A couple-three weeks ago, Megan McArdle made the very smart point — as she is wont to do — that it doesn’t make much sense for Washington to try and inflate away our debt. After all, much of our obligations consist of Social Security and Medicare payments, which are inflation-indexed. In other words, inflation might be a nice way to effectively repudiate the twelve trillion we already owe, but would do little to alleviate the 50-plus trillion dollars (in today’s value) already legislated into to future Federal spending.
But like a lot of smart points, Megan’s point isn’t quite smart enough.*
Those twelve trillion dollars we’ve already borrowed… well, that debt is out there. We owe it. We’ve got to pay it back. And we will pay it back — with solid greenbacks, or maybe with the Weimar varietal.
But the “structural” debt? Why, Congress could repudiate that tomorrow, with or without inflation. We haven’t borrowed that money… yet. And while I doubt this Congress has the fiscal balls (“fiscal balls,” really? -ed.) to tackle our out-of-control entitlements in a responsible way, there is a cowardly out Congress could take.
All our honorable elected officials need to do is to under-calculate the Consumer Price Index (i.e., predicted future inflation) for the first time ever. And –presto!– problem solved.
At the stroke of a pen, our future, not-yet-borrowed debts would still be tied to inflation — but slightly less so. Social Security and Medicare payments would still increase, making everybody feel all warm and fuzzy, if only temporarily. But the key is, the trick is, that so long as scheduled payments increase less quickly than inflation does, then the structural debt still would magically inflate away.
Typically, Congress has used a CPI calculated in such a way that transfer payments increase faster than inflation. That way, Congress gets to pretend that payments are tied to inflation, while welfare recipients see their real-world benefits increase — all without Congress having to put themselves on the record as having increased payments. In other words, Congress gets to buy votes without having to appear to be buying votes.
To put it more simply, for decades now, Congress has used imaginary CPI numbers to screw tax payers in favor of tax receivers.
Now then. Do you think that a Congress cowardly enough to engage in that sort of behavior, is somehow brave enough to use equally-imaginary CPI numbers to screw us all over, rather than admit that they’ve bankrupted us all?
*Not to imply I’m smarter or better trained than Megan — I’m neither. She just missed this particular one is all.
The problem is that there are no adults in the halls of Congress. There are the ones that say everything is okay if we go shopping and ask more of every one of us. There are the ones that say everything will be okay if we continue to shop but ask less of us since we’ll still get enough. And there are the dreamers who think that if we just go out for coffee a little less often (the personal equivalent of getting rid of earmarks,) all will balance itself in no time.
Huge amounts of money spent on war, defense, housing, subsidized housing in the form of the mortgage deduction and other welfare programs, medical care, more medical care, roads to somewhere, retirement, education, debt financing, more debt financing, tax incentives, tax breaks, and all the rest aren’t going to go away unless we are willing to either pay for them now in the form of taxes or pay for them later in the form of less services. What we’re doing now doesn’t work, hasn’t worked for years, and no one is proposing anything that will do anything about that. The adults are absent from the discussion.
Taxes are not too high, services are. Taxes could be lower and stay that way only if we cut services. Taxes could pay for the services we get if we raised them. Any other option is a lie, plain and simple. Voodoo economics led to today’s zombie economy: it’s pumped up with magic, not vitality. So unless the Republicans are going to continue to look as feckless and financially stupid as they have shown themselves to be, they need to offer some specific cuts in spending to go with their idiotic tax-decreases-only kneejerk reaction to all governance. Democrats need to stop pretending that tax increases can be avoided since they have not pledged to cut much (or really anything) either. And the American people need to see where the money is going and have arguments about something other than the ether above Washington and instead about what’s really decided there. “Tastes Great/Less Filling” was a more substantive discussion than most of what goes on in the country today.
I think that Social Security payments increase at the rate of increase in per-capita personal income, which historically has been higher than the increase in the consumer price index. IIRC, the payments were tied to the increase in cpi until perhaps twenty years ago, when Congress changed it, in what I would guess was simple pandering to the retired and soon-to-be retired.
I’m, as usual, open to correction on either of those points.
I disagree with the premise of the article – for decades Congress, in cahoots with the prevailing administration, has “tweaked” the CPI to UNDERSTATE inflation. This has served two purposes: to minimize government payouts to obligations that are indexed to inflation (make the deficit appear smaller) and to portray the economy in better shape than it really is.
As a middle-class professional with family, my observation in my own finances is that the current rate of inflation is not really only 2-3%.
I’m with Ray, yes the CPI has been tweaked and twisted beginning during GHWB’s term (going into effect during the Clinton years and then being twisted on the rack again a few more times by Scamba’s Goldman Sachs boys).
Slowly at first, then by gaining speed due to the same principle that makes compound interest so powerful, the inflation-indexing reforms that slowed Federal tax takings during the Reagan years have been steadily undermined.
Oh, and the reason the Left still clings to discredited hack labels like “Voodoo Economics” is that Lefties burn with resentment over real Republicans having woken up and stopped being tax collectors for the Welfare State. (All that noisy Democrat tut-tutting about the deficit was false piety.)
I’d forgotten about the Nixon Penny gag (issued to pay for LBJ’s guns-and-butter vote-buying, of course).
Remember the Susan B. Anthony dollar Carter issued during his malaise years as a consolation prize to his feminist backers after the turn-down of their so-called Equal Rights Amendment? Almost the size of a quarter and worth about as much too.
(Someday, should our descendants achieve a more enlightened age there’ll be a Phyllis M. Schlafly dollar. It’ll be gold and the size of a manhole cover.)
Here’s how Congress understates inflation: Let’s say that (due to *hypothetically* inflationary pressures), it costs you about $1000 more than last year to buy food, utilities, rent, transportation, etc. (BTW, taxes are NOT included in inflation calculations.)
But wait – you purchased a new personal computer this year, for about $1000. And that new 4 GHz processor is 4000 times faster than the original IBM PC (1 MHz) that came out about 25 years ago, for about the same price. So the government assumes that, since your new PC is 4000 times *better* than the original, it *really* only costs 1/4000 as much, or about 25 cents. (They do the same claculations for cars, appliances, etc. by the way).
So, it cost you about $1000 more to live, BUT you bought a $1000 computer for only 25 cents, so it all balances out and your personal inflation rate is….. zero!
I had fiscal balls once. The itching drove me crazy!