Stiglitz Disses Bowles Simpson Deficit Commission’s Recommendations

[TampaYankee]

Why I didn't sign deficit letter

By JOSEPH E. STIGLITZ | 3/28/11 5:24 AM EDT

I was asked to sign the letter from a bipartisan group of former chairmen and chairwomen of the Council of Economic Advisers that stresses the importance of deficit reduction and urges the use of the Bowles Simpson Deficit Commissions recommendations as the basis for compromise.

The letters signatories believed that their support would show that there was a core to scientific economics that crosses ideological boundaries. While I agree there is a core set of principles to which all card-carrying economists would (or should) subscribe resources are limited, incentives matter I did not sign.

I believe the Bowles Simpson recommendations represent, to too large an extent, a set of unprincipled political compromises that would lead to a weaker America with slower growth and a more divided society.

In a white paper written for the Roosevelt Institute, I explain the principles that should underlay deficit reduction and what a deficit reduction package consistent with these could look like.

The ballooning of the deficit since the crisis struck has understandably moved deficit reduction to the center of the debate. But the best way to reduce the deficit is to put America back to work.

Overwhelmingly, the deficit increase has been caused by the enormous shortfall between the economys potential and actual output. Even as growth has resumed, the output gapreflecting in high unemploymenthas persisted. The Bowles-Simpson recommendations, if adopted, would constitute a near-suicide pact: Growth would slow, tax revenues would diminish, the improvement in the deficit would be minimal.

What matters for sustainability is the debt to gross domestic product ratio and that likely could worsen. This is what we have seen in the similarly poorly designed austerity measures of Greece, Latvia and Ireland; and in earlier such measures in Argentina and East Asia. The International Monetary Fund seems to have learned the lesson but not the Bowles-Simpson Commission.

With monetary policy demonstrably ineffective in pulling us out of our malaise, fiscal policy is only recourse to putting America back to work. Fortunately, we can simultaneously stimulate the economy now and reduce the deficit in the medium term.

Years of underinvestment in the public sectorin infrastructure, education and technologymean that there are ample high-return opportunities. Tax revenues generated by the higher short- and long-term growth will more than pay the low interest costs, implying significant reductions in deficits. Any firm that could borrow at terms similar to those available to the U.S., and with such high return projects, would be foolish to pass up the opportunity.

So, too, increased progressivity of the tax systemshifting the burden from low and middle income Americans, who have seen their incomes decline, to upper income Americans, the only group in the country that has prospered for the last decadewould have double benefits. The shift would stimulate the economy in the short run, and reduce the growing divide in the country in the long run.

With a quarter of all U.S. income going to the upper 1 percent, and Americas middle class actually facing lower incomes than a decade ago, there is only one way to raise more taxes: Tax the top.

So, too, increased progressivity of the tax systemshifting the burden from low and middle income Americans, who have seen their incomes decline, to upper income Americans, the only group in the country that has prospered for the last decadewould have double benefits. The shift would stimulate the economy in the short run, and reduce the growing divide in the country in the long run.

With a quarter of all U.S. income going to the upper 1 percent, and Americas middle class actually facing lower incomes than a decade ago, there is only one way to raise more taxes: Tax the top.

In short, redesigning tax and expenditure programs could promote faster economic growth in both the short run and long; increase equity and opportunity, and lower the national debt, and the debt/GDP ratio even more.

In my report, I outline the low-hanging fruit that could easily exceed the $4 trillion dollar target set by the Bowles-Simpson Commission. For example: (a) The Cold War ended more than two decades ago, but we continue to spend tens of billions on weapons that dont work against enemies that dont exist. Fruitless wars have not increased our security and our militarys credibility. Rather, they have undermined both.

We could have more security with less spending. The commission recognized this but didnt go far enough. Congress and the Obama administration have not gone far enough either.

(B The health care reform bill did little to eliminate the trillion-dollar giveaway to the drug companies, resulting from restrictions on the ability of government (the largest buyer of drugs) to negotiate prices. In contrast to every other government in the world. While much more can, and should, be done to control health care costs, this little change would make a big difference.

Eliminating corporate welfare, both that hidden in our tax systems and in the hidden give-aways of our countrys natural resources to oil and gas and mining companies; eliminating the unjustifiable and harmful tax breaks for speculators and companies that keep their money out of the country, and taxing activities that generate large negative externalitieswhether the environmental pollution that threatens our health and our childrens future, or the financial transactions that brought out country and the world to the brink of ruincould all easily generate trillions of dollars in revenues. At the same time, they could also create a fairer society, a cleaner environment, and a more stable economy.

Deficit reduction is important. But it is a means to an end not an end in itself. We need to think about what kind of economy, and what kind of society, we want to create; and how tax and expenditure programs can help achieve those goals.

Bowles-Simpson confuses means with ends, and would take us off in directions which would likely be counterproductive. Fortunately, there are alternatives that could do more for deficit reduction, more for putting America back to work now and more for creating the kind of economy and society we should be striving for in the future.

Joseph E. Stiglitz served as chairman of the Council of Economic Advisers under President Bill Clinton. He was chief economist of the World Bank from 1997 to 2000 and was awarded the Nobel Memorial Prize in Economic Sciences in 2001. His most recent book is Freefall: America, Free Markets and the Sinking of the World Economy.

See original article at:http://www.politico.com/news/stories/0311/52027.html

[TampaYankee]

I think he has it just about right.

He expresses my view of the best way to achieve a fair, effective and meaningful approach to deficit reduction that recognizes pure austerity measures alone won't produce the economic rubustness we need to reduce tha deficit.

We can't cut our way to success alone and have a country with any resemblance to the country we have known since WWII. We have to combine trageted cuts with prudent targeted tax increases and lots of ecomonic growth to get it done. That means creating jobs and it means thoughtful spending reallocation based on reforms and reogranization. That means infrastructure referbishment to provide those jobs and lay the framework for the next fifty years of economic growth. It also means reforming the largest single source of increased cost to govermnment and a big cost to business and the private sector, health care, even more to cut costs of meds and services while improving patient outcomes. It can be done. There are numerous examples that show it can be done.

[Guest hitoallusa]

It can be done but those with money and interest groups are too powerful in the US. They will not yield or give up their benefits and interests. What Joe says is right but unrealistic. I like his academic mind set though and I think a college professor should be like that. Pure and clear about what he believes. The US is obsessed with its greatness (oh my screen name) that it's denying change. Who would give up their benefits and interests? Another crisis will hit and then people will be forced to accept change because they have no other option.I believe change will come sooner or later. It just takes time and patience.

I think he has it just about right.

He expresses my view of the best way to achieve a fair, effective and meaningful approach to deficit reduction that recognizes pure austerity measures alone won't produce the economic rubustness we need to reduce tha deficit.

We can't cut our way to success alone and have a country with any resemblance to the country we have known since WWII. We have to combine trageted cuts with prudent targeted tax increases and lots of ecomonic growth to get it done. That means creating jobs and it means thoughtful spending reallocation based on reforms and reogranization. That means infrastructure referbishment to provide those jobs and lay the framework for the next fifty years of economic growth. It also means reforming the largest single source of increased cost to govermnment and a big cost to business and the private sector, health care, even more to cut costs of meds and services while improving patient outcomes. It can be done. There are numerous examples that show it can be done.

[lookin]

Music to my ears!

However, it does seem that big business, whose interests are likely shared by the "top 1%", has a chokehold on the government and, as Hitoallusa says, is not about to give it up.

While our politicians still need the votes of the hoi polloi, it seems the best way to get those votes is through ridiculously expensive campaigns that need to be funded by big business and the top 1%. Typically, the only choice voters have these days is between one beholden candidate and another beholden candidate. Until that pattern is broken, I think it's only going to get more pronounced.

Democracy in this country appears to be drifting away from the one man-one vote model the country was founded on, and which we encourage other nations to adopt. Seems like we need to take care of our own knitting first.

/rant

[TampaYankee]

Music to my ears!

However, it does seem that big business, whose interests are likely shared by the "top 1%", has a chokehold on the government and, as Hitoallusa says, is not about to give it up.

While our politicians still need the votes of the hoi polloi, it seems the best way to get those votes is through ridiculously expensive campaigns that need to be funded by big business and the top 1%. Typically, the only choice voters have these days is between one beholden candidate and another beholden candidate. Until that pattern is broken, I think it's only going to get more pronounced.

Democracy in this country appears to be drifting away from the one man-one vote model the country was founded on, and which we encourage other nations to adopt. Seems like we need to take care of our own knitting first.

/rant

There is much to what you say. SOTUS has permitted our system to be corrupted even more than before Citizens United, and appears set to go even further any day now by strking down a public financing law in Arizona. The GOP Big Business/Tea Pary coalition may ultimately buy our entire government if the people don't wake up. I'm not optimistic. If so then the question is moot and we have lost our country. But that cannot happen now or even next year. So budgets must be compromised.

Short term and maybe longer term the GOP BB/TP keep enough power to thwart compromise reform short of outright effective capitulation. The situation ultimately may have to be resolved the way it was done after the Big Crash of '29. Labor reforms, social reforms, and economic/banking reforms came out of the chaos that caused. That shows that the electorate can wake up and focus.

If we cannot reach acceptable compromise on spending then it may be necessary to let the national economy fail Big Time by not increasing the debt ceiling and let the electorate choose the path forward. I doubt Big Business would like the effect of that on their bottom line and I suspect they would drop the Tea Party quicker than last weeks soiled diapers. I'm sure some GOPers would hold the ideological line come hell or high water but most of them have pretty short money leashes and most will go the way they are pulled. The governing GOP might look more like the GOP of the 80's than the John Birch Society of the 50's and 60s.

So I see either some 'intelligent' (used loosely) compromise achieved or 'going to the mattresses'. As usually the case, we are likely to end up with a compromise no one likes which is no real solution to the problem. Washington is most successful at kicking the can down the road.