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The Debt-to-GDP Diversion

by DEAN BAKER

Morgan Stanley director Erskine Bowles and former senator Alan Simpson are still trotting around a plan for arbitrary deficit reduction targets that completely ignore the basic reality of the deficit. In their new version they tell us:

“To be credible for the long-term, we believe that the debt must be brought to below 70 percent of GDP by early in the next decade, and kept on a downward trajectory thereafter.”

Where did the 70 percent number come from, divine inspiration? It is clearly not grounded in reality. Japan has a debt-to-GDP ratio of more than 200 percent and can still borrow long term at just 1.0 percent interest.

Of course such debt targets are easily shown to be silly, since we can buy back debt issued at low interest rates at sharp discounts when the interest rates rise. If a lower debt-to-GDP ratio is important, that is the simplest way to meet it.

This would be a small matter if Bowles and Simpson were not proposing real pain to real people. Their cuts to Social Security and Medicare will be a major hit to tens of millions of seniors who even now have a median income of just $20,000 a year. The change to the Social Security cost-of-living adjustment alone, which amounts to a 3 percent cut over the lifetime of a typical beneficiary, would be a much larger hit to the income of the typical senior than President Barack Obama’s tax increases were to the high-income people affected by them.

The proposed cuts to Medicare seem like gratuitous pain. In their 2010 plan, Bowles and Simpson had called for $300 billion in cuts to Medicare spending over the decade. Since then, the Congressional Budget Office has already reduced its Medicare spending projections by more than $500 billion. This means that we already have seen more savings from Medicare than they originally targeted.

Bowles and Simpson also again ignored demands to tax Wall Street. Europe is moving ahead with plans to impose a financial speculation tax. The Joint Tax Committee has estimated that a modest tax on speculation here could raise $40 billion a year. But for some reason taxing Wall Street never appears in their plans.

However the most infuriating aspect of their plan is the implication that we have an out-of-control deficit. As every budget analyst knows, the deficit is high because the economy collapsed when the housing bubble burst. Serious people talk about getting the economy back on its feet and re-employing the millions of people who lost their jobs. Bowles and Simpson talk about debt-to-GDP ratios.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This article originally appeared on Debate Club.

 

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

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