"Your proceedings are clouded by illegitimacy.
First, most of your meetings are secret, apart from two open sessions before this one, which were plainly for show. There is no justification for secret meetings on deficit reduction. No secrets of any kind are involved. Nothing you say will affect financial markets.
...Secrecy breeds suspicion: first, that your discussions are at a level of discourse so low that you feel it would be embarrassing to disclose them. Second, that some members of the commission are proceeding from fixed, predetermined agendas. Third, that the purpose of the secrecy is to defer public discussion of cuts in Social Security and Medicare until after the 2010 elections.
...most members of the Commission are political leaders, not economists. ...it is impossible to have a fair discussion of any important question when the professional participants in that discussion have been picked, in advance, to represent a single point of view.
...The fact that the Commission has accepted support from Peter G. Peterson, a man who has for decades conducted a relentless campaign to cut Social Security and Medicare, raises the most serious questions. ...Your having done so is a disgrace.
...you also should not have accepted help from the Economic Policy Institute...
Let me now turn to the economic questions.
...Future Deficit Projections Are Generally Based on Forecasts Which Begin by Assuming Full Recovery, But This Assumption Is Highly Unrealistic.
...To understand how the discussion of future deficits is being framed, it is necessary to grasp the work of the principal forecasting authority, the Congressional Budget Office. CBO's projections...wipe out the current deficits, over a very short time horizon, by assuming a full economic recovery.
...CBO claims to expect a relatively rapid return, over five years, to high levels of employment, and the baseline incorporates a correspondingly high rate of real growth in the early recovery from the great crisis.
...under present financial conditions this scenario of a rapid return to high employment is highly unrealistic.
...de-leveraging in the private sector is sure to remain the rule for a long time, as mortgages and other debts default or are paid down, and as many households remain effectively insolvent due to their mortgage debt.
...Having Cured the Deficits with an Unrealistic Forecast, CBO Recreates Them with Another, Very Different, But Equally Unrealistic Forecast.
...In the CBO forecasts, big future deficits arise from a combination of (a) rapidly rising health care costs and (b) rising short-term interest rates, in the context of (c) a rapid return to high employment and (d) continued low overall inflation.
...Even if CBO were right about recovery, which it is not, this projection is internally inconsistent and wholly implausible.
...the economic forecasts on which you are being asked to develop a credible plan for reducing deficits over the medium term are a mess. The unemployment and growth forecasts are implausibly optimistic, while the inflation and interest rates projections are implausibly pessimistic and mutually inconsistent.
Good policy cannot be based on bad forecasts.
...The only way to reduce a deficit caused by unemployment is to reduce unemployment. And this must be done with a substantial component of private financing, which is to say by bank credit, if the public deficit is going to be reduced. This is a fact of accounting. It is not a matter of theory or ideology; it is merely a fact. The only way to grow out of our deficit is to cure the financial crisis.
To cure the financial crisis would require two comprehensive measures. The first is debt restructuring for the entire household sector, to restore private borrowing power. The second is a reconstruction of the banking system, effectively purging the toxic assets from bank balance sheets and also reforming the bank personnel and compensation and other practices that produced the financial crisis in the first place. To repeat: this is the only way to generate deficit-reducing, privately-funded growth and employment.
...the practices of banks and investment banks with which they were closely associated worked to destroy the financial system..., But I would wager that the Commission has spent no time, so far, on a discussion of the relationship between deficit reduction and financial reform.
...without private credit, deficit reduction plans through fiscal austerity, now or in the future, will fail. They cannot succeed. If at the time the cuts take effect the economy is still relying on public expenditure to fund economic activity, then reducing expenditure (or increasing taxes) will simply reduce GDP and the deficits will not go away.
...Only when the private sector steps up, will the debt-to-GDP ratio begin to decline.
...Most people assume that "bipartisan commissions" are designed to fail: they are given thorny (or even impossible) issues and told to make recommendations which Congress is free to ignore or reject.
...the goal is to defer recognition of the difficulties for as long as possible.
...Recommendations based on CBO's unrealistic budget and economic outlooks are destined to collapse in failure.
...Thus the interesting twist in your situation is that the Republic would be better served by advancing no proposals at all."
James K. Galbraith
Lloyd M. Bentsen, jr. Chair in Government/Business Relations,
Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin,
and Vice President, Americans for Democratic Action, June 30, 2010
Via The Economic Populist
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