Max & Doug & the budget

Max Sawicky sawicky at epinet.org
Tue Feb 16 09:13:42 PST 1999



> On Wed, 10 Feb 1999, Max Sawicky wrote:
>
> > Whether debt is paid down or not, after 2013 (according
> > to projections) the Feds will have to raise taxes that
> > will end up financing Social Security benefits.
>
> Just to make sure I'm following: we could just let the
> debt rise back to where we paid it down, right?

Sure if you reduce debt now you could let it rise later, rather than use tax revenue or spending cuts to pay for something.

The logic of the Clinton proposal is that in 2013, although debt and interest costs would be lower than presently, there will still not be any loose change to pay benefits because the debt reduction campaign will be continuing. Then to finance total cash benefits you need tax increases or spending cuts.

If, after running surpluses for 15 years and persuading the nation that debt reduction was the new religion, it was somehow decided to slack off, then it is true that foregone interest costs would provide some ability to finance the benefit overhang without higher taxes or lower spending elsewhere.


> > The difference between Clinton's scheme and a simple
> > debt pay-down is that in the former case, these
> > same taxes would redeem bonds held by the Trust
> > Fund before being paid out as benefits. Without
> > the scheme, the money would just shoot through the
> > Trust Fund and pay benefits directly.
>
> I'm not sure if I understand this or not. Are you
> saying that in a normal
> paydown, Govt. gives pays back a billion dollars it
> owes the Social
> Security Trust Fund. But in Clinton's plan, Govt.
> pays back a billion
> dollars, and then borrows it again, and then pays it
> again -- so that the
> balance sheet is still a billion dollars to the good?
> In the unlikely
> event I've understood, what's the point?

You're mixing up the present and the future. In the present, and for the foreseeable future, Clinton would use surpluses to pay down debt and double the deposits to the trust fund. In the future, when cash is need to supplement Trust Fund cash income to pay benefits (starting in 2013), the Trust Fund redeems enough bonds to the Federal government to meet all its cash expenses.

Under this scheme, in principle the Trust Fund can be credited for the entire budget surplus (or any other amount), then use cash is is given by the Federal government to pay out all benefits in excess of its cash income.

In other words, the two merry-go-round rides that the budget surplus takes through the Trust Fund might as well be six. They have no bearing necessarily on where the government's cash surplus ends up and what it is used for.


> > With a pay-down, taxes would be used pay off debt and pay
> > benefits. Current projections say there's enough tax
> > revenue to do this for 50 years or so, since surpluses
> > are projected that far into the future (further, with
> > different assumptions).
>
> I'm sorry, didn't you just say
>
> > Whether debt is paid down or not, after 2013 (according
> > to projections) the Feds will have to raise taxes that
> > will end up financing Social Security benefits.
>
> They can't both be true, can they? Or am I
> misunderstanding again?

They can't use the same dollar to pay down debt and pay benefits. They can use either, however, to increase the Trust Fund balance.

Example: I am in debt to you and I am obliged to pay Henwood's restaurant bills. I receive a dollar. I can set up 'Henwood fund' and deposit the dollar in the fund, then lend the dollar to myself, leaving an IOU in the fund. The fund now has a balance of $2. I can do this ad infinitum, but at the end of the day I only have a dollar to use for either paying you or feeding Henwood. The IOU's in my fund are non-tradable.

Clinton is taking unified budget surplus dollars, putting them in the fund, lending them to the Federal govt, putting them back in the fund, and lending them again. The question is where the cash ends up -- debt reduction, benefit payments, or elsewhere (tax cuts, spending increases).

The logic of the savings paradigm is to continuously and endlessly use any cash residual (after SS benefits are paid) for debt reduction. Ergo there will be no resources available for anything else as long as a Trust Fund shortfall is assumed to prevail at some point over the next 75 years.

To Taber, who said:

"Max, I saw your petition, and I need education, from you or anybody who cares to help me out. Why not pay down the national debt? As I read your petition the objection is that the public money would not be available for infrastructure and social needs. OK. But I remember reading in Galbraith's _Money_ someplace that according to Keynes the debt contracted in stimulating a depressed economy was supposed to be paid down once the economy got better."

Why is that invalid?"

Some surplus under current circumstances is plausible. Mandating the use of every loose nickel in the budget for debt reduction for the next 15 years, if not longer, is not. Bad fiscal policy; bad budget policy.

Some debt, even modestly growing debt, can be carried indefinitely.

MBS



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