Semi-Daily Journal

A devastating article. The points made are correct, the points should have been made over and again by responsible analysts these past months. The New Deal and Great Society advances have been turned aside by these radical-conservative-Republicans. We should be thoroughly saddened.

Seems like a good strategy to me. Starve the Leviathan! It might be the only way to shrink the massive and growing welfare state.

Brad,

Can you provide the link to the original article? I assume it's an NYT piece and therefore requires registration, but that's fine by me.

jefferson, do you wish for a civil war? A nuclear civil war? It is only a question of time if your State follow in this direction.

DSW

Remind me again about all the wonderful widdle conservative economists who I am supposed to give a darn about who have helped foster the terrible fiscal policy of this Administration. Phooey....

Yes. Let us starve the Leviathon. The hell with the poor, the sick, the elderly, the children. The hell with public institutions. Social Security is awful. Medicare is worse. Medicaid worse than both. Veteran's Benefits worse again. Public Schools, whoever needs em. Starve the Leviathon except, of course, for the military.

http://www.nytimes.com/2003/05/27/opinion/27KRUG.html

Link to article by Paul Krugman:

The Deficit Increase Plan is also the Federal Workers Unemployment Plan

http://deancalltoaction.blogspot.com/

Why are editorials on the two pages after the first in european newspapers, but on the two pages before the last in US-papers? Why does Brad think that visitors to his site has not read the NYT, or have anyway missed Krugman's op-ed(often tuesday and thursday)?

Silly questions? - try this then:
Why is the editorials and op-eds in the WSJ subscribers-only in the online version?

In relative historical terms, I'm moderately conservative economically. Compared to the Republican right, I'm a big lefty.

I tend to think that government is inefficient and generally not the preferred way to acomplish many goals. On the other hand, there's lots of things that the private sector can't do. Most conservatives agree that national defense needs to be politically coordinated and is too critical to be left to the private sector, many conservatives (though diminishing) believe this about primary and secondary education, but they refuse to consider that this may be true about health care, as well. Why not?

My observation over the years is that what it really comes down to is an irrational resentment against paying taxes. That's it. No matter that we pay less tax than pretty much every other advanced country. No matter that when it comes down to specific programs, conservatives no less than liberals are unwilling to give up programs that benefit *them*.

In 1999 and 2000, I had the good fortune of finding myself pretty far into the highest marginal tax bracket. I paid six-figure income tax bills. And I *don't* begrudge them. I *do* begrudge the people who whinge all the damn time about taxation.

Jefferson's comment about the "Leviathan" is ironic considering that, in Hobbes's view, it's the Leviathan that keeps us from acting like animals. And, really, this administration's economic and social policies are rather like those expected from a group of people resentful of the civilizing affect of government and who, one way or another, wish to eliminate institutional barriers against their own use of violence, literal or metaphorical.

"And, really, this administration's economic and social policies are rather like those expected from a group of people resentful of the civilizing affect of government and who, one way or another, wish to eliminate institutional barriers against their own use of violence, literal or metaphorical."

Superb comment....

So...

I take it from everyone's criticism of the "starve the Leviathan" comment that the following is implied:

- All decreases in the size of the U.S. government are a bad idea.

- All of the current departments and programs the government currently consists of are an appropriate place for government to be spending tax dollars, including all tariffs, subsidies, and pork barrel spending that goes to, say, Alaska.

- None of the coming spending cuts forced by the tax cut will come from the military.

This is not helpful thinking, but rather counter-productive partisanship. I think that the Republican strategy to create a fiscal crisis is: tactically smart, dishonest, cynical, and a terrible idea (playing chicken with national bankruptcy is unwise).

Why couldn't the Dems counter-propose a bill that makes some radical changes to reduce ill-advised or wasteful spending (like corporate subsidies, keeping troops in Germany, building new weapons in cases where our existing weapons are unrivaled, building highways that no one uses, etc.) , to reduce the deficit? This would show the following things:

- The Democrats are the party of fiscal responsibility

- The Democrats don't always oppose spending cuts just on reflex

- If the Republicans want to reduce the size of government, they can negotiate with reasonable partners rather than lying and cynically creating an artificial fiscal emergency

Why not propose something constructive that will steal a lot of fiscally conservative swing voters? Of course, that won’t satisfy those who truly just want to give handouts to the rich (the Dick Armey contingent), but they could be discouraged from radically stupid strategies like the Bush Tax Cut by offering improved efficiencies in the tax code (Say, a flat tax with progressive brackets?).

Wow, this post turned into a bit of a manifesto, didn’t it? Thanks for reading this far.

A-ro, I didn't mean to imply by my criticism of Jefferson's "Levithan" comment that I think all current government spending is good. I meant to imply that I don't think that the federal spending is, in general, too large. There's a difference. This administration's fiscal policies are going to force the reduction or elimination of good spending along with the bad. (It'll be ironic for them if it also forces a reduction in defense spending.) You're right: such a strategy is egregiously cynical—cynical about both government and voters.

Just keep in mind that these deficits are so enormously huge that it is absolutely impossible (as a practical matter) for them to be rectified by spending cuts.

PK is right to try to bring this debate in the open. GOP radicals have for years been talking about cutting social programs. That was David Stockman's big idea, that Reagan would cut taxes AND spending. As it turned out, Reagan cut taxes (the easy part) but spending was never cut because it was not politically possible. Thus the title of Stockman's book "The Triumph of Politics".

Once the disconnect between Reagan tax cuts and long term SS demands were laid on the table, a plan to save SS was devised. The public had no support for dumping SS.

The GOP should have to explain how they plan to bring the budget into balance in the future, not just how they will cut taxes today. If the GOP supports maintaining SS, & Medic-are/aid then they should say so. If they do not then they should say so. Staging a fiscal crisis as a political tactic is not a good idea. What if we come to the brink of the crisis and the people yell "Soak the Rich." A fiscal crisis could bring the return of the 90% tax bracket. Ken Lay could be poster boy for the slogan, "Give us our money back".

Where is Bob Dole when we need him?

Keith M Ellis,

"A-ro, I didn't mean to imply by my criticism of Jefferson's "Leviathan" comment that I think all current government spending is good."

I know. I was just being a jerk to try to make a larger point. I guess in part, I was playing the part of a Bush-ite, with whom we will have to negotiate if anything smart is to be done fiscally in the near future.

"Just keep in mind that these deficits are so enormously huge that it is absolutely impossible (as a practical matter) for them to be rectified by spending cuts."

I know, isn't it scary? In the best case scenario, the next congress will deal with it with a grand Tax Code Reform, Wasteful Spending Cut, And Least-Unwise-Tax-Hike-Possible Bail Out Act.

We'll see...

The Democrats are the party of fiscal decency and responsibility. The Radical-Republicans are out to slash every possible social benefit program from Social Security to Medicare to Medicaid. The need is for the Democrats to point this out again and again, to fight radical-conservative fiscal policy at every step, to and hope analysts have the courage to point out what these radical-conservatives are about.

Radical-Republicans are fighting to end Social Security, Medicare, and Medicaid, along with any other social benefit program that comes to mind.

Isn't the coming fiscal crisis best for everyone?

Consider what will happen. The obligations of Social Security plus Medicare (plus prescription drugs), national defense (never less than $300,000,000,000 from now on), medicaid, various entitlements, and interest on the debt will swallow the entire budget around 2012. There will be no money left for discressionary programs like federal highways, agriculture subsidies, water projects, transit subsidies, Army Corps of Engineers projects, or the other corporate welfare measures we all suffer from.

States will determine their own transporation and water needs and provide for their true costs with state funds. That alone will improve life in America tremendously withing a generation. Corporate welfare payments will be limited to trade protectionism; there will be no direct payment. State taxes may have to rise, but neighboring states will not be able to shirk the burden anymore through federal subsidies. That will keep government close to the people and responsible to the citizens more than to big centralized lobbying efforts in D.C.

Social Security will become a more direct income support program. As Congress finds that it simply can't afford to pay everyone full benefits it will either eliminate the cap on payroll taxes (charging the rich their share for once) or means test the benefits to cut off millionaires or both. Seniors will be secure from poverty and the rich will no longer have such a free ride.

Sure there would be some good things harder (not impossible) to finance, like university basic research, but overall it's a desirable outcome for everyone.

But the real right-winger can tell you what's wrong here. The problem isn't the loss of current revenue. The problem is the tax cut.

Bush and his cronies have negotiated a non-supply side tax cut. Supply siders believe in lower tax rates with fewer tax breaks, credits, and exclusions. That can raise or lower revenue, but in the long run it directs economic activity toward real wants instead of finding and exploiting tax loopholes. And that brings growth and happiness.

And part of the Bush agenda was very supply side. The dividend tax repeal would have been a miracle. With the deemed dividends and capital-gains basis step-up, corporations would have had an incentive to pay their corporate income taxes. Every corporate tax break in the tax code would have become worth about 75% less overnight, because paying up would have finally brought a benefit -- the right to save on shareholder taxes. The increase in corporate tax payments combined with savings from not needing corporate tax shelters and more efficent investments may even have eventually exceeded the loss from dividend taxation. It would certainly be harder to hide Enron style cheating if multiple layered offshore dummy companies used to hide from dead-weight loss corporate taxation were no longer standard practice in the finance industry.

Instead, we end up with a giant giveaway to millionaires with no serious behavior improvement incentive.

And the big $1000 giveaway per child is nothing but an entirely new entitlement for the fertile and middle class. It should be counted as a giant new Republican spending program, since it isn't a tax cut at all. It's just a welfare program administered by the IRS and targeted at the already comfortable. Of course, it will do nothing for the supply side.

A-ro,

I wasn't among the original responders, and I don't pretend to speak for them. However, I can offer an alternative to your apparent interpretation of the source of their objections.

One criticism of the stealth-starvation approach has to do with the stealth. Politicians who want to change the way the nation works ought to have the courage to identify which parts of government ought to shrink and by how much. They ought to get busy cutting back on the parts they think need cutting, rather than leaving it for the next guy to do, under the strain of a mounting debt burden. If government is too big, then cut it. In a democracy, government is too big when the public in general thinks it is - not when you think it is an not when politicians without the courage of their own convictions think it is.

The "starvation" part of the stealth-starvation plan is also objectionable. It doesn't distinguish between the Leviathan's liver and his spleen, his brain and his tail. Cutting programs because there is little choice is likely to lead to bad choices. Cut programs that shouldn't be part of government to begin with, not whatever is needed to get the deficit back down to a financable level.

So, while I don't know what everybody else had in mind, it is pretty clear to me that the "starve the Leviathan" approach lacks courage and enforces a suspension of judgement when it finally begins to bite. I am not in favor of either. I am generally not in favor of underhanded politics and lying to the public, which seem at the base of this particular approach to cutting the size of government.

Distaste for dishonesty and cowardice in policy making can be entirely independent of one's views on the appropriate size of government, as well as on any of the other, more partisan challenges you laid down for those opposed to the approach you suggest.

Newt,
That's an interesting way to view the strategy. I am sypmathetic toward some of the arguments that lead you to say we may end up better off, like making the states build highways. However, if those are good ideas, let's debate them and pass them as laws on their own. It is not good governance to trick everyone into discressionary spending cuts they don't want, even if it's for their own good. If the plan is to move discressionary spending to the states and cut federal taxes, let's be honest about that and debate it. It will take a lot longer, but it's best to do things the right way, or, as bhako stated, it could backfire and we could end up with a 90% tax bracket instead of the spending cuts.

K Harris,

I agree with you, as my previous post shows.

Just to give us some perspective, Citizens Against Government Waste is a conservative group that tracks 'pork.' If they're liberal at all, it's in the way that they define 'government waste.'

Though I don't agree that everything they call 'waste' really is waste, it's hard to disagree that the amount of waste is relatively trivial - around 22.5 billion, or 1% of the budget, or .01% of GDP. (They don't include military spending.)

Suppose the plucky fiscal manager is asked how much waste to cut, and she says "All of it." She's just cut no more than 23 billion dollars, and now must find another 275 billion dollars just to break even.

Before we go too much further vividly describing the Leviathon's anatomy (you scared me there for a second, K Harris :-)), we should be looking at the numbers. Is there waste here that I'm missing?

Citizens Against Government Waste
www.cagw.org

What we need is more supply-side idiocy. Cut cut cut taxes and watch the economy grow so fast that more revenue will come in than at higher tax levels. Rubbish. Supply-siders simply do not know economics or are dishonest about what they are trying to accomplish.

Krugman is correct as always. These Republican radicals are out to end all social benefit spending, especially Social Security and Medicare and Medicaid.

I see a lot of folks here want the Republican agenda on program and entitlement cuts to be spelled out explicitly. That way, the affected parties could cry out in pain when they clearly see how their freeloading on the rest of us will come to an end.

And we all know that a highly motivated special interest will be able to crowd out the general interest and maintain its wasteful program. It's well documented in any poli-sci or Public Choice survey.

So what you really want is that Republicans should announce their agenda in a way that ensures no Republican will ever be elected. That isn't going to happen.

Communicating your message to an uninterested public requires careful massaging. You need to keep the benefits formost in the minds of the people and soothe the special interest opponents of your plans. That isn't somehow dishonest; it's the way politics works.

It's the responsibility of the Democrats to present the worst aspects of Republican plans. And to keep a positive agends of their own, too.

That a very hard task, but that's also why politics is both difficult and important. And it will stay that way until the day voters all have Ph.D's in economics. (On that day they'll all vote Democrat anyway since 99.9% of them will be out of work from the Ph.D. glut.)

Saam Barrager,

I was aware that CAGW defines less than 1% of gov't spending as wasteful. I would expect more of the deficit to be made up by tax hikes, as well as moving some types of spending to the states where it belongs -- in other words, a tax hike at the state level (since there is no free lunch). We could probably cut billions from defense if we were smarter about where we need to keep troops stationed, and what equipment should get priority for being modernized first (hint: not "all of it"). But mostly it would be tax hikes, and meaningful (again, hard choices with no free lunch promises) reform to SS, Medicaid, and Medicare like means testing and raising the retirement age.

"I see a lot of folks here want the Republican agenda on program and entitlement cuts to be spelled out explicitly. That way, the affected parties could cry out in pain when they clearly see how their freeloading on the rest of us will come to an end."

Another radical-conservative-mean-spirited bit of lunacy. Poor children in need of free public education are not freeloading on the rest of us!

Yes. Why not simply raise the retirement age for Social Security and Medicare to 90? No problem.

Suppose we also cap the age limit for Medicaid to say 6 motnhs? No problem. Duh.

Newt,

You're right, making the Repubs spell out their hidden spending-cut plan will put up a serious barrier to it actually happening. But that's life. Our government is structured to creat gridlock and discourage radical change until most people think it's a good idea. Usually, that's a good thing, if frustrating for those who "see the light" before the national conciousness catches up.

Condoning the Republican's cynical back-door trickery approach in the name of expediency overlooks the wisdom of our constitution's gridlock system.

It's like the abortion debate. Having the Supreme Court decree that it is legal (Roe v Wade) is great if you're pro-choice (like me). But in the long run, I don't think we want to say it's okay that the courts make laws because we agree with the result. What if the court had ruled abortion illegal? Suddenly liberals (like me) would be calling for strict constructionist judges who won't usurp the legislature's power.

The point is, I don't want underhanded tactics like the Bush Tax Cut/Spending Cut Trojan Horse to be used in making fiscal policy, even if it's expedient, and even if I agree with the results, because it screws everything up, and I will have no recourse if those tactics are used against me. In short, it's undemocratic. We have to muddle though with democracy because benign dictators, while expedient, don't exist.

Newt- you are absolutely correct that it is up to the Democrats to bring this subject to the negotiating forum. Unfortunately, the next forum is not until the 04 presidential election. That said, PK has lobbed the Democratic presidential candidates a huge softball. We will see who can figure out how to knock it out of the park.

jd, that's a classic example of why fiscally reasonable Republicans need to be careful of what they say. When you write

>>Another radical-conservative-mean-spirited bit of lunacy. Poor children in need of free public education are not freeloading on the rest of us!
<<<

You are making the kind of attack that Republicans would get all the time if they wrote out their plan as explicitly as I have.

And the Democrats would be as dishonest about it as you were.

Children in need of free education would not be affected if the federal government shut down entirely. Free public education is provided by each of the fifty states, paid for out of state budgets. The federal government doesn't even fully fund its own education mandates like NCLB and IDEA.

Republicans believe that poor children would be better off with the entire Federal Department of Education, which is not responsible to educate even one single child, abolished. But wise Republicans don't say that aloud. Because criticism like your misleading rhetorical attack would be too damaging in the eyes of swing voters with short attention spans.

Reducing the debt is going to be easy. Step 1: revoke the licenses of the existing broadcast companies and auction 1/2 of the bandwidth, reserving the other 1/2 for public uses. Step 2: 90% capital gains tax. Step 3: assets of companies that have not paid federal taxes in 5 years are liquidated. Of course all this will require impeaching a bunch of judges, but wtf.

Republican-radicals have spelled out what they are after time and time and time again. I suggest paying attention.

"...the people now running America aren't conservatives: they're radicals who want to do away with the social and economic system we have, and the fiscal crisis they are concocting may give them the excuse they need."

citizen k,

As much as it pains me as a center-lefty to do it, I have to invoke the Laffer Curve. Wouldn't a 90% capital gains tax actually reduce tax revenue? I mean, sure it would spare everyone with a 401k and screw those rich enough to bother with lots of stocks beyond that, but come on. Why not just make profits illegal?

This is in response to A-ro at May 27, 2003 01:52 PM with regards to Army modernization:

The military is not extensively modernizing everything at once; it has been working in stages. Currently the Army has two distinct forces and force modernization plans. The first one is the counter-attack force, primarily based around the III Corps. It is the 3rd and 4th Mech Infantry divisions, and the 1st Calvary Division. These units are the ones that get the first call on the newest gear and they are the ones which were the primary recipients for the vast majority of the new equipment bought during the 1990s. The response force (V Corps, XVIII Corps) got some new equipment (anti-tank missiles, air defense vehicles, a light artillery piece that is just coming online now) but they have been making do with modified hand-me downs.
The Navy is the same way, they are keeping the early non-VLS (Tomahawk launching system) Los Angeles class submarines and the long hull Perry class frigates on active duty and stretching out their life spans.

Dave

"Although you wouldn't know it from the rhetoric, federal taxes are already historically low as a share of G.D.P."

What a crock. That's only true if one's knowledge of history is limited to about the last 20-30 years.

Federal taxes, as a share of GDP, are approximately a factor of 5 higher than they averaged from 1789 to 1930.

Fester,

You got me. I made a statement that I couldn't back up with the facts. I guess if there were any obvious wastefull spending in the military, they would have done away with most of it by now. That is, wastefull spending with respect to fulfuling the stated goals. Maybe it's our military mission or stance that we need to look at more closely. Do we need to be able to defeat great britain in a war at a moment's notice? If we cut military spending by $80 billion, wouldn't our NATO allies start spending more?

Anyway, thanks for pointing out my slopy comment.

Mark,

Well, it appears that perhaps Krugman has a better comprehension than you of what contexts are meaningful and what contexts are not. That is, if you seriously think that the 1789-1930 period is relevant to this discussion.

Keith, Mr. Bahner's comments are perfectly relevant. From 1789 until the first world war, the United States was the equivalent of a banana republic, selling off the vast resources it stole from the indigenous inhabitants to pay for growth. Beginning with World War II, the United States became a great power, and therefore required human and technological infrastructure beyond what banana republics require. It currently taxes (total federal, state, local) somewhat less than most other industrialized nations, and delivers less particularly in the way of medical services.

The Republicans wish to return the United States from being a great power to being a banana republic.

The tax rates can, of course, then match.

As an outsider, one phrase of Krugman's struck me in particular:

"programs that have become fundamental to the American way of life will be gutted".

To many non-Americans, social programs and the US are like oil and water. It may be that such programs are, in fact, fundamental to the American way of life, but they are not fundamental to the American self-image that we see from over the border.

Perhaps this is why the programs are in danger. I don't want to stray too far into economics as amateur psychology, but if the American self-image had a little more solidarity in it and a little less self-reliance, perhaps the programs would not be as vulnerable to the Bush administration's attacks.

How about ending ag. subsidies? Very few non-corporate farms are left to be hurt.

Or ending the wildly expensive and socially destructive Drug War? And taxing drugs, but keeping their prices below the black market rates that encourage violence to pay for them?
Which also keeps a nice chunk of capital in the legal financial system, instead of bleeding it off into the black market.

Those 2 alone are non-trivial sacred cows where money is spent in ways that are arguably harmful to society. Let's go sacred cow hunting.

Paul Krugman represents the final, depressing answer to the cynical question: "How much of a buffoon can a formerly great economist become?"

That Brad posted this asininity without critical comment certainly leads me to believe that Brad is rapidly succumbing to Krugmanitis, a disease (closely related to Potomac Fever) that seems to be afflicting a lot of otherwise sensible liberal-leaning economists.

Paul Krugman, in this article, demonstrates that

a) he does not do much research for his column writing

and/or

b) is indifferent to the truth.

I say this because Krugman states that Bush and his team of rabid right-wingers are out to cut government spending. But even nominal research would demonstrate that Bush's first two budgets have raised domestic non-defense spending by 20% over two years, the fastest two-year growth rate since Jimmy Carter. This includes very large increases for arguably ineffective federal education spending, positively harmful agricultural subsidies (a "New Deal" program that Bush doesn't seem to be "gutting"), and a lot of pork-barrel discretionary spending.

The real disaster of Bush is that his "compassionate conservatism" does not represent an attempt to cut or even control government spending, as Krugman inexplicably believes; rather, it consists of a politcally cynical ploy to please the Republican base with tax cuts while using subsidies and tariffs to pander to a variety of constitutencies (some liberal). Because Paul Krugman is currently so bent (consiously or unconsciously) on pleasing his readership and/or because Paul Krugman is so intellectually lazy in his column-writing, he lobotomizes himself in order to push the lefty New York Times-reader-pleasing "right-wing cabal" line of reasoning, rather than really nailing Bush on his idiocy of combining tax cuts with massive spending increases.

Of course, Econ 101 tells us that raising spending while cutting taxes creates a deficit. Because the gummint has to cover this deficit this deficit by selling bonds, bond prices fall and interest rates rise, which means that the "cut" taxes are simply replaced with a new implicit tax on capital formation and investment. Thus, the final scandal of Bush's fiscal policy is that he isn't even truly cutting the burden of government on the populace, since the true burden of government flows from government spending, and Bush is raising government spending.

Krugman mentions none of this. Oddly, Krugman accidentally carries Bush's water by repeating the same argument that the Bush administration itself has made: that these tax cuts will stave off big increases in government spending in the future. So, in the long run, these tax cuts must not really create deficits! Yay for tax cuts! Krugman, in his zeal to play the conspiracy card, has actually bought into Ari Fleischer's propaganda. That's a neat trick, Paul.

Krugman the economist is quite different from Krugman the New York Times columnist. The former writes lucidly and informs his readership on things economic, while the latter has become an attack dog for the Democrats. I think part of his problem is the pressure of doing two columns per week; a bimonthly column would better serve his readership. Unfortunately, his columns have become repetitious, and predictably boring. Perhaps he has become victim to the spreading intellectual rot at the NYT.

Keith,

What in the world are you talking about? Of course Krugman knows Bush is raising spending, everyone who is paying attention knows that. The question is why he is raising spending while cutting taxes.

On that there are essentially two theories. One is that Bush believes in hard-core supply-side economics. The other is the theory Krugman espouses in this column.

You *do* realize, don't you, that the last time we did this during the Reagan era it is documented that some people involved in it had exactly this reasoning? You *do* realize, don't you, that some conservative commentators have tried to rationalize this current situation in these terms? Including, I believe, the WSJ editorial board? This is not a loony theory.

The truth this time around is almost certainly very similar to what it was the last time around. I have no confidence that Bush himself, like his predecessor Reagan, really understands any of the economic issues involved. I suspect that he's surrounded by people advocating these policies for a variety of reasons, including both those above and others.

But of all these theories, this one is the most credible. Because while almost no one really believes that the extreme supply-side scenario will come to pass (that we won't have to cut spending *or* raise taxes), many people agree that things could play out pretty closely to the way that Krugman describes. It could work. And it's in accordance with the stated goals and ideologies of the people making the decisions. And, given who they are and how they got there, isn't it more likely that they're devious and competent than insane and incompetent?

(Given some of the comments in this thread, including especially A. Zarkov's, I'm beginning to see why some of the regulars here reacted so vigorously and negatively to my many comments that Krugman would be more effective after moderating his present style at the NYT. Nevertheless, I stand by my assertion—which was essentially pragmatic.)

The U.S. was a banana republic before WW2, Charles? Hmm... a few quibbles:

1) The banana republics, if I'm thinking of the same countries you are, do not have especially low government/GDP ratios.
(El Salvador's revenue as a % of GDP is about 16%, Dominican Republic about 17%, Costa Rica about 20% Jamaica about 30%)

2) The U.S. was a great power since the Civil War, at least (would Spain lose a war to a banana Republic? Would Japan and Russia submit to the arbitration of a banana republic for their disputes?).

3) Other great powers had much lower government/GDP ratios in earlier times too. France, for example, more statist than most, had government at about 10% of GDP in 1900, and most industrial countries of the time had about 5%.

4) The U.S. was probably the most dynamic economy in the world between the Civil War and the Great Depression. Banana republics are usually assoicated with stagnation.

(BTW, is U.S. post-Civil War growth overrated? U.S. growth from the Civil War to the early 1900s was impressive by international standards, but not extraordinary by todays standards, unless I'm mistaken. True, GDP growth was consistently about 4%, but population grwoth was consistently about 2.2%. 1.8% productivity growth is certainly not bad historically, but wouldn't be a cause for special celebration today, especially when one considers that the southern half of the country was recovering from a devastating war for some of it, and the economy usually grows more quickly, since it gets to do the "easy" bit about restoring the balance of capital to labor through investment, not the "hard" bit about increasing total factor productivity. Am I missing something, as far as it being a great boom time?)

So... I think that the real answer is more likely to be Keith M. Ellis's than Mark Bahner's or Charles Utwater II's, though I am no expert in the field. The nature of politics and/or the economy have changed -- not just in the U.S., but throughout the world -- so that a bigger government is necessary, desirable, or... well, exists: make of it what you will.

"The U.S. was a great power since the Civil War, at least..."

No, it was a power to be ranked with the other world powers from then on (see Trollope's comments on the matter). It probably became a GREAT power in the decade before the First World War.

I am pleased to see someone else discover my earlier point that neoconservatives are into change, not conserving.

This column gives us yet another fine example of the Inefficient Markets/Efficient Krugman Hypothesis. Interest rates are going so high that the government apparently won't be able to finance its deficits at any price-- but only once all those big dummies in the bond market figure out what Krugman already knows. Not only knows, but considers almost too obvious to need explaining. (I recall him making a very similar pronouncement about the oil market back in December. How did that turn out, anyway? Are we at $50 a barrel yet?)

How can throwing the Federal budget in deficit lead directly to spending cuts in Social Security and (part of) Medicare, when those are financed through *payroll taxes that have not been cut*?

I know that Krugman et al. think that the federal government (federal funds plus trust funds) needs to be saving $ to prepare for the baby boom generation, but *per se* the bankrupting of the non-trust fund portion of the budget doesn't *directly* impinge on the solvency of e.g. Social Security.

That is to say, if they *really* got rid of Social Security and Medicare, they'd have to get rid of the payroll tax. Of course, the right loves payroll taxes because they're regressive.

It's a good thing liberals would never do this. It's especially a good thing that, say, FDR never exploited (and played up) the Depression as an excuse to effect the social change he wanted.

That having been said, of course this tax cut is a bad idea. As a pretty radical conservative, it pains me to disagree with any kind of tax cut, but this is just absurd. Where's my tax cut? Keith Ellis writes: "In 1999 and 2000, I had the good fortune of finding myself pretty far into the highest marginal tax bracket. I paid six-figure income tax bills. And I *don't* begrudge them. I *do* begrudge the people who whinge all the damn time about taxation."

Well, as one of those who whinge, I'm all kinds of happy for you if you enjoy giving money to the government for social services (I mean that without irony). However, it sounds like you can afford it. For people like myself, whose taxes take what could be an (extremely) modest living wage and turn it into a pittance and whose taxes make the difference between being able to pay the bills and falling into debt, I think a little whinging can be excused. If paying more than a third of my rent to a government whose programs I use minimally if at all is not over-taxation, I don't know what is. Cut taxes for the rich and the poor.

"Of course, the right loves payroll taxes because they're regressive."

What? The right doesn't love the payroll tax. The corporate-welfare people love the payroll tax because they want to freeload off the poor. The welfare-welfare people want to freeload off the rich. The right, on the other hand, would like to stop bilking everybody. By all means, please kill the payroll tax dead and bury it at a crossroads with a stake through its heart.

So, you get no benefit from knowing that unemployable persons, senior citizens and the otherwise disadvantaged living in the richest country in the world are entitled to a minimum standard of living?

Hey, conservatives, when did you become pro-debt? Wise up, guys--this is the exploding national debt scenario you've been telling us about for decades It's lunatic; one doesn't encourage fiscal responsibility by going deeply into debt.

Look folks, you may hate the level of government spending, but before first Reagan and now W. Bush, it was done with realistic budgeting practices. Could we at least have an agreement to pursue those? You may--just possibly--be able to persuade people to abandon some of the spending you object to. Impoverishing the country for generations is not going to stand to your credit.

If you would prefer to force policy changes by deception on the USA, then you are enemies of democracy.

(Any replies which try to discuss the national debt without looking at it as a percentage of the GNP will be ridiculed unmercifully.)

>>. France, for example, more statist than most, had government at about 10% of GDP in 1900

France was "more statist than most" in 1900????? Do you know what the heck you're talking about?

"Well, as one of those who whinge, I'm all kinds of happy for you if you enjoy giving money to the government for social services (I mean that without irony). However, it sounds like you can afford it."

Yeah, well, I'm broke now. But that's another story. (A typical dot-com story.)

My experiences in earning money have been widely varied. I've been on food stamps, I've made more than 350K in a year (in what were technically *wages*, so no capgains tax break for me). I wasn't bragging—my point was sort of preemptive: I've found that many, many conservatives assume that all liberals that don't really mind current rates of taxation must not make very much money. My personal experience demonstrates that a principled liberal doesn't necessarily suddenly become a tax-begrudging government hating conservative when he finds himself paying a very large tax bill. (And, most of the money wasn't withheld and so in 1999, especially, I wrote a damn enormous check on April 15th.) It was a little heady, but I felt patriotic doing it.

Anyway, you sort of make the same sort of mistake with me here in assuming that my situation makes me unlikely (because you thought I was too rich) to feel the pain you're feeling. I don't begrudge you *not* liking to pay your federal tax. Why assume that my not minding it is somehow illegitimate?

Now, I do begrudge whining about it because, *in general*, I've found that most complaints are pretty irrational. To me, it's often comparable to people whining about speed limits or something. They're only paying attention to how they're obviously inconvenienced while ignoring the ways in which they're subtly benefitted. That's not to say that there aren't legitimate arguments to be made for lowering taxation and government spending. But, to be frank, oftentimes these arguments sound to me like rationales for a pre-existing conclusion motivated by very subjective emotion. But not always.

I'm a pragmatist, not a utopian (of either a leftist or rightist persuasion). I do have ideals and values, but I'm not enthusiastic about using government in a brute-force attempt to realize those ideals and values. So I'll differ somewhat from my fellow leftists here who often talk about "social justice". On the other hand, if I think that government is the best, most realistic solution to a well-defined problem, I don't really have any qualms about supporting it. And I'm perfectly happy to pay for it with my tax dollars. Furthermore, in the case of health care to use as an example, I think that paying for it in tax dollars rather than in the myriad, hiddden ways that the current (very) broken system makes me pay for it will cost me *less*. I don't have a lot of patience for the point of view that doesn't want to pay for it directly via taxes but is willing to pay *more* for it, indirectly, just because it's hidden and they can ignore it. This sort of thing, again, is what I don't like about what I consider a lot of reflexive anti-tax arguments.

At any rate, this is a bit of a digression.

"So what you really want is that Republicans should announce their agenda in a way that ensures no Republican will ever be elected. That isn't going to happen."

Maybe the Republicans should look into the odd detail that the public doesn't like their agenda.

Krugman's claim that "federal taxes are already historically low as a share of G.D.P." is incorrect even since 1962. Since the mid 1950s Federal Receipts as a share of GDP has been variable around 18%. Krugman really distorts history to say that the current share (17.9%) is historically low.

Don't believe me? I've graphed the data on Federal Revenues as a share of GDP at http://truckandbarter.blogspot.com

You can get data on federal receipts for yourself from Table 1.2 of Historical Tables 2004, at the Office of Management and Budget: http://www.whitehouse.gov/omb/budget/fy2004/pdf/hist.pdf

"But when will the public wake up?"

The public is awake. It apparently isn't too disturbed by what it sees happening. This in itself seems offensive to a lot of people.

There is a great deal the Democrats could learn from all this. Who's betting they will?

Well Stephane, how much good is unemployment insurance that maxs out at under $1000/month here in Arizona very useful to most people? And you've got to make quite a bit to hit the max. And you've got to get fired without cause to get it. Have you ever run a business or worked in HR? It's pitifully easy to find "cause" to fire someone.

Many people I know here who have lost jobs in the last few years haven't even bothered to file, although the fear of homelessness sure did inspire them to put in a LOT of job applications realy quick like. When you had worked full time and then are offered $40/week from unemployment, like a very close friend of mine's benefit would have been, it feels more like a slap in the face than help. Oh I'm sorry, must have been their fault for not working in an industry that was subject to a special "bailout" with enhanced unemployment insurance terms.

At least you used accurate terminology: Minimum sure was the right word.

I'm not opposed to tax funded social safety nets per se, lord knows there've been a few years in my life I could have used one, but the money we do spend is spent so inefficiently, and so much manpower and time fullfilling arcane rules, many of which merely serve as pretexts to NOT help, that I have a very hard time wanting to add more money to the current system.

How much money could be shifted to benefits by simplifying bloated rules, and cutting labor and other overhead? Now repeat that across the board, and you will have very possibly lowered spending while increasing benefits.

E. Naeher wrote, "'Of course, the right loves payroll taxes because they're regressive.' What? The right doesn't love the payroll tax."

If so, then why is Bush so intent on slashing progressive taxes but not (regressive) payroll taxes?

Jim Harris wrote, "The public is awake. It apparently isn't too disturbed by what it sees happening. This in itself seems offensive to a lot of people. There is a great deal the Democrats could learn from all this. Who's betting they will?" I guess this Democrat has learned that the press is more concerned with lies about blowjobs than with lies concerning the Federal budget and WMDs in Iraq.

Stephen: "If so, then why is Bush so intent on slashing progressive taxes but not (regressive) payroll taxes?"

Because it's politically impossible, that's why. And why is it politically impossible? I don't really blame the Dems; how about AARP? It helps to view the situation from the administration's viewpoint for just a minute.

I'd still like an answer to my question: if long-term deficits are a certainty, why is the long end of the treasury and corporate bond curves so low? Paul Zrimsek already mentioned this. We deserve some kind of answer.

JT writes:
>I'd still like an answer to my question: if long-term
>deficits are a certainty, why is the long end of the treasury
>and corporate bond curves so low? Paul Zrimsek already
>mentioned this. We deserve some kind of answer.

This is indeed an interesting question. For what it's worth, I think this point also stumps Krugman and other observers, who are increasingly surprised that foreign investors are still so willing to accept a rate of return this low given our current balance of payments problem. The easy and cheesy answer is that US debt is still considered a safe haven of some sort. I think it is quite legitimate to ask how long the current state of affairs can hold up. But in one sense it is kind of like asking why in the world did we bid up stock prices so high in the late 90s, or why any other kind of financial bubble exists. And given the risk in the current situation, I think it is crucial to ask why in the heck we have just signed into law a tax measure that essentially must lead to an increase in debt levels. This isn't, of course, a question that just Krugman asks. Greenspan pointedly mentioned this in his testimony this month as well.

JT,

two reasons:

1: Nobody wants to bid the long bonds lower to push the yields up, not after three years of sub par returns in the markets

2: The markets know that some future administration will be forced to bite the bullet and raise additional revenues to close the deficit gap.

In all probability that future administration will be Democratic, further strengthening the 'tax and spend' image of Democrats. Bush I fell into the hole dug by Reagan and whoever follows Bush II will fall into the same hole.

The New Republic - Unbalanced

sorry, here's the link:
The New Republic - Unbalanced

Another reason is that a lot of bond holders view stocks as being still overpriced and not a good investment. With money markets and CDs offering all time lows the only other game in town is bonds. The Fed is threatening another interest rate cut that makes current bonds more valuable. Bond prices will go down only after it is clear that interest rates will be going up. When do you think interest rates will go up?

"But at some point bond markets will balk ? they won't lend money to a government, even that of the United States, if that government's debt is growing faster than its revenues and there is no plausible story about how the budget will eventually come under control."

Errrr, What About JAPAN ???

Nah... I don't really know what I'm talking about, D^2. I don't know exactly where to find numbers for the French budget relative to other powers in 1900, or French GDP (if that was even measured in 1900). If you do, though, please illuminate.

Kevin Brancato, it is a mistake to use old OMB numbers to determine tax receipts as a percent of GDP. OMB has consistently overestimated receipts since 2001. For an analysis using updated CBO numbers (that predict an additional $50-$80 billion shortfall from the March prediction click here:

http://www.cbpp.org/5-12-03bud.htm

Even without any new tax cuts, receipts, measured as a percentage of the economy, are on course to fall to levels not seen for a number of decades.

CBO projects that revenues for this fiscal year will fall $50 billion to $80 billion below its March projection. If federal revenues fall $50 billion below the March projection, they will equal 17.1 percent of the economy (i.e., of the Gross Domestic Product) in 2003. That would be the lowest level since 1965. If federal revenues fall $80 billion below CBO’s March projection, revenues will equal 16.8 percent of the economy, the lowest level since 1959. In short, even without any new tax cuts, receipts as a percent of the economy are on course to fall below 17 percent of GDP for the first time since 1959.

Moreover, the figures refer to total federal revenues as a share of the economy. When just federal income taxes are considered, income tax receipts are on course to drop to their lowest level, measured as a share of the economy, since 1943.

These findings should give some pause to the current drive to enact further tax cuts. Receipts have already fallen to sufficiently low levels that questions about the adequacy of the nation’s revenue base must be raised, especially with the retirement of the baby-boom generation fast approaching. Moreover, the data showing that the decline in receipts has been greater than expected also means that the economy already is receiving a larger fiscal stimulus than had previously been recognized; the decline in revenues translates into a larger deficit, which means more fiscal stimulus.

Krugman is not incorrect that taxes are at an historic low if you use the latest numbers. In a $10 Trillion economy, a 1% drop in tax revenue is $100 billion.

Kevin Brancato wrote:

Krugman's claim that "federal taxes are already historically low as a share of G.D.P." is incorrect even since 1962. Since the mid 1950s Federal Receipts as a share of GDP has been variable around 18%. Krugman really distorts history to say that the current share (17.9%) is historically low.

sorry, but Federal receipts are not the same as federal Taxes.

You can look at tax rates or tax receipts (the two are NOT the same). Tax rates are at historical lows: the median income family is now paying an effective rate of 6.71% in 2001. The last time they saw that was in 1957. Families at twice the median income paid an effective 15% in 2001. Except for a short period 1992-1994, the last time the rates were below 15 for this crowd was in 1974. See

Tax receipts are at historical lows also. Income + corporate taxes (as % GDP) in 2002 was 11th out of 59 years since 2004 - in oly 10 out of the past 59 years has this percentage been lower.

Comparing gross federal receipts (17.9% )is meaningless - that number includes excise taxes, social security receipts and 'other'.

krugman's claim that 'taxes are at historical lows' is quite accurate - both from an effecive tax rate basis as well as Tax receipts as % GDP basis.

JT,

Sure, it's politically difficult to cut payroll taxes. But do you really think the Administration, or Congressional Republicans for that matter, have any interest whatsoever in cutting a regressive tax?

Almost all tax moves by the Republicans are consistent with a determination to cut taxes for the wealthy and do little or nothing to cut taxes for the not-so-wealthy. You can cite economic theory all you want as to why this or that tax cut is economically justified, but Occam's Razor says it's class warfare.

JT,

Sure, it's politically difficult to cut payroll taxes. But do you really think the Administration, or Congressional Republicans for that matter, have any interest whatsoever in cutting a regressive tax?

Almost all tax moves by the Republicans are consistent with a determination to cut taxes for the wealthy and do little or nothing to cut taxes for the not-so-wealthy. You can cite economic theory all you want as to why this or that tax cut is economically justified, but Occam's Razor says it's class warfare.

JT,

Sure, it's politically difficult to cut payroll taxes. But do you really think the Administration, or Congressional Republicans for that matter, have any interest whatsoever in cutting a regressive tax?

Almost all tax moves by the Republicans are consistent with a determination to cut taxes for the wealthy and do little or nothing to cut taxes for the not-so-wealthy. You can cite economic theory all you want as to why this or that tax cut is economically justified, but Occam's Razor says it's class warfare.

JT,

Sure, it's politically difficult to cut payroll taxes. But do you really think the Administration, or Congressional Republicans for that matter, have any interest whatsoever in cutting a regressive tax?

Almost all tax moves by the Republicans are consistent with a determination to cut taxes for the wealthy and do little or nothing to cut taxes for the not-so-wealthy. You can cite economic theory all you want as to why this or that tax cut is economically justified, but Occam's Razor says it's class warfare.

Long rates: thanks for the responses. If it helps, Dsquared gave a similar answer, that the bond markets expected the deficits to be reduced by subsequent gov't action. Maybe.

About a bond market bubble: that such a bubble is occurring may be the case but let's keep in mind that the bond market, much more so than the equity markets, are driven by professional money managers at financial institutions. I think that would limit any speculative fever. It'll be interesting to see how this plays out but I wouldn't take the "deficits as far as the eye can see" as a given considering the message from the financial markets.

bakho--Thank you for informative response and the link to CBO data.

Suresh--I believe that social security taxes, excise taxes, and 'other' are both federal taxes and federal revenues.

I not am trying to engage in a policy debate; I just want to look at the data. If 2003 winds up with historically low ratio of federal taxes to GDP, as is forecasted, then this should be placed into historical context. Comparison should be made to the historically high ratio of federal taxes to GDP that occurred in from 1996-2001, as well as to previous periods when the ratio was historically low.

"Comparing gross federal receipts (17.9% )is meaningless - that number includes excise taxes, social security receipts and 'other'."

Meaningless, how? Let's have another look at the original context:
--------------------
Although you wouldn't know it from the rhetoric, federal taxes are already historically low as a share of G.D.P. Once the new round of cuts takes effect, federal taxes will be lower than their average during the Eisenhower administration. How, then, can the government pay for Medicare and Medicaid-- which didn't exist in the 1950's-- and Social Security, which will become far more expensive as the population ages?
--------------------
This argument looks pretty damned silly if you define "federal taxes" in such a way as to exclude the very taxes that pay for Medicare and Social Security, doesn't it? Not to mention that one of Krugman's favorite pastimes is jumping all over conservatives who say "taxes" when they mean only "income taxes".

"Well, it appears that perhaps Krugman has a better comprehension than you of what contexts are meaningful and what contexts are not. That is, if you seriously think that the 1789-1930 period is relevant to this discussion."

The period from 1789-1930 is very relevant to the discussion. From 1789-1930 is when the federal government (largely) followed the Constitution. No New Deal/Great Society Democrat (as Krugman is) wants the federal government to return to following the Constitution.

So Paul Krugman and friends would rather pretend that a time when the federal government was the size required by the Constitution never even existed.

It's a good thing that Jason McCullough's and Jim Harris' comments are separated by Kevin Brancato's, as otherwise we'd have a matter/antimatter explosion on our hands.

Sorry, Jim, but rightists here seem to be openly acknowledging that they must hide their agenda from the public, while the leftists insist that, if the public knew, they'd object. The two sides are consistent in their arguments, except for your insistence that the American public, which believes that Saddam Hussein masterminded 9-11, understands the long-term economic implications of the "$320 B" tax cut. Do you actually have any evidence that the public at large understands the implications? Or does your insistence simply support you position?

JT’s question on why long rates are so low does, as he asserts, deserve an answer. I don’t have a complete one, but I can offer an observation. Returns on any given investment have to be compared to what is available on reasonable substitutes. US long Treasury rates are little different from those in the Eurozone (0.28% lower at 10 years, just now). US long rates are lots better than those available in Japan (2.96% higher at 10 years just now). US 10-year rates are considerably higher than rates on 2-year notes (2.12% just now - that's pretty steep). The P/E on the DJIA is 27.9 about now, which inverts to 3.58%, and that is generally considered a higher risk asset than Treasuries (though there is more dispute about that these days), so the 0.62% pick-up for holding basket of Dow stocks is not hard to explain. Now, if one were to buy real estate instead...

It is also worth noting that bank holdings of Treasuries are near historic lows, as a share of total assets. Banks have historically been major holders of Treasuries. That is an odd circumstance, given that foreign holdings of Treasuries are above historic norms now. These two types of investors are making very different choices. Perhaps the fact that banks don’t have an interest in influencing foreign exchange rates has something to do with that. It is not guaranteed that banks will step in to balance things up if foreign accounts sell Treasuries. On the other hand, it would be an odd event for foreign accounts, in aggregate, to sell Treasuries. They normally just slow purchases, which would be a problem, nonetheless.

The reason why long term rates are low is the same reason why money-losing dot-coms were valued so highly just a few years ago. The markets are only semi-efficient and psychology plays a huge role in pricing.

As reality descends on us in the future the rates will increase.

Paul,

the argument that Income taxes are low, therefore social security is at risk is not at all silly.

Social security is NOT self funding from FICA taxes, at least it won't be very soon. In that situation, future *Income taxes* have to pay for social security (and medicare / aid), unless we *raise* FICA taxes, agreed?

In that context, you *should* exclude FICA contributions and focus on Income taxes as % of GDP since this is the piece that must fund the FICA deficit that is likely to arise as baby boomers age - absent a FICA increase.

To the extent we expect a FICA funding gap that is to be filled with other sources of tax revenue, reducing those sources will put social security at risk.

This is the spirit of Krugman's argument and it makes perfect sense to me.

Nominal rates are very low. Whether real (after inflation or, better, after inflation expectations) rates are low is a different question.

Nominal rates are very low. Whether real (after inflation or, better, after inflation expectations) rates are low is a different question.

Mark, a government of the size you prefer cannot govern the nation the USA has become.

"The public is awake. It apparently isn't too disturbed by what it sees happening."

When 20% of them are out of work, and their savings are being eaten away by double-digit inflation, think they still will be calm?

Paul Z., you critisize Krugman for not including payroll taxes, but you're missing the crux of Krugman's argument, IIRC. I believe Krugman's point is that income taxes, which of course fall more heavily on those earning more income (especially from capital gains and dividends), are indeed lower now. Given that payroll taxes are what make Bush's tax cuts even possible, and that the incipient retirement of the boomer cohort will both lower payroll taxes and increase what Social Security and Medicare are obligated to pay out, and Krugman's point about the danger Bush's tax cuts pose in the future is quite clear.

Mark B., this isn't about the constitutionality of social programs like Social Security and Medicare at all. It's about the long-term economic consequences of Bush administration policy.

"Social security is NOT self funding from FICA taxes, at least it won't be very soon. In that situation, future *Income taxes* have to pay for social security (and medicare / aid), unless we *raise* FICA taxes, agreed?"

No, not necessarily, not at all.

Franklin Roosevelt specifically rejected income tax revenue for Social Security when he created it, and famously said SS would be "out of the Treasury forever" -- meaning no income tax revenue for it. And he meant forever, setting up a financing scheme for it so it wouldn't ever need income tax revenue, not even in our future. (Note that despite all the claims that we must protect the New Deal, this is very far from FDR's Social Security we are protecting).

FDR had quite strong reasons for keeping SS "out of the Treasury". Krugman never bothers to mention them. Have you considered them? The Greenspan/Moynihan Commission that reworked SS's finances (after the generations of politicians following FDR destroyed them) also worked on the basic proposition that SS would always be financed with payroll taxes, never income taxes. It had strong reasons too.

Greenspan has since said that the recent *assumption* on the part of some that *of course* income tax revenue should be poured into SS would bring about the most dramatic change in the history of the program -- and that its consequences seem to be totally unexamined by those who make it.

Of course, a good number of reform proposals have been put forth to reduce or eliminate the need to pour in income taxes on top of payroll taxes in the current "tax and transfer" benefit system. Moynihan had one. And I've even made the crude proposal of means testing millionaires out of Social Security benefits. (There are going to be lots and lots of millionaire retirees 30 years from now on current trend -- and FDR never imagined *his* Social Security being a poor-to-rich transfer program.)

Have you ever kept FDR's reasoning (and that of the subsequent SS trustees and reform commission) in mind when examining whether one of these alternative proposals or the simple "pour income taxes in" notion best fits the the intentions of Social Security's creators?

Social Security has been hugely reshaped and "reformed" in the past. Personally, I don't see the logic in suddenly freezing just now, so it will pay huge poor-to-rich transfers in the future. Consequently I do not see the logic in making the be-all-and-end-all of current fiscal policy preserving the national ability to to make those poor-to-rich transfers in the future. That looks like luddite policy to me.

But I guess I'm just not "progressive" enough. ;-)

No, you are neither progressive or compassionate. Simply another radical-conservative-selfishly-myopic note of obfuscation.

PK does not say what numbers he is using. If he is using the CBO numbers I posted above, then those numbers include all Federal revenues, including payroll taxes. With the tax cut Federal Revenue is expected to drop below 17% of GDP. That would be levels last seen in the 1950s. PK references to Ike administration make me think that he is also going by the latest CBO update.

As for Social Security, more revenue is currently collected than is being paid out to the tune of 30%. The SS trust fund money is "borrowed" by the Federal government to fund other programs. In the next 15 years, SS will collect less in payroll taxes than is paid out. The difference will come from the SS trust fund. That means that SS will have to start calling the loan. That means that taxes other than payroll taxes will be flowing into the SS trust fund to pay off the loan. The money due to SS security will be paid for by increased taxes or cuts in spending or increases in borrowing. The Clinton concept was to pay down the debt so that when the trust fund needed to be repaid, the Federal government would be in a better position to pay it back.

The interest on the debt is high right now and we are cutting corners by issuing low interest short term debt. When interest rates rebound, the debt service payments will become a greater portion of the budget. How large is the debt service? Under Clinton, the debt service was greater than the increase in the government debt. That is money that could be better spent on other programs or even tax cuts.

My impression was that Roosevelt financed SS through payroll taxes for extremely dubious reasons: to make social security politically untouchable, since it would be removed from the normal stream of government revenue. Payroll-tax based financing has been quite effective in that respect, with many people -- including those who, intellectually, know that social security is a pay-as-you-go program -- talking about it as if people were owed social security because they should be able to get the money that they put into the system earlier back out of it for retirement, as if it were a trust fund.

However, Jim, it sounds as if you know more about Roosevelt's reasoning than my (admittedly rather cartoonish) version of it. Why not be more specific about the logic of Roosevelt/Moynihan/Greenspan?

Though, I think that the main point has been that even if social security no longer finances itself, the considerable surpluses it's run over the decades means it can still operate by indirectly directing income taxes to itself from the bonds it's bought, without getting income tax money explicitly appropriated to itself. After all, saying that payroll taxes in excess of social security needs go into general revenue, but that social security needs must be paid through payroll taxes and cannot be drawn FROM general revenue seems a little inconsistent.

But... I think we should gradually phase out social security anyway (not that I think it will happen in my lifetime), so making social security dependent on income taxes, like any other federal program, making it less of a political sacred cow, would be a good thing in my view anyway.

Even if you disagree with me and think SS is a good thing (as I suspect most people here do), though, I think it's hard to make the case that we should effectively deceive the public into thinking it's something it isn't to amke it politically invulnerable.

"Greenspan has since said that the recent *assumption* on the part of some that *of course* income tax revenue should be poured into SS would bring about the most dramatic change in the history of the program -- and that its consequences seem to be totally unexamined by those who make it."

Maybe Greenspan shouldn't have suggested raising the SS tax rate was such a good idea back in the 1980s then, if he's so offended by an interaction with income taxes. Where does he think the massive SS surpluses are going?

I checked on the PK website and he linksto the CBPP analysis using the CBO numbers that I posted.

http://www.wws.princeton.edu/~pkrugman/fiscalfacts.html

You can argue about the CBO numbers but they are produced by a GOP former Bush administrator. I would think that the conservative GOP base (the Grover Norquist wing) would laud the reduction of revenue to GDP to historic low levels.

"My impression was that Roosevelt financed SS through payroll taxes for extremely dubious reasons: to make social security politically untouchable, since it would be removed from the normal stream of government revenue..."

That's part of it. And it wasn't such a dubious notion in that the payroll tax financing constraint kept SS from expanding into a huge European-style general welfare system, while at the same time the dedicated financing kept its revenue from being siphoned off by political interest groups for other purposes (see comments below). So it politically stabilized SS both ways (to a good degree.)

"Why not be more specific ..."

It's a very interesting story, but don't take it from me. E.g. look over some of the original materials at http://taxhistory.tax.org/default.htm They thought much more clearly about SS back when they were setting it up than we do today, with it now all politicized to the nth degree.

"I think we should gradually phase out social security anyway ... making it less of a political sacred cow".

Yes. And the irony is this is exactly what the "no compromise" defenders of SS who want to pour general revenue into it will get as a result of doing so. Imagine using large amounts of income tax revenue to prop up SS in an era while the gov't is running large deficits, as it will be. Everyone else who needs federal money from the Argriculture Dept. through Defense and Education to the people running real welfare programs will unite and say, "Why are we collecting income taxes to pay full Social Security benefits to Bill Gates?". There's going to be a big natural political alliance for means testing. Bill's not going to get his full benefit -- and rightly so, too, as he'll hardly need to receive that income tax revenue more than the others do.

Once SS is means tested *at all* it becomes a welfare program that nobody young can rely on because they don't know where the politicans will put the means testing level in the future. Add to that the negative returns that it will be providing to so many in that generation on their payroll tax contributions (even lower including any income taxes) and nobody's going to want to be paying for a benefit they can't can't rely on when they could get a better rate from an insured savings account or by buying an actual government bond. SS will be unpopular. The third rail of politics won't be carrying any voltage any more.

"(not that I think it will happen in my lifetime)"

If you are young enough, it might. The irony here is that proposals like Feldstein's and Moynihan's could have put SS on a fiscally sound track permanently and saved it "as we know it" indefinitely into the future as an independent program. But now it is getting late in the game for those to work.

Just like some say FDR used a little bit of socialism (partly in the form of SS) to save capitalism in the Depression years, today a little bit of capitalism (in the form of privately owned 2% savings accounts added to the system, and a few complimentary adjustments) could have saved SS as we know it into the far future -- no income taxes, everybody covered, no means testing.

But those 2% accounts, which have been adopted by Sweden for its Social Security system, are too "radical right wing" for today's Democrats. Most people don't realize the Swedes are such radical right-wingers.

"The irony here is that proposals like Feldstein's and Moynihan's could have put SS on a fiscally sound track permanently and saved it "as we know it" indefinitely into the future as an independent program. But now it is getting late in the game for those to work."

Please. Marty Feldstein would as soon have no Social Security than ever "save" it. Mart is delighted that this radical-Republican Administration is doing all it can to undermine Social Security, Medicare, and Medicaid. This Administration is bent on ending any and every possible social benefit program.

Thanks Lise

Marty Feldstein is thrilled by the destructive fiscal policy this Administration is pursuing. The idea has always been to end the New Deal and Great Society programs that have fostered such a wonderfully strong American middle class. Perhaps this middle class will wake up to how mean-spirited this Administration is.

Brad, given the financial train wreck that Paul is describing, do you have any thoughts on why the rush by Democratic challengers to develop universal health care coverage? (Note: I'm not criticizing the idea of universal coverage.)

Imagine if we had extended health care coverage for millions of low income workers rather than cutting capital gains or dividend taxes.

By the by, 48% of capital gains income goes to households with incomes above $1 million.

http://www.cbpp.org/

"Maybe Greenspan shouldn't have suggested raising the SS tax rate was such a good idea back in the 1980s then, if he's so offended by an interaction with income taxes. Where does he think the massive SS surpluses are going?"

The surpluses weren't Alan's creation, FDR's social security progam had a reserve account that was to hold surpluses to fund it forever (though politicians long before Bush spent and tax-cut it all away).

But to the point, the unexamined assumption that puzzles Alan of course is that the shortfall over-and-above the trust fund financing will be financed with income taxes. I mean, there have been plenty of funding shortfalls in the history of Social Security, yet nobody ever before assumed they would be financed with income taxes. In addition to payroll tax hikes there have been lots of changes in the benefit formula in SS in the past. Greenspan's commission produced major benefit cut backs. So why are income tax increases suddenly just assumed?

Consider that we are talking about the world of 2040 -- a full 100 years after Social Security was created. In that century we will have gone from a world where:

. the old were the poorest group as a class, almost none of them had private pensions, and workers who were richer than they helped them out by paying a very low tax rate through SS; to a world where ...

. the old are the richest class as a group, they own literally trillions of dollars in private pension assets (not to mention other wealth), workers as a class are poorer than they are, and are paying a high tax rate to fund transfers to them as a group.

Why do we *assume* that the benefit schedule for SS can't be changed in the future (as it has been so often in the past) to reflect this reversal of reality, and significantly close the funding gap?

Why do we instead assume that in 2040 workers will have to pay yet more, now through income taxes, to satisfy a benefit schedule set up in the prior century for a very different world? Isn't that a rather luddite attitude?

Alan wonders why "reform" isn't even a consideration for the assumers.

Without giving the theoretical structure, here is some stuff that ought to work on Social Security/unemployment in the modern world:-

- Set up taxes with impact (NOT incidence) on producers, if you don't already have them. VAT/GST will do.

- Count out the people entitled to work (citizens, legal residents, etc.). You don't need a list, just a count.

- Estimate the average cost of one of these being unemployed. Not the cost to him or her, the spread cost, including Vagrancy Costs. In Australia it's about A$10,000 p.a. N.B., this is less than a minimum to live off, long term.

- Work out the producer tax rates, as a percentage, that would yield all today's revenue needs plus that unemployed cost for everybody in the legal working population if they were all unemployed. It's a dummy number, since many aren't.

- Implement the tax with a tax break for each producer, based on offsetting the tax bill by that virtual cost for each person legitimately on the payroll there. Do pro rata stuff as needed, and use a quarterly voucher system to track offsets rather than make everybody need to be identified and sorted out individually.

This sets up a virtual employment subsidy with no actual cost. Pay attention to those words "virtual" and "actual", and remember that the level chosen is critical: it must be less than enough to live off yet enough to let everyone price themselves into work. Short of Malthusian limits, there are always solutions, and the Vagrancy Costs/Social Security costs figure is one with no additional opportunity cost. It may be lowered over time, for instance by fiscal drag, so increasing net output even more.

Now stand back, and over time allow the vouchers to be monetised and become a Guaranteed INadequate Income system, a real rather than a virtual subsidy. Then transfer the payment obligations to separate funded trusts, and allow those to pass back responsibilities to individuals, and you have completed a transition from a Pigovian provisional and mediated solution to a more self maintaining disintermediated Coasian one. Right back where Solon left things two and a half millennia ago, in fact - since financial pressures would no longer make people do the dirty work (we could go for effective civil conscription, e.g. by age relating the entitlements, rather than the Athenians' more Coasian slavery - but I digress).

"So Paul Krugman and friends would rather pretend that a time when the federal government was the size required by the Constitution never even existed."

And Mark Bahner would rather pretend that he lives in a 19th century state. Who'd have thought that he's actually a Mennonite?

"And Mark Bahner would rather pretend that he lives in a 19th century state. Who'd have thought that he's actually a Mennonite?"

Appropo of very little, but irrestible to me for retelling in this context, is something my best friend said to me this afternoon. He told me that, back in the day, when he used to be a libertarian and subscribed to some libertarian magazine (don't remember the name), he said—while barely restraining hysterical laughter—that every few months or so, there were articles such as "Are Photons Private Property?"

We laughed and laughed and laughed. Who says that there's no one left that you can make fun of? Libertarians and Objectivists: comedy gold. I'm telling ya'.

Paul Krugman is a smart and interesting guy. Unfortunately, he misses the mark in this article. First, he commits the grandfather fallacy with : "...programs that have become fundamental to the American way of life will be gutted." He never goes on to make the case that the social programs ought to exist. They're going to be gutted, so what? Should they be? If not, why not? What is the "correct" level of social benefits?

Second, he uses the pseudo-refuting description "radical". It's not enough to just call something "radical". Calling something "radical" doesn't by itself do anything to refute the proposition. Perhaps sometimes "radical" solutions are precisely what's required.

Third, for what it's worth, the Harvard economist Robert Barro has a completely different take on the Bush tax cuts. You can read his "BusinessWeek" column on the Bush tax cuts at his Harvard web site. I can't remember the url right now but just Google on Robert Barro and you can easily find it.

"The surpluses weren't Alan's creation, FDR's social security progam had a reserve account that was to hold surpluses to fund it forever (though politicians long before Bush spent and tax-cut it all away)."

True, FDR had built them in there, but Greenspan was on the 1980s reform commission that recommended building up a surplus to deal with the future claims, right?

I think we're differing on what "income taxes" means. When I say "SS funding through income taxes", I mean the federal government paying back the funds its taken from the social security surplus to pay down the debt. After all, what was the point of running those huge surpluses?

For those of you who don't like Social Security,

"May your mother-in-law move into your house when she retires."

"Why do we instead assume that in 2040 workers will have to pay yet more, now through income taxes, to satisfy a benefit schedule set up in the prior century for a very different world? Isn't that a rather luddite attitude? "

-Posted by Jim Glass at May 28, 2003 02:40 PM

Jim, can I sign you up on a petition to eliminate the US Constitution? After all, it was set up in the *third* century prior to this one, for the needs of a group of agricultural/sailing ship merchant colonies, in a much more different world.

Barry -- boy was that an intelligent post.

bakho-

My mother in law has never been to the U.S., has never paid into and will never collect Social Security, but eventually will be moving in with us. And that's just fine with me.

Why should I be subsidizing somebody else's mother-in-law? :)

"...Why should I be subsidizing somebody else's mother-in-law? :)
Posted by Kevin Brancato"

Which makes more than clear that in no way the USA intend Iraq to enjoy a democracy. Because that would imply a subsidy to somebody else. The

DSW

While Barry's post was heavy with irony, he was actually making use of and driven by an esablished mindset, one that was reinforced by the very institutions that are part of the USA. To the rest of us in the outside world, what the USA has is far less self evidently the right way to do things.

So what was meant with irony is actually a very real question, only not one accepted as such by anyone in a position to do anything about it. Me, I see the makings of the Roman "Social Wars" here.

"Jim, can I sign you up on a petition to eliminate the US Constitution? After all, it was set up in the *third* century prior to this one,..."

Yes, and it has been amended 27 times, dramatically so on occasion, with many such additional changes in its interpretation as would be unimaginable by the founders. It has changed with the world it is in.

It's too bad so many don't want Social Security to do the same. It actually follows Bismark's model, set up in the 19th Century, as the history section of ssa.gov explains. And here we are in the 21st...

BTW, "change with the times" does not = "eliminate".

"When I say 'SS funding through income taxes', I mean the federal government paying back the funds its taken from the social security surplus to pay down the debt. After all, what was the point of running those huge surpluses?"

But when others say "income taxes" they mean extra income taxes on top of those income taxes, because the income taxes you are talking about leave SS > 20% underfunded for today's young workers.

I thought the entire point of the SS increases in the 1980s was to build up a sufficient net improvement in the government's position that it could temporarily run the boomer-related deficits with no problem.

There's a few components as I see it:

Worker/retiree ratio
Health care spending
The baby boomer bulge

I guess I need to do a bit more research.

So... I think that the real answer is more likely to be Keith M. Ellis's than Mark Bahner's or Charles Utwater II's,..."

Julian, Julian, Julian! Whenever you're uncertain about the "real answer," always go with Mark Bahner! ;-)

First of all, what I said about the size of the federal government today is absolutely true. It is at least 5 times as large as the average size from 1787 to 1930. Paul Krugman DELIBERATELY only chose to go back to Eisenhower with his statement that, "federal taxes are already historically low as a share of G.D.P.," because he isn't honest enough (or informed enough, which I highly doubt!) to admit the New Deal was a radical and unconstitutional federal power grab. Paul Krugman pretends that the New Deal is legitimate, because he knows that most U.S. citizens don't have the knowledge of history and law to know that he's lying.

Second, Charles Utwater's post was mostly nonsense, with only enough truth in it to make it seem plausible. Mr. Utwater asserted that the "the United States was the equivalent of a banana republic, selling off the vast resources it stole from the indigenous inhabitants to pay for growth."

There are so many things wrong with that statement that it's hard to even begin. First, a "banana republic" is defined by "dictionary.com" to be:

"A small country that is economically dependent on a single export commodity, such as bananas, and is typically governed by a dictator or the armed forces."

To call the early United States a "banana republic" is therefore essentially nonsense. The early U.S. NEVER had a dictator...let alone a military dictator. And the U.S. was NEVER a "small country"...and NEVER "dependent on a single export commodity."

So the "banana republic" is nonsense.

As for the "stolen" resources...the only conceivable resource "stolen" from the Native Americans was land. Well, when Columbus arrived, there were probably a million Native Americans "owning" the entire continental United States. One tribe of several 10s of thousands "owned" entire states.

The European settlers and their descendants got this land from Native Americans through a variety of means: 1) the forcibly took some, 3) the purchased some, 3) they simply occupied some, and claimed squatters' rights, and 4) they took over lands that the Native Americans abandoned, in many cases because Native American populations were devasted by diseases carried by Europeans and their descendants, for which Native Americans had no immunity. (It's ridiculous, in my opinion, to blame Europeans for giving Native Americans these diseases, as the Europeans and Native Americans both understood virtually nothing about what causes or prevents disease transmission.)

So, Mr. Utwater's "banana republic" nonsense, and his "stolen resources" is also more nonsense than truth. (If the Native Americans had been able to actually USE the natural resources with which they were endowed, as Europeans used hydropower to run factories, the Native Americans would have been able to keep more of their lands.)

In general, as the late Julian Simon extensively demonstrated, resources are CREATED by human ingenuity. (The Native Americans had no cotton "resources," because they didn't have the ingenuity to turn cotton into textiles.)

"The nature of politics and/or the economy have changed -- not just in the U.S., but throughout the world -- so that a bigger government is necessary, desirable, or... well, exists: make of it what you will."

The nature of politics and the economy have NOT changed such that a bigger government is necessary or desirable. There has never been any need for a bigger government than the minimum necessary to protect the rights of individuals.

And the world-wide average size of government has been declining since at least the mid-1970s...and is likely to continue to decline towards the minimum size necessary to protect the rights of individuals.