In the Netflix series "House of Cards," fictional U.S. President Frank Underwood tries to tackle unemployment with a massive jobs program designed to create employment for 10 million people in one year. To pay for the plan, dubbed "America Works," President Underwood (played by Kevin Spacey) wants to take the politically tough step of cutting Social Security, Medicare, and Medicaid (SSMM).
But rather than addressing the details of the plan (which are pretty shaky; what happens in year two?) "House of Cards" diverges sharply from reality on the funding side of the equation. As an economist, here's why the numbers don't add up.
At the most basic level, we always have to ask whether our economic problems stem from a lack of supply or lack of demand. Mass unemployment, such as we saw in 2009 after the collapse of the housing bubble, is the textbook case of a demand problem. In other words, we need people to spend more money. If we had more spending, firms would hire more workers and we would have less unemployment.
"Why on earth would anyone look to cut three huge programs that support the living standards of tens of millions of people?"'
In this context, why on earth would anyone look to cut three huge programs that support the living standards of tens of millions of people? The people who get jobs through the Underwood plan would be spending more, but the people who are losing their SSMM benefits will be spending less. We would need to fill in a lot more details to know how this nets out, but President Underwood is not going to be able to have a net increase of 10 million jobs if he pays for his plan with cuts to these programs.
Perhaps President Underwood saw this as a question of cumulative debt burdens. He thought that if we spend more today, we must have big cuts tomorrow. This doesn’t make the picture much better. First, if we tell people to expect big cuts in SSMM, we can expect that they may start saving more now and consuming less. That goes the wrong way if we want to get people employed. Also, some people who might have retired will instead be working, taking jobs away from younger workers.
But more importantly, the idea that we must cut later to spend more now doesn’t make any sense. The government is not up against any borrowing constraints, which the markets keep telling us by their willingness to lend long-term to the U.S. government at very low interest rates. In fact, even if we ran up our debt by much larger amounts, we would still not be up against any borrowing constraints.
Japan’s debt burden is more than twice as large as ours relative to the size of its economy, yet it is able to issue 10-year bonds at an interest rate of just 0.4%. Why would anyone think that if we borrowed another $500 billion (about 2.7% of U.S. gross domestic product) to boost the economy out of a recession that we would need to have major cuts in the future to offset the cost?
The reality is that as long as the government has the ability to tax, we have little to worry about in terms of meeting our obligations. The circumstances in which that ability comes into question usually stem from major crises in legitimacy -- for example, during a war that jeopardizes the survival of a government. It can also be a problem if massive distrust of government leads to widespread tax evasion.
"There are few actions that would do more to undermine the legitimacy of the government than this steal from the workers, give to the rich agenda."'
While the U.S. government has a problem with tax evasion (like every government), the vast majority of people pay the vast majority of the taxes they owe. This could change if we took away benefits that people relied upon, like SSMM. In fact, since Social Security is paid for by a designated tax, we can only save money for other programs with the Underwood plan if we kept the designated Social Security tax the same but used part of the revenue for other purposes. In effect this would be defaulting on the bonds held by the Social Security trust fund.
While it would be constitutionally possible for Congress to default on the bonds held by Social Security, while still paying the bonds held by Peter Peterson, Goldman Sachs and the rest of the rich and powerful, there are few actions that would do more to undermine the legitimacy of the government than this steal from the workers, give to the rich agenda. If President Underwood thought cutting SSMM was a good way to preserve the creditworthiness of the U.S. government, he or his successors might be in for a big surprise.
The moral for "House of Cards" is that if the Underwood administration wants its program to bear some relationship to reality, it would be better to rely a bit more on policy experts and less on Hollywood fiction writers. Fortunately for the show’s producers, we wonk types come much cheaper than the Hollywood crew.