Home > Uncategorized > The old debt and entitlement charade

The old debt and entitlement charade

from Dean Baker

The establishment is trying to pull a big one over on the public yet again. One of the designated topics for the last presidential debate goes under the heading, “debt and entitlements.” This should have people upset for several reasons.

The first is simply the use of the term “entitlements.” While this has a clear meaning to policy wonks, it is likely that most viewers won’t immediately know that “entitlements” means the Social Security and Medicare their parents receive. It’s a lot easier for politicians to talk about cutting wasteful “entitlements” than taking away seniors’ Social Security and Medicare.

The ostensible purpose of the debate is to allow voters to be better informed about the candidates’ views. So if the purpose is conveying information, why not use terms that most voters will understand?

But the semantics are the less important part of the problem. Why is it that Social Security and Medicare are linked to debt?  These are not the only programs that entail future commitments of resources.

For example, our military budget involves large commitments of future resources. New weapon systems can require decades to develop and produce. We commit ourselves not only to the annual salaries of current soldiers, but also many decades of veterans’ benefits. And, when we make military commitments through policies like the expansion of the North American Free Trade Agreement, we are potentially obligating ourselves to vast expenditures in future conflicts.

Many of the government’s largest commitments of future resources do not even appear in the budget. When the government grants a patent or copyright monopoly, it is allowing the holder to effectively tax the public for decades into the future.   This is a fact that is little understood because the folks who constantly scold us about the deficit never point it out. Granting a patent or copyright monopoly is a way in which the government finances research and creative work. The cost of these monopolies is enormous. In the case of prescription drugs, the United States will spend more than $430 billion this year for drugs that would likely cost less than one-fifth this amount if they were sold in a free market without patent protection.

The $350 billion difference between the patent protected price and free market is a bit less than 9 percent of the federal budget. And this is just prescription drugs. If we add in the cost of patent and copyright monopolies in other areas, it would likely come to more than twice this amount.

This is money that the government is committing our children to pay in the form of higher prices — effectively a tax on prescription drugs and other protected items — that never appears in the government books. The deficit hawks will yell and scream about the interest burden we are imposing on our children with the government debt (currently near a post-war low relative to the size of the economy), but don’t want us to pay attention to the huge patent rents the government gives to pharmaceutical, software and entertainment companies.

Of course we have to pay for research and support creative work, but there are far more efficient mechanisms. The deficit hawks prefer patent and copyright monopolies because they can conceal the cost from the public.

It is also important to point out that the economy’s problem since collapse of the housing bubble has been a deficit that is too small, not one that is too large. This is why the interest rate on government debt is incredibly low. (High deficits are supposed to raise interest rates.) We need more demand in the economy to fully employ the labor force and to get firms to spend more money investing in equipment, software, and other areas.

We have paid an enormous price because of the lack of demand in the economy. The economy in 2016 is almost $2 trillion smaller (more than $6,200 per person) than the size that was projected in 2008 before the crash. This is an enormous “austerity tax” that those screaming for smaller deficits have effectively imposed on the country. Millions of people are needlessly unemployed, and tens of millions are earning lower wages, because people in Washington argued it was more important to have a low budget deficit than a strong economy.

But you won’t hear this story in the debate questions. Those organizing the debate want to see Social Security and Medicare cut, so they are framing the topic in a way that cuts to these programs will seem like the only reasonable answer.

We will see how the candidates respond in the debate, but it is important for the public to know that the debate sponsors are pushing their own agendas, not trying to better inform people on the issues.

See article on original site

  1. October 22, 2016 at 3:40 pm

    It is difficult to see how such clear thinking starts out so accurately and invariably turns to growth and jobs via deficit spending to increase demand. It makes textbook economic sense but is suggested for an economy that already operates at a five Earth consumption rate. The exact figure for how far the world economy overshoots Earth’s carrying capacity may not be known accurately. Even so, the birds and the bees are disappearing along with fish and forests and that is the symptom leading to a medical type diagnosis of excess demand relative to Earth’s life support systems.

    Current economic thinking per respected economists posits that it is okay to use deficit spending to prime the pump of growth, especially for green growth. Making this approach even more attractive is Paul Krugman style management of inflation to reduce the value of the borrowed amount to be so negligible in the future as to practically eliminate the need to repay it.

    Remember, this wonderful economic analysis for priming the pump to increase growth is proposed for an economy that consumes and pollutes at almost a five Earth rate – If everyone in the world lived like USers, the global economy would require five Earths to absorb pollution and recharge aquifers etc.

    My point is that economists almost unanimously fail to see that deficit spending destroys democracy, which is the only known tool able to focus distributed human intelligence on surviving to avert climate collapse and heal Earth. A bond issue program fits in here with probably hundreds of bonds, to start with.

    Deficit spending and subsidies destroy democracy and using bond issues as a forum for discussion is a way to exercise atrophied democracy and bring it back to good health. National and state discussions of bond proposals designed to direct green production and services exercises democracy and will eventually direct attention to the number one US polluter, military, as an obvious task for analysis by distributed human intelligence.

    One may counter that an elite educated class of government analysts have the best idea of where to invest in green effort that will heal Earth. Such a source might contribute to the bond proposals along with those that well up from unofficial specie intelligence.

    The goal is to reduce material growth below one full Earth and raise qualitative growth for all future generations of every life form. I would like to see someone with Dean Baker’s level of experience conclude this article with an economic design that will improve the quality of life to infinity on a finite planet.

    I believe people are fairly clear that capitalism centralizes capital into large pools even though it does not generate actual profits that contribute to a healthy nation and Earth. I also believe that simple symptoms such as more empty houses in the US than homeless people should be treated more like a doctor might consider and prescribe treatment for. Economic reasoning is looking through the lens of an accepted academic reality that refuses to consider impending rapid extinction of humanity directly resulting from an already oversized world economy fueled mainly by US and European corporatism as it actually exists in the real world today.

    • October 22, 2016 at 6:16 pm

      Garrett Connelly:“Deficit spending and subsidies destroy democracy.

      Well, since every unit of money anywhere has always come from deficit spending, what you are saying is that democracies cannot use money at all. This is not very realistic, reasonable or helpful. It makes very little sense.

      Believing things like that, like automatically connecting deficit spending and economic growth with material growth is the confused, unclear thinking, not what Dean Baker or Paul Davidson are saying here,

      The goal is to reduce material growth below one full Earth and raise qualitative growth for all future generations of every life form. Again, this is not at all inconsistent with “deficit-financed” “green growth” as proposed here.

      This confused automatic identification of the “financial” with the “real” is precisely what is at the heart of the bad, illogical, nearly useless mainstream economics that has helped create the very problems you are worried about.

  2. October 22, 2016 at 4:50 pm

    Yes Garrett, it is still a very difficult task to integrate economics and ecology at a high level of intellectual synthesis “acceptable to Ph.D.’s” in both fields. Just ask Richard Smith, author of “Green Capitalism: The God that Failed,” whose courageous book illustrates the difficult terrain, which I believe he successfully negotiated but which seems to have left many in both fields “speechless.” Hence the long pause at Amazon before anyone reviewed it.

    I happen to think that under L.Randall Wray’s handling of banking, money and deficits in his book “Modern Monetary Theory” that what Dean has written above can be reconciled with a Green New Deal, with the nature of the work for a new CCC and WPA being apportioned differently that under candidate Clinton’s programs: greener, that is to say. Two further observations, however, document how difficult the task of intellectual persuasion will be.

    No one in academic economics was braver that James Galbraith during 2008-2009 in trying to put the national hand-wringing over deficits to rest, and he also did this a wonderful chapter in his book “The Predator State,” Chapter 5, “The Impossible Dream of Budget Balance.” He was treated with open derision at places like Bloomberg News and pretty much buried by the dominant media.

    Today it is Bill McKibben, the environmental writer, who comes closest to grasping the magnitude of our environmental problems, and linking them to past economic reality by calling for a national mobilization to fight global warming patterned after the American experience in WWII, 1941-1945. There is a cultural and psychological dimension to this, a needed feeling of constructive as opposed to destructive nationalism on behalf of a moral ideal…saving the planet replacing the crusade against fascism and Imperial Japan.

    Needless to say, this is very dangerous terrain to all the fields I’ve touched upon. The drift, both here and in Europe, towards more destructive forms of “national mobilization” illustrate the point. When I write about the magnitude of the stakes, of think about Germany, 1918-1933, what some are referring to today as the West’s “Weimar Moment.”

  3. Paul davidson
    October 22, 2016 at 5:10 pm

    I have long indicated these entitlements are not a drag on growth but just the opposite.

    click on this link below to see interview. Go to the very end of interview to hear commentator’s view of what my work represents.

  4. louisperetzperetz
    October 23, 2016 at 9:30 am

    I think that Dean Baker is right about the deficit and debt that all governments agreed. But he doesn’t say why they did. I think they are afraid of the inflation of prices which should come if they do otherwise. I mean the debt is the same sum of the increasing of money. And they don’t like it, because of the lack of money value which damage mainly banks. Lobbies banks used to say that it will damage people too. Of course, but a little less because they don’t loan money on long time.

  5. October 24, 2016 at 12:56 am

    Dean Baker gives us a warning when he says, “But you won’t hear this story in the debate questions. Those organizing the debate want to see Social Security and Medicare cut, so they are framing the topic in a way that cuts to these programs will seem like the only reasonable answer.

    We will see how the candidates respond in the debate, but it is important for the public to know that the debate sponsors are pushing their own agendas, not trying to better inform people on the issues.”

    My response, WTF. This may be news to economists (and it isn’t) but it’s not news to many citizens of the US, and it certainly is not news to sociologists, anthropologists, and historians, as well as many other social scientists. Perhaps the best way for me to approach this is to introduce everyone to a term from anthropology/sociology. The term is “performativity.” It refers to the creation of collective life through physically building that life. Society, corporations, economics, etc. are performed. This is why I say economists are aware of the situation Baker warns against. Economists are among those who play a role, a large role in performing the economy, and thus in creating the situation described by Baker. The main concern in studying performativity is identifying who performs and how they perform. Performing the economy involves others besides economists (e.g., bankers, store clerks, Federal Reserve, WTO, GATT, etc.), including what we generally refer to as individual persons, trade agreements, businesses of all forms and sizes, wars, etc. Since we are concerned with economists here, let’s consider some of the ways economists perform the economy.
    1. Define standards of rationality and categories of risk.
    2. Determine the rules for investment decisions.
    3. Forecast and critique “macro” expectations.
    4. Design/Formulate “micro” incentives.
    5. Propose and defend marketization, and indoctrinate citizens into correct market designs.
    6. Develop and apply theories to explain economic actions.
    7. Serve as expert witnesses.
    8. Creation of new languages for economic actions.
    9. Propose and defend norms for correct economic decisions.
    10. Define efficiency.
    11. Define identifies for economic actors, and provide the “subjective” inner voice for these actors.
    12. Help design institutions, from hospitals to schools, from political parties to universities.
    13. Define choice.
    14. Define good and bad investing.
    15. Confronting people with questions they never thought of before and thus constructing their preferences (often missed by those who study economic actions).

    This constitutes quite a research agenda, but not for economists. Economists don’t seem to be aware of the agenda. Historians are addressing these concerns. As are anthropologists, sociologists, and psychologists. This brings me to the most interesting, for me of the ways economists perform the economy. Economists mathematize everything about economic life. This has the side effect of making it difficult for economists to communicate or work with other social or physical scientists. Both because economists misuse mathematics and because they use mathematics as a barricade to keep others “out of their discipline.”

  6. October 24, 2016 at 2:33 pm

    Heterodoxy ― a new paradigm or just another political sect?
    Comment on Ken Zimmerman and Dean Baker on ‘The old debt and entitlement charade’

    There is the political realm and there is the scientific realm. Roughly speaking, the issue in the political realm is about the realization of the Good Society and the issue in the scientific realm is to gain knowledge about how the universe or one of its numerous subdomains works. Knowledge takes the form of a theory that fits the criteria of material/formal consistency. In politics, open questions are decided by the legitimate sovereign, in science they are decided by proof/disproof. Who the legitimate sovereign is is taken here as historically given as ‘We, the people’.

    In the ideal case, the legitimate sovereign decides all political questions, that is, how society is organized and how the economy as a subsystem is organized/institutionalized. In the ideal case, the legitimate sovereign keeps entirely out of science because science works according to its own principles. Therefore, the legitimate sovereign decides about war/peace or the size/composition of the national budget but has NO voice in deciding whether E=mc2 or a2+b2=c2 is true or false.

    It is obvious that what is historically given at the moment is far from the ideal state of a neat separation of politics and science. Economics is a case in point. Hence it is of overriding importance to always clearly distinguish between political and theoretical economics. The main differences are:
    (i) The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the actual economy works.
    (ii) In political economics anything goes; in theoretical economics scientific standards are observed.
    (iii) Political economics is about opinion/rhetoric; theoretical economics is about knowledge/proof. Opinion is subjective, knowledge is objective. Opinion is scientifically worthless.

    The fact of the matter is that theoretical economics has from the very beginning been dominated by the agenda pushers of political economics. Smith and Ricardo fought against the precapitalistic order, Marx and Keynes were agenda pushers, so were Hayek and Friedman, and so are Krugman and Varoufakis.

    Note well that it does not matter at all what the agenda is. More precisely, it does not matter whether the agenda is more rightist or more leftist. Agenda pushing AS SUCH is incompatible with science, no matter how the agenda pusher defines the Good Society. This definition has to be discussed and decided in the political realm.

    Political economics is scientifically worthless. Both, orthodox and heterodox economics has achieved not much, if anything, of scientific value in the last 200 years. Walrasianism, Keynesianism, Marxianism, Austrianism is provable false. This is the actual problem of economics and not which party wins the next election.

    From the standpoint of science, Heterodoxy means to refute the actual paradigm and to replace it by a superior paradigm. This is also called a scientific revolution. Obviously, a scientific revolution is something quite different from a political revolution.

    But, just as Orthodoxy has been hijacked by readily to identify political agenda pushers like Hayek, Friedman, Krugman et al. Heterodoxy, too, is currently in danger of being defined in political terms as movement/party.

    Agenda pushers/non-scientists/anti-scientists of all stripes are easily recognizable by:
    ― appeal to emotion and common sense,
    ― storytelling and ad hominem argumentation,
    ― replacement of material/formal consistency as guiding principle by anything goes,
    ― non-acceptance of scientific standards, yet posing as science,
    ― populism, i.e., appeal to the majority of scientific retards,
    ― putting unprovable beliefs or mere speculations on the same level as proven/testable theories.

    With Ken Zimmerman, Assad Zaman, Robert Locke et. al. as methodological loudspeakers, RWER-Heterodoxy is going down the political drain instead of climbing higher on the scientific ladder.

    Egmont Kakarot-Handtke

    • October 24, 2016 at 7:52 pm

      C.P. Snow may have somewhat oversimplified the relationship between science and what he called the literary. But he got the basics correct. The two are connected, and cannot be disconnected. Why? Because they are both human enterprises. They both address the same topics and concerns. They both are driven by human creativity, observation, and curiosity. They are different, but only superficially. And as Snow pointed out if we don’t end this “two cultures” nonsense soon we’re all the worse for it. Perhaps to the point of threatening the future survival of humanity. I oppose equally all efforts to elevate either science or the literary over one another. Snow asks, “Are we? Have we crystallized so far that we are no longer flexible at all?” In academics, we see this. We educate mathematicians, biologists, physicists, philosophers, economists, etc. We no longer educate humans. And the lack of flexibility continues to spread. If it goes much further none of us will be to have full and honest conversations with one another. And to quote from a well know poem, “this is the way the world ends, not with a bang but a whimper.”

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