[Peace-discuss] Some sense on the economy

[C. G. Estabrook]

What fiscal emergency?
By Doug Henwood, Special to CNN
May 20, 2011 10:08 a.m. EDT

STORY HIGHLIGHTS
There is no reason to panic about U.S. debt levels, says Doug Henwood
Republicans' warnings of imminent fiscal disaster are groundless, he says
Henwood: Examination of the Congressional Budget Office's projections dispel 
such fears
Budget hawks are trying to pass off current levels of red ink as the new normal, 
he says

Editor's note: Doug Henwood edits the Left Business Observer, a newsletter on 
economics and politics he founded in 1986, and hosts a weekly radio show, 
"Behind the News," that originates at KPFA, Berkeley, and is syndicated to 
stations across the United States. His books include "Wall Street" and "After 
the New Economy."

(CNN) -- On Monday, Treasury Secretary Timothy Geithner officially notified the 
world that the U.S. government could no longer meet all its obligations. That's 
because Republicans in Congress are blocking an increase in the debt limit -- 
the maximum debt the Treasury is allowed to contract -- making it impossible for 
the government to borrow as much as it needs to keep going. They deem this a 
fiscal emergency and want deep spending cuts.

The Treasury can play some games to keep going for several months. But if Social 
Security checks start bouncing -- or, more seriously, if the Treasury can't 
continue to pay interest on its bonds -- it would be a maximum political and 
economic disaster.

No doubt Wall Street will sit down recalcitrant GOP back-benchers and remind 
them of their responsibilities. But what about this alleged fiscal emergency 
that Republicans are using to create the threat of maximum disaster?

Before 1917, Congress had to approve every loan floated by the government. But 
since then, it has put the Treasury on a fixed debt limit. It didn't need to be 
raised before the Great Depression, but with that and then World War II, it 
began to be raised frequently.

Since 1940, it has been raised about 100 times. We've had a few melodramas 
around raising it, but this is the hottest one yet.

What's different this time that's making Republicans in Congress threaten to 
force Uncle Sam's checks to bounce? At least two things: the massive increase in 
debt over the last few years because of the financial crisis and Great 
Recession, and the ascendancy of some extraordinary personalities to positions 
of political power. We've long had deficit hawks, but they've usually been 
creatures of the boardroom and not people who use teabags as headgear.

There is no reason to panic about U.S. debt levels. We have some economic 
problems, but we are not the Greece of tomorrow. Deficits should decline 
markedly over the next several years and Social Security and Medicare won't eat us.

Over the last three years, the federal deficit has been about 9% to 10% of GDP. 
That is very large by historical standards, about three times the average of the 
previous three decades. But the gusher of red ink didn't come from a bout of 
profligacy -- it came from the worst recession in 70 years.

In a recession, revenues decline as employment and incomes sink, and spending on 
unemployment insurance, food stamps and Medicaid rise. Add to that the spending 
on the financial bailout and the stimulus, and you've got a prescription for the 
biggest deficits (relative to GDP) since World War II.

Officially, the economy has been recovering since June 2009, though it certainly 
doesn't feel that way. In a more normal cycle, the deficit would be shrinking as 
well, but it hasn't fallen by much so far. Unemployment has been very sticky, 
which means more spending and less revenue.

On top of that, the deal the administration and Congress struck at the end of 
2010 -- the extension of the Bush tax cuts and a 2-point reduction in employees' 
contributions to Social Security -- has been a major hit to revenue. Heaven 
knows what will happen when those expire.

But, barring catastrophe, the effects of the recession should fade. According to 
the Congressional Budget Office's baseline projections -- what will happen if 
there are no major policy changes from the present -- the deficit should fall 
dramatically over the next several years, from about 10% of GDP today to about 
3% in 2014.

In other words, if we do essentially nothing, the deficit will fall by 
two-thirds, back to its historic average. The ratio of federal debt to GDP will 
stabilize at around 75% -- high, but still well below the level that most 
mainstream economists consider critical (which would be close to 100%).

Close examination of the CBO's projections cannot support anything resembling 
hysteria. The two things that have everyone terrified, Social Security and 
Medicare, actually look quite unthreatening.

In 2010, Social Security spending was 4.8% of GDP. In 2021, the CBO projects it 
will be 5.3%, an increase of 0.5 point. In 2010, Medicare spending (less 
premiums paid by beneficiaries) was 3.1% of GDP. In 2021, the CBO projects it 
will be 3.6%, also an increase of 0.5 point.

In other words, the budgetary monsters that are supposed to be the ruin of the 
American way of life will increase their share of the national economy by about 
1%. That's a bit less than what the wars in Iraq and Afghanistan are costing us, 
and less than half the cost of the Bush tax cuts.

This is not a long-term fiscal emergency; it's what you'd expect after an 
economic crisis. But budget hawks -- and they're not all Republicans -- are 
trying to pass off current levels of red ink as the new normal, even though it 
isn't. They've had it out for Social Security and Medicare -- programs that work 
very well, cost little to run and are immensely popular -- ever since they were 
created.

Republican Rep. Paul Ryan's Medicare plan would force beneficiaries to double 
their out-of-pocket spending. Only a bogus emergency could make something that 
cruel worth discussing.

http://www.cnn.com/2011/OPINION/05/20/henwood.debt.ceiling/index.html