an example showing the failure of a government run economy - it's a success story.

I know what GDP is, now tell me what it means to the price of a loaf of bread.

Jared separate from the deficit debate what about the Alternative Minimum Tax (ATM). Politicians seem to learn only one economic mantra in their careers: "tax cuts solve all problems", or no matter how depressed demand is "balance the budget under all circumstances."

However the AMT is drawing more and more upper middle class taxpayers. It is also responsible for a large part of the treasuries revenue. can letting any of Bush's tax cuts for the top 1% to lapse be enough to limit or eliminate the AMT.

Another aside. My guess is that what it takes to prepare a tax return all the limitations and ht the cutoffs, that involve time and money are more annoying and turn more people against taxes than the the amount actually paid. A simplified system that is still progressive would probably do a lot to allow more flexible fiscal policy.

Daniel A. Greenbaum

At least T. Boone Pickens isn't affected by the AMT.

I think there is a lot to your last comment. I also think that most middle-upper middle class people (rightly) think that the rich are getting so many loopholes and so on that they are avoiding alot of the taxes we pay and the whole system is basically unfair. Therefore they support anything that promises them any kind of cut.

So, as far as every day life, its meaningless to refer to the GDP

No, it isn't a matter of whether it would have been wise for SSA to retain and invest the funds.  SS is a transfer program.  It is NOT a retirement account.  The thing is, the people who have the most to transfer are exempt. 

When the trust fund started pre-payment, it didn't pre-pay anything, it transfered money to the general fund.  That reduced income tax.  That allowed someone to get a tax reduction.  It wasn't the poor or middle class.  Follow the trail of the ACTUAL money.

Linguistic tricks ("trust fund") do not change what actually happened.  What actually happened is that higher income people experienced lower taxes while lower income people experienced higher taxes, to pay for the operating budget of the United States.  This effect lasted for 30 years (actually it continues today).  This effect is REGRESSIVE TAXATION.

I am not playing word games.  I am describing the actual real impact of this program on 200 million people.  The so called "trust fund" is the word game.

You commended the growth in wealth disparity as increasing the future tax base.  When I mention that the middle class got cut out of that, I am only pointing out that there was a bias in WHO got to grow the tax base (build their assets).   Trickle down, trickle down, trickle trickle trickle......

You continue to ignore cross class impacts at the concurrent time period.  You also raise the word "welfare" to scare away any possible discussion of this topic.

The fact is, the program has, from the beginning, been a redistribution program.  No beneficiary (by aggregate group) has ever contributed as much as he (again group, obviously some individuals who don't survive do) contributed.  The donor group is always redistributing their income to the donee group.  This is not a new feature of SS, it is a 70 year old feature.  Only when ideologues use the word "welfare" is this a problem.

The problem is, we are giving the well to do a free pass.

But, forget that.  I don't WANT them to be part of SS.  I just want them to PAY FOR THE REST OF GOVERNMENT.  After all, they are the principal users of the REST OF GOVERNMENT.  That is the point of the 14%.  Don't tax anyone anything until everyone is paying the same base amount.  Since the poor and middle class are paying for SS, that is fine.  Leave that alone, but stop taxing them for the rest of the crap.

It just annoys the living hell out of me that the well of carry a lighter burden than the poor because we LIE about the fact that we have a redistribution program that they don't have to pay for. 

Social Security is currently a social insurance program that engages largely in a transfer between generations, not income groups. The are exceptions due to the survivor and disability benefits. The transfer aspects of social security are the main reason the comparison to its rate of return to some form of private account is totally bogus. The money taken in today is largely paid out to current receipients.

I am not sure who is except from FICA? The current cap on Social Security tax is, I believe, $96,000. That is a fair amount to be subject to Social Security Tax. I wonder how much that amount can be raised before the whole program becomes politically unacceptable.

Daniel A. Greenbaum

Great points, all.  Keynesianism, then military Keynesianism--the latter worked for Reagan, too. 

Yes, the D's do seem to have become the party of fiscal rectitude, which is not a bad thing, if we don't lose sight of role of gov't, something that has defined Democratic economics since Keynes.

One of the main reasons you use GDP in the context of this piece is for perspective.  If I told you the deficit was ~$250 billion, you might freak out or just scratch your head and yawn, with no reference point.  I could tell you it's equivalent to a gazillion loaves of bread, but that doesn't say much to most people.

By scaling it to GDP, you get a better sense of the magnitude, and since the size of the economy changes so much over time, this is imperative; $250b would have been a huge deficit 30 years ago: 14% of GDP. 

If I told you we're spending $600 million on some gov't project, you might be aghast, but if I told you that was 0.02% of the federal budget, you'd hopefully find that to be a useful perspective. 

That doesn't, of course, mean that big numbers don't matter--if we're wasting 2% of GDP or 0.02% of the budget, we should stop right now!  But without scaling these numbers, there's no frame of reference.

Former CBO director Doug Holtz-Easkin has a sort of homey way of putting it: we spend 20 cents of each dollar on the Fed gov't, raise about 18 cents in taxes, and borrow the rest (ergo, the deficit of 2% of GDP).

Suppose that the government wants to spend a hundred billion on a little space exploration. If we are producing only a hundred billion dollars worth of the goods and services that you itemize, there wouldn’t be anything left and the people would starve and not be able to go to movies. If we are producing ten trillion in goods and services, well hell, gas up the rockets we would only be only diverting one percent of GDP so we can probable do without that amount of bread and movies.

So you see, it is important to pay attention to GDP or you might starve to death or not be able to go to the movies.

Sheesh!

I think there are still quite a few people that have a sense of fairness and don't vote only for their self interests. Are there enough of them to sink SS. Don't know.

AS Keynes says... In the long run, we are all dead.