What Are Debt And Entitlements?

October 18, 2016

in Economics,Politics

debt-ss-medicareConservatives distort the English language. One of the more prominent examples is the word entitlement. According to the dictionary, an entitlement is something due to one by law or contract. In the case of Social Security and Medicare, they are benefits that are paid for by the FICA tax of 15.2%.

Conservatives confuse the word ‘entitlement’ with the words ‘sense of entitlement.’ They also try to conflate debt and the Social Security funding. Social Security and Medicare are funded by the FICA tax, not by income taxes. They are not items on the budget.

The sole effect of Social Security on the debt is that some of the surplus of the Social Security funds are stolen to cover much of the debt. China owns about 10% of our debt. Saudi Arabia somewhat less. Many others own a share but by far the largest chunk is owed to Social Security.

All of the talk you hear from the right is that benefits need to be reduced or eliminated. A couple of Congressmen have admitted that there is no intention of repaying the funds. That is why I used the word stolen above. I simply don’t know how else to characterize it.

The problem with the economy is that there is an insufficient amount of money flowing through it. During the Great Depression we were gifted with Social Security, unemployment insurance and other programs that inject money into the economy. Looking at the numbers,our recent Great Recession would have been worse than the Great Depression but for the floor that those programs put under the economy. You may have been aware that we didn’t experience 24% unemployment this time.

You and I don’t have enough spare change to boost the economy. The big banks are sitting on considerably more than $2 trillion but they borrow money at a rate barely above zero and  buy Treasury Bonds which pay a decent differential. And, there is no risk. Similarly, the major corporations are sitting on much the same amount. If you and I can’t prime the economic pump, and the banks and major corporations refuse to, that leaves the government.

True, fixing the infrastructure, funding education and training, seeding research and developing renewable energy will add to the debt. However, those employed will spend their paychecks throughout the economy. Those getting the government money both directly and second- and third-hard, etc. will pay taxes. The banks and major corporations need to be removed from corporate welfare and taxed their share.

George W. Bush added $5.3 trillion to the national debt with his tax cut for the wealthy. He added more with 2 unnecessary wars. Corporate welfare, particularly to the military/industrial complex and al-Pharma put the cherry on top. The rational way is for the government to go into debt in poor economic times and repay it during better days.

The foregoing  is my contribution. The following is by Dean Baker, Co-director, CEPR; author, The End of Loser Liberalism: Making Markets Progressive.

The establishment gang is trying to pull a big one over on the public yet again. One of the designated topics for the last presidential debate goes under the heading, “debt and entitlements.” This should have people upset for several reasons.

The first is simply the use of the term “entitlements.” While this has a clear meaning to policy wonks, it is likely that most viewers won’t immediately know that “entitlements” means the Social Security and Medicare their parents receive. It’s a lot easier for politicians to talk about cutting wasteful “entitlements” than taking away seniors’ Social Security and Medicare.

The ostensible purpose of the debate is to allow voters to be better informed about the candidates’ views. So if the purpose is conveying information, why not use terms that most voters will understand?

It is likely that most viewers won’t immediately know that ‘entitlements’ means the Social Security and Medicare their parents receive.

But the semantics are the less important part of the problem. Why is it, that Social Security and Medicare are linked to debt? These are not the only programs that entail future commitments of resources.

For example, our military budget involves large commitments of future resources. New weapon systems can require decades to develop and produce. We commit ourselves not only to the annual salaries of current soldiers, but also many decades of veterans’ benefits. And, when we make military commitments through policies like the expansion of NATO, we are potentially obligating ourselves to vast expenditures in future conflicts.

Many of the government’s largest commitments of future resources do not even appear in the budget. When the government grants a patent or copyright monopoly, it is allowing the holder to effectively tax the public for decades into the future.

This is a fact that is little understood because the folks who constantly scold us about the deficit never point it out. Granting a patent or copyright monopoly is a way in which the government finances research and creative work. The cost of these monopolies is enormous. In the case of prescription drugs, the United States will spend more than $430 billion this year for drugs that would likely cost less than one-fifth this amount if they were sold in a free market without patent protection.

The $350 billion difference between the patent protected price and free market is a bit less than 9 percent of the federal budget. And this is just prescription drugs. If we add in the cost of patent and copyright monopolies in other areas it would likely come to more than twice this amount.

This is money that the government is committing our children to pay in the form of higher prices – effectively a tax on prescription drugs and other protected items – that never appears in the government books. The deficit hawks will yell and scream about the interest burden we are imposing on our children with the government debt (currently near a post-war low relative to the size of the economy) but don’t want us to pay attention to the huge patent rents the government gives to pharmaceutical, software, and entertainment companies.

Of course we have to pay for research and support creative work, but there are far more efficient mechanisms. The deficit hawks prefer patent and copyright monopolies because they can conceal the cost from the public.

It’s a lot easier for politicians to talk about cutting wasteful ‘entitlements’ than taking away seniors’ Social Security and Medicare.

It is also important to point out that the economy’s problem since collapse of the housing bubble has been a deficit that is too small, not one that is too large. This is why the interest rate on government debt is incredibly low. (High deficits are supposed to raise interest rates.) We need more demand in the economy to fully employ the labor force and to get firms to spend more money investing in equipment, software, and other areas.

We have paid an enormous price because of the lack of demand in the economy. The economy in 2016 is almost $2 trillion smaller (more than $6,200 per person) than the size that was projected in 2008 before the crash. This is an enormous “austerity tax” that those screaming for smaller deficits have effectively imposed on the country. Millions of people are needlessly unemployed, and tens of millions are earning lower wages, because people in Washington argued it was more important to have a low budget deficit than a strong economy.

But you won’t hear this story in the debate questions. Those organizing the debate want to see Social Security and Medicare cut, so they are framing the topic in a way that cuts to these programs will seem like the only reasonable answer.

We will see how the candidates respond in the debate, but it is important for the public to know that the debate sponsors are pushing their own agendas, not trying to better inform people on the issues.

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