David R. Henderson  

Quotations from Alice Rivlin

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My last post was about Sidney Winter's talk at the Naval Postgraduate School on Monday. This is about Alice Rivlin, the co-presenter. The format she and her husband, Sidney Winter, tried was to model a productive discussion between a "liberal," [in the 20th century meaning of that word] and a conservative. She played the conservative and he the liberal. I wasn't sure at times whether she was playing or saying things she believed. In Q&A, she clearly, based on her passion, clarity, and body language, was saying things she believed and so that's what I'll focus on.

I'll mention two things, though, that she said while playing a conservative that seemed to reflect her actual views.

1. In arguing with Sidney Winter, who wants a large well-funded military because if it's small, "we" can't intervene in other countries, Alice Rivlin said, "Aren't we a little bit tempted to use it [the military] if we have it?" One could argue that this is a watered-down version of the late Senator Robert Taft's conservatism, but it's not what is generally thought of as conservative today. It did seem to reflect her actual view, but I'm not sure.

2. The current budget mess (high deficit with the failure to get long-term spending on Medicare, Medicaid, and Social Security under control), "can't be blamed on either party."
My thought:
It can't? Both parties have contributed to it, with FDR and LBJ, both Democrats, being the major contributors. FDR pushed for and implemented Social Security. LBJ pushed for and implemented Medicare and Medicaid. I remember Hillary Clinton, a Democrat, saying her 2008 run for the Presidential nomination, that Social Security, Medicare, and Medicaid were Democratic accomplishments. Is Alice saying she's wrong?
Possibly, Alice is taking a very short-run view here, in which case she's right if she means that you can't blame one party: you should blame both.

Q&A

Someone in the audience asked her if she thought we would end up muddling through for the next 20 years. Her answer:
"I don't think we've got 20 years; I'm not sure we have 5. Can we afford to wait another 5 years? I don't think so. If we didn't raise the debt ceiling and we actually defaulted, we'd have a hell of a crisis."
Shortly after that, she said:
"If the Tea Party is strengthened in the next election, we might have a default."


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COMMENTS (40 to date)
happyjuggler0 writes:

"If the Tea Party is strengthened in the next election, we might have a default."

It is unsustainable to keep borrowing more and more at a higher rate than the economy is growing.

Yes, end the funding for wars where we are involved in other countries intranational wars. However we very much need to cut transfer spending, especially of the type that is essentially a pyramid scheme that is doomed to end soon enough anyway. The sooner we do so, the better off we will be.

Ken B writes:

If the Tea Party had been 'strengthened' in elections going back a couple decades I doubt we'd have the crisis she worries about. Using the arbitrary debt ceiling may be a crude tool to force a small bit of restraint, but where's a better one?

Trespassers W writes:
If we didn't raise the debt ceiling and we actually defaulted, we'd have a hell of a crisis.

Try that line of reasoning with your bank when you max out your credit card.

Be sure to call them terrorists when they don't raise your credit limit.

Les Cargill writes:

Maybe it's just fatigue, but I don't think default is a possibility for a century or more, and that assumes a lot of things break bad. Most of the Bad Things are really demographics, and those are manageable. They are not manageable in a politically palatable way, but them's breaks.

basically, start threatening to use scrip to pay for Medicare. That'll fix it in fairly short order; a Medicare tax rise would be easier after that. it would neutralize the medical lobby.

We *do* need a serious look at why growth is so poor. Other than Tyler Cowan (present company excepted) , nobody seems to be looking at it. Well, except for Scott Sumner.

sieben writes:

Do these people sincerely believe in their apocalyptic predictions? Do their investment portfolios reflect this?

Blackadder writes:

Trespassers W,

The debt ceiling is a self-imposed limit by Congress. It's less akin to maxing out your credit cards than it is to going over the budget you've set for your family.

If a family goes over its budget, and decides to respond by defaulting on its mortgage, would you consider that a rational response?

David R. Henderson writes:

@Ken B,
Well said. In a future post, when I get a chance, I’ll talk about Alice’s lack of historical perspective that she demonstrated when I interacted with her at the 1988 AEA meetings. Having said that, I still think she’s among the best that “liberal” Washington has to offer.

Greg G writes:

" Using the arbitrary debt ceiling may be a crude tool to force a small bit of restraint, but where's a better one?"

Refusing to authorize new spending is a much better tool than refusing to pay for spending you have already authorized.

Mercer writes:

"If the Tea Party had been 'strengthened' in elections going back a couple decades I doubt we'd have the crisis she worries about."

The same people who call themselves the Tea Party today supported the GOP when it expanded Medicare, increased military spending and supported nation building in Iraq. If they really were for a smaller government they would have voted for Ron Paul this year. To think they will act differently the next time the GOP is in charge when it comes to spending on things they like is a triumph of hope over experience.

Tom Dougherty writes:

I read a bumper sticker the other day that said, "Socialism is great until you run out of other people's money". That is what the debt ceiling represents - running out of other people's money. You would soon find out what a fraud the social security trust fund is if the congress refused to raise the debt ceiling. The IOUs in the trust fund represent claims on general revenue, one source of which is issuing debt. And if no further debt could be issued non-discretionary spending would soon feel the squeeze of not enough money chasing too many big government big spending programs. If tax revenue alone would fund the government, some very hard choices would have to be made very quickly. The politicians would have to either raise taxes rather dramatically and face an angry public or choose between cutting off grandpa’s check or cutting deeply into all the government department and agencies of the federal government. Default of the debt would do the same thing as the not raising the debt ceiling, except a default would not be reversible.

Greg G writes:

@ Trespassers W

I have to agree with Blackadder that your credit card analogy is a bad one.

Defaulting on the debt is much more like telling your bank that you're not going to pay for the stuff you put on your credit card last month because you think that would really help you to avoid overspending next month.

Randy writes:

I say show us the spending cuts first, then maybe we'll talk about higher taxes and/or borrowing. And if they want to force a showdown between the latter and default, then default it is.

Seth writes:

"If the Tea Party is strengthened in the next election, we might have a default."

lol

Reminds me of the old joke, "I have a drinking problem. I don't have a drink."

Tom D - The debt ceiling doesn't represent running out of other people's money. The debt ceiling is a fake limit that politicians set primarily for political purposes. So they can 1) tell their constituents they voted for fiscal responsibility when they set and 2) can use it as a political bargaining chip gov't closes in on it (e.g. "I'll vote to raise the limit, if you vote for my bill") and 3) also say they voted for fiscal responsibility when they vote to raise it (similar to Rivlin's quote).

Running out of other people's money is what you are seeing in Greece at the moment. We're heading that direction, just not quite there yet. I hope Mars has an economic boom soon so they can bail us out.

Greg G writes:

"If the Tea Party is strengthened in the next election, we might have a default."

The biggest part of the Tea Party consists of people who voted for George W. Bush twice. They will only want to default with a Democratic president.

Johnson85 writes:
Defaulting on the debt is much more like telling your bank that you're not going to pay for the stuff you put on your credit card last month because you think that would really help you to avoid overspending next month.

Defaulting on your mortgage would be idiotic. Cutting back on current consumption would be reasonable. If something drastic were required, telling Grandma and Grandpa that you're not going to make that payment to them that they'd promised themselves you'd make to them or pay for the medical care that they promised themselves you'd pay them.

Not that any party's politicians are particularly serious or thoughtful on average, but I think trying to use the debt ceiling in order to slow future spending increases is pretty reasonable compared to threatening default to avoid slowing future spending increases

Johnson85 writes:

Not sure how I screwed up that quote above, but meant to quote:

The debt ceiling is a self-imposed limit by Congress. It's less akin to maxing out your credit cards than it is to going over the budget you've set for your family.

If a family goes over its budget, and decides to respond by defaulting on its mortgage, would you consider that a rational response?

Joe Cushing writes:

The tea party could prevent default by cutting spending. If we keep borrowing more and more, we will default. As of now, the government has plenty of income to pay interest on debt. People on the other side always like to say that if we don't borrow money we will default. That's only true of we decide that interest is the item we want to cut from the budget when there isn't enough money to pay for everything congress wants to spend money on.

Joe Cushing writes:

Let me put this in a different way.

Lets say your mortgage and credit card pmts are $1500 a month together. Your living expenses like food and electricity add up to $1000 a month. You bring home $3000 a month. That leaves you with $500 to spend or save. You spend on average $200 at the bar, $200 on random unneeded retail stuff, $100 on your boat maintenance, and you support a $1000 a month gambling habit. You support this extra $1000 a month of spending by borrowing on your credit card.

After a while you go and visit Tea Party Financial Advisers who tell you that you have to cut up your credit cards or face financial ruin. You turn to your adviser and tell him that if you cut up your credit cards, you will be in financial ruin because you will default on your debt.

This is the logic people are using when they say we will be in default of we don't raise the debt ceiling.

David Friedman writes:

"You would soon find out what a fraud the social security trust fund is if the congress refused to raise the debt ceiling."

I do not believe that is correct. As I understand the situation, the money that the federal government "owes" to the Social Security trust fund counts as part of the debt.

So if the government pays a billion dollars to help fund social security, the debt goes down by a billion, letting them borrow another billion without exceeding the debt limit. Hence Social Security, contrary to some past administration rhetoric, is one government program whose spending is not constrained by the debt limit.

Devil's Advocate writes:

What is so difficult about cutting spending AND raising taxes, to solve the issue. Remember the Dems offering a 10:1 approach? Oh yea, it would require compromise...something the tea party does not enjoy...wuff!

David R. Henderson writes:

@David Friedman,
You’re right.
@Devil’s Advocate,
Remember the Dems offering a 10:1 approach?
Actually, no I don’t and I’m pretty sure that never happened. Please give a cite.

Randy writes:

@DA,

The problem is that its isn't about doing both spending cuts and taxes. Its about which gets done first. For decades they have been raising taxes first and promising spending cuts later - and then never getting around to the cuts. It is time to cut spending - period. If they want balance, then cut proportionally from everyone.

Trespassers W writes:

@Blackadder and Greg G

OK, points taken, and I admit my analogy was flawed.

@Blackadder

The debt ceiling is a self-imposed limit by Congress. It's less akin to maxing out your credit cards than it is to going over the budget you've set for your family.

If a family goes over its budget, and decides to respond by defaulting on its mortgage, would you consider that a rational response?

Yes, I would consider that a rational response, but it ignores how the family got to that stage, and who is to blame for it, which is the whole point.

To extend your analogy: Mom and Dad have been going over budget for years, except for a few lucky years here and there. Every time they react by drawing on their HELOC or credit cards. Mom insist that not a penny can be cut from the budget. (Yes, they have to pay their utility bills, but the gym membership? Landscaping? Donations to charity?) Dad isn't much better--he's been spending like crazy at the gun shop ever since he got mugged a decade ago. Mom thinks the solution is for Dad to get a better-paying job, and won't even discuss her spending habits until that happens. Dad's not sure a better-paying job exists.

The teenage son points out that they're going to lose their home if they don't get their act together. Eventually, in a desperate effort to prevent default on the mortgage, he cuts up their credit cards. Mom and Dad never change their behavior, and eventually it becomes "rational" to default.

Alice would apparently consider the son to be the grave threat in this scenario.

Ted Levy writes:

David,

I'm guessing Devil's Advocate may be remembering a question a news journalist moderator asked at an early Republican Presidential debate and imagining that constitutes an actual substantive Democratic policy position. To be fair, it IS easy to confuse statements by major television journalists and statements by DNC operatives and Democratic party spokesmen.

Another way of viewing the debt ceiling is here: http://tedlevy56.blogspot.com/2012/01/whats-point-of-debt-ceiling.html

David R. Henderson writes:

@Ted Levy,
Thanks. Great substance and great line. :-)

Blackadder writes:

Trespasser W,

You think that the rational response to going over the family budget is to default on your mortgage?

The rational response to spending too much is not to quit paying your bills.

The approach being advocated here is akin to saying "if we keep spending so much money eventually we will go bankrupt; so let's declare bankruptcy now, as it will help us to spend less."

The Congress shall have Power ....

To borrow Money on the credit of the United States;

That's why there is a debt ceiling, the Constitution requires some formal method of authorizing borrowing.

Greg G writes:

After all this discussion I still haven't heard a good reason why anyone would think that defaulting on previously authorized spending is a better "tool" to reduce future spending than simple authorizing less future spending.

Ted Levy writes:

Patrick R. Sullivan was kind enough to not only respond to my comment above here, but to also make the identical comment at my blog. Since I have answered him there:

http://tedlevy56.blogspot.com/2012/01/whats-point-of-debt-ceiling.html

there is no need for me to extend the tangential discussion here, other than to note his answer is shockingly and grossly incorrect.

Trespassers W writes:
You think that the rational response to going over the family budget is to default on your mortgage?

Perhaps we have a different understanding of what the situation is exactly in your hypothetical example. I thought you were describing a more extreme case than just blowing through the family budget once. If the family has been utterly irresponsible, then yes, at some point what's done is done and default is going to be a sensible option. You might have some good analogy here, but I'm missing it.

In any case, whether rational or irrational, default by the government on its debts would suck, right? What confused me is why this suckiness would be laid (by Alice) at the feet of those trying to force some kind of fiscal sanity through refusing to raise the debt ceiling, rather than those who insist on continuing a pattern of behavior that must eventually result in default or the equivalent.

Randy writes:

@ Greg G,

I don't see any difference. All of the spending currently being done has been "authorized", but that's not a reason to continue it indefinitely. Things change... well, except for political spending perhaps...

Greg G writes:

Randy,

The difference is that one method preserves the ability to borrow at low cost in the future. The other guarantees you will pay higher interest rates. Those higher rates represent additional and unnecessary government spending.

Congress has the authority to cut future spending any time it wants to.

If you want to really see deficits explode watch what happens if we are forced to pay much higher interest rates because people don't believe we can be relied on to pay our debts on time.

Randy writes:

Greg G,

I hear you, but I am just anti-socialist enough to believe that the situation you describe would be a good thing. Along the lines of it being a good thing to cut the purse strings on grown up children at some point. Hard, but necessary.

Jim Glass writes:

"FDR pushed for and implemented Social Security."

And in doing so he was *far* more fiscally conservative than anyone in Washington today, Republican or Democrat.

FDR insisted that his SS program be fully self-funded and not make any draw on general revenue, ever. Some of his aides drafting the law tried to pull a fast one on him and included provisions for unfunded benefits drawing on general revenue in the 1960s -- 30 years in the future. But FDR actually read the text of the law, found it, and threw a famous tantrum. He made them withdraw the law from Congress, re-write it as fully self-funded, period, and re-submit it. When he famously said his SS Act of 1935 was "actuarially sound and out of the Treasury forever", he was telling the truth.

Can anyone imagine any politician today vehemently objecting to a popular program only because it would add to the national debt only after 30 years from now???

What happened then is this: FDR's financing mechanism for SS was to use the payroll tax to pay down the national debt (as no other kind of saving on the required scale was possible in the 1930s). When the payroll tax started coming in...

[] The Left said, "This is terrible, workers' payroll tax should not be used to pay off rich bondholders. We should spend this money on new social programs..." and started drafting all kinds of utopian "social investment" plans to consume the revenue.

[] The Right said, "This is terrible, everyone is just going to squander all this tax money coming it -- it is impossible to save it."

So in 1939 they reached a classic political compromise: they immediately killed this *first* SS surplus by the combination of both slashing the tax rate and greatly boosting and accelerating benefits. ("Kill this surplus *now* with tax cuts and spending increases!" -- sound familiar?)

FDR's head of SS, Arthur Altmeyer, protested against this to Congress, saying it would force SS to ultimate insolvency (see 1983) and unfairly force future generations to pay much more for fewer benefits. He reported that Congress's leaders told him: yes, but that will be in the future and be somebody else's problem.

FDR vetoed the funding changes but a united Congress rolled over the veto, SS was put on its unsustainable course, and FDR never dealt with it again (focusing on WWII). And today the SS actuaries say SS is underfunded by by a cool $20 trillion at present value.

OK, so who is to blame for converting SS from an actuarially sound funded program into what Paul Samuelson praised as "a Ponzi scheme that works", Left or Right?

The true problem is that politics works in real time, day-by-day. Politicians buy votes now by increasing spending *now*, subject to the constraint of losing votes now due to the need to raise taxes *now* to provide the cash flow for the spending. A balance is reached that limits spending and taxes.

BUT there is no constraint on politicians buying votes *now* by making promises to spend *far into the future* that are totally unfunded, regardless of scale. Political accountability for that is zero -- politicians are no more accountable *now* for the future solvency of the US than they were in 1939 for the future solvency of Social Security. The "accountability mechanism" doesn't exist. For either Left or Right.

After WWII, national financial systems in the advanced economies reached the point where politicians could buy votes immediately by making spending commitments far into the future, while escaping any countervailing constraint as these promises don't require *current* tax increases. This condition is world-wide, in all the advanced-economy democracies of the world -- in many other countries much worse than in the USA.

Conclusion: Our government solvency problems area not a Democratic and/or Republican caused thing. If they were, they would be a problem that exists only in the USA. But they are *universal* across developed economy democracies.

One must conclude they result from a defect in the constitutional structure of modern democracy. Thus, fundamentally, it is pointless to blame Democrats or Republicans (or Tories or Labour, or Social Democrats...) because all politicians behave according to the incentives of the system they are in, and the system produces this result universally.

Prediction: Because all the political system's incentives operate immediate-term -- none long-term -- the USA will skate right up to the edge of major fiscal crisis, no matter how obvious its approach is, continuing to defy all the warnings about same that have been piling up since the 1990s. Then... ???

Many other nations are in much worse fiscal/economic shape than the US and will be heading off the cliff before us -- we can see several bunched up against the edge of the cliff in Europe today.

As we watch them go over, maybe we will learn something from their examples, and take some steps to avert the worst for us while there is still a little time left. We shall see.

Blackadder writes:

Trespassers W,

Perhaps we have a different understanding of what the situation is exactly in your hypothetical example. I thought you were describing a more extreme case than just blowing through the family budget once.

Even if a family has been consistently overshooting its budget for years and years, it's still not a solution to say "I'll just stop paying my bills."

If the family has been utterly irresponsible, then yes, at some point what's done is done and default is going to be a sensible option.

There comes a point at which it is no longer possible to pay one's bills. When that happens, default may become an unavoidable necessity. Greece is at that point. America is not.

In any case, whether rational or irrational, default by the government on its debts would suck, right? What confused me is why this suckiness would be laid (by Alice) at the feet of those trying to force some kind of fiscal sanity through refusing to raise the debt ceiling

Because they are the ones urging default. Again, refusing to raise the debt ceiling is no more a way to deal with our nation's spending problem than refusing to pay your credit card bill is a solution to a family's spending problem. If you want to cut spending, cut spending. You don't try to destroy the village in order to save it.

Jim Glass writes:

On the issue of the debt ceiling, Patrick Sullivan is substantially correct.

Yes, before there was a debt ceiling the US govt certainly issued debt -- but Congress voted on every separate debt issue! Do you want the Tea Party doing that?

The debt ceiling legislation was adopted to make it *easier* to issue debt, by authorizing it up to "pre-approved" amount.

The Treasury cannot issue debt on its own accord, it needs some sort of Congressional authorization. That is a constitutional requirement. Congress must authorize borrowing. Authorizing spending is different a thing -- that does not authorize issuing of debt.

Thus it is not possible to simply "get rid" of the debt ceiling, it must be replaced by something -- such as going back to the old practice of Congress authorizing each individual debt issuance, or including in specific spending bills authority to Congressional authority to issue as much debt as may be needed to finance them, or something.

In short: Anyone who wants to get eliminate the debt ceiling has to propose an alternative method of Congress authorizing the issuance of debt.

Because Patrick is correct, only Congress has the authority to issue debt -- not the Treasury.

Randy writes:

For those above using a family analogy, keep in mind that it is not the parents who will be paying off the debt, but their children and grand children.

Devil's Advocate writes:

@David R. Henderson:
@@Devil’s Advocate,
Remember the Dems offering a 10:1 approach?
Actually, no I don’t and I’m pretty sure that never happened. Please give a cite.

O.K., it wasn't 10:1...it was 6:1. Point on compromise remains. Cite: http://www.cbpp.org/cms/index.cfm?fa=view&id=3605

Tom Dougherty writes:

David Friedman writes,

“I do not believe that is correct. As I understand the situation, the money that the federal government "owes" to the Social Security trust fund counts as part of the debt.”
“So if the government pays a billion dollars to help fund social security, the debt goes down by a billion, letting them borrow another billion without exceeding the debt limit. Hence Social Security, contrary to some past administration rhetoric, is one government program whose spending is not constrained by the debt limit.”

Well let’s think about this. Let’s say the government is up against the debt ceiling. The SSA presents the Treasury with one billion in IOUs. Before the Treasury can pay off the one billion in SSA IOUs with treasury bills or bonds, it would have to sell them to the public, but selling them would exceed the debt limit. So, the debt limit would constrain the payment of the SSA trust fund by issuing new debt. It is a timing problem that new debt would have to be issue before the SS IOUs can be paid, but with the debt limit that cannot happen.

But as soon as government debt was below the debt ceiling your point would hold, but I still see problems with your point. Let’s say the government was one dollar below the debt limit. It could only issue one dollar’s worth of debt, which would extinguish the one dollar’s worth of debt as soon as the IOU was paid. Then it could issue another dollar of debt which again would be extinguished as soon as the IOU was paid. So, the SSA IOUs could still be paid off but only by issuing debt one dollar at a time. SS may not be constrained by the debt ceiling, but the Treasury’s ability to pay off SSA IOUs would be. The government would obviously want a bigger cushion than one dollar in order to issue debt to pay off the IOUs.

The debt ceiling would also expose the fraud that the Trust Fund itself holds real assets that can be used to pay SS recipients. The Trust Fund is an accounting gimmick. The IOUs in the Trust Fund only represent a claim on the government’s general revenue mainly obtained from taxes or the issuing of debt (or the government’s lack of ability to issue debt).

Jim Glass writes:

"If the Tea Party is strengthened in the next election, we might have a default."

There is no reason why failure to increase the debt ceiling need automatically cause default.

If Obama was a smart, tough political operator (of which I have seen no sign) and the Tea Party created another such crisis, he would destroy it this way:

Since the last crisis he has had the Treasury updating its computer system so it has much more flexibility in selectively choosing what checks to issue.

When the next crisis arrives and the Repubs refuse to increase the debt limit to meet cash flow needs, he says to the nation...

"Republicans today have made it impossible for the USA to pay all its bills as promised, for the first time in our history. Thus, I am forced to prioritize which payments we will make currently and which will be deferred until a later date.

"Protecting America's credit standing has been of paramount national importance since the time of Alexander Hamilton. We have an unvoidable obligation to pay the debts we owe at home and abroad. World financial order depends on the USA honoring its debts. The Constitution says the debt of the USA shall not be questioned.

"Thus, we will pay our obligations to our debt holders first. The USA will not default on its debt. To remain under the current debt ceiling other government programs -- defense, education, Medicare, and so on -- will have the payments
due under them deferred, on whatever scale is necessary, until such time as the Republicans agree to a temporary increase in the debt ceiling to be effective as budget talks continue..."

When the first checks don't arrive, the Repubs would fold faster than the cheapest tent you ever saw at the cheap tent store. That would be the end of this issue forever -- and the Tea Party would be seen forevermore in a whole new light by the Repub comrades.

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