yllus
Elite Member & Lifer
To summarize, Mr. Coburn thinks that moderate inflation (higher than 2%, but not 20%) is in America's future. He seems like a reasonable guy, willing to call out people on his own side, and willing to work with either a President Obama or a President Romney. Considering that Mr. Coburn is a member of your Gang of Six commissioned with finding a solution to your federal debt issue I think that this is a must read for anyone interested in America's economics.
The Washington Post - Sen. Tom Coburn, part one: Defusing the debt bomb
Sen. Tom Coburn (R-Okla.) served on the Simpson-Bowles commission, is a member of the Gang of Six, and just published The Debt Bomb: A Bold Plan to Stop Washington from Bankrupting America. We spoke last week in his office. This interview, which focuses on Americas debt and growth problems, is the first in a two-part series. The second interview, which focuses on health care, will be published later this week.
Ezra Klein: So taxmageddon is coming at the end of the year. Depending on how you look at it, its an opportunity for Congress to trigger a massive and unnecessary fiscal crisis, or to actually get some serious legislating done on our long-term fiscal issues. Are you optimistic about the outcome?
Tom Coburn: No. But it depends on what the mix is. If President Obama is still president and were in control of the Senate, I think youll see significant attempts to get something done. But I dont think theyll be much more successful than what we saw in August. And I wouldnt consider that very successful. If Romney wins and we win control in the Senate, we have to send a signal that were going to fix it in order to take away all that potential risk to the economy. You have to say well work all over the Christmas holidays to get it fixed.
EK: When you look at the Romney scenario, it seems Republicans have spent a few years now learning how to take tough votes on the budget, particularly on the Ryan plan. So if Republicans control the House and Senate, it seems to me that youd see quite dramatic action on those issues, as they can be passed with 51 votes through budget reconciliation.
TC: Well, you can. Ryan has a good plan. I dont think it goes fast enough. But the fact is hes got a plan. The president wont put out a plan. The Senate Democrats wont put out a plan. Its kind of like boxing with a shadow. You cant ever hit it. But it doesnt matter if youre Democrat or Republican. The pain will get worse every year we dont fix these things. And there will come a time when it wont matter if youre a Republican or Democrat. And I dont have much faith right now that were up to the task of coming to agreement to fix this.
EK: I want to come back to the question of the plans in a second,. But your book opens by imagining a very dire fiscal crisis in 2014. And this goes to your contention that Ryans plan doesnt bring down the debt fast enough. Where do you get the urgency of your schedule? I look at Treasuries and theyre selling with very low yields. So you can say thats just the Federal Reserve manipulating prices. So then I look at credit default swaps on the United States, and there are no alarm bells there, either. I look at countries like Japan and England that have carried on with very high debt levels for a very long time. Weve seen other countries that control their own currency manage very high debt levels throughout the 20th Century.
TC: Well, you need to go study Japan. Theyre going to crash.
EK: People have been saying that for 20 years.
TC: You have two things coming together. This is the first year theyll be a net issuer of debt outside their country. Theyve totally financed all their debt internally. We havent. Thats one big difference. They also have a much lower birth rate. Seven births for every 1,000 people. So their population is shrinking and their demographic shift is much worse than ours. And this year, the postal system there that runs all their retirement accounts will not be buying any government debt. Zero. So the Japanese government, for the first time, is going into the international market. And the yens value is going to decline against every major currency. Whether that happens this year or next year or in three years, its going to happen. And theyve now had almost two decades of no real GDP growth. So Japan isnt going to make it. The reason they havent had any problems is they havent asked anyone else in the world to buy their debt. Now theyre going to have to.
The same thing ultimately will happen to us, but well be the last person it happens to. The world still views this as the safest place. You see Greece, which will probably be out of the euro by the end of this year. Then you look at Spain and Italy and Portugal and Ireland. Europe is going to print money just like Ben Bernanke is printing money. And whats the end result of that? Inflation.
EK: Well, it depends how you manage it.
TC: How do you sterilize $3 trillion worth of debt?
EK: The difficulty for me when you say that is Im a market-oriented guy. I trust the markets, more or less. And if you look at the markets inflation expectations, theyre not high. They dont think what the Fed has done will lead to inflation.
TC: They dont now. But nobody ever does when you print money like that. If you study [Carmen] Reinhart and [Kenneth] Rogoff and what they said, they know whats coming. Every country thats ever been with a debt crisis and has printed money has ended up with an intentional inflation problem. Think for a minute that youre Ben Bernanke. Youre trying to control inflation, jumpstart the economy, and improve the unemployment rate. What do you think his long-term answer for this is?
EK: At the moment, I dont think he has one.
TC: His long-term answer is inflation.
EK: Not only do I think that would be an okay answer, but Reinhart and Rogoff do, too. Rogoff has been arguing for higher inflation for a long time. But Bernanke says he wont permit that. And I dont see a reason he would allow inflation later but oppose it now, when it could really help. In fact, what hes been saying is he wont do the monetary stimulus many want now specifically because he doesnt want to deanchor inflation expectations later.
TC: But 10 years from now, our bonds wont be two percent. So what percentage of the total budget do interest costs become if you normalize back to the historical average? If you do that today, you add $650 billion to our annual interest costs. How long do you think he can keep two percent inflation? If he does, then well continue to have two percent growth. In other words, if we start getting the growth, then well see the inflation. The reason theres no inflation now is theres no velocity to the money. Weve got $2 trillion sitting on the sidelines with corporations in this country. Another few trillion in personal bank accounts. And the reason is no one has confidence in the future. And its not so much the details of the plan to fix it as the psychological confidence it will get fixed. And thats why I voted for Bowles-Simpson.
EK: When Bowles-Simpson went before the House, it was rejected by a huge bipartisan majority. Do you see there as being any possibility that one outcome of the taxmageddon period could, be a grand bargain in the Gang of Six/Simpson-Bowles vein?
TC: I dont know the answer to that, frankly. My hope would be we reach a grand compromise. But the vote in the House proves what I said in the book. You had a vote in the House on a plan that could solve our problems and the Democrats didnt vote for it because it touches Social Security and Republicans vote against it because of revenues. Both sides accentuated their differences rather than sending a signal to the international community that we could get together and cut $4.5 trillion over the next 10 years. Which raises the question: Why are they here? If youre here just to get reelected, youre worthless to the country.
EK: Youre searingly critical of Congress in the book. So let me ask you: How do you fix the Senate?
TC: Let the Senate operate the way its supposed to. put stuff through committees. bring it up in regular order. Have an open amendment process. Im the number one amendment offerer in the Senate in the last few years.
EK: Congratulations.
TC: Well, its not necessarily a compliment. But the point is the Senate really could work if you let it work on the real issues. If you were to put Simpson-Bowles on the floor and really have a strong debate on that bill, it could get through the Senate.
EK: When I talk to the party tactician types, the senators trying to figure this out, their argument is that when you try to do this out in public, with 24-hour news media broadcasting every move and every possible compromise, the issue polarizes, the interest groups descend, the party bases descend, and solutions get taken off the table. In the end, they think there will have to be some big backroom deal. They think a more open process would make this harder, not easier.
TC: I just adamantly disagree. Thats the sickness of Washington. What that really says is the politician doesnt want to stand up and debate and tell their interest groups no. We had the pharmacists in here earlier. They want a bill to protect community pharmacies. And I said, you know what, the market is changing, Im not about to support a bill, even though you support me, that doesnt allow the market to work this thing out. I think the reason you get this kind of analysis is because people wont stand up and do what they think is right because it hurts their political chances. And on our bonds, our bonds will be fine until theyre not, till that tipping point comes when they say crap, we cant get out of it.
EK: As you just said, youre a market guy. You want the market to work things out. You believe in the markets ability to work things out. So why do you think your view of our likely debt and inflation path is so much more dire than the markets?
TC: Because the market is biased towards up. Why do you invest in the market? Not because you think youll lose money. Why do you invest in bonds? To make money. Where is the contrarian view?
Let me give you one example. Five weeks ago, Bernanke said there would be no QE3. What happened to the 10-year bond in four days? It rose 48 basis points. What the market said then is if theres no more QE3, were going to short the value of a bond. Thats one little signal. What if you get 20 signals? How do you explain the Chinese getting rid $160 billion of our debt last year? Eventually, theyre not going to buy our debt. Who bought most of our debt last year? It was the Federal Reserve. Go out there and try and float $10 billion of our long-term debt. You cant. Theres no market. Because the long-term market is saying, send us a signal that youll fix this. And so the reason we have the shortest debt maturity in our countrys history is first, because you cant sell long-term debt because no one wants to buy it, and second, because long-term debt makes the deficit look worse.
Look, I may not be right. But what I see and the people I read -- all I do at night is read economic reports on peoples view of us -- and when you look at it, Spain, wont make it, the European Central Bank will eventually print money. You agree?
EK: Im hoping so.
TC: Theyll do that to buy time. And where I agree with Paul Krugman is you cant just have austerity. You need growth, The question is how do you get the growth. Do you get the government-driven growth, or do you get confidence and certainty so that the private money comes in and creates the growth? One costs you double. The other costs you half. So theres a fourfold difference in where you get the growth from. When you borrow the money to spend $800 billion, you got that debt hanging on you, which Reinhart and Rogoff have proven without a doubt, when youre at 90 percent and above, and were at 101 percent right now, debt-to-GDP, thats at least a one percent cut to growth.
EK: To go back to Krugman, if he were sitting here, hed say in this crisis theres been no evidence anywhere that cutting deficits leads to growth. Weve not seen it in the euro zone or the UK. And hed say the Reinhart/Rogoff story is a correlation story. It doesnt prove that high debt always and everywhere hurts growth.
TC: Go look at Sweden. Heres what Sweden did. They cut their spending and their taxes. They have the best growth rate in Europe. They had a surplus this year. They had growth at six-plus percent. They actually did a Reagan style approach to their problem by cutting spending and cutting taxes. And theyre the fastest growing with a decline in their debt-to-GDP ratio.
EK: But correct me if Im wrong, but if I recall, Swedens monetary policy went towards a very sharp devaluation, theyve been driven by export growth, and alongside Israel, theyve been more aggressive than any other central bank in the world. Theyve done stuff that if we did it here, people would lose their minds.
TC: I think there are monetary parts to that. But their finance minister put in place tough stuff. They had people who left Sweden because of the tax ratio. Now theyve moved back. And its not a perfect example, but its an exception to the Krugman story.
EK: Is there anything we need but deficit reduction to get growth back on the right path?
TC: Its signals. The number one thing, and I think most economists would agree, confidence matters. If you have negative confidence, then you get much lower growth. If you have positive confidence you get much better growth with the same set of numbers. I think people are so disgusted with Washington that if we send a signal were actually going to fix this -- with any combination of tax and spending, remember that I voted for Simpson-Bowles -- well get our mojo back when people have some confidence in the future and see their Congress solving their problems.
EK: It seems your view is that just as the market needs to have faith in your demographics and in the flexibility of your labor market and the competitiveness, it has to have faith in your political systems capacity to deal with long and short-term threats. Do you see any reason for the market to have that faith right now?
TC: No. One of my biggest worries is what happens if Romney wins and Republicans control both chambers, do they have the courage to do what it takes to fix the country? Its kind of their last chance. If theyre given the favor of control and they dont act on it, why should you ever trust them again? You shouldnt. Itll be the death knell of the Republican Party. They controlled it all for four years under Bush and grew the government. They created a new entitlement with no revenue. Went against the very tenets of what they said they believe.
One of the reasons I wrote the book was to show a whole lot of people how many stupid things we do. I dont really blame presidents too much. You gotta get appropriations. I say the problem is not that we dont get along. We get along too well. Government is twice the size it was 10 years ago. The president cant spend the money if we dont appropriate it. So its not a president problem. Its a congressional problem.
EK: On the other side of that hypothetical, lets say Obama wins, but Republicans hold the House and maybe even take the Senate. How do they act in that hypothetical? Are they more or less willing to compromise with Obama?
TC: I dont know. Im not good at predicting that. If President Obama is president again, those problems are still there and we have to solve them. He knows that. Weve had conversations where hes told me hell go much further than anyone believes hell go to solve the entitlement problem if he can get the compromise. And I believe him. I believe he would.
The Washington Post - Sen. Tom Coburn, part one: Defusing the debt bomb
Sen. Tom Coburn (R-Okla.) served on the Simpson-Bowles commission, is a member of the Gang of Six, and just published The Debt Bomb: A Bold Plan to Stop Washington from Bankrupting America. We spoke last week in his office. This interview, which focuses on Americas debt and growth problems, is the first in a two-part series. The second interview, which focuses on health care, will be published later this week.
Ezra Klein: So taxmageddon is coming at the end of the year. Depending on how you look at it, its an opportunity for Congress to trigger a massive and unnecessary fiscal crisis, or to actually get some serious legislating done on our long-term fiscal issues. Are you optimistic about the outcome?
Tom Coburn: No. But it depends on what the mix is. If President Obama is still president and were in control of the Senate, I think youll see significant attempts to get something done. But I dont think theyll be much more successful than what we saw in August. And I wouldnt consider that very successful. If Romney wins and we win control in the Senate, we have to send a signal that were going to fix it in order to take away all that potential risk to the economy. You have to say well work all over the Christmas holidays to get it fixed.
EK: When you look at the Romney scenario, it seems Republicans have spent a few years now learning how to take tough votes on the budget, particularly on the Ryan plan. So if Republicans control the House and Senate, it seems to me that youd see quite dramatic action on those issues, as they can be passed with 51 votes through budget reconciliation.
TC: Well, you can. Ryan has a good plan. I dont think it goes fast enough. But the fact is hes got a plan. The president wont put out a plan. The Senate Democrats wont put out a plan. Its kind of like boxing with a shadow. You cant ever hit it. But it doesnt matter if youre Democrat or Republican. The pain will get worse every year we dont fix these things. And there will come a time when it wont matter if youre a Republican or Democrat. And I dont have much faith right now that were up to the task of coming to agreement to fix this.
EK: I want to come back to the question of the plans in a second,. But your book opens by imagining a very dire fiscal crisis in 2014. And this goes to your contention that Ryans plan doesnt bring down the debt fast enough. Where do you get the urgency of your schedule? I look at Treasuries and theyre selling with very low yields. So you can say thats just the Federal Reserve manipulating prices. So then I look at credit default swaps on the United States, and there are no alarm bells there, either. I look at countries like Japan and England that have carried on with very high debt levels for a very long time. Weve seen other countries that control their own currency manage very high debt levels throughout the 20th Century.
TC: Well, you need to go study Japan. Theyre going to crash.
EK: People have been saying that for 20 years.
TC: You have two things coming together. This is the first year theyll be a net issuer of debt outside their country. Theyve totally financed all their debt internally. We havent. Thats one big difference. They also have a much lower birth rate. Seven births for every 1,000 people. So their population is shrinking and their demographic shift is much worse than ours. And this year, the postal system there that runs all their retirement accounts will not be buying any government debt. Zero. So the Japanese government, for the first time, is going into the international market. And the yens value is going to decline against every major currency. Whether that happens this year or next year or in three years, its going to happen. And theyve now had almost two decades of no real GDP growth. So Japan isnt going to make it. The reason they havent had any problems is they havent asked anyone else in the world to buy their debt. Now theyre going to have to.
The same thing ultimately will happen to us, but well be the last person it happens to. The world still views this as the safest place. You see Greece, which will probably be out of the euro by the end of this year. Then you look at Spain and Italy and Portugal and Ireland. Europe is going to print money just like Ben Bernanke is printing money. And whats the end result of that? Inflation.
EK: Well, it depends how you manage it.
TC: How do you sterilize $3 trillion worth of debt?
EK: The difficulty for me when you say that is Im a market-oriented guy. I trust the markets, more or less. And if you look at the markets inflation expectations, theyre not high. They dont think what the Fed has done will lead to inflation.
TC: They dont now. But nobody ever does when you print money like that. If you study [Carmen] Reinhart and [Kenneth] Rogoff and what they said, they know whats coming. Every country thats ever been with a debt crisis and has printed money has ended up with an intentional inflation problem. Think for a minute that youre Ben Bernanke. Youre trying to control inflation, jumpstart the economy, and improve the unemployment rate. What do you think his long-term answer for this is?
EK: At the moment, I dont think he has one.
TC: His long-term answer is inflation.
EK: Not only do I think that would be an okay answer, but Reinhart and Rogoff do, too. Rogoff has been arguing for higher inflation for a long time. But Bernanke says he wont permit that. And I dont see a reason he would allow inflation later but oppose it now, when it could really help. In fact, what hes been saying is he wont do the monetary stimulus many want now specifically because he doesnt want to deanchor inflation expectations later.
TC: But 10 years from now, our bonds wont be two percent. So what percentage of the total budget do interest costs become if you normalize back to the historical average? If you do that today, you add $650 billion to our annual interest costs. How long do you think he can keep two percent inflation? If he does, then well continue to have two percent growth. In other words, if we start getting the growth, then well see the inflation. The reason theres no inflation now is theres no velocity to the money. Weve got $2 trillion sitting on the sidelines with corporations in this country. Another few trillion in personal bank accounts. And the reason is no one has confidence in the future. And its not so much the details of the plan to fix it as the psychological confidence it will get fixed. And thats why I voted for Bowles-Simpson.
EK: When Bowles-Simpson went before the House, it was rejected by a huge bipartisan majority. Do you see there as being any possibility that one outcome of the taxmageddon period could, be a grand bargain in the Gang of Six/Simpson-Bowles vein?
TC: I dont know the answer to that, frankly. My hope would be we reach a grand compromise. But the vote in the House proves what I said in the book. You had a vote in the House on a plan that could solve our problems and the Democrats didnt vote for it because it touches Social Security and Republicans vote against it because of revenues. Both sides accentuated their differences rather than sending a signal to the international community that we could get together and cut $4.5 trillion over the next 10 years. Which raises the question: Why are they here? If youre here just to get reelected, youre worthless to the country.
EK: Youre searingly critical of Congress in the book. So let me ask you: How do you fix the Senate?
TC: Let the Senate operate the way its supposed to. put stuff through committees. bring it up in regular order. Have an open amendment process. Im the number one amendment offerer in the Senate in the last few years.
EK: Congratulations.
TC: Well, its not necessarily a compliment. But the point is the Senate really could work if you let it work on the real issues. If you were to put Simpson-Bowles on the floor and really have a strong debate on that bill, it could get through the Senate.
EK: When I talk to the party tactician types, the senators trying to figure this out, their argument is that when you try to do this out in public, with 24-hour news media broadcasting every move and every possible compromise, the issue polarizes, the interest groups descend, the party bases descend, and solutions get taken off the table. In the end, they think there will have to be some big backroom deal. They think a more open process would make this harder, not easier.
TC: I just adamantly disagree. Thats the sickness of Washington. What that really says is the politician doesnt want to stand up and debate and tell their interest groups no. We had the pharmacists in here earlier. They want a bill to protect community pharmacies. And I said, you know what, the market is changing, Im not about to support a bill, even though you support me, that doesnt allow the market to work this thing out. I think the reason you get this kind of analysis is because people wont stand up and do what they think is right because it hurts their political chances. And on our bonds, our bonds will be fine until theyre not, till that tipping point comes when they say crap, we cant get out of it.
EK: As you just said, youre a market guy. You want the market to work things out. You believe in the markets ability to work things out. So why do you think your view of our likely debt and inflation path is so much more dire than the markets?
TC: Because the market is biased towards up. Why do you invest in the market? Not because you think youll lose money. Why do you invest in bonds? To make money. Where is the contrarian view?
Let me give you one example. Five weeks ago, Bernanke said there would be no QE3. What happened to the 10-year bond in four days? It rose 48 basis points. What the market said then is if theres no more QE3, were going to short the value of a bond. Thats one little signal. What if you get 20 signals? How do you explain the Chinese getting rid $160 billion of our debt last year? Eventually, theyre not going to buy our debt. Who bought most of our debt last year? It was the Federal Reserve. Go out there and try and float $10 billion of our long-term debt. You cant. Theres no market. Because the long-term market is saying, send us a signal that youll fix this. And so the reason we have the shortest debt maturity in our countrys history is first, because you cant sell long-term debt because no one wants to buy it, and second, because long-term debt makes the deficit look worse.
Look, I may not be right. But what I see and the people I read -- all I do at night is read economic reports on peoples view of us -- and when you look at it, Spain, wont make it, the European Central Bank will eventually print money. You agree?
EK: Im hoping so.
TC: Theyll do that to buy time. And where I agree with Paul Krugman is you cant just have austerity. You need growth, The question is how do you get the growth. Do you get the government-driven growth, or do you get confidence and certainty so that the private money comes in and creates the growth? One costs you double. The other costs you half. So theres a fourfold difference in where you get the growth from. When you borrow the money to spend $800 billion, you got that debt hanging on you, which Reinhart and Rogoff have proven without a doubt, when youre at 90 percent and above, and were at 101 percent right now, debt-to-GDP, thats at least a one percent cut to growth.
EK: To go back to Krugman, if he were sitting here, hed say in this crisis theres been no evidence anywhere that cutting deficits leads to growth. Weve not seen it in the euro zone or the UK. And hed say the Reinhart/Rogoff story is a correlation story. It doesnt prove that high debt always and everywhere hurts growth.
TC: Go look at Sweden. Heres what Sweden did. They cut their spending and their taxes. They have the best growth rate in Europe. They had a surplus this year. They had growth at six-plus percent. They actually did a Reagan style approach to their problem by cutting spending and cutting taxes. And theyre the fastest growing with a decline in their debt-to-GDP ratio.
EK: But correct me if Im wrong, but if I recall, Swedens monetary policy went towards a very sharp devaluation, theyve been driven by export growth, and alongside Israel, theyve been more aggressive than any other central bank in the world. Theyve done stuff that if we did it here, people would lose their minds.
TC: I think there are monetary parts to that. But their finance minister put in place tough stuff. They had people who left Sweden because of the tax ratio. Now theyve moved back. And its not a perfect example, but its an exception to the Krugman story.
EK: Is there anything we need but deficit reduction to get growth back on the right path?
TC: Its signals. The number one thing, and I think most economists would agree, confidence matters. If you have negative confidence, then you get much lower growth. If you have positive confidence you get much better growth with the same set of numbers. I think people are so disgusted with Washington that if we send a signal were actually going to fix this -- with any combination of tax and spending, remember that I voted for Simpson-Bowles -- well get our mojo back when people have some confidence in the future and see their Congress solving their problems.
EK: It seems your view is that just as the market needs to have faith in your demographics and in the flexibility of your labor market and the competitiveness, it has to have faith in your political systems capacity to deal with long and short-term threats. Do you see any reason for the market to have that faith right now?
TC: No. One of my biggest worries is what happens if Romney wins and Republicans control both chambers, do they have the courage to do what it takes to fix the country? Its kind of their last chance. If theyre given the favor of control and they dont act on it, why should you ever trust them again? You shouldnt. Itll be the death knell of the Republican Party. They controlled it all for four years under Bush and grew the government. They created a new entitlement with no revenue. Went against the very tenets of what they said they believe.
One of the reasons I wrote the book was to show a whole lot of people how many stupid things we do. I dont really blame presidents too much. You gotta get appropriations. I say the problem is not that we dont get along. We get along too well. Government is twice the size it was 10 years ago. The president cant spend the money if we dont appropriate it. So its not a president problem. Its a congressional problem.
EK: On the other side of that hypothetical, lets say Obama wins, but Republicans hold the House and maybe even take the Senate. How do they act in that hypothetical? Are they more or less willing to compromise with Obama?
TC: I dont know. Im not good at predicting that. If President Obama is president again, those problems are still there and we have to solve them. He knows that. Weve had conversations where hes told me hell go much further than anyone believes hell go to solve the entitlement problem if he can get the compromise. And I believe him. I believe he would.
