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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Living with a deficit terrorist majority

Posted by WARREN MOSLER on October 28th, 2010

>   
>   (email exchange)
>   
>   On Wed, Oct 27, 2010 at 8:11 PM, wrote
>   
>   This kind of talk is not bullish.
>   
>   If they try to do things too quickly all bets are off.
>   

Right. That’s what I see as our biggest risk, though 100 billion isn’t all that much, and it likely be out of future spending.

All these republicans you’ve been cheering on are heck bent on total destruction of our economy via deficit reduction as they’ll have enough votes for a balanced budget amendment. And a lot of democrats as well.

Tea Party leaders Michael Johns and Michael Patrick Leahy do know how it works, and to their credit haven’t been cheer leading balancing the budget, just lower taxes. But now seems they need to take a much more active role in working to keep taxes a lot lower than spending, which means opposing the balanced budget amendment move.

The mess we are in now can be traced to the tax hikes in the early Clinton years that were allowed to persist and drive the budget into surplus in the late 90′s, which reduced the financial equity that supports the credit structure by maybe a trillion, back when that was a lot of money. And, of course, when it collapsed the next year no one understood the obvious move was the likes of a payroll tax holiday to sustain demand from income, rather than wait for private sector credit expansion.

Bush finally did that in 03 shortly after Elizabeth and I met with Andrew Card at the white house pointing this out. His then famous statement when asked about the deficit ‘i don’t look at numbers on a piece of paper, i look at jobs’ followed shortly after our meeting. But that’s another story…

Republicans Plan Budget Cuts as Early Act If They Take Power

By Patrick O’Connor

October 27 (Bloomberg) — U.S. House Republicans plan to try to slash $100 billion from the federal budget as early as January if they wrest power from Democrats in this year’s midterm elections, setting up possible early showdowns with President Barack Obama on taxes and spending.

A Republican House takeover would thrust new committee heads, such as Representative Dave Camp on the Ways and Means panel, into the spotlight within weeks — or days — of seizing their gavels in early January. They would confront quick political tests that could alienate independent voters and Tea Party activists alike, analysts said.

“The major issues are going to be fiscal, and fiscal issues are always contentious,” said Jack Pitney, a political science professor at Claremont McKenna College in Claremont, California.

Carrying out spending cuts that Republicans have pledged to seek — which would amount to 21 percent of the government’s so-called discretionary money pot — could prove politically difficult. Reducing funds for programs such as college loans for low-income students or medical research at the National Institutes of Health is harder than promising to do that on the campaign trail.

‘Political Repercussions’

Republicans “will quickly find out that across-the-board cuts have political repercussions,” Pitney said.

A lame-duck session of Congress convening two weeks after the Nov. 2 elections will try to fund the government next year and deal with Bush-era tax cuts expiring Dec. 31. Prospective Republican House control could be an obstacle to Democrats in finishing that work before adjourning. Camp and other Republicans would then need to grapple with those tasks as they take over, even as they push their promised budget cuts.

The backdrop is a federal deficit that the Congressional Budget Office said totaled $1.29 trillion in the fiscal year that ended Sept. 30. At 8.9 percent of the nation’s gross domestic product, it was the second-biggest shortfall since 1945.

The following reviews the battle lines likely to be drawn in top House committees under Republican rule, and looks at the potential panel leaders who would preside over the fights:

Appropriations

If Democrats fail to fund the government through September 2011, the end of the federal fiscal year, this committee would be the stage for that fight in the new Congress. And settling on the panel’s chairman would be one of the initial tasks facing Republicans.

House Republican leader John Boehner of Ohio, his party’s speaker-in-waiting, called for the $100 billion budget cut on Sept. 23 as part of a governing agenda aimed at wooing voters. The cuts, which weren’t specified, would come from the $477 billion Congress allocated in 2010 for non-defense domestic discretionary programs. Social Security and Medicare are among the programs excluded from the proposed 21 percent reductions in discretionary spending.

Obama’s request for $73.4 billion for the Department of Education in the 2011 budget, including $23 billion for Pell Grants to help low-income students afford college, offers one example of the tough choices the Republicans would face. A 21 percent cut across-the-board would take about $15 billion from education. A 21 percent cut in Pell Grants would subtract almost $5 billion from the program.

HHS Budget

Obama asked Congress for $76.4 billion for the Department of Health and Human Services. Almost half that — $32 billion – -is for NIH, which includes the National Cancer Institute and other research facilities. A 21 percent cut would slash NIH funding by more $6 billion.

The question of which Republican would lead the Appropriations panel is complicated by the six-year limit the party placed on how long a lawmaker could serve as its leading member on a committee.

Representative Jerry Lewis, a California Republican, reaches that limit at year’s end. He has said he will seek a waiver to allow him to take the committee’s helm.

Lewis, 76, initially balked when Boehner pushed House Republicans to embrace a moratorium on lawmaker-sponsored projects, known as earmarks. Lewis reversed his position last year, gaining favor with Boehner.

Representative Hal Rogers, a Kentucky Republican, would be the likely committee head if Lewis fails in his bid. Rogers, 72, is known for steering funding for road improvements and other projects to his state and district. The Lexington, Kentucky, Herald Leader once dubbed him the “Prince of Pork.”

26 Responses to “Living with a deficit terrorist majority”

  1. Ivan Says:

    Neither the Republicans nor the Tea Party will do anything other than modest spending cuts while pushing through significant tax cuts. They’re all trying to capture the mantle of Reagan. Cut taxes, increase the size of the pie, and the deficit shrinks. I’d be very surprised to see anything else. Whether they understand it or not almost doesn’t matter at this point. The fact that they believe tax cuts will help the economy is probably enough for now to get us on the right path.

    Reply

    SethM Reply:

    My feelings exactly. Luckily for the country actual deficit reduction is very difficult politically.

    With a divided congress and an energized group of tax haters, I think there’s a good chance that spending will remain level while taxes are cut. This is by no means optimal (lower taxes on the rich will lower the velocity of money) but it’s certainly better than what is occurring in Europe.

    If an increased deficit is coupled with a smaller trade gap (which seems to be one of the few areas that enjoys bi-partisan support), the US might stumble its way into a recovery. Otherwise we’ll have to wait until the next crisis and the resulting increase in fiscal spending that will inevitably follow it.

    Reply

  2. mike norman Says:

    $100 bln is probably enough to put GDP in modestly negative territory, when the multiplier effect of an income reduction of that size is factored in.

    Reply

    WARREN MOSLER Reply:

    so proportionately, japan’s 61 billion is a tad larger.
    ;)

    Reply

  3. zanon Says:

    it will not happen. this is so they get elected.

    Reply

  4. Tom Hickey Says:

    The only spending cuts that are possible practically are those that don’t have a politically significant constituency in ’12. Add those up. Not very much. Add the proposed tax policy to that and there is a huge deficit that will really upset the fiscal conservatives. Some know that if they vote for a big budget gap, they probably can’t survive a primary in ’12 after promising to cut the deficit. GOP unity may not be possible to maintain this time around with wisely divergent views separating fiscal conservatives from the “deficits don’t matter” crowd. There is a lot of grassroots anger about the Bush years, and going back to deficits that aren’t “paid for” may be a lot more difficult this time. But there is no reasonable way to “pay for” the proposed tax policy, which is why none has been offered in the campaign and the candidates have assiduously avoided the questions about it from reporters, even on Fox. Double-bind coming?

    How that will impact the GOP plan to make Obama a one-term president is moot, since the GOP going to share the blame next time if this election goes their way. Add to that a brewing civil war in the GOP between fiscal conservatives and deficit-be-damned tax-cutters, and this could get interesting fast, depending on how the election goes.

    Reply

    beowulf Reply:

    Add to that a brewing civil war in the GOP between fiscal conservatives and deficit-be-damned tax-cutters…

    Who do you mean by the latter? Even the tax cutters talk about offsetting spending cuts, which just means hamstringing the provision of government services without increasing aggregate demand. As I’ve suggested before, if we cut spending–and there are all sorts of rent seeking subsidies that can be cut– we should recycle the savings with a refundable tax credit (i.e. a negative income tax).
    http://votesmart.org/speech_detail.php?sc_id=58061&keyword=&phrase=&contain=

    Make that the default location for any spending cuts and conservative can knock themselves out eliminating whole cabinets if they wish and they won’t be starving aggregate demand

    Reply

    Tom Hickey Reply:

    Beowulf, we know that to offset the tax policy that the GOP proposes, they would have to cut into non-discretionary spending, which they have largely ruled out in the campaign. Their numbers don’t add up. It’s based on the idea that tax cuts are going to “pay for” themselves, and we know where that is going based on previous experience. As you know, the GOP is not going anywhere near the Vote Smart proposal. Their claim is that it is the handouts to the poor indigent that are breaking the budget, along with “waste, fraud, and abuse.” “Waste, fraud, and abuse” of course, involves only non-military government contracts, not anything affecting their key constituencies.

    In fact, the Dem plan if the GOP wins is to hang them on the numbers by making them put forward specifics, forcing them alienate important constituencies for ’12. As soon as ’10 is over, ’12 begins in earnest, as Mitch McConnell said. The Dems aren’t going to be sitting on their hands either. This is going to look more like football than governing.

    Reply

    Jim Baird Reply:

    With the Republicans constantly talking about how we are overwhelmed by “parasites” because “over 50% of americans don’t pay taxes” (Never mind that these “parasites” pay ruinous payroll taxes, or that when from 1913 when it was instituted until WWII, only about 2% filed a return) I don’t see them ever going for a negative income tax. Republicans stand for decreasing taxes on Millionaires and increasing them for everyone else, period, full stop.

    Reply

    beowulf Reply:

    Yeah, ironically the negative income tax was first proposed by conservative economist Milton Friedman and was endorsed by Republican President Richard Nixon. His bill was defeated in Congress by an odd coalition of Northern liberals who thought Nixon was offering too little to the poor and Southern conservatives who thought Nixon was offering too much to poor blacks. Earlier this month, it was proposed for the UK by the Conservative Prime Minister David Cameron.
    http://fullcomment.nationalpost.com/2010/10/08/david-frum-britain-may-get-radical-on-taxation/#more-14390

    Socialists all I guess. :o)

  5. mike norman Says:

    Even modest spending cuts in the current environment are damaging unless something offsets them. What will that be? Higher consumption when nobody has a job? Perhaps higher net exports if they continue to destroy the dollar, however, inflation would eat into real growth. Will businesses suddenly start to invest like crazy when GDP is limping around at a few tenths above zero?

    Reply

  6. Will Richardson Says:

    It seems that the wrong ‘lessons’ are being learnt from the UK Liberal Conservative Coalition…how ironic…

    This looks likely to lead to chaos in US politics but maybe that’ll mean the economy will limp along.

    In the UK they’ve got up to 5 years for things to turn ‘itself’ around, not so much leeway in the US electoral cycle…

    So…’interesting times’ in the Chinese sense…even more irony!

    Reply

  7. Winslow R. Says:

    I haven’t seen any discussion of the Fed buying new vs. old tsy bonds.

    The Fed would pull ‘potential’ future interest payments forward by buying higher rate bonds.

    Purchasing higher rate/price bonds increases the current deficit (by having the government/Fed pay now for future interest payments) while in theory lowering the future deficit (as bonds are retired, the interest accrues to Fed/government).

    Example….

    By purchasing an old 6.25% bond maturing in 2030 the Fed would pay $1360 for every $1000 of debt. Normally those interest higher payments would trickle out over the economy until 2030.

    By purchasing a newer 3.5%% bond maturing in 2039 the Fed would pay $908 for every $1000 of debt. In effect, lowering possible ‘future taxes’. Someone lost $91 in capital in just one year. The Fed/government was able to spend $1000, then borrow it back for $1000, then pay it off with $908 in just one year. Sounds deflationary to me.

    If interest rates shot up in a couple of years to 10%, that 6.25% bond would likely fall to less than $650 for every $1000. The Fed would have ‘overpaid’ by $710. Sounds inflationary to me.

    I’ll be interested in the mix. If the Fed purchases higher priced bonds, it could be seen as ‘wasteful’, but that is what would likely have the largest near term effect.

    Reply

  8. Rodger Mitchell Says:

    Prediction: If the Republicans successfully cut federal spending, the economy will tank. The Republicans then will claim they “inherited this mess” and “the budget cuts are the only thing that saved us.”

    Why do I say this? The Democrats still brag about the Clinton surpluses, which caused the 2001 recession.

    Rodger Malcolm Mitchell

    Reply

    Tom Hickey Reply:

    Sounds right in world in which up is down and down is up.

    Reply

  9. Do Cash For Gold Buy Loosegemstones Says:

    In this article, we will talk about the most common reasons to Living with a deficit terrorist majority. That’s what I see as our biggest risk, though 100 billion isn’t all that much, and it likely be out of future spending.

    **************

    john

    Do Cash For Gold Buy Loosegemstones

    Reply

  10. Linda G Says:

    Please help… ;-).

    A few of us really are trying over there, ;-).

    Seriously though, potentially, there are perhaps a 100 or so folks, maybe more, who may indeed at least “hear out” the talks from the conference in April, which I posted there on the home page a day or so ago, and which Nick (“Mystic”) referred to again in one of his own daily posts. (You can get to the home page of our site via the link attached to my name above…)

    And yes, for sure, he and I are just beginning to learn about this ourselves, and so, we may be making several mistakes as we discuss it, but we are trying to do so seriously, and to invite others who visit the site to do so too…

    I know that, at least for me, that set of talks at the conference in April in Washington, really was a tremendous help – all of the presentations and the Q & A s afterwards.

    Those really did have quite an impact on me, and I do hope some folks that take part in our little site will give that set of talks a “hearing out” as well.

    Don’t worry… I won’t continue to hound folks over here after this, ;-)… and yep, there are some stiff headwinds there at this point (well, almost exclusively so, at least from those who are actually commenting so far – although you never know about those who may be reading and listening, but not commenting).

    So I don’t know if it would or wouldn’t be more trouble than it’s worth for any of you folks to be a part of what at least Nick and I are trying to put forward over there (as clumsily as we may be doing so, ;-)). But I thought I’d give it one more shot.

    Anyway, I think you folks have something truly special you’re trying to “get out” into the public domain, and I appreciate your efforts in doing so, especially yours, Mr. Mosler… My goodness, putting your neck on the line by running for public office… I can only imagine some of the “abuse” in one way or another you must have endured at times throughout your efforts to do so. Wow… Thanks for that…

    Sincerely,

    Linda Grinaker

    Reply

    Linda G Reply:

    Yikes! After 60-some-odd comments over there, it doesn’t look very promising regarding many folks really taking in what that conference had to offer… rather disheartening. (I know a lot of you folks have been at this for quite some time. I had just begun, and I am just now finding out what it is to come against some of those walls when attempting to introduce others in the public to this…)

    Well, I gotta hope that for every unreceptive comment, there may be several others who have taken notice of the videos from the conference and have discovered a really wonderful introduction to MMT.

    And I, at least, know where I can go to check out those videos again any time I would like to.

    For MMT related discussions, etc., I think I’ll simply make my way over here and/or to one of the blogs I’ve since discovered…

    Fascinating stuff… I’ll be eager to keep learning more about it, as well as watching for any further developments on the front of public acceptance… in our country (U.S.) or elsewhere.

    Linda Grinaker

    Reply

    Matt Franko Reply:

    Linda,
    Suggest you take a short break from that site, check out the mandatory readings that Warren has on the right side column….

    Put some time into reading these papers, I think you will understand most of it. If you have any questions, just post them here and someone will probably explain it…just take a short break from there…Ive looked over there and I cannot figure out where to “jump in”…

    Resp,

    Reply

    Linda G Reply:

    (lots of chuckling)

    Yeah, there’s more hostility than I was expecting, and, of course, many of those commenting haven’t actually checked out the presentations from the conference. Oh well, ;-).

    However, Nick has a fairly loyal group of folks (from his youtube days) who simply like to consider some of the things he grapples with, even if a lot of them don’t actually step forward and comment. My guess is that the past few posts over there actually may have generated some honest interest from some new folks… I hope so.

    And yes, I’m taking advantage of the links here, and am working on making my way through some of the mandatory readings.

    And yeah, at this point, I don’t have a lot further to offer regarding this subject over there, so I likely will take a break at this point. No doubt it will come up again in time from Nick (that’s how I first learned about it… via Nick’s little channel on youtube, ;-)… you never know, huh?

    Well, thanks, Matt, for at least checking things out over there.

    Linda G

  11. kkken530 Says:

    I can understand Linda’s frustration,as I’ve had a similar experience on a local web site. I’ve tried to explain MMT and I’ve been called a liberal spendthrift. They are stuck in a “Gold-standard” world.I’d love it if some others could post.NotinKokomo An Idea I’d like to get Warren to consider is returning to his run for president in 2012. Only not alone. Chech which senate & house seats will be up,an get a team to run for each seat so not only would you get the prez,bu a group in the house & senate to support his program. Being you would all be running on an MMT based idea for the country you would save a lot on radio&TV ads as everyone is backing the same program. Sell it as a saving of SS & Medicare,plus lower taxes for the Masses as we’d drop payroll taxes to 1% or maybe 2% but on ALL earned income,One payer health care with the Doctors in charge of what health care is needed,and the feds pick up the costs.Build desalination plants on the gulf and bring fresh water to Texas,Arizona and New Mexico,and another on the west coast for California. Explain how money really works to the majority that doesn’t understand it,both those that no nothing about economics,and the “Gold Standard” folks who have it wrong..

    Reply

    Linda G Reply:

    Hi. You did a lot of work over there, I see. Don’t worry about attempting anymore. As I mentioned at some point within the thread, it was like being among a bunch of folks who were pointing out the merits and flaws – and doing so without holding back – a book very few of them had actually taken the time to read. Boy… I guess that until a current paradigm that folks are functioning within actually gives way, folks sure don’t seem willing to consider letting it go and venturing into something different and new.

    I guess that was a bit of a hint of what dealing with the public in general is like… hard to imagine doing that as a candidate, day in and day out… a lot of wear and tear.

    But I do appreciate you’re giving it a shot to make a difference in that thread over there.

    Linda G

    Reply

    WARREN MOSLER Reply:

    I would need a lot of backing and support. Can’t do it on my own.

    Reply

    kkken530 Reply:

    I agree,support is essential.,bu you seem to have a bunch of people in your comments section that know what they are talking about as far as MMT. Which you need to rebrand as Modern American Currency Knowledge. “MACK” or something similar to get away from the THEORY IDEA. You have uber bucks so you probably run with a crowd that is also rich.Help with money needs. You and your friends have 2 years to educate the voters on how modern money works. If you have a team with candidates in many states you can organize rallys with speakers like randle wray ,michial hudson.ETC. Your own mike norman. I’d like to see what your other posters have to say.
    KEN

    Reply

    kkken530 Reply:

    No one else has comments??

  12. Rodger Mitchell Says:

    The European Union has an “almost balanced budget” rule, which is why most of the members teeter on the edge of bankruptcy.

    If you want to know what the real effect of a federal balanced budget would be, read BALANCED BUDGET .

    I’ll quote just one paragraph: “The Chicago Tribune wants a balanced budget, meaning the federal money supply does not grow. Worse yet, in a balanced budget, the real money supply shrinks. Say in year 1 the money supply is $10 trillion and inflation is only 2% annually. By year 2, the real value of that $10 trillion has shrunk to $9.8 trillion. By year 10, with the same ongoing inflation, that balanced budget money supply has shrunk in real value to only $8.2 trillion. A balanced budget, with only 2% annual inflation, will cause our real (inflation adjusted) money supply to shrink almost 20% in ten years.”

    Actually, the discussion of a balanced budget amendment might be helpful. It would provide a national forum for the facts to emerge.

    Rodger Malcolm Mitchell

    Reply

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