Semi-Daily Journal

We are heading for an awful mess. Far too little household saving, a government deficit that will grow and grow at a time when we are aging and will need more social services than ever, and a balance of payments deficit that is growing dangerously.

I know that the very rich can be somewhat insulated from the worst economic shocks. But what are all these people thinking? They have to live in this country too. Do they think that being rich and isolated will be pleasant - or even possible - if the vast majority of citizens find themselves un or under employed and the standard of living continues to decline? What kind of business climate will it be when everyone is broke? How long can the country survive as a vast debter state?

The more one reads about the economic policy, one gets the feeling that just like in the war, where Bush insisted that his advisers and handlers not tell him any bad news, the same rule must apply with respect to economic news. Only the most absurdly rosy Laffer-curve fantasists could conceive that the neo-Victorian income and wealth redistribution system that Bush, Tom deLay and Lott/Frist have set up will lead to anything but social disaster and economic chaos. But then, if no one is allowed to tell you bad news...

The more one reads about the economic policy, one gets the feeling that just like in the war, where Bush insisted that his advisers and handlers not tell him any bad news, the same rule must apply with respect to economic news. Only the most absurdly rosy Laffer-curve fantasists could conceive that the neo-Victorian income and wealth redistribution system that Bush, Tom deLay and Lott/Frist have set up will lead to anything but social disaster and economic chaos. But then, if no one is allowed to tell you bad news...

The more one reads about the economic policy, one gets the feeling that just like in the war, where Bush insisted that his advisers and handlers not tell him any bad news, the same rule must apply with respect to economic news. Only the most absurdly rosy Laffer-curve fantasists could conceive that the neo-Victorian income and wealth redistribution system that Bush, Tom deLay and Lott/Frist have set up will lead to anything but social disaster and economic chaos. But then, if no one is allowed to tell you bad news...

" beyond a ten-year horizon, spending on Social Security, Medicare, and Medicaid is almost certain to grow faster than national income or revenues as the baby boom generation retires, life spans lengthen, and per capita health care expenditures rise."

Since these things are not paid for by income taxes, but Payroll taxes, and the recent tax rate reductions were on incomes, there is not the connection being implied. Unless we're going to be honest and admit that SS and Medicare are insolvent. Which some find hard to swallow.

However, Michael Boskin is about to publish a paper claiming that the baby boomers have trillions of dollars in assets in their 401Ks and other retirement vehicles. So why do we need to worry about spending taxpayers money on these wealthy?

brad, could you or someone comment on the effect or accuracy of the recent rash of stories about the timing of the taxes on 401k's when the accessed by the boomers in retirement--
that is about the boskin paper
http://emlab.berkeley.edu/users/burch/e231_sp03/Boskin.pdf

"I know that the very rich can be somewhat insulated from the worst economic shocks. But what are all these people thinking? They have to live in this country too. Do they think that being rich and isolated will be pleasant - or even possible - if the vast majority of citizens find themselves un or under employed and the standard of living continues to decline? What kind of business climate will it be when everyone is broke? How long can the country survive as a vast debter state?"

-Posted by SOB at June 27, 2003 01:28 PM

The theory is probably 'take all that you can get away with. Let others keep things from collapsing.'.

Mr. Sullivan -

It isn't Social Security that will be "insolvent." The federal government owes a ton of money to the Social Security trust fund, but instead of saving up to pay it, it is running huge deficits. The government must either default on its debt or find trillions to pay that debt. THAT is what they're talking about.

Those tax cut were our Social Security saying goodbye.

Patrick,
These entitlements are only insolvent because during years of surplus from the payroll taxes, the funds were not put in a "lockbox" but spent on items that should have been funded by other taxes.

That is an interesting analysis you put forward though. Spend the money on non-entitlements and then say the entitlements are insolvent. You sound like a modern day conservative to me.

Dan, and Issues Guy, you have just admitted SS is insolvent due to spending by government, not by the recent tax cuts.

You're really grasping at straws, Patrick. The issue is that the Bush administration has launched a huge withdrawal of money from the federal government but has not even tried to reduce spending to match. Result: massive deficits.

Sullivan,
You're a frickin'right-wing moron!

Social service programs from Social Security, to GI Benefits after World War II and Korea, to public schooling at all levels, to Medicare and Medicaid, to equal rights legislation, have assured the emergence of a wonderfully broad and generally secure middle class. There has been a simmering resentment of such program from the radical right from the New Deal on. The radical right is in control of much of the Republican Party, and is determined to end or weaken the social service programs that have assured our middle class society.

Michael Boskin is a radical rightee at the radical rightee American Enterprise Institute.

Remember James Glassman of "Dow 36,000" fame? Another American Enterprise radical rightee hoping to wreck Social Security as we all rush private Social Security retirement funds to the bursting stock market bubble.

Patrick,
I wrote, "the funds were not put in a "lockbox" but spent on items that should have been funded by other taxes." So whether you want to say the entitlements are insolvent because of things like Bush subsidizing agribusiness or because of things like the Bush tax cuts doesn't matter. Either way you're slicing up the same apple. Payroll tax money was not spent on entitlements which is why they should be replaced with income taxes for the sake of integrity.

Here's a question for conservatives in general - Do you ever get tired of being wrong and sounding retarded?

Now all you have to do, Dan, is prove that the spending would have occurred in the absence of the surplus of payroll tax revenues.

"Now all you have to do, Dan, is prove that the spending would have occurred in the absence of the surplus of payroll tax revenues."

Why would that matter? If the administration took money from payroll taxes, instead of raising other taxes, then they have to return this money without raising payroll taxes, until all that money has been returned.

DSW

So the CEA is projecting a general fund deficit for 2004 in excess of $550 billion. So Congress is about to pass two things on healthcare: (a) a prescription drug benefit that will costs $40 billion per year or more; and (b) a new tax benefits for health care that will lower tax revenues by $20 billion a year or more. Since financial solvency does not matter - why don't we have the government pay for everything we wish to consume and eliminate taxes altogether? Would not that assure Bush would win reelection? It would seem that his reelection is all that truly matters.

I just printed Boskin's paper so the following two thoughts might be unfair - but I'll ask anyway. He traces the Federal debt versus the accumulation of funds in these savings vehicles. Is he assuming all of IRA accumulations are coming from new savings? Doesn't much come out of other forms of savings? Additionally, his model seems to suggest a fiscal neutral switch to more deferral, but that strikes me as being quite different from a pure tax cut that is not offset by spending cuts or other tax increases.

I'll try your idea out with a bank. I'll take a loan and when they come to collect I'll ask them to prove the spending would have occured in the absence of the loan. Your thinking sure would bring the capitalist system to a halt.

I refer you to my question for conservatives in general.

Finished Boskin's paper. These American Enterprisers are hacky as hack can be. This is pretned economics aimed at destroying Social Security. Fortunately Bossee Boskin has no need for Social Security since the radical-right showers love on such hacks.

Painful choices? Ouch! The fiscal policy of this administration is limiting our options. We have a current commitment to Iraq that costs $36 billion per year, an increase in military spending of almost $100 billion per year and all the talk is of cuts in entitlements. I know where some truly painful cuts can be made. They can be made and lmit the power of our politicians to engage in unilateralist preemptive wars by scaling back our military to a reasonable level. That is not the decision to cut social programs that the GOP wants but when push comes to shove how many more aircraft carrier groups and submarines do we really need? When are the current military jets good enough and ones costing twice as much overkill? These are Difficult choices, but ones that can be made.

Painful choices? Ouch! The fiscal policy of this administration is limiting our options. We have a current commitment to Iraq that costs $36 billion per year, an increase in military spending of almost $100 billion per year and all the talk is of cuts in entitlements. I know where some truly painful cuts can be made. They can be made and lmit the power of our politicians to engage in unilateralist preemptive wars by scaling back our military to a reasonable level. That is not the decision to cut social programs that the GOP wants but when push comes to shove how many more aircraft carrier groups and submarines do we really need? When are the current military jets good enough and ones costing twice as much overkill? These are Difficult choices, but ones that can be made.

Painful choices? Ouch! The fiscal policy of this administration is limiting our options. We have a current commitment to Iraq that costs $36 billion per year, an increase in military spending of almost $100 billion per year and all the talk is of cuts in entitlements. I know where some truly painful cuts can be made. They can be made and lmit the power of our politicians to engage in unilateralist preemptive wars by scaling back our military to a reasonable level. That is not the decision to cut social programs that the GOP wants but when push comes to shove how many more aircraft carrier groups and submarines do we really need? When are the current military jets good enough and ones costing twice as much overkill? These are Difficult choices, but ones that can be made.

Dahl: you are ahead of me because I've only quickly skimmed this Boskin paper. Regardless of his politics, I'm wondering about his analysis. My preliminary observations are as follows: (a) he's partially right to talk about assets as well as liabilities but he seems to focus only on the asset side and dismiss the huge liabilities; (b) his assertion that few have even mentioned the asset side of deferred tax revenues ignores a lot of literature: (c) his not pulling out Roth IRAs from tradtional IRAs biases his statistics as Roth IRAs have no future tax collections; but most importantly (d) his projections assume tax losses will constrain future government spending and (e) he assumes this will represent a net increase in national savings. What if government spending is not constrained and national savings falls?

Hal

Should have made it clear that your initial comments were perfectly on point. These last comments are more fully developed and most important. What you have argued echoes extends much of the recent deficit critique of Stephen Roach. Right, also, the need really is to answer these critiques politics apart.

Hal - Interesting Germane Article

http://www.nytimes.com/2003/06/29/international/europe/29AGIN.html?8hpib

Aging Europe Finds Its Pension Is Running Out
By RICHARD BERNSTEIN

BAD FÜSSING, Germany — This spa town in the Bavarian countryside, blessed with natural hot springs with reportedly curative powers, does not resemble Fort Lauderdale or Miami Beach, but it is the rough German equivalent, the place where retirees go for their comfort and well-being.

But if Bad Füssing is small compared with senior citizens' centers in the United States, it nonetheless represents a big part of the future in Germany and elsewhere in Europe, where a population that is both living longer and producing fewer children is beginning to change some of the fundamentals of both social and political life....

"What if government spending is not constrained and national savings falls?"

This is precisely the argument. Where are the cuts going to come from? Private savings will hopefully increase, though this slows consumption, but tax cuts will leave a growing deficit as far as we can project. Social service needs have to increase given the population ripple needs of the aging baby boom generation.

Patrick, I'm perfectly willing to recognize the increased spending that Gore was promising. We'll never know what would have happened since he is not in the Whitehouse. He very well might not have kept his promises. Clinton scaled his spending plans back dramatically so who knows?

By his actions Bush, however, has let all previous Federal profligates off the hook. By declaring that we had money for tax cuts Bush declared that we had the funds to cover all of our outstanding Federal debts. The commission he authorized to look into shoring up Social Security removes any claim of ignorance.

Dahl

Bruce Bartlett's latest discusses the Boskin paper over at www.nationalreview.com. He rightfully calls this no pot of gold

When do you reach the moment of truth?
What is the possible maximum debt limit for the Federal Government?

In Canada our federal government hit a wall in 1992 when Moody's downgraded our national debt. At the time about 0.36 of every dollar collected was going to service interest on a total national debt of 500 billion (CAN) I think our debt to GDP ratio was near 80%.
Ten plus years later things are under control. Only 0.16 of every dollar is going to interest and the debt to GDP ratio is about the go below 50%
Most importantly it is impossible for a politician either at the state (provincial) or federal level to get elected on the promise of deficit spending. Political parties of all persuasions accept this. It was a very hard lesson. Turning things around came through a combo of tax increases and spending cuts. There was a very long recession 92 to 96. There was no choice. Well it was either do that or go like Argentina and just default and die.

My question is can America be subjected to the same pressures to curb government borrowing that Canada faced in the 1990s?
Canada is a small country, the capital markets called the shots. The United States is ten times as large. Can the international bond holders stop lending? What would this look like? What markers should we be looking at? Has anything intelligent been written about this?

What happens when the fiscal policy of the worlds economic leader is reckless? Is a global recession inevitable?

The Boskin paper discussion should include a few more points:
1. If about $400B/year is being placed in tax-deferred accounts, then let's agree that approximately $120B a year would be available to the Federal Government were such programs not in effect. The $120B does not cover the $450B deficit. This simple current-time fact elmiinates all discussion about the assumptions behind a pretend net-present-value calculation.

2. If an employee is making, say, $60k/year and switches at retirement to a combination of IRA/401K withdrawals and Social Security of $60K/year, it is true that the government is finally getting tax money on the deferred IRA/401K. However, the next ongoing tax is probably unchanged or even reduced as boomers retire. Again I see no reason to believe that taxes on IRA/401K withdrawals will save the federal government from its current policies.