With debt debates swirling, one group dispels some key myths Special

Posted May 9, 2011 by Michael Krebs
As congressional lawmakers begin to square off on the national debt and the challenges facing the nation on spending cuts, one non-profit organization is elevating the matter with an aggressive advertising campaign.
Worthless Dollar
Worthless Dollar
By most accounts from varied economists, America's soaring national debt has become a matter of sustainability, particularly as it regards the nation's intermediate and long term credit worthiness on the global financial stage.
A number of congressional legislators have come forward over the years to decry the policies and the agendas of their colleagues in the competing political party and of the administration occupying the White House. However, it now appears that the national debt has emerged as a more immediate crisis, and the discourse among lawmakers is more urgent and specific, with no less than three plans circulating on capitol hill on how to best tackle the most pressing questions.
In the midst of this backdrop, one non-profit research organization has released a bold advertising campaign, urging Americans to become more aware of the matter and offering specific remedies on how to defeat the debt more permanently.
The Employment Policies Institute launched a multi-media advertising campaign and a dedicated web site, Defeat the Debt, to elevate solutions to the debt questions as they see them.
Offering top 5 myths on reducing the country's $14 trillion debt, I caught up with Richard Berman, the executive director of the Employment Policies Institute in an email interview to question these five myths.
EPI cites as its first myth that income taxes can be used to reduce the debt. Income taxes are just one revenue trigger for the federal government, and when one tax is diminished or removed it seems that the revenue is gathered elsewhere in more hidden areas. The question then becomes whether or not the average consumer would be responsible for a variety of alternative taxes and fees should alternative recommendations on income taxes be implemented.
"Our point is a simple one: When a small group of individuals (2% of all taxpayers) is already shouldering 46% of the income tax burden, discussions about taxing the affluent as a way out of debt isn’t supported by the math," Berman stated. "The last two Presidents before this one have also established commissions to address entitlements and the debt. All have failed spectacularly, because recommendations to cut spending on big, popular programs are politically difficult. But that doesn't mean we can ignore it or set it aside—which is exactly what we do by using revenue to try and solve a spending problem."
Social Security and Medicare could certainly use reforming, and this is the second and likely most unpopular of EPI's stated myths. In the case of Social Security alone, so many people, particularly the most productive working demographics aged 30-50, are already deeply vested.
"Defeat the Debt is focused on the big entitlement programs because that's where the problem's at: The Congressional Budget Office has identified Medicare, Medicaid, and Social Security as the three long-term drivers of our fiscal imbalance," Berman replied. "And past reforms to Social Security (like raising the age of eligibility) have been phased in so gradually as to be almost imperceptible. The point is, we have the flexibility to make these changes now with relatively little "pain," but we'll have far less flexibility and far more pain if we keep delaying or denying."
The Obama administration has been arguing that repealing the health care legislation would actually increase the nation's debt burden, but the claim has made it to EPI's number three myth.
"The health care law is loaded with 'reforms' that will make insurance more expensive, not less. To take a few examples: the law mandates certain benefits that must be offered by all insurance policies; the law allows people to wait until after they’re sick to purchase insurance; the law significantly limits an insurer's ability to adjust premiums for risk factors like age; the laws imposes new taxes and fees on pharmaceutical companies, medical device manufacturers, and insurers," Mr. Berman wrote. "These 'reforms' will be reflected in higher premiums. To the extent that some consumers won't feel this cost pressure, it's because they're receiving a taxpayer-subsidized premium credit. Raising costs and covering them up with a new entitlement we can't afford is hardly the way to fix a health care system."
The fourth EPI myth tackles the question of government efficiency, a favorite among Libertarians. For example, there is a federal Department of Education, but all meaningful education decisions happen at the state and local level. There is a Department of Transportation, but the failure of high-speed rail's implementation showcased the local nature of all transportation decisions. Why not eliminate these overbearing and under-performing departments immediately? When implementing efficiencies in government they have to come with meaningful workforce reductions and asset sales. Would this not present significant savings?
"Most government agencies are funded from a pot of money called 'discretionary spending.' I have no doubt that there’s waste in the agencies that this money funds; but growth in discretionary spending is not what’s driving our debt crisis. Even under pessimistic fiscal scenarios, the CBO projects that the percent of the federal budget spent on discretionary items will remain fairly steady (and actually decline somewhat) in the coming years. Meanwhile, the cost of entitlements and interest will gradually consume all available revenue," Berman explained. "Take your example about the Department of Transportation (DOT): For 2011, the Obama administration requested $79 billion in funding for DOT. If you cut all programs in half (assuming some are necessary) you’ve removed about 1 percent of the entire federal budget. And you’re still left with the entitlement programs that are driving the problem in the first place."
The fifth myth that EPI addresses is the question of whether or not the US can afford higher interest rates, implying that a drop in credit worthiness could be absorbed by other productivity in the economy. The US dollar is down in large part because our interest rates are low. Our interest rates are low because our economic activity is stagnant. The loss of our AAA rating would have significant short-term impact, but wouldn't higher rates and a more realistic assessment of our credit value translate into higher longer-term investment from other nations interested in a quality treasury bond holding?
"It sounds like you're suggesting that investors would prefer a country with a lower credit rating. If that were the case, Moody's and Standard & Poor's wouldn't be warning us about a possible rating downgrade--they'd be encouraging it," Berman stated. "Consider what happened to Spain in the wake of losing its own AAA rating: investors got skittish, and interest rates rose in response. (And when government borrowing is at higher rates, consumer loans for cars, homes, and tuition also carry higher interest rates). We're already on track to pay over $6 trillion in interest on our debt over the next decade; interest alone could consume nearly half the federal budget by 2084. We need to improve our fiscal situation in the eyes of the credit raters, not cross our fingers and hope that a downgrade won’t be as bad as we fear."