Unfinished Business

The rest of my answer to Fareed Zakaria

Earlier today, I joined CNN host Fareed Zakaria to talk about deficits, inflation, and whether we’re focusing on the wrong things when we debate the price of the Build Back Better agenda and how to “pay for” it. I knew ahead of time that we would have only 5-6 minutes to cover a lot of ground, and I did my best in the short time we had.

Here’s the the full clip of our conversation. I think Fareed was hoping to squeeze in one last question, even as his producers were trying to tell him to wrap up. So I began, but was unable to finish, responding to his last question.

Longtime followers of MMT, and those who’ve read my book, probably know what I was about to say. For those who were left wondering, here’s the short answer to Fareed’s question, “What about the long-term issue of entitlement spending—Medicare, Social Security…?"

I wouldn’t have said this in my response, but since I have (with your indulgence) more time to respond in this forum, let’s start by thinking about what motivates this question in the first place.

If Fareed had posed this question to just about any other economist in the country, he would almost certainly have gotten a very different response from the one I was in the process of offering. That’s because virtually the entire economics profession —liberals, moderates, and conservatives—agrees with the basic premise of his question—i.e. that programs like Social Security and Medicare pose significant challenges because it’s going to cost a lot of money to sustain them in the year’s ahead.

A few years ago, The Washington Post featured dueling opinion pieces (here and here) with seemingly divergent perspectives on the issue. The first was authored by a group of senior fellows and economists at the conservative Hoover Institution. It was titled, “A Debt Crisis is Coming.” This is how the authors of that piece assigned blame for the looming fiscal crisis.

“As is well-known, our deficit and debt problems stem from sharply rising entitlement spending. Without congressional action, the combination of the automatic spending increase per beneficiary provisions of these programs and the growth in entitlement program recipients as the population ages will cause entitlement spending to continue to rise far faster than U.S. national income and tax revenue.”

In response, The Washington Post carried a piece titled, “A Debt Crisis is Coming. But Don’t Blame Entitlements.” It was written by five former Chairs of the Council of Economic Advisors (CEA), including familiar names like current Treasury Secretary Janet Yellen and Harvard economist Jason Furman. They wrote:

The federal budget deficit is on track to exceed $1 trillion next year and get worse over time. Eventually, ever-rising debt and deficits will cause interest rates to rise, and the portion of tax revenue needed to service the growing debt will take an increasing toll on the ability of government to provide for its citizens and to respond to recessions and emergencies….

None of that is in dispute. But the Hoover economists then go wrong by arguing that entitlements are the sole cause of the problem…

Just as entitlements are not the primary cause of the recent jump in the deficit, they also should not be the sole solution. It is important to use the right wording: The main entitlement programs are Social Security, Medicare, veterans benefits and Medicaid. These widely popular programs are indeed large and projected to grow as a share of the economy, not because of increased generosity of benefits but because of the aging of the population and the increase in economywide health costs.

There is some room for additional spending reductions in these programs, but not to an extent large enough to solve the long-run debt problem…

As we focus on the long-run fiscal situation, our goal should be to put the debt on a declining path as a share of the economy.”

So both camps agreed that programs like Social Security and Medicare are contributing to our nation’s long-run fiscal challenges. The “debate,” such as it is, revolves around how much to blame democrats for feeding the beast and how much to blame republicans for starving the government of much-needed revenue.

I could never have signed either letter.

Why? Because the U.S. did not then face—and does not now face—a debt crisis. And that’s true regardless of projected spending on programs like Social Security and Medicare.

I wrote an entire chapter explaining all of this in my book. Laying it out in sixty-seconds for a television audience is tough. But the bottom line is that a currency-issuing government, like the United States, can afford to meet any payment obligation it has—even the really big ones—as long as the bills are payable in the government’s own currency.

Now, that doesn’t mean that we should triple Social Security benefits or carry on allowing Medicare to get swindled into paying the highest prices in the world for prescription drugs, simply because we can afford the bill. It just means that the financial costs aren’t the binding constraint. Inflation is.

And that’s exactly what Alan Greenspan tried to explain to Congressman Paul Ryan, when he was asked about the long-run challenges facing programs like Social Security. I really love this clip, because Greenspan gets it exactly right. It’s not about the money or the spending. Covering the costs of these programs is easy—as long as there is sufficient political support to maintain them. The challenge, as Greenspan explains, is making sure that the money can be spent into an economy that is productive enough to deliver the real goods and services that program beneficiaries will want and need in the years ahead.