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Hey, You’ve Got to Inflate That Debt Away

November 24th, 2009 - 6:06 am

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.

Return of the Nixon PennyAll 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.

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