Lecture 21 BUDGETS & INFRASTRUCTURE

DEFICIT HYSTERIA
The public is being assaulted with deficit hysteria:
warnings that deficits are rising and spiraling out of 
control. The truth is that the projected deficits for the
next few years are declining.
 
Other warnings claim that high deficits will push interest
rates up, making it harder for companies to borrow money
to expand and ultimately costing the economy jobs. This is
known as “crowding out” of private investment. But with
excess productive capacity, the Fed funds rate at zero,
and companies sitting on trillions in cash that they would 
invest if they found it profitable, there is no "crowding
out" to be found. 

The Fed's discount rate - the interest charged to 
financial institutions - has been at 0.75 percent for over 
a year. The prime rate - the basis for setting the amount 
of interest charged for mortgages and consumer credit - 
has been at 3.25 percent for over a year.
 
With a 10 percent deficit, we pay essentially
the same interest rate as that paid by Germany, which is
running a deficit equal to 3 percent of its economic output.
 
In the state legislatures, spending cuts have led to the 
loss of 300,000 public sector jobs, which is creating a 
drag on growth. All of those people will have less money 
in their pockets to buy goods and services. To avoid 
bankruptcy, the states have no choice, but the federal 
government has no problem selling bonds.

In fact, the U.S. has a debt-to-income ratio far smaller 
than most corporations. Our ND is about equal to our 
annual income, while succesful companies like Caterpillar
are running debts four times their incomes. JP Morgan 
Chase has borrowed 50 times its annual income. Their debt 
represents investments that will pay off in the future, 
and we should also be investing in infrastructure, 
education, and stimulating the economy.
DO THE MATH
Exactly what is the claimed terrible future consequence of
the current deficit? These are the facts:

1. The current 30-year T-bond interest rate is 1.25%. Each 
   $1T of debt has an annual cost of $12.5B.

2. Estimated 2021 GDP is $19T in 2011 dollars. Therefore, 
   each $1T of debt in the year 2011 will amounts to 0.07% of 
   2011 GDP.

3. A $4T deficit today will cost 0.3% of GDP in 2021. 
   That's what the deficit hawks claim to be worried about. 
   They are either liars or imbeciles - or both.

We now have twice the French per-capita health care costs 
with worse outcomes and the lowest level of taxation in 60 
years. Between a serious effort to control healt care 
costs (already underway in the current health care law), 
the pending 2013 return to the Clinton era tax rates, and 
the new Dodd-Frank regulation reform to prevent further 
financial fraud, we will overcome the only serious 
problems we face - provided that the voters throw the 
deficit hawks out of Congress. 
WHENCE THE BUDGET DEFICIT?
The Congressional Budget Office’s projections from 
January of 2008,  the last ones made before it recognized 
the housing bubble and the  implications of its collapse, 
showed a deficit of just $198 billion for
2009, the year President Obama took office. In other 
words, the current deficit is almost entirely due to the 
Bush meltdown.

A NY Times analysis attributed about 10% of the 2009
deficit to Obama’s agenda, including the $787B stimulus
program (American Recovery and Reinvestment Act (ARRA).
 
This is a brief review of their analysis of contributions 
to the deficit:

*Revenue decline due to recession: 37%

*Reagan, Bush tax cuts, wars, drug benefits, bailout: 33%

*Continuation of tax cuts, wars, bailout under Obama: 20%

*Stimulus: 7%

*Obama's health care, education, energy: 3%



 
THE TRUE REASON
But the biggest distortion about deficits is that they are
a consequence of spending. Aside from the recession, we
are running high deficits now for three reasons.

1. We're under-taxed. The 2010 federal government revenue 
   is the lowest since 1950. After recovery, taxes 
   should be raised back to Reagan era rates.

2. We have a health-care system out of control and the 
   problem is not Medicare, which has much lower 
   administrative costs than does private insurance. If we 
   s pent the same amount per person for health care as many 
   countries with longer life-expectancies, we would have 
   large budget surpluses in the near future. The current law
   (Affordable Care Act) is an improvement over unbridled 
   private insurance but is not as efficient as the single-
   payer systems used in most advanced nations. A later 
   lecture covers this subject.

3. We spend a disproportionate amount on our military. The 
   “Medicare gap” is equal to 20% of the military spending 
   increase since 9/11. This expense may decline as our 
   troops leave Iraq and as Afghanistan assumes more 
   responsibility this year.

A more realistic recession policy would be spending public 
dollars and running short term deficits to minimize the 
pain felt on Main Street. Cutting spending simply 
increases the hardship without a serious effect on long 
term debt. Austerity during a recession is the mistake 
President Roosevelt and the Congress made in 1937, 
stopping the recovery and increasing unemployment by 5%.
MORTGAGE FORECLOSURE CRISIS
The best way to alleviate the foreclosure crisis is to end
the recession with a program of full employment.  In 
addition, there are other measures to pursue:

*The Home Buyer Tax Credit which expired April 30, 2010 
should be reactivated.

*To revitalize the residential and commercial market and 
support property prices, it is necessary to keep 
foreclosed property off the market.  This requires that 
the federal government provide loans at reasonable rates 
to banks or other holders of property under foreclosure. 
These owners would then use the loans to rent their 
properties.  The property would be managed by an RFC-like 
trust through local property managers as sub-contractors. 

*Return Fannie and Freddie to their status before becoming 
publicly traded. Their sole purpose should be to guarantee
mortgage liquidity. Part of that charge would be to rate 
mortgage-based bonds, a function which should be denied to
other rating agencies.

*Restore strict credit criteria for granting a mortgage.

*Maintain the mortgage interest deduction.
Public - Private Investment
There is a scam prevalent in our economy:
     
 First:   Taxes are cut.

 Second:  Budget deficits appear
          and government cuts infrastructure services.

 Third:   Citizens call for better service
          but not for the old tax level.

 Fourth:  "Serious People" call for privatization
           of public infrastructure.
          
 Fifth:   Public infrastructure is privatized; rates rise.         

 Sixth:   The people who wanted a tax cut
          are now paying the old tax rate or more
          to a corporation instead of to the government,
          but without the control over the corporation
          that they had over the government.

This is like selling the family silverware
 to a corporation and then  renting the silverware
 to eat -  with no control over the condition of the
 silverware or the amount of rental.

The result is the end of the middle class.
Proceed to:
Lecture 22. TAX RATES & SOCIAL SECURITY
Thanks for your interest.
  Marvin Sussman, retired engineer

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