Casting Light on “The Moment of Truth”

In a cross-post from New Deal 2.0, James K. Galbraith writes that the National Committee on Fiscal Responsibility and Reform’s underlying budgetary analysis is faulty because it rests on the false premise that a country can involuntarily default on a fiat currency it creates. He concludes that if the committee acts on this false premise, it will do so in a way that shifts burdens onto the middle class and off of the wealthy.

The report of the National Commission on Fiscal Responsibility and Reform, issued on December 1, 2010 by Chairmen Erskine Bowles and Alan Simpson, is entitled “The Moment of Truth.” The words appear in block caps on the second page, weighty and portentous. They reappear in the first paragraph of the preamble:

“Throughout our nation’s history, Americans have found the courage to do right by our children’s future. Deep down, every American knows that we face a moment of truth once again.”

These sentences set the tone. The first is a bald-faced lie, as a Westerner like Senator Simpson knows perfectly well. To the contrary, we have often fallen under the sway of robber barons, water barons, oil barons, bison-killers, clear-cutters and strip-miners, hell-bent on maximum pillage in the shortest time. Only occasionally have a few heroes like Teddy and Franklin Roosevelt, Gifford Pinchot and Harold Ickes Sr. emerged to battle for the most precious physical elements of our heritage — and then only with limited success.

In the next paragraph, the Commission states the threat:

“Our challenge is clear and inescapable. America cannot be great if we go broke.”

Exactly what it might mean for America to “go broke” is not explained. Nor is it anywhere in the report. But the paragraph continues:

“Our businesses will not be able to grow and create jobs, and our workers will not be able to compete successfully for the jobs of the future without a plan to get this crushing debt burden off our backs.”

Apparently “going broke” means becoming unable to pay interest on the national debt. That being so, let’s ask the question: under what circumstances might the United States Treasury Department become unable to pay interest on the federal debt?

Unlike Argentina or Ireland, the United States owes its debts in a currency it controls. When our Treasury wishes to make a payment, it sends a signal, by computer, to the payee’s bank. The bank posts the payment by changing a number in the bank account of the payee. The payee, on checking his or her account, now realizes that she or he has a larger balance, and so larger spending power. That’s all there is to it.

There is no way that this process can be disrupted by any economic force. Yes, Congress could forbid payments — but the payments are ordered in the Constitution, so Treasury would just head to court. A nuclear bomb might disrupt the computers. But otherwise, nothing ever can, or ever will, stop the United States Treasury from paying interest when due. The notion that “America” might “go broke” is meaningless. To say that it might in a White House document is disturbing.

In the third paragraph of the preamble, the Commission tugs on a few familiar heart-strings:

“Ever since the economic downturn, families across the country have huddled around kitchen tables, making tough choices about what they hold most dear and what they can learn to do without. They expect and deserve their leaders to do the same.”

Who would not be moved by this image of a family, “huddled” against the cold, working on the family budget, waiting for “their leaders” to work on theirs?

If this family is a typical American household, chances are it has some experience with the federal presence in the economy. A retired parent gets Social Security and Medicare, and the others expect to do so later on. An indigent aunt receives Medicaid. An older brother is veteran, perhaps with some injuries or trauma picked up in Afghanistan or Iraq. The mortgage interest is deducted from taxable income. Quite a few such workers may be postal workers, or TSA inspectors, or other public servants. Or perhaps the working parents have their wages supplemented with the Earned Income Tax Credit.

When our family takes a moment from its own budget plans to examine this one, they may feel less than completely grateful. Perhaps they’ll notice that the sacrifices so nobly embraced by “their leaders” will actually fall on them. Social Security, Medicare and Medicaid will be cut. The Earned Income Tax credit might go away. The mortgage interest deduction will be curtailed — depressing home prices even if our family’s modest mortgage remains deductible. Federal workers — ten percent of them — would be singled out and fired. Military pensions will be reduced, we learn, to bring them “in line with standard practices in the private sector.” Practices in the private sector often do not include pensions; the commission does not say why, if that is so, future young men and women would volunteer.

Noticeably missing from the Commission’s plan are measures that would fall on the “leaders” themselves. The very richest pay cash for their houses. The commission would reduce, not increase, marginal income tax rates. There is no suggestion of a financial transactions tax. It’s true that the Commission would tax capital gains and dividends as ordinary income, but at the top rates they propose, who would care?

In the fourth paragraph, the Commissioners declare that:

“…we spent the past eight months studying the same cold, hard facts. Together, we have reached these unavoidable conclusions. The problem is real. The solution will be painful. There is no easy way out. And Washington must lead.”

The reference to “studying” is suggestive. Are there any studies? White papers? Background analyses? Normally, one might expect a commission to produce some. In this case, it did not. The Commission’s web site makes no mention of any such thing.

Paragraph five makes two uses of the word “grandchildren,” but otherwise says nothing.

In paragraph six, the Commission summarizes the evidence for its dire conclusions:

“Over the course of our deliberations, the urgency of our mission has become all the more apparent. The contagion of debt that began in Greece and continues to sweep through Europe shows us clearly that no economy will be immune. If the US does not put its house in order, the reckoning will be sure and the devastation severe.”

This is as close to an evidence-based statement as the preamble gets. So what is the evidence? Does the European crisis really show “clearly that no economy will be immune”?

Well, in fact Germany, France, Holland, Britain and even (so far) Belgium are quite immune, despite debt-to-GDP ratios comparable to or higher than ours. Even Italy isn’t in crisis (at least, not yet). Ireland is deep in crisis, despite budget surpluses before the crisis and three years of austerity even harsher than proposed here. Spain is in crisis, despite a public debt burden much lower than our own.

What seems clear, on any reasonable reading, is that big countries don’t get hit by speculators the way small countries do.

The Commission also seems unaware that the world crisis didn’t begin in Greece. It began in America. It spread to Greece when US private debt markets collapsed and investors sought safety by dumping small-country bonds. And where did the investors flee? Why, directly into United States Treasury bonds! Quite the opposite of being vulnerable to crisis, the US Treasury is the largest, most obvious, most notorious and greatest beneficiary.

The only other effort at economic analysis in the report is the section entitled “The Looming Fiscal Crisis.” This begins with the claim that, “Our nation is on an unsustainable fiscal path.” No evidence is presented. The current deficit is big, of course, because unemployment is high, but there is no program here to fight unemployment.

The rest of the section argues that something terrible will happen if the debt-to-GDP ratio rises, as projected, to 90 percent in 2020 — and then continues on to 185 percent of GDP by 2035. Yes, this would be terrible: it would mean that the private economy never recovered. But the commission assumes that the private economy does recover. In testimony to the Commission on June 30, I described the incoherent nature of the projections that produce these scary debt-to-GDP numbers. The Report makes no effort to rebut my work. Indeed, the fact that I submitted testimony, at their invitation, on behalf of Americans for Democratic Action, goes unmentioned on their witness list.

The final three paragraphs of this section trot out the bugbears. There is the fact that much US Treasury debt is held by (gasp) China, “a nation that may not share our country’s aspirations and strategic interests.” As if China’s US debt holdings were not determined by China’s trade surplus, but by our debt level.

And then the Commission reverts to the great bogeyman of 1993, President Clinton’s first year: The bond market. “If we do not act soon to reassure the markets,” they write, “the risk of crisis will increase…” Oh really? You can look up the interest rates in the paper, any day.

The old Soviet Union had two newspapers, Pravda and Izvestia — Truth and Light — and the saying in Moscow was, “Where there is Truth, there’s no Light. And where there is Light, there’s no Truth.” It’s clear now that the Soviet Union didn’t really end.

The walls came down, and we became them.

James K. Galbraith is General Editor of “Galbraith: The Affluent Society and Other Writings, 1952-1967,” just published by Library of America. He teaches at The University of Texas at Austin.