The New York Times editorial board came to a shocking realization this week: we are living on borrowed money. That was the headline of an editorial it ran calling for deficit reduction.

Having discovered the deficit, the piece then went on to call for a combination of increased revenue and reduced spending to reduce the need to borrow. In this process, it insisted that cuts to Social Security and Medicare must be on the table.

Needless to say, this insistence caught the eye of many people. Republicans, and many Democrats, have been looking to cut and/or privatize these programs for decades. Beating back these efforts has been a major victory against the drive to give all the money to the rich.

Seeing the NYT join the ranks of those demanding cuts is more than a bit disturbing. Of course, this is not the first time the NYT’s editorial board has joined with those on the right. Back in the 1980s the paper famously told readers that the “right minimum wage” was $0.00.

But let’s step back for a moment and look at the bigger picture. The NYT is indisputably correct in saying that we are running unusually large annual deficits. However, the piece is more than a bit off the mark in focusing on the debt, rather than these deficits.

Here it spends a lot of time getting into the “really big number” game, telling us:

Over the next decade, the Congressional Budget Office projects that annual federal budget deficits will average around $2 trillion per year, adding to the $25.4 trillion in debt the government already owes to investors.

The NYT has a very educated readership, but I am fairly certain that almost none of its readers has any idea what $2 trillion a year means, nor do they have a good idea how large $25.4 trillion is over the course of a decade. And, I am also pretty sure the NYT editorial board knows that its readers don’t know what these really big numbers mean. But hey, this is a good way to scare people.

The piece does tell us the debt is projected to hit 115 percent of GDP by the end of this period. If that’s scary, consider that Japan’s debt is over 250 percent of GDP, and its economy has yet to collapse.

But, there is potentially a real issue here, if we get beyond the really big number silliness. Deficits can get so large that they raise inflation to unacceptable rates. Here the problem is not that we are borrowing (we can always print money, as out MMT friends remind us), the problem is that we are creating too much demand in the economy.

The NYT has a very educated readership, but I am fairly certain that almost none of its readers has any idea what $2 trillion a year means, nor do they have a good idea how large $25.4 trillion is over the course of a decade. 

This can be a concern, but it seems as though that is not the case just now. We did have a bought of inflation in the last two and a half years, but that was largely driven by the pandemic and the fallout from Russia’s invasion of Ukraine. The rate of inflation is now dropping by almost every measure and we are moving back towards the Fed 2.0 percent target, even if the pace of the decline may not be fast enough for some people. This suggests that deficits may not be too large.

It is also worth noting that when we look at deficits as a share of GDP, they are projected to be below 6.0 percent of GDP for the rest of this decade, with the exception of a projected deficit of 6.2 percent in 2025. That is high by historic standards, but not hugely out of line with what we have seen in the past. The deficit was 4.6 percent of GDP in 2019, when inflation was still at the Fed’s target, with no evidence of inflation rising out of control.

Many prominent economists, like Larry Summers, argued that the economy faced a problem of “secular stagnation” meaning there was too little demand in the economy to keep it running near its capacity. This was due to the fact that huge amount of income had been shifted upward to people who were less likely to spend it, and also that slower labor force growth meant less need for companies to invest to accommodate a growing workforce. In that context, large deficits were actually needed to keep the economy near full employment.

As a practical matter, we don’t know exactly how large those deficits have to be. Before the pandemic, a deficit near 5.0 percent of GDP seemed fine. Is a deficit near 6.0 percent of GDP also fine? Given the recent course of inflation data, it seems that it might be, but we can at least acknowledge it is an open question.

Reducing the Deficit Versus Reducing Demand in the Economy

Let’s assume for the moment that we really do have a problem with inflation. The issue is not the deficit per se, but rather too much demand in the economy. So, we should be asking the larger question of how we can reduce demand in the economy, not just the narrow question of how we can reduce the government deficit.

One way the government creates demand in the economy is through its granting of patent and copyright monopolies. While discussion of these government-granted monopolies seems to be strictly forbidden in the pages of the New York Times, they are actually a huge deal in terms of the economy. These monopolies cost us on the order of $450 billion a year (1.8 percent of GDP) in the case of prescription drugs alone. We will spend over $550 billion this year on prescription drugs that would likely cost less than $100 billion in a free market.

Drugs would almost invariably be cheap if they were sold in a free market without patents or other related protections. Instead, drugs that might sell for $20 or $30 a prescription as generics, will instead sell for thousands or even tens of thousands of dollars with a government-granted monopoly. If we want to get serious about reducing inflationary pressures in the economy, we could talk about scaling back these monopolies, which inflate prices not only for drugs, but also medical equipment, computers, software, and a wide range of other items.

The issue is not the deficit per se, but rather too much demand in the economy.

Unfortunately, this possibility never gets raised in the context of deficit reduction. Perhaps it hits too close to home for the people who control major news outlets, since the beneficiaries of these monopolies likely include many of their friends and relatives. It’s possible to talk tough about cutting Social Security and Medicare, but not the payments that those at the top end of the income distribution get as a result of these government-granted monopolies.

There are of course many other areas where changing the rules can lead to large reductions in demand. If we were as determined to have free trade for doctors’ services (a possibility enhanced with telemedicine) and the services of other highly paid professionals, as we were with cars and clothes, we could save hundreds of billons annually in payments for a wide range of services.

A financial transactions tax, comparable to the sales taxes that we pay on most items we buy, could reduce the resources wasted in the financial sector by well over $100 billion a year (0.5 percent of GDP). But again, the industry is so powerful that this is not discussed in polite circles.

Anyhow, I could go on (see Rigged, it’s free), but the point here should be clear. For whatever reason, the NYT editorial board decided it had to show it’s tough by putting Social Security and Medicare on the table, programs that working people depend on to protect them in their old age and in the event of disability. However, when it comes to the rules the government has put in place that are responsible for the massive inequality we see in the economy today, well, the NYT editorial board is not that tough.

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