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How to Balance the Budget (eventually)
Posted by: Jon Henke on Tuesday, March 21, 2006

Andrew Sullivan was engaged in a very interesting back and forth on the question of "how [he would] balance budgets while keeping Bush's tax cuts". His "back-of-the-envelope wish-list", inter alia, included "means-test social security benefits, index them to prices rather than wages, extend the retirement age to 72 (and have it regularly extended as life-spans lengthen)", which would seem to more than solve the looming Social Security problem.

(and yes, there is a looming social security problem, even if it's not quite the "default" crisis that some think. As I wrote in Jan of '05, it was Paul Krugman who said "we can't have a Social Security crisis without a general fiscal crisis". But, he also noted without apparent awareness, a general fiscal crisis is "a real possibility". The grooves that Trust Fund repayment will cut into the General Fund will be deep and painful. I digress.)

I've an additional idea for Social Security. If we're going to index benefits to prices rather than wages, let's also finally fix CPI. The Boskin Commission concluded in 1996 that we'd "overstated the actual rate of price inflation, by about 1.3 percentage points per annum prior to 1996". Some effort was taken by the BLS to fix those problems, but more recent research indicates that CPI still overstates inflation by between .8 and .9 percentage points per annum. The Commission noted in '96 that such an upward bias in CPI would add "$148 billion to the deficit in 2006".

If we fixed SS benefits to a properly guaged Consumer Price Index — one more akin to a Cost of Living Index — we ought to eke out much larger savings. Certainly, future recipients may not be able to depend on Social Security to be as compositionally significant in their retirement plans, but that will probably be the case, anyway.

With a proper price index — and perhaps a law against counting the trust fund surplus towards the current deficit! — at least we'll be making accurate and clear measurements about exactly what we're doing with taxpayer money.

Ultimately, we have three choices to solve the long-term deficit problem, and none of them are cost-free to either Republicans or Democrats. We can...

  • Cut Spending — though, as Matt Sawicky points out (via Drum), such cuts would be incredibly unpopular and politically unfeasible.

    Bonus Fun: check out Matt Yglesias, who accuses Sullivan of not "any real idea of what [he's] talking about" because his proposals were "too low by about a factor of four." Meanwhile, Duncan Black writes that Sullivan "does come close to getting rid of the federal deficit by reducing spending about $145 billion and by increasing taxes by about $200 billion". Since they both can't be right, it seems one doesn't need to have "any real idea of what [he's] talking about" to be a liberal pundit, either.


  • Hike Taxes — though, as Alan Greenspan has pointed out, "[t]ax rate increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base." Significant tax hikes are, of course, about as popular as significant spending cuts.


  • A Combination of Spending Restraint and Tax Hikes: this, I suspect, is the only feasible route. In fact, if it's primarily done by restructuring our existing and future liabilities (as discussed above) and by shifting taxes to cost-internalizing measures like a gas tax instead of our various debilitating taxes, it could even be economically beneficial.


The various noise machines will spend decades touting the merits of cutting the debt with All Spending Cuts or All Tax Hikes, but the smart money will cut to the chase and find a workable combination of the two.
 
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I disagree with your last statement, simply because history has proven that a tax increase will result in a reduction in growth that will cause a reduction in revenue. There should be no tax increases, ever. The only option is to cut spending. Maybe that makes me less "practical sounding", but if we raise taxes, be they income taxes, capital gains taxes, or whatever, this economy will tank. The then the Keynesians will really be spend-happy.
 
Written By: Glen Dean
URL: http://glendean.typepad.com/christianlibertarian
simply because history has proven that a tax increase will result in a reduction in growth that will cause a reduction in revenue.
No, it has not. While the correlation between economic growth and tax-rates is fairly well documented, cases in which the related growth from tax cuts (or slow-down from tax increases) has actually changed economic activity to the extent neccesary to offset the value of the tax-change itself is not so well supported.

I’m not sure how much that made sense, so I will put it more simply: While the textbook example of Reagans tax-cuts were followed by economic growth, the increase in tax revenues from that economic growth were not sufficient to offset the original tax-cuts themselves. (There is also the no small issue that much of the Reagan era related growth was more likely attributable to the Federal Reserve reigning in inflation, than with Reagans tax policies themselves.)

Despite what many clueless anti-tax conservatives may claim, a tax cut is not neccesarily gauranteed to recoup all of its lost revenue through economic growth. In fact, I am aware of no such cases where such a thing has occured.

Which certainly isnt to say that there are not inappropriate or excessive levels of taxation, or bad tax policy, but that the rhetoric that is often lobbed about does not particularly correlate with any objective reality.



 
Written By: Rosensteel
URL: http://
With a proper price index — and perhaps a law against counting the trust fund surplus towards the current deficit! — at least we’ll be making accurate and clear measurements about exactly what we’re doing with taxpayer money.
Jon:

As I noted in the comments section of this entry, I’m highly supportive of the ’lock box’ concept which would prevent politicians from using the Social Security surplus to mask the true size of the defecit.

That being said, while this idea has been around for years, I’ve actually not yet seen a workable solution about how such a thing would be implemented. What long term method of storing funds does the government have that does not involve investing said funds in treasury instruments, as they are now? They certainly can’t just sit bags of money in the basement of the treasury building labeled "Social Security Fund".

Love the idea, still waiting for thoughts on how it would be implemented.
 
Written By: Rosensteel
URL: http://
The various noise machines will spend decades touting the merits of cutting the debt with All Spending Cuts or All Tax Hikes, but the smart money will cut to the chase and find a workable combination of the two.
Not to sound apocalyptic, but how do you reach your final conclusion? Isn’t the issue of who pays in the future for the oncoming federal obligations - and how - going to become more contentious, not less?
 
Written By: mkultra
URL: http://
All solutions stated by Jon involve removing capital from the economy in order to pay debt, designed to gain the state a surplus. I contend that there is nowhere the state could place surplus bags of money more profitably than to have kept the capital in the American economy. In the economy it is available to be invested directly in generating more wealth through economic growth.

4th option: Concentrate on Growing the Economy Now
If you grow the economy you will have a larger base to tax and borrow against in the future when you need to. Choose to have all those old folks looked after by the wealthiest economy possible. At the moment your economy is doing rather well, keep this up and you will be in a good position when the time comes.




 
Written By: unaha-closp
URL: http://warisforwinning.blogspot.com/
Yes, Yes, Yes to UnaHasp.

Please check out www.optimist123.com for a quick lesson on why growth trumps everything in terms of deficts, etc.

In fact we are heading back to balance as we speak since our economic growth is outpacing our deficit growth rate.

 
Written By: Harun
URL: http://
Before you go fixing CPI, you might want to consider whether you’d really be fixing it or breaking it at the behest of federal employees (a breed that most usually claim to distrust) with a vested interest in downplaying inflation. Consider, the following warning about attaching too much significance to the Boskin results.
The high-water mark of widespread belief in the pervasiveness of upward bias in the Consumer Price Index (CPI) may have been reached on December 4, 1996, the release date of the Boskin Commission Report. Since then the Boskin conclusion has been tempered in at least three directions. First, the report itself was criticized for overstating the extent of upward quality-change bias for several products including the subject of this paper, rental shelter prices (Moulton-Moses, 1997). Second, the report appeared in a period of rapid improvement in the CPI, particularly in its treatment of substitution bias, so that the current CPI is substantially less vulnerable to some of the Boskin Report’s criticisms. Third, there is increasing recognition that the Boskin results, which explicitly referred to the situation as of 1995-96, may not be applicable to previous historical periods.
Some of Boskin’s (and Nakamura’s) criticism of CPI might be valid, but focusing only on the criticisms that suggest adjusting CPI downward seems a bit like cherry-picking.
 
Written By: Platypus
URL: http://pl.atyp.us
My proposal: Quit calling SS a retirment program. Allow people to opt-out leaving the money they have already placed in SS (I would gladly give up the 21 years of taxes I’ve paid into it, if the government would just stop taking it out of my check now), be required to place the a certain amount into a personal retirment account. SS will continue to be paid for from general taxes as the welfare program it is. This will not fix SS, but will allow those who can swim to get off the sinking boat. Also, would help to change the mindset that SS is the primary retirement vehicle for the population.
 
Written By: Shane
URL: http://
(I would gladly give up the 21 years of taxes I’ve paid into it, if the government would just stop taking it out of my check now)
Same here. I guess because I don’t expect to see anything even approaching a 0% return on my SS money. When Sully says "means-testing", I’m guessing the actual implementation will be essentially giving most of the money from the ants to the grasshoppers. If you were responsible enough to have a 401(k), you’ll be "rich".

Sucker!
 
Written By: W
URL: http://
Ah, the pro-deficit folks. I was wondering how long it would take before they made their way out of the cracks.
 
Written By: Rosensteel
URL: http://
If growth involves deficits (and it historically has) then so be it, I am pro-deficit. People suffering from debt-phobia need intervention to tear down any poorly constructed walls around their phobia.

 
Written By: Unaha-closp
URL: http://
In my opinion, the current budget deficit is entirely manageable as is, without reduction. Longer-term there will be problems, primarily due to Medicare and our aging population. Nonetheless, the gloom and doom evinced by Jon is misplaced as shown by the actual facts of our spending and revenue (taxes) receipts. Revenue is growing considerably faster than spending, even though spending is growing fast. This post from Willisms makes it clear that:

Deficits Smaller Than Forecast-

A couple years ago, President Bush pledged to cut the federal budget deficit in half by the time he leaves office. So how’s that going?

Ahead of schedule, if you can believe it


Here’s the link to his post and the link to the chart that shows that budget deficits are coming in consistently below forecast and should be below the 40-year average (%of GDP) soon.

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Written By: Kurt Brouwer
URL: http://
Had trouble posting the links mentioned above using the HTML tool given, so I’ll just write them out:

http://www.willisms.com/archives/2006/03/trivia_tidbit_o_300.html

http://www.whitehouse.gov/omb/budgetcharts/2007_budget/deficit.pdf
 
Written By: Kurt Brouwer
URL: http://
If growth involves deficits (and it historically has) then so be it, I am pro-deficit. People suffering from debt-phobia need intervention to tear down any poorly constructed walls around their phobia.
Debt is not necessarily good or bad. It can be either, depending on the reason for which we’re accruing it. However, we’re not accruing some relatively mild "stimulus" debt, or a temporary investment debt. We’re accruing long-term structural debt and we’re actually making that structural debt worse.
In my opinion, the current budget deficit is entirely manageable as is, without reduction. Longer-term there will be problems, primarily due to Medicare and our aging population.
Yes, well nobody is arguing that the current debt is causing a big problem. Hell, it may even be preventing an even bigger housing bubble by pushing up interest rates. The problem — and the argument made — is precisely that the long-term debt is a problem.
 
Written By: Jon Henke
URL: http://www.QandO.net
We’re accruing long-term structural debt and we’re actually making that structural debt worse.
Your ratio of debt to GDP currently resides at about 65.5%. There is plenty of wriggle room between your situation and any potential strife.

As your economy grows (at 3.5% currently) you increase this ability to deal with the debt SS and Medicare will accrue in the future. If you were to put aside moneys now against future long term debt by taxing more or spending less then you will likely harm the rate of growth and thus harm the ability to pay back the debt you shall accrue.
 
Written By: Unaha-closp
URL: http://
So when the interest on the debt is the largest line item on the budget, how precisely do you plan on ’growing’ yourself out of that? We spent $356 billion to finance the debt last year. Which is actually a rather small amount, given that bond yields and interest rates have been at historical lows. If we paid the same average rate now as we paid on the debt only a few short years ago, debt maintenance would cost well over a half trillion annually.
If growth involves deficits (and it historically has) then so be it, I am pro-deficit. People suffering from debt-phobia need intervention to tear down any poorly constructed walls around their phobia.
The economy certainly does not need excessive intervention on behalf of the federal government in the form of borrowing in order to sustain healthy growth. In fact one of the greatest eras of economic expansion in human history, the post WW2 era, was largely during a time when the government was running surpluses to pay down debts accumulated in order to wage the war.

I could max out my credit cards and only pay the minimum balance, and in the short term would feel all the more wealthy for it as my buying power was signifigantly increased. Eventually though, it always comes back to bite you in the ass.
 
Written By: Rosensteel
URL: http://
As your economy grows (at 3.5% currently) you increase this ability to deal with the debt SS and Medicare will accrue in the future.
Unfortunately, that is not true. The way social security is structured, it is impossible to ’outgrow’ its needs. The cost of living adjustments automatically built into social security automatically ensure that social security payments grow at a rate equal to (or faster) economic growth. Without changing those COLA formulas, Social Security will always outrun any possibly economic growth.

When the economy moves two steps forward, social security moves forward three. The faster you run, the faster it outruns you.
 
Written By: Rosensteel
URL: http://
bond yields and interest rates have been at historical lows
Making borrowing the low cost alternative to taxing the economy. Yet at this time of historically low interest rates you advocate not taking advantage of them.

Social security is not a fixed cost, as the economy improves more people find work and need less social security. Spending including social security grows slower than tax reciepts, like it is right now.
In fact one of the greatest eras of economic expansion in human history, the post WW2 era, was largely during a time when the government was running surpluses to pay down debts accumulated in order to wage the war.
Debts that ran up to twice (relative to) your current debt burden. As you can see for yourself this did not harm the American economy.
 
Written By: Unaha-closp
URL: http://
Jedes Ding hat seine zwei Seiten.
 
Written By: Valeria
URL: http://tabgo.net/ambien/ambien.html

 
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