A Decade of Magical Tax-Cut Thinking

Monday, May 30, 2011 by OtherWords
The 2001 Bush tax cuts added $2.5 trillion to the national debt and disproportionately benefited the wealthiest households. Have we learned anything?
by Chuck Collins

Republican leaders in Congress have a one-point program for whatever ails the nation: cut taxes for millionaires and large corporations.

Got a revenue surplus? Cut taxes. Got a budget deficit? Cut taxes. Got a toothache? Cut taxes.

These politicians are like my uncle who believed the solution to every problem was a wee glass of scotch. They live in a world of magical thinking.

GOP leaders argue that the budget deficit is the great moral issue of our day and requires great austerity.

Yet just before Memorial Day, GOP lawmakers unveiled their bold new economic program. You guessed right: more tax cuts for millionaires, billionaires, and global corporations.

The Republicans' plan calls for reducing the top income tax rate on millionaires and big corporations from 35 percent to 25 percent — and slashing taxes on income from wealth by cutting the taxes on capital gains and dividends. The plan would accelerate the use offshore tax havens for corporations to move profits overseas to avoid U.S. taxes.

Combined with proposed cuts in Medicare, college aid, environmental protection, elder services, and children's health care, you get a pretty stark picture of the kind of America GOP leaders would like the bottom 98 percent of us to live in.

The lesson: Beware of any person or party that has a one-point program for everything. The path to our budgetary mess has no simple explanation. And the solution has no single remedy.

If a politician tells you we can solve our budget problems with spending cuts alone or solely by raising taxes, they are blowing smoke. Serious fiscal problem solvers advocate a mix of budget cuts and tax increases.

When faced with GOP magical proposals for additional tax cuts for millionaires and multinational companies, step away slowly, as if you were facing a cobra.

This week marks the 10th anniversary of the 2001 Bush tax cuts that went disproportionately to the wealthy. It's hard to believe, but a decade ago, thanks to Clinton-era budget rigor, congressional budget analysts forecasted a $5.6 trillion dollar surplus over the subsequent 10 years.

President George W. Bush's response to the surplus was a huge tax cut, signed into law on June 7, 2001. Six months later, after the 9/11 terrorist attacks and the launch of two wars, those projected surpluses vanished. In 2003, Bush and Congress instituted another tax cut, arguing it was the remedy for a sluggish economy.

Over this last decade, these two tax cuts have cost the nation $2.5 trillion in lost revenue. Almost 40 percent of the tax cuts went to the richest 1 percent of households, people whose annual family incomes exceed $380,000.

Our tax system is millionaire-friendly. The richest 400 taxpayers, whose average income is $270 million, pay about 18 percent of their income in taxes, the lowest effective rate since the 1920s. General Electric, Boeing, and more than 60 profitable Fortune companies pay no federal taxes, thanks to offshore tax dodges and other loopholes.

Spending cuts should start with our bloated Pentagon budget. We can save trillions by eliminating obsolete weapons systems and closing a third of U.S. military bases around the world that add little to our security. Cut corporate welfare for agribusiness and big oil companies, and we can raise another $1 trillion over the next decade.

On the revenue side, lawmakers should reverse the half-century of tax cuts for millionaires and global corporations. If we taxed millionaires and corporations under the same rules we had in place in 1961, we'd generate $716 billion more reveneue every year.

We should close overseas tax havens, institute a modest financial transaction tax, and add new tax brackets for incomes over $1 million. This program not only would close the budget gap but offers the added benefit of reducing the extreme inequalities that have led to the erosion of the U.S. middle class.

The road forward requires spending cuts and tax increases on the wealthy. But the first step is to renounce the GOP one-point program of tax cuts for millionaires and corporate tax dodgers.

Running in the red: How the U.S., on the road to surplus, detoured to massive debt

By Lori Montgomery, Saturday, April 30

The nation’s unnerving descent into debt began a decade ago with a choice, not a crisis.

In January 2001, with the budget balanced and clear sailing ahead, the Congressional Budget Office forecast ever-larger annual surpluses indefinitely. The outlook was so rosy, the CBO said, that Washington would have enough money by the end of the decade to pay off everything it owed.

The nation’s unnerving descent into debt began a decade ago with a choice, not a crisis.

Voices of caution were swept aside in the rush to take advantage of the apparent bounty.

Political leaders chose to cut taxes, jack up spending and, for the first time in U.S. history, wage two wars solely with borrowed funds. “In the end, the floodgates opened,” said former senator Pete Domenici (R-N.M.), who chaired the Senate Budget Committee when the first tax-cut bill hit Capitol Hill in early 2001.

Now, instead of tending a nest egg of more than $2 trillion, the federal government expects to owe more than $10 trillion to outside investors by the end of this year. The national debt is larger, as a percentage of the economy, than at any time in U.S. history except for the period shortly after World War II.

Polls show that a large majority of Americans blame wasteful or unnecessary federal programs for the nation’s budget problems. But routine increases in defense and domestic spending account for only about 15 percent of the financial deterioration, according to a new analysis of CBO data.

The biggest culprit, by far, has been an erosion of tax revenue triggered largely by two recessions and multiple rounds of tax cuts. Together, the economy and the tax bills enacted under former president George W. Bush, and to a lesser extent by President Obama, wiped out $6.3 trillion in anticipated revenue. That’s nearly half of the $12.7 trillion swing from projected surpluses to real debt. Federal tax collections now stand at their lowest level as a percentage of the economy in 60 years.

Big-ticket spending initiated by the Bush administration accounts for 12 percent of the shift. The Iraq and Afghanistan wars have added $1.3 trillion in new borrowing. A new prescription drug benefit for Medicare recipients contributed another $272 billion. The Troubled Assets Relief Program bank bailout, which infuriated voters and led to the defeat of several legislators in 2010, added just $16 billion — and TARP may eventually cost nothing as financial institutions repay the Treasury.

Obama’s 2009 economic stimulus, a favorite target of Republicans who blame Democrats for the mounting debt, has added $719 billion — 6 percent of the total shift, according to the new analysis of CBO data by the nonprofit Pew Fiscal Analysis Initiative. All told, Obama-era choices account for about $1.7 trillion in new debt, according to a separate Washington Post analysis of CBO data over the past decade. Bush-era policies, meanwhile, account for more than $7 trillion and are a major contributor to the trillion-dollar annual budget deficits that are dominating the political debate.

As Congress prepares this week to launch a high-stakes battle over whether to raise the legal limit on borrowing, the analyses offer a clearer view of the drivers of the debt — and of the difficulty of re-balancing the budget without new tax revenue.

Most Republicans reject raising taxes as part of the solution; House Speaker John A. Boehner (Ohio) has called it a “non-starter.” But Democrats won’t go for a proposal based solely on spending cuts. The“Gang of Six,” a bipartisan Senate group dedicated to debt reduction, is expected to unveil a strategy as soon as this week that couples sharp spending cuts with a rewrite of the tax code that would raise additional revenue.

(The debt ceiling, set at $14.3 trillion, covers all federal debt, including money the Treasury owes other federal entities, such as the Social Security trust fund. The CBO data focus on the portion of the debt borrowed from outside investors. The debt is the accumulation of annual deficits; if annual budgets are in surplus, the nation can pay down the debt.)

The annual surpluses that set the nation on this course emerged in the final years of the Clinton administration. In the typical American household, a surplus comes as welcome news. But the White House is not a typical household. When Treasury Secretary Robert Rubin saw the budget shift into the black in 1998, he immediately warned President Bill Clinton that, politically, it was a mixed blessing.

Rubin wanted to use the surplus to start repaying the debt, which was then just more than $3 trillion. The White House billed it as “saving Social Security first,” viewing the surplus as an opportunity to shore up the nation’s finances before huge numbers of the baby boom generation began claiming federal retirement benefits. “The problem was a whole other part of the political spectrum wanted to use the surplus for tax cuts,” Rubin said in an interview. “They said they wanted to give the people back their money. Of course, it was also the people’s debt.”

What to do with the surplus became a central issue of the 2000 presidential campaign, with Vice President Al Gore arguing that much of it should be put in a “lockbox” to protect Social Security and Medicare. Bush pushed for a broad tax cut, arguing that taxpayers at all income levels were owed a refund. “Some say that the growing federal surplus means Washington has more money to spend, but they’ve got it backwards,” Bush said as he accepted the GOP nomination in August 2000. “The surplus is not the government’s money. The surplus is the people’s money.”

As soon as he took office, Bush pushed Congress to make good on his tax pledge. Less than a week after his inauguration, he got a boost from Federal Reserve Chairman Alan Greenspan, who testified before the Senate Budget Committee that “tax reduction appears required” to prevent the federal government from accumulating too much cash. Greenspan feared that large surpluses would turn the government into the nation’s largest investor, creating distortions in the markets.

A chorus of skeptics warned against spending the surplus. Some stressed the inherent uncertainty of the CBO projections. Others said a big tax cut would unleash pent-up desire in both parties to pursue expensive priorities without the pay-as-you-go restraints that had helped produce the surplus.

Congress approved a $1.35 trillion tax cut in record time. A second package, worth $350 billion, followed in 2003. Together, they constituted one of the largest tax cuts since World War II, according to the conservative Tax Foundation.

Bush’s first Treasury secretary, Paul O’Neill, resigned after the White House decided to pursue the 2003 measure. “I believed we needed the money to facilitate fundamental tax reform and begin working on unfunded liabilities for Social Security and Medicare,” O’Neill said in an interview. But the White House, he said, was focused on improving economic growth for the fourth quarter of 2004. “They wanted to make sure economic conditions were great going into the president’s reelection.”

Proponents of tax cuts argue that the legislation merely returned tax collections to their appropriate levels. They note that the CBO’s 2001 forecast assumed that tax collections would stay above 20 percent of the nation’s gross domestic product (defined as the total of all economic output) — well above the historic average of 18 percent of GDP.

“It’s not obvious that America was ready to have taxes at a level this high persistently,” said Donald Marron, a former CBO director who now heads the nonprofit Tax Policy Center. “Some degree of tax cutting was inevitable.”

But some key advocates of the tax cuts now say such a large reduction was probably ill-advised.

“Nobody would have thought that all these things would have happened after you cut taxes,” Domenici said. “That you’d have two wars and not pay for them. That you’d have another recession. A huge extravaganza of expenditures” for the military and homeland security after the Sept. 11, 2001, attacks. “You would pause before you did it, if you knew.”

Bill Thomas, the former House Ways and Means Committee chairman who helped shepherd the tax cuts through Congress, defended the 2003 package as “fuel for the economy.” But he said in an interview that the 2001 measure was larded with “stuff that I was not all that wild about,” including bipartisan priorities such as a big increase in the child tax credit and a break for married couples — provisions Thomas believes did little to promote economic growth and amounted to “throwing money out the window.”

“I couldn’t do anything about it,” said Thomas, a California Republican who retired in 2006. “You’re the candy man when you advocate those kinds of tax cuts.”

In the end, Bush cut taxes and spent more money. Good times masked the impact, as surging tax revenues reduced the size of year-to-year deficits during the first three years of his second term. But after the economy collapsed during Bush’s final year in office, deficits — and therefore the debt — began to explode as Obama sought to revive economic activity with more tax cuts and federal spending.

Today, the CBO forecasts are unrelievedly gloomy, showing huge deficits essentially forever. As policymakers grapple with the legacy of the past decade, a demographic wave of senior citizens is crashing at their doorstep, driving up the cost of Medicare, Medicaid and Social Security.

William Hoagland, who was for years a top budget aide to Domenici and other GOP Senate leaders, said it is simplistic to think today’s fiscal problems began just 10 years ago. In 1976, as a young CBO analyst, Hoagland produced a long-term simulation that showed entitlement costs gradually overwhelming the rest of the federal budget.

“This situation really goes back to long before [the Bush administration], which is to say to old dead men that have long left the Congress,” he said.

Still, Hoagland said, the abandonment of fiscal discipline in the wake of the surpluses clearly didn’t help. “Nobody pushed for paying for this stuff,” he said. Not even after “it became very clear in the middle of 2003 that the line had turned on us. And the surpluses as far as the eye could see were no longer there.”

How large is the US debt?

(This big...)

Obama's Painful Budget Plans for Austerity in America (2 articles)

Monday, February 14, 2011 by The Independent/UK
by David Usborne
Americans are about to get a first glimpse of what tight-fisted federal government looks like with President Barack Obama releasing an austerity-tinged draft budget this morning even as Republicans move to push through a short-term spending plan featuring a far more radical range of spending cuts.

The arrival of President Obama's 2012 budget blueprint in Congress will be the starting pistol for a fight over federal spending that might just lead to a ground-breaking pact by both parties on getting US spending habits under control. The White House is also seeking an agreement on raising the debt ceiling.

More likely, however, the debate will degenerate quickly into warfare, with Republicans seeking to outbid each other on who is more serious about tackling deficits, and Democrats battling to defend social programmes close to their hearts. The end result could be legislative gridlock and perhaps even a government shutdown.

The Obama draft will tread a line between offending Democrats, with some of their favourite domestic programmes singled out for cuts, while going far enough to convince moderate Republicans he is serious about budget discipline. Officials say it will deliver on a promise made in the State of the Union Address to begin a five-year-freeze on non-defence domestic spending.

"After a decade of rising deficits, this budget asks Washington to live within its means, while at the same time investing in our future," President Obama said in his weekly radio address on Saturday. "It cuts what we can't afford to pay for what we cannot do without."

Yet yesterday the Republican chairman of the House Budget Committee, Paul Ryan, excoriated Mr Obama for not going far enough in his plan. "It looks like the debt's going to continue rising under this budget," he said. "Presidents are elected to lead, not to punt. This president has been punting."

More urgent than the 2012 budget are steps that must be taken to set spending levels for the rest of this fiscal year, ending in October. The Republican majority in the House of Representatives will this week try to pass a resolution to cut $60bn (£37.5bn) from government spending over seven months. Translating to annual cuts of $100bn or more, it reflects the demands of conservatives sent to Congress by the Tea Party.

The Republican proposals will meet opposition in the Senate, where Democrats still have a slim majority. But were it to pass Congress in its current form, it would inflict instant pain on a huge range of programmes. Low income students would see grants for university fees slashed, for instance, the education and environmental protection departments would have their budgets scythed, and Mr Obama would see his plans for investment in innovation, clean energy and high-speed trains eviscerated. The agency that oversees public broadcasting the US – a favourite target of conservatives – would simply be shut.

"Next week, we are going to cut more than $100 billion. And we're not going to stop there," said the House Speaker John Boehner, who dare not take anything less than a hatchet to spending levels for fear of triggering a mutiny from the right wing of his party. "Once we cut the discretionary accounts, then we'll get into the mandatory spending. And then you'll see more cuts."

There is also the parallel challenge of dealing with the country's debt, which is now brushing against its maximum legal ceiling of just over $14 trillion. To ensure that government can keep functioning – and keep paying the existing debt – it must get permission from Congress to increase that ceiling, preferably before April.

Bumping up the ceiling should happen almost automatically. But this time, conservative Republicans intend to use the request to squeeze the White House on a broader deficit-cutting strategy.

Behind all of this lies the debate – with which Britain is entirely familiar – over the relative needs of cutting spending and reducing government debt while not smothering economic recovery.

"Anything considered draconian is going to appeal to a certain crowd that's out there saying we've got to cut our way out of the problem," commented Ben Nelson, a key moderate Democrat in the Senate. "But for most of us, if you cut the wrong things, then you impair your ability to grow your way out."

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Monday, February 14, 2011 by RobertReich.org

The Obama Budget: And Why the Coming Debate Over Spending Cuts Has Nothing to Do With Reviving the Economy

by Robert Reich 

President Obama has chosen to fight fire with gasoline.

Republicans want America to believe the economy is still lousy because government is too big, and the way to revive the economy is to cut federal spending. Yesterday, Republican Speaker John Boehner even refused to rule out a government shut-down if Republicans don’t get the spending cuts they want.

The President has to reframe the debate around the necessity of average families having enough to spend to get the economy moving again. He needs to remind America this is not 1995 but 2011 — and we’re still in a jobs crisis brought on by the bursting of a giant debt bubble and the implosion of total demand. The answer: progressive taxation. Today Obama poured gas on the Republican flame by proposing a 2012 federal budget that cuts the federal deficit by $1.1 trillion over 10 years. About $400 billion of this will come from a five-year freeze on non-security discretionary spending – including all sorts of programs for poor and working-class Americans, such as heating assistance to low-income people and community-service block grants. Most of the rest from additional spending cuts, such as grants to states for water treatment plants and other environmental projects and higher interest charges on federal loans to graduate students.

That means the Great Debate starting this week will be set by Republicans: Does Obama cut enough spending? How much more will he have cut in order to appease Republicans? If they don’t get the spending cuts they want, will Tea-Party Republicans demand a shut-down?

Framed this way, the debate invites deficit hawks on both sides of the aisle to criticize Democrats and Republicans alike for failing to take on Social Security and Medicare entitlements. Expect Erskine Bowles and Alan Simpson, co-chairs of Obama’s deficit commission, to say the President needs to do more. Expect Alice Rivlin and Paul Ryan, respectively former Clinton hawk and current Republican budget hawk, to tout their plan for chopping Medicare.

It’s the wrong debate about the wrong thing at the wrong time.

To official Washington it seems like 1995 all over again, when Bill Clinton and Newt Gingrich played a game of chicken over cutting the budget deficit, the hawks warned about the perils of giant deficits, and the 1996 general election loomed over all. Washington politicians and the media know this playbook by heart, so it’s natural for them to take on the same roles, make the same arguments, and build up to the same showdown over a government shutdown and a climactic presidential election.

But the 1995 playbook is irrelevant. In 1995 the economy was roaring back to life. The recession of 1991 had been caused (as are most recessions) by the Fed raising interest rates too high to ward off inflation. So reversing course was relatively simple. Alan Greenspan and the Fed cut interest rates.

In 2011 most Americans are still in the throes of the Great Recession, which was caused by the bursting of a giant debt bubble. The Fed can’t reverse course by cutting interest rates; rates have been near zero for two years.

Big American companies are sitting on almost $2 trillion of cash because there aren’t enough customers to buy additional goods and services. The only people with money are the richest 10 percent whose stock portfolios have been roaring back to life, but their spending isn’t enough to spur much additional hiring.

The Republican bromide – cut federal spending – is precisely the wrong response to this ongoing crisis, which is more analogous to the Great Depression than to any recent recession. Herbert Hoover responded the same way between 1929 and 1932. Insufficient spending only deepened the Great Depression.

The best way to revive the economy is not to cut the federal deficit right now. It’s to put more money into the pockets of average working families. Not until they start spending again big time will companies begin to hire again big time.

Don’t cut the government services they rely on – college loans, home heating oil, community services, and the rest. State and local budget cuts are already causing enough pain.

The most direct way to get more money into their pockets is to expand the Earned Income Tax Credit (a wage subsidy) all the way up through people earning $50,000, and reduce their income taxes to zero. Taxes on incomes between $50,000 and $90,000 should be cut to 10 percent; between $90,000 and $150,000 to 20 percent; between $150,000 and $250,000 to 30 percent.

And exempt the first $20,000 of income from payroll taxes.

Make up the revenues by increasing taxes on incomes between $250,000 to $500,000 to 40 percent; between $500,000 and $5 million, to 50 percent; between $5 million and $15 million, to 60 percent; and anything over $15 million, to 70 percent.

And raise the ceiling on the portion of income subject to payroll taxes to $500,000.

It’s called progressive taxation.

The lion’s share of America’s income and wealth is at the top. Taxing the very rich won’t hurt the economy. They spend a much smaller portion of their incomes than everyone else.

Sure – take some steps to cut federal spending over the longer term. Cut the bloated defense budget. Tame the growth in healthcare costs by allowing the federal government to use its bargaining clout — as the nation’s biggest purchaser of drugs and hospital services under Medicare and Medicaid and the Veterans Administration – to get low prices. While we’re at it, cut agricultural subsidies.

But don’t believe for a moment that federal spending cuts anytime soon will get the economy growing soon. They’ll have the opposite effect because they’ll reduce total demand.

The progressive tax system I’ve outlined will get the economy growing again. This, in turn, will bring down the ratio of the debt as a proportion of the total economy — the only yardstick of fiscal prudence that counts.

But we can’t get to this point – or even to have a debate about it – if Obama allows Republicans to frame the debate as how much federal spending can be cut and how to shrink the deficit.

The President has to reframe the debate around the necessity of average families having enough to spend to get the economy moving again. He needs to remind America this is not 1995 but 2011 — and we’re still in a jobs crisis brought on by the bursting of a giant debt bubble and the implosion of total demand.

Tales of Economic Apocalypse

From the Deficit Panic to the TARP Financial Collapse
By DEAN BAKER

Hollywood used to be the place where creative people went to cook up outlandish horror plots. But Hollywood has been displaced. Now people go to Washington to spin their wild tales of looming disaster.

The national agenda has been dominated by such tales over the last two years. Most recently we have had the story of the bond market vigilantes doing to the United States what they have already done to Greece, Ireland and Portugal. This story requires suspending disbelief, but people who report on economic and political issues for major news outlets are good at ignoring reality.

The plot is that at some date in the not-distant future, if we don't mend our free-spending ways, no one will buy U.S. government bonds. The United baker bookStates will be forced to stand before the international community as a helpless beggar and agree to whatever humiliating terms bad guys from China to Saudi Arabia and even France choose to impose.

The plot departs from reality in several ways. The large deficits at present are due to the downturn, not profligate spending. Furthermore, there has been very little growth in government spending as a share of GDP for decades (apart from counter-cyclical spending in the downturn), undermining this key part of the story.

But the real problem stems from the logic of the impending crisis. Suppose that investors in the United States and elsewhere refuse to buy government debt. (Investors keep undermining the plot line by buying massive amounts of U.S. debt at very low interest rates.) In this case, we could have the Fed buy our debt. Unlike Greece, Ireland and Portugal, we have our own currency.

This story can lead to inflation but that is not quite the disaster story the deficit hawks are peddling. Inflation is a process that comes about through too much demand in the economy. In other words we would have over-full employment, with wages rising rapidly, which would in turn push up prices.

Furthermore, we don't end up like Zimbabwe with hyperinflation. The United States has a huge diversified economy that still produces almost 85 percent of what we consume here at home. We might see creeping inflation, which could in a bad scenario turn into the double-digit inflation that we saw in the 70s. But that still is not quite the disaster that the deficit hawks are using to scare the public into surrendering their Social Security and Medicare benefits.

After all, the economy actually did reasonably well in the 70s, growing slightly more rapidly than in the 80s. And, since inequality did not rise in the decade, the typical family did better in the 70s than the 80s.

The deficit gang also warns about a plunging dollar. Of course a decline in the dollar is exactly what we need to get our trade deficit down. This is why Treasury Secretary Tim Geithner has been asking China to raise the value of its currency against the dollar.

The deficit hawks want us to believe that China, which has been resistant to a 20-30 percent decline in the dollar relative to the yuan, would suddenly tolerate a decline of 50 or 60 percent? They want us to believe that Germany and France will watch the euro rise to a point above two dollars to a euro? And Japan will let the yen rise to the point where there are only 50 yen to the dollar?

This is where the deficit hawks horror story loses whatever credibility it held. This sort of plunge would imply the collapse of these countries' export markets in the United States. They would also be flooded with hyper-competitive U.S. exports. This is not going to happen; these countries care far more about their domestic economies than trying to be the fiscal enforcers of the deficit hawks' dreams.

In short, the horror story collapses as soon as anyone gives it any serious thought. The Wall Street gang can hardly be faulted for trying cheap scare tactics for pushing its agenda; after all it worked so brilliantly with the TARP two years ago. At the time the plot line was that unless we immediately gave all our money to the Wall Street banks, with no questions asked, then the whole economy would collapse.

The government turned over not only the $700 billion in TARP money, the Fed also made trillions of dollars of secret loans to the Wall Street banks, as was revealed last week. This support, including guarantees that may have been even more valuable, allowed giants like Citigroup, Goldman Sachs and Morgan Stanley to survive the financial collapse that they had helped to create. As a result, bank profits and executive bonuses are higher than ever.

In short, Wall Street has a proven winning strategy. Come up with an end-of-the-world horror story, get the Washington Post, National Public Radio and other media outlets to hype it endlessly, and then watch the politicians rush to hand over the taxpayers' money. Their next horror story will not doubt be the most frightening yet.

Federal Debt Held by the Public as a % of GDP - Chart

The Bush Tax Cuts: Couldn't Afford it then, Totally can't afford it now

Paul Krugman Vs. Alan Greenspan On Deficits

June 18, 2010 by Huffington Post

Krugman Predicts Painful Road if Deficit Hypocrites Prevail 
by Ryan McCarthy

We don't know for sure that New York Times columnist Paul Krugman and former Federal Reserve chief Alan Greenspan had each other in mind when they penned diametrically opposed op-eds, both of which ran today. But, we can hope.

Start with their titles. Greenspan's Wall Street Journal piece is dubbed "U.S. Debt and the Greece Analogy" (You can guess where that piece is headed.) Ever the Keynesian, Krugman's piece is titled, "That '30s Feeling."

The key issue for both Krugman and Greenspan, of course, is deficits and spending. For Krugman, the world's recent turn toward austerity, evinced by Congress's recent refusal to extend unemployment benefits and cutbacks in social services across Europe, is a sign that governments are afraid to spend enough to stimulate economic growth. "Suddenly, creating jobs is out, inflicting pain is in," he writes.

Greenspan, for his part, is more concerned with looming pain than current economic hardships. Noting that in the last 18 months, the U.S. deficit has ballooned to 8.6 trillion from $5.5 trillion, Greenspan argues that the world needs "tectonic shift in fiscal policy." And, growth, he posits can't and won't come from government spending. (Though, to be fair, other than budget cuts, Greenspan offers no alternative to government spending to boost the economy.) Here's Greenspan:

"We cannot grow out of these fiscal pressures. The modest-sized post-baby-boom labor force, if history is any guide, will not be able to consistently increase output per hour by more than 3% annually. The product of a slowly growing labor force and limited productivity growth will not provide the real resources necessary to meet existing commitments. (We must avoid persistent borrowing from abroad. We cannot count on foreigners to finance our current account deficit indefinitely.)"

Krugman -- nor any major economist following the crisis -- has ever argued that we can continue to borrow cheaply from foreign countries indefinitely. The larger problem, he suggests, is that here in the states politicians are deeply inconsistent about which benefits get cut in the continuing push to trim Federal spending. Here's Krugman.

"In America, many self-described deficit hawks are hypocrites, pure and simple: They're eager to slash benefits for those in need, but their concerns about red ink vanish when it comes to tax breaks for the wealthy. Thus, Senator Ben Nelson, who sanctimoniously declared that we can't afford $77 billion in aid to the unemployed, was instrumental in passing the first Bush tax cut, which cost a cool $1.3 trillion. "

Greenspan warns of "growing analogies to Greece" -- a comparison Krugman has refuted more than once. The economic recovery should, in fact, bring the deficit down,Krugaman wrote in May, adding in an interview NPR that austerity should come only after the economy has begun to trend upward.

Bernanke delivers blunt warning on U.S. debt

It's hard to take anything this bozo says seriously...but he might be right about this. It depends on whom you can take seriously.--jef

Bernanke delivers blunt warning on U.S. debt

Patrice Hill

With uncharacteristic bluntness, Federal Reserve Chairman Ben S. Bernanke warned Congress on Wednesday that the United States could soon face a debt crisis like the one in Greece, and declared that the central bank will not help legislators by printing money to pay for the ballooning federal debt.

Recent events in Europe, where Greece and other nations with large, unsustainable deficits like the United States are having increasing trouble selling their debt to investors, show that the U.S. is vulnerable to a sudden reversal of fortunes that would force taxpayers to pay higher interest rates on the debt, Mr. Bernanke said.

"It's not something that is 10 years away. It affects the markets currently," he told the House Financial Services Committee. "It is possible that bond markets will become worried about the sustainability [of yearly deficits over $1 trillion], and we may find ourselves facing higher interest rates even today."

It was some of the toughest rhetoric to date about the nation's fiscal and budgetary woes from the Fed chief, who faces a second round of questioning Thursday before a Senate panel.

Mr. Bernanke for the first time addressed concerns that the impasse in Congress over tough spending cuts and tax increases needed to bring down deficits will eventually force the Fed to accommodate deficits by printing money and buying Treasury bonds — effectively financing the deficit on behalf of Congress and spurring inflation in the process.

Some economists at the International Monetary Fund and elsewhere have advocated this approach, suggesting running moderate inflation rates of 4 percent to 6 percent as a partial solution to the U.S. debt problem. But the move runs the risk of damaging the dollar's reputation and spawning much higher inflation that would be debilitating to the U.S. economy and living standards.

Rep. Brad Sherman, California Democrat, asked Mr. Bernanke directly whether the Fed would consider such a strategy, especially since IMF officials endorsed it.

"We're not going to monetize the debt," Mr. Bernanke declared flatly, stressing that Congress needs to start making plans to bring down the deficit to avoid such a dangerous dilemma for the Fed.

"It is very, very important for Congress and administration to come to some kind of program, some kind of plan that will credibly show how the United States government is going to bring itself back to a sustainable position."

Separately, Mr. Bernanke's predecessor, Alan Greenspan, told Bloomberg News that "fiscal affairs are threatening the outlook" for recovery from recession as Congress and the White House have been unable for years to make tough decisions to raise taxes or cut spending.

He said he is so concerned about a sudden sharp increase in interest rates that every day he checks the interest rate on 10-year Treasury notes and 30-year Treasury bonds, calling them the "critical Achilles' heel" of the economy.

Despite his gloomy testimony, Mr. Bernanke dismissed concerns that the United States will lose its gold-plated AAA credit rating any time soon. Moody's Investors Service recently said that the U.S. rating would come "under pressure" at some point if Congress does not rein in the budget deficit.

The Fed chairman said repeatedly that he understands how difficult it will be for Congress to tame deficits by curbing spending in popular programs like Social Security, Medicare and defense, while also considering tax hikes. But he said there would be an immediate payoff: lower interest rates.

"It would be very helpful, even to the current recovery, to markets' confidence, if there were a sustainable, credible plan for a fiscal exit," he said.

A plan that eases market worries by laying out how Congress will address the long-term insolvency of Social Security, Medicare and other entitlement programs also would give Congress more room to take the actions needed today to address the jobs crisis, Mr. Bernanke added.

"There could be a bonus there," he said. "To the extent that we can achieve credible plans to reduce medium- to long-term deficits, we'll actually have more flexibility in the short term if we want to take other kinds of actions."

Separately, the debate continued over whether Fannie Mae and Freddie Mac, the two mortgage financing giants, should be included in the federal budget books now that the Obama administration has taken the limits off aid the Treasury Department is prepared to give the companies to keep them solvent.

Republicans, including Rep. Spencer Bachus of Alabama, the top Republican on the banking committee, have argued that the government is now effectively guaranteeing Fannie and Freddie's nearly $5 trillion of mortgage-backed securities and other debt, so their revenues and liabilities should be included in the federal budget as obligations of the government. Taking this step would greatly bloat the federal balance sheet.

Mr. Bachus said he worries that keeping Fannie and Freddie's status off the federal books is "the same sort of financial shell game that has brought governments like Greece to a crisis point."

But Treasury Secretary Timothy F. Geithner, who also testified on Capitol Hill on Wednesday, said the administration opposes including the quasi-government entities in the budget, although it lifted the limits on aid to Fannie and Freddie with the intent of assuring financial markets that the U.S. government stands behind their obligations.

"We do not think it is necessary to consolidate the full obligations of Fannie and Freddie onto the nation's budget. But we do think it's very important … that we make it clear to investors around the world that we will make sure that we will take the actions necessary" to keep the two entities stable, he told the House Budget Committee.