Warning: Swallowing the President's Bitter Pills May Cause Harsh Austerity

We are being told that the mess this President caused when he helped pass the Bush tax cuts in exchange for 1 year of unemployment insurance - which was unnecessary because Republicans caved on UE extension before - WITHOUT even securing a rise in the debt ceiling by putting his full trust in John Boehner with the full faith and credit of the US was "worth it." This of course gave Boehner immense political power and the right hostage needed to cause the debt ceiling debacle just like I predicted. Well here are are again dealing with the fallout.

Already? Obama Tells Supporters to Expect 'Bitter Pills'

As the Huffington Post, who listened in on the call, reports:

The president, speaking from a White House phone, cautioned listeners to expect disappointments during his second term. As he has in the past, Obama warned that he was prepared to swallow some bitter pills during the negotiations, including some that would agitate the base.
 

"As we move forward there are going to be new wrinkles and new frustrations, we can't predict them yet," he said. "We are going to have some triumphs and some successes, but there are going to be some tough days, starting with some of these negotiations around the fiscal cliff that you probably read about."

Though his encouragement to his activist base may be encouraging to some, the President's preemptive admission that he's willing to give away bargaining chips so early in the game will surely irk those who criticized Obama for his negotiating style throughout his first term. That will be doubly true for progressives who have publicly called for a more hardline stance when it comes to defending key social programs like Social Security, Medicare, and Medicaid.

We know from the president's interview with the Des Moines register that much of what was in the memo revealed by Bob Woodward as part and parcel of all of this nonsense we shouldn't even have to be dealing with in the first place is a starting point. Oh yes, many will screech about how Simpson Bowles is dead because the commission was a failure, but the horrible ideas live on through our elected leaders that keeps bringing them back to life.

Obama vows debt-cutting ‘grand bargain,’ immigration reform in Des Moines Register interview

"I am absolutely confident that we can get what is the equivalent of the grand bargain that essentially I've been offering to the Republicans for a very long time, which is $2.50 worth of cuts for every dollar in spending, and work to reduce the costs of our health care programs," Obama said. (The White House quickly clarified that he meant $2.50 of spending cuts for every dollar in new tax revenue.)

"We can easily meet—'easily' is the wrong word—we can credibly meet the target that the Bowles-Simpson Commission established of $4 trillion in deficit reduction, and even more in the out-years ...

This is not going to help the unemployed and it's economic illiteracy. When you hear things like, "We all agree we must pay down the deficit," it might as well be, "We all agree on economic illiteracy. Come on. Everybody's doing it." Anyone who is still making excuses for this doesn't even understand why this fake fiscal cliff, really an austerity bomb as Brian Beutler of TPM puts it, is coming back up in the first place.

“The past isn’t dead. It isn’t even past.” – William Faulkner

This is quite literally true so for all those "that was then this is now" excuse makers, you have a lot of studying and reading to do.

By now readers of the blog Naked Capitalism are aware from the reference to the paper by the excellent Yves Smith of the paper by Federal Reserve economists Glenn Follette and Louise Sheiner showing that the projections used by the CBO for continuous exponential health care cost growth are quite flawed as is the whole case to swallow these bitter austerity pills. Instead of reexaming their flawed projections based on that post, the CBO strangely decides to solicit a private chat with Yves Smith for unspecified reasons showing they really have no counter factual to the data that refutes them. After all, the CBO assumes growth past 100% of GDP as well which is impossible.

Economist at the CEPR Dean Baker concurs as well for he remembers how the CBO did not project the housing bubble and he has made similar cases in the past.

Now UMKC economist William K. Black uses Zane Tankel's whining about Obamacare to in addition to the Glenn Follette and Louise Sheiner paper to explain to us what a huge lie deficit hysteria really is. Their paper refutes the testimony of Richard S. Foster, FSA, MAAA, Chief Actuary, Centers for Medicare & Medicaid Services in front of the House Committee on the Budget (February 28, 2012) with solid evidence. The pervasive accounting fiction with regard to health care costs in tandem with a lack of knowledge about sectoral balances in a sovereign currency is sadly pervasive as we can see throughout the actuarial realm.

Applebee’s Obamacare Rant Reveals the Lies of the Deficit Hysteria

Projecting that U.S. health care costs will continue to increase at roughly twice the average growth rate of GDP guarantees that federal budget expenditures will be driven by health care costs. Chart 7 of Foster’s testimony explains that what he terms the “alternative” projection is what he favors as most accurate. Under this scenario, Medicare would rise to approximately 10.5% of GDP by 2080. Chart 8 projects Medicaid expenses only out to 2020 – increasing to nearly 4% of GDP. By 2080, this implies that combined federal Medicare and Medicaid expenditures would exceed 20% of GDP – roughly 100% of the federal budget. That is absurd, a point made forcefully by Federal Reserve economists in an article entitled: AN EXAMINATION OF HEALTH-SPENDING GROWTH IN THE UNITED STATES:
 

PAST TRENDS AND FUTURE PROSPECTS (by Glenn Follette and Louise Sheiner).
 

“All other” health care expenses would, under similar approaches to projections, rise to over 40% of GDP by 2080. The overwhelming bulk of these expenses would be private health insurance and state contributions to Medicaid. The first question that should arise, therefore, is which constraint would actually bite first and doom the projections. The imminent constraint is not the federal budget. The U.S. is neither a household nor a business firm. We have a sovereign currency that we allow to freely float and we borrow in our own currency. The U.S. federal government, therefore, is nothing like a nation that has joined the euro and given up its sovereign currency. Like Japan, the U.S. can create money, or if it chooses to issue debt it can do so at minimal interest rates even with a debt to GDP ratio over twice as large as the current U.S. ratio.
 

Businesses have to compete. Many must already compete globally and the future will increase the number of firms that must maintain global competitiveness. Foreign firms often provide no health care benefits to their workers. U.S. businesses also have to compete against small U.S. businesses that are not subject to the employer mandate of Obamacare. Decades before the U.S. federal government experiences ran into any real budgetary “crisis” the increase in health care costs that the CBO is projecting would bankrupt businesses that offered health insurance. “Somebody has to pay” – and if health care costs increase indefinitely at twice the growth of GDP no business can long survive paying such costs. The only question is how soon they will become uncompetitive and fail – and the Tankels (Applebee) and Schnatters (Papa John) of the world are claiming that we have already rendered them uncompetitive by requiring them to provide health insurance to a pool of very young workers in good health (i.e., a far cheaper pool to insure than would be the case for most professions and industries). Note that neither of their businesses faces global competition. Many U.S. industries and professions will face much more severe competitive disadvantages than restaurants do if health care expenses increase as the CBO projects.
 

The mass loss of U.S. competitiveness that would occur if the CBO health care expense projections proved true would mean that the CBO budget projections would be wildly over-optimistic. One of the grave but more subtle flaws in the CBO projections is that they are not “stock flow consistent.” For example, under the CBO’s projected increase in health care expenses U.S. firms would soon fail by the tens of thousands as they were rendered uncompetitive. The U.S. would fall into a Great Depression, the budget deficit would explode, and Medicare expenses would skyrocket as tens of millions of Americans lost their jobs and became impoverished. Health care expenses measured as a percentage of GDP would surge as expenses increased and GDP fell sharply. The CBO projections, however, are internally inconsistent on multiple dimensions as James K. Galbraith, L. Randall Wray, and Warren Mosler explained in their Congressional testimony and paper entitled: THE CASE AGAINST INTERGENERATIONAL ACCOUNTING: The Accounting Campaign Against Social Security and Medicare.
 

Another example of internal inconsistency would become obvious if we increased the length of the CBO projection. Eventually, health care costs would exceed 100% of GDP under the CBO’s methodology. That is, of course, impossible because health care costs are part of GDP. The assumptions about the growth of health care expenses and GDP are not consistent.

I have had this debate here in the blogsophere and it appears I have been vindicated by this Glenn Follette and Louise Sheiner paper as well. Of course I was merely aware of the work of James K. Galbraith, L. Randall Wray, and Warren Mosler on how intergenerational accounting has pervaded the Financial Accounting Standards Board (FASB) which in turn has pervaded the CBO, CMS, and SSA in some of their trustee reports. Funny balance sheets claiming to be the nation's balance as well as the federal government using those terms interchangeably along with similar doom and gloom projections showing only liabilities and no assets for Social Security and Medicare do not add up.

Not only that, but I knew the CBO projections couldn't be accurate because if a trend is unsustainable it won't be sustained, especially past 100% of GDP. So now hopefully we can stop hearing excuses anywhere about why Medicare is on the table. Also Social Security belongs absolutely nowhere in the conversation at all. We know this now.

As I stated in that diary, it's time to protect our whole safety net from these intergenerational warriors and anyone who would make excuses for them or this austerity bomb. Obviously the CBOs projections are off, but truly whatever the health care cost burden is in the future will be in the private sector because other countries don't pretend asymmetric information and monopolistic for profit health insurance companies provide optimal outcomes for private businesses. Only we do.

These costs cannot and will not bankrupt our government for the reasons stated above; a sovereign currency denominated in our own debt created by a keystroke. However, health care costs will continue to be a drag on our economy despite being more sustainable than projected by the intergenerational warriors unless we take the burden off of businesses and go for Medicare for All. The CBO doesn't want to respond to Glenn Follette and Louise Sheiner because they can't. So all this crap about how the president has to put everything on the table is simply demonstrably complete crap so I don't want to hear that anymore and I don't want to read that anymore, anywhere.

This austerity bomb is completely unacceptable and reeks of economic illiteracy and budgetary fallacies cooked up by Wall St and their Third Way wing in the Democratic party.

Don't make excuses for it. Don't play that game. Raise your voice! Oppose this! Deficit terrorism will terrorize many people already hurting who are counting on you to care about them.

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Yes, they are starting with ...

BruceMcF's picture

... 2.5 sending to 1 revenues ... but of course, that implies a final post-compromise position of 3:1 or 4:1.

As Cenk said in the last day or two, if they wanted "balance", they would start at $3 tax revenue for each $1 in spending cuts, to get to a post-compromise position of 1:1.

And if they wanted "balance", non-defense discretionary, which has already had $1.5T in austerity cuts, would sacrifice $0 additional. It would all come from defense cuts.

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According to Obama's 2013 budget and ten year projections

Big Al's picture

the budget deficit will remain at least 6-700 billion (or $600 billion to over one trillion depending on the figures) for the next ten years even with his proposals.  Now why is there so much concern about the deficit?  Because it adds to the national debt and the interest paid on the debt.  Obama's proposals indicate the national debt will rise to about $25 trillion by 2022.  Most definitely a conservative estimate and doesn't take into account additional spending for more wars, disasters, jobs programs, etc.   IOW, it won't slow down the debt much at all.  The interest alone by 2022 on the national debt will be about ONE TRILLION DOLLARS PER YEAR!   Interest on the debt alone will be more than the Medicare program by 2022. 

They have to know the debt cannot be paid off.   It seems these cuts are at least in part to allow room for the payment of more interest to the bankers and their shareholders.  75% of the debt is public debt and we're paying interest on it to the fucking bankers, soon to the tune of a trillion per year.  Fuck the private banks, they are the problem.  

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The same kind of flaws are in some of these projections

priceman's picture

Assuming the economy grows any, revenue will come in and the debt will come down and we can't really take at face value the projected interest rate either. Look at what happened to the yields on 10 year treasury bonds in the 90s when the debt was almost 1/3rd of what it is now though technically the more debt there is the more interest you pay because they are a collection of treasuries held in the aggregate which mostly consists of American households and firms as well as the Fed, but I would take issue with some of the assumptions in those projections as well because we know the projections for medicare are wrong now. However, paying off the debt and the interest on that debt is a matter of data entry at the Fed, not a financial burden for the public.

Now it is true because of the ZIRP that banks make money off of any yield they get when they can borrow at 0% form the discount window and buy treasuries profiting off of that. They can also create money by creating deposits and just get these reserves later anytime they want to service those deposits.

The scary thing is not the debt and I take issue with any assumptions that the war machine will be tamed(which I do take issue with as far as running up debt to kill and create a police state). The scary thing is what will this debt be used to cut? Reagan wanted to starve the beast to make cuts and so will Obama because of this fear mongering on the debt we hear about. I know this paradoxical, but there is no deficit crisis. there is an unemployment crisis, a moral crisis with a country addicted to war, and politicians who use deficits for austerity even in a country that really only issues debt to set interest rate targets in our banking system. It does steal from depositors who don't make interest and transfer that wealth to Wall St which is the biggest problems with ZIRP besides the fact that it can't bring about a recovery because we are already at the zero bound.

So despite my nuanced disagreement with you, you are essentially right about some of this with regard to the banks and their shareholders and bond holders.

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Hmm.

Big Al's picture

All righty then. 

They aren't my projections and I'm not sure where the nuanced disagreement is.  I was trying to point out that the way things are going, the interest on the debt will be one trillion per year.  Evidently that's just a data entry thing, so I'll quit beating the dead horse.

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I won't say anything yet because I'm too angry.

Glinda's picture

On Capitol Hill, it isn’t clear how strenuously Democrats will resist cutting entitlements. Rep. Chris Van Hollen (D., Md.) said he and others were open to changes as long as they were done in a measured way and were part of deal that included tax increases. Mr. Van Hollen also said changing Social Security and increasing the Medicare eligibility age above 65 should be part of negotiations.

 

“I’m willing to consider all of these ideas as part of an overall plan,” Mr. Van Hollen said Tuesday at the Journal’s CEO Council.

The Daily Change: Chris Van Hollen Says He’s Open To Cutting Social Security And Medicare Benefits — Tell Him No

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For what it's worth

traveler's picture

my view is that Obama was groomed and chosen for this task years ago. The country would erupt if a Republican tried to push it through. The corporate media will first offer fake criticizm and then support him. Dem leaders will attempt to sooth the masses.

A "compromise" will be forthcoming. 

Bend over and get ready.

Oh, check out and compare the political compass positions of Romney and Obama. There's barely a cat's whisker of difference between the two of 'em.

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