Semi-Daily Journal

What would be a reasonable approach to moderate the rising costs of Medicare and Medicaid? Since health care is a source of considerable well paid employment and gives us an export advantage, how much do we really have to worry about expanding health care costs? There seems to be a bias to regarding health care costs as unfortunate for a country, but I have trouble accepting that.

It's funny, but I seem to recall Prof Krugman's "basic point" in a typically assertive column of his being that the revenue lost to the Bush tax cuts would have been enough to cover both Social Security *and* Medicare obligations.

Didn't he write....

"the present value of the revenue that will be lost because of the Bush tax cuts ... would have been more than enough to 'top up' Social Security and Medicare, allowing them to operate without benefit cuts for the next 75 years" ...

http://www.pkarchive.org/column/032103.html

... notably including Medicare in the analysis? Now it's suddenly dropped out?

Is this one of those "corrections without admitting to correcting anything" that the Times op-ed writers are becoming noted for in the business? As Gail Collins explained for Maureen to the editor of another paper?
http://www.al.com/opinion/mobileregister/mmarshall.ssf?/xml/story.ssf/html_standard.xsl?/base/opinion/1059311986105720.xml

Ayhow, the true *basic point* is the cost of total projected future spending on social programs, and as our host notes: "Projected Medicaid and Medicare expenditures are truly terrifying..." One must add the Social Security shortfall to *that*.

Krugman says, seemingly mockingly: "The tax cuts must be minor, they insist, compared with the 'real problem'. Sheesh. Is it really so hard to do a bit of homework? "

Well, compared to the *real problem*, they are. Let's do some homework and look.

E.g., Gale estimates the maximum potential cost of the Bush tax cuts at 2.4% of GDP. He also estimates... "In future years, spending on Social Security, Medicare, and Medicaid alone is anticipated to exceed 19 percent of GDP."

http://www.j-bradford-delong.net/movable_type/2003_archives/001859.html

... which is up from about 7.5% of GDP today, an increase of 11.5 points. But 19% of GDP is just for starters, around 2035 -- spending on SS and the medical programs just keeps shooting upward afterward.

It is so bad that in 2001 GAO cut off its projections of future government finances around 2050 -- just 2/3rds of the way through the 75-year projection period -- because by then spending on these programs exceeds the size of today's entire US gov't in GDP terms, and deficits incurred to finance them are rocketing straight up -- total spending on just these items is 35% of GDP then, which GAO considered that implausible.

See http://www.gao.gov/new.items/d01385t.pdf , see figures #3 & 4.

And that was *before* the Bush tax cuts.

So when this impossible situation existed *before* the tax cuts it can hardly be attributed to them -- and repealing them in toto would do exactly nothing, zero, nada, to close this fiscal abyss as projected in 2001.

These programs have to be reformed, one way or another, there is no way around it. And since they must be, they will be -- but it surely would be much better to get an early start on it. (And giving new prescription drug benefits to Warren Buffett and Bill Gates does not seem an auspicious start to promoting future fiscal solvency.)

Now, reviewing my homework, when I see projections of future massive deficits resulting from spending increases of 11.5%+ to 25%+ to indefinitely larger amounts of GDP, which existed *before* any tax cuts, and compare them to tax cuts that might max at 2.4% of GDP, in my mind I see which is the more "minor" contributor to the situation.

People who are really, honestly worried about future deficits should be concerned about those spending increases *first*.

BTW, given all the numbers above, the fiscal projections before the Bush tax cuts, the difference between 2.4% on the one hand and 11.5%, 25%, etc., on the other, etc., I'm still waiting for someone to explain to me Professor Krugman's thinking behind his claim that the revenue lost to the Bush tax cuts ...

"would have been more than enough to 'top up' Social Security and Medicare, allowing them to operate without benefit cuts for the next 75 years."

1)Krugman did NOT drop Medicare from his analysis.

The CBPP report he links to says, "The tax cuts are substantially larger than the combined deficits in Social Security and the Medicare Hospital Insurance program. The projected deficit in the Medicare Hospital Insurance (HI) program — also known as Medicare Part A — is 1.1 percent of GDP, according to the trustees’ report. The combined Social Security and Medicare HI deficit is 1.8 percent of GDP, well below the cost of the Administration’s proposed tax cuts (2.3 to 2.7 percent of GDP)."

2) Jim: thanks for pointing out the size of the hole. So, when do YOU think it would be a good time to stop digging?

Yeah. But Medicare A isn't all of Medicare. Plus there is Medicaid. We have a big long-run problem.

One thing to note about the "actuarial shortfall" of Social Security as measured by the CBPP is that it is a small number. It may be small in comparison with the Bush tax cuts. It is also small in relation to other measures of the Social Security problem.

Over the next ten years or so, until the Baby Boomers hit retirement big time, Social Security tax receipts will exceed outlays. Taking this money, accumulating it, and applying compound interest, you would conclude that Social Security will have only a modest "actuarial shortfall."

But if you look at the difference between what Social Security will take in and what it will pay out in 20 years, without counting on cumulative surpluses until then, you get a much bigger number.

I'm not saying that the CBPP is wrong or that the bigger number is right. But it is possible for reasonable people to argue that the Social Security problem is indeed much larger than the Bush tax cut.

And of course, Medicare is a train wreck, on any reasonable measure.

What to do? You could either attempt to run up huge surpluses now to try and maintain the existing programs (and I don't know how you do that without causing macroeconomic problems) or you raise the eligibility age (retirement age) for those programs for people currently under the age of 50 or so.

No one doubts that funding entitlements is going to be very difficult. Many of us have been saying for a long time that we need to deal with it. Bush is not only NOT dealing with the problem, HE IS MAKING IT WORSE. You can try to minimize how much worse, but there is no question that the tax cuts move the ball in the wrong direction.

I also have to say that I am unwilling to characterize the difficulty we will have paying back the bonds in the trust fund as being an entitlement problem per se. That surplus exists as the result of a serious Ronald Reagan TAX HIKE on working people. A series of Republican presidents have run up a gigantic debt, spending that money they took from working people while writing them IOU's. We will not be suckers and let them leave Social Security and Medicare holding the bag when the IOU's can't be easily paid off.

Fuck this right wing class warfare.

Jim Glass is overlooking that through most of the 90s health care costs were rising at a high but tolerable rate. As long as health care costs were not skyrocketing, then SS and Medicare and Medicaid were affordable. That picture has changed. Recently, health care costs have been rising at an unsustainable rate. So projected future health care costs are skyrocketing. This alters the analysis. It is not that anyone is trying to fudge the numbers. But the future numbers do change and that requires flexibility. If health care increases are unsustainable, then measures must be taken to limt the rise.

SS is not a problem. Medicaid/Medicare is potentially a problem. One thing is sure, Health care costs will not continue along the same trend line that they are on today. At some point they will rise at a lower rate.

What we get from the Bush administration is not a debate to find a compromise policy going forward. What we get from the Bush administration is a series of half baked tax cuts and Social Service programs that are presented in my way or the highway form with little chance of altering them or making them better.

NOW I see Glass' and my mistake. When Krugman, Gale and the CBPP say that the revenue losses from Bush's tax cuts will "exceed the 75-year actuarial deficit in the Social Security and Medicare trust funds", they mean "the deficit in tbose trust funds as it would be WITHOUT the Bush tax cuts added on." They're not saying that eliminating the Bush tax cuts would eliminate the SocSec-Medicare problem -- they're just saying that the Bush tax cuts, if made permanent, would make it vastly worse. Gale says this explicitly: Bush's tax cutting "deserves EQUAL billing with Social Security and Medicare as 'the real fiscal danger.'...A long-term resolution of 'the SocSec-Medicare-Medicaid problem] will have to include significant INCREASES in tax revenues as a share of the economy." (Emphases mine.)

Specifically, the CBPP predicts that the accumulated SocSec-Medicare deficit without the Bush tax cuts will equal $10 trillion by 2078 (which does not clash with that graph Glass and I kept quoting in the GAO report, which just indicates that the ACCUMULATED deficit will grow from 13% of GDP in 2040 to 20% of GDP in 2045) -- but if the Bush tax cuts become permanent, this deficit will equal $22 to $24 trillion instead. Gale agrees with this.

Arnold Kling wrote, "But if you look at the difference between what Social Security will take in and what it will pay out in 20 years, *without counting on cumulative surpluses until then*, you get a much bigger number." [emphasis added]

And what do "reasonable people" mean by "without counting on cumulative surpluses until then"?

Assume (without saying so) that Bush will spend them funding tax cuts for the rich?

When the tax cuts were passed, the thinking was that the revenue numbers from the 1997-2000 period were recurring. It is now obvious that those revenues were the capital gains of a market bubble.

That being the case, I find it hard to believe that the tax cuts will be made permanent when they expire.

In hindsight, it seems to me that Social Security taxes are too high and should be lowered with the expected future lowering of benefits. I guess I'm advocating a true pay-as-you-go-system. What you collect is used to pay for your expenses. Actually, this seems to me to be the correct policy going forward as well.

'And what do "reasonable people" mean by "without counting on cumulative surpluses until then"?'

a) so far, every Presidential candidate who is talking about repealing the Bush tax cuts is talking about repealing them to pay for X, where X is a large social program, not a Budget surplus.

b) Even if we could generate a political consensus for a surplus, I am not sure that it would be economically feasible. With today's unemployment rate, should the government run a surplus now? Probably not. Suppose that in three years we are almost back to full employment. Should we then take a sharp turn toward surplus? Probably not--it could trigger another recession. The point is that it is not clear that we will be able to run large Budget surpluses without creating adverse macroeconomic consequences.

Anyway, this argument is somewhat beside the point. Suppose that we assume that the "actuarial shortfall" is the correct number. Then it is relatively small as a percent of GDP, as are the Bush tax cuts. What looms large as a percent of GDP is the Medicare shortfall. See http://www.techcentralstation.com/1051/techwrapper.jsp?PID=1051-250&CID=1051-073103A

How does the Bush wing of the GOP plan to restore fiscal responsibility? Since they will tell us, we can only speculate. It seems they want to count the payroll taxes as revenues but not the associated payments from Social Security benefits in the future. Maybe we should simply changing our thinking. Our after-tax incomes are the only real source of our retirement. In this mindsight, the implied increase in payroll taxes paid for the income tax cuts.

Chad, you may be correct about SS taxes being too high. However, in the 1980s, it was recognized that the boomer retirement would cause strains on SS. How to deal with it? In a compromise signed by Reagan, SS taxes increased 50%. The idea was that the boomers would help defray the costs of their own retirement by paying more taxes over their working careers. The boomers have kept their end of the bargain and are currently paying 30% more in SS taxes than payouts. Reagan and Bush ran massive deficits and borrowed from the SS trust fund.

Clinton raised taxes on the wealthy, held down spending, lowered unemployment and finally reached a point where SS trust fund actually had a meaning. Mr. Bush has reversed course and has given all the SS surplus to his wealthy buddies as a tax cut and increased spending on the military industrial complex including such turkeys as the unworkable missile defense system.

Maybe you are correct. If SS taxes were cut by 30%, then the tax cuts of Mr. Bush would have to be reversed and the revenue collected from the upper middle class and the wealthy instead. What are the chances of Bush signing on or the GOP voting for that?

So Arnold, who in the Bush administration is focusing on Medicare/Medicaid and health care? It does not seem to be occurring at a very high level. It doesn't seem to even be on the radar. Instead there are piecemeal prescription drug plans, etc. Who among the Democrats is looking at health care cost containment? Health care costs will not continue to skyrocket because the pain will become too great long before the implosion.

"Jim Glass is overlooking that through most of the 90s health care costs were rising at a high but tolerable rate. As long as health care costs were not skyrocketing, then SS and Medicare and Medicaid were affordable. That picture has changed. Recently, health care costs have been rising at an unsustainable rate. So projected future health care costs are skyrocketing. This alters the analysis. It is not that anyone is trying to fudge the numbers. But the future numbers do change and that requires flexibility. If health care increases are unsustainable, then measures must be taken to limt the rise.

SS is not a problem. Medicaid/Medicare is potentially a problem. One thing is sure, Health care costs will not continue along the same trend line that they are on today. At some point they will rise at a lower rate."

Health care costs aren't increasing because doctors are setting money on fire when no one is looking; they're increasing because people are willing to spend a very large part of their year-to-year marginal income gains on better health care.

I can just imagine the panicked 1945 editorials about the "automobile spending crisis." My god, look at all the money we're spending on cars, and we're not getting anything for it!

The deadweight loss from funding health care through taxation *may* end up being a problem. However, "increasing health care costs", in of themselves, are most definitely *not* a problem.

I absolutely do not believe that health care costs are rising as the result of consumer willingness to increase spending on health care. Consumers are shielded from health care costs, and costs are rising accordingly. Here's an example: I take Prozac. I have no health insurance, I pay out of pocket. For this reason, I've been interested in buying the recently (for about a year) available generic version. A year ago, when it first became available, I thought I'd switch. But I discovered that my pharmacy (Walgreen's) was charging only very slighly less for the generic than for the brand label. Both were about $2.50 for 20mg. I figured that there wasn't at the time enough competition yet to drive down the price. However, last month a friend of mine told me that he bought his generic Prozac (fluoxetine) from the pharmacy at our local grocery store for about $0.66 for 20mg. I figured that the price had finally come down (I have been taking a different SSRI). But when I called my pharmacy, they are stilling selling their fluoxetine for $2.50 per 20mg! That's a 378% difference! In a functioning market, this would not be possible. I simply cannot believe that the portion of the GDP that is going to health care is part of a efficient market. And, anyway, as we know many other countries have superior public health with less health care spending. This is why. Our system is the worst of all possible worlds. It should either be socialized, or it should be made to function as a real market ("pay as you go").

>> Health care costs aren't increasing because doctors are setting money on fire when no one is looking; they're increasing because people are willing to spend a very large part of their year-to-year marginal income gains on better health care.

Or, alternatively: people are being pressurised into spending a large part of their year-to-year marginal income gains through increased premiums or copayments, through the consolidation of programmes (who cares about consumer choice?), or simply to fund the well-documented administrative waste of private insurers. I refer you to this tale, courtesy of 'South Knox Bubba':

http://www.southknoxbubba.net/skblog/archive_2003_08.php#1841

My parents drive to Canada every few months, for a holiday and to buy prescription drugs. There is never a problem, and the saving would more than pay for the holiday even if they flew. Several of the friends buy drugs from Canada through an "e-mail - store" service.

"That's a 378% difference! In a functioning market, this would not be possible."

In other words - if only people would do what the academic theories say they should.

Back when I took science, a theory was supposed to DEscribe what happens, not PREscribe. Free market economic theories are a crock. They sound great - if only people (and pharmaceutical companies) would follow them like they are supposed to!

Jim Glass is arguing apples and oranges in his post. The original Krugman article was based on the CBPP study and clearly referred to SS and Medicare.

Why does PK argue about SS and Medicare? Because the GOP is arguing that SS should be individual defined contribution accounts, that SS is broken beyond repair and to mount a political case to cut Wall Street brokers in on a good share of the SS dollars as commisions. IF you read the article, read the analysis then you will see that PK is correct. The shortfall in SS and Medicare is small compared to the Bush tax cuts if extended.

Jim argues oranges by bringing an elephant (Medicaid) into the barn with 2 small ponies, (SS and Medicare). It is a straw man argument. Jim pretends that Krugman included Medicaid in his analysis (which he did not) and then refutes a claim that Krugman never made. Nice bit of chicanary there.

The CBPP report is limited to SS and Medicare. The GAO report includes MEDICARE. Of course they disagree. The GAO report does not refute PKs argument because the GAO analysis INCLUDES MEDICAID. Is Jim missing PK's argument about SS and Medicare, or is he intentionally creating a straw man?

PK is correct that the Bush tax cuts are too large and that cutting back on the tax cuts could totally fund the SS and Medicare shortfall. Medicaid is another story. Even eliminating all the Bush tax cuts would not fully fund Medicaid if the costs continue to rise at the current rate (the GAO projection). However, a potential Medicaid shortfall bolsters even more PK's assertion that the tax cuts are bad fiscal policy and not affordable. The argument that the pending Medicaid problems are so large that an extra 2.5% of GDP would make no difference for potential solutions is ridiculous. Or should I say Luskin-esque?

Arguing the accounting here misses the fundamental point, which is that across the developed world, in Europe, Japan and the US, the old are throwing the biggest and longest party the world has ever seen, at the expense of the younger generation.

Programmed for growth entitlements are only a part of this story. In Europe unemployment and insecure employment are just as important, heavily concentrated amongst the youth. In the US skyrocketing real asset prices such as home values inflate the incomes of older people at the expense of younger would-be purchasers.

Of course it will have to come to an end at some point, the riotous and increasingly evident impossibility of financing it going forward makes that clear; and all of these entitlement programs and their built-in cost escalators will then be hacked back to something affordable.

In the meantime however identifying how individual programs could be tweaked here and there to bring them into balance for another couple of decades is about as productive and rewarding as pissing into a hurricane.

>> In the US skyrocketing real asset prices such as home values inflate the incomes of older people at the expense of younger would-be purchasers.

And the market dictates, increasingly, that old people sell their homes so that they can spend their declining years being fed mashed banana in care facilities, thus recycling their assets back into the economy. Or at least spending their life savings on prescription medication. No?

Arnold,

But you have to distinguish between "surplus" and "surplus outside of Trust Funds".

Either
(a) the government plans on honoring its trust fund commitments (not defaulting and not changing the law regarding the intended dispositions of the funds), or
(b) the government has no such plans, in which case Federal taxes are far less progressive than they appear to be. (See also the Republican party line on not providing tax breaks to people who don't pay federal *income* taxes.)

Re the long-term cost of Medicare and Medicaid:

How is this not a red herring? Medical costs will skyrocket, so even if these programs were completely privatized, there'd be a problem.

(a) There's a limit to how much GDP the populace will be willing to spend on medical care. One writer pointed out that, in a relatively wealthy society like ours, it's not outrageous to suggest a larger fraction of GDP should be spent on health care. (I myself don't think we should, but...)
(b) For some odd reason, everyone focusses on the insurance end of things. Despite my left/liberal pretensions, I think providers, particularly doctors, are more the problem than insurance companies. (I started realizing this when a well-structured statistical study of the putative benefits of bone marrow chemo therapy showed no advantages over conventional therapy, which is much much cheaper. Guess who wanted to stop insuring the treatment? Guess who wanted insurance to keep covering it?)

My prediction is that health care will eventually be socialized. Not that I think government is necessarily better than the private sector for this, *a priori*, but I don't see how a private insurer can capture the benefits of paying for preventive care (not to mention that a risk pool consisting of the entire nation prevents things like cherry picking). But my main point is that the provider system is seriously broken.

NF's post makes a point that, while familiar to all of us, has been mostly left out of the discussion here. It is central to the discussion. The aging of the population has increased demand for medical care. The huge advances in medical and drug technology have provided a big lift on the supply side - there is more medical care available than ever before. That has not necessarily lowered the cost of very increment of medical care, but it has surely made a wider variety and higher quality of care available. Those two factors, along with a system that shields users from the full cost of the medical care they receive by spreading it across the working population, is a formula for rising medical costs. Now, what part of the formula do you not like? The first two factors depend considerably on the third. Effective demand for life-lengthening and life-improving medical care depends on the elderly having access to lots of money. Advances in medicine depend largely on funding for research, much of which is driven by a profit motive. That is not to say we are doing this the best way possible, but you have to decide what outcome you are willing to live with before you change policy.

"Arguing the accounting here misses the fundamental point, which is that across the developed world, in Europe, Japan and the US, the old are throwing the biggest and longest party the world has ever seen, at the expense of the younger generation."

Rubbish. What rubbish. Where would I ever be without the amazing support and love of my parents. I owe them the same for the rest of their lives.

Wow, this is bizarre. Ellis & Sweeney, German and Canadian health care spending keeps going up, and they have single-payer, so I don't see how rising medical costs are specific to the messed-up US system.

"There's a limit to how much GDP the populace will be willing to spend on medical care."

Why would the marginal preference for medical spending hit zero, as long as new spending increases quality of life/life expectancy? Prozac didn't exist until recently, remember.

There's this wierd knee-jerk response to treat medical spending as a liability. I don't get it.

Krugman has a good article on this; it doesn't requir too much imagination to come up with an economy where virtually all spending is on medical care, and for a good reason: it works.

Link:

http://www.pkarchive.org/economy/OldHealth.html

"Why would the marginal preference for medical spending hit zero, as long as new spending increases quality of life/life expectancy?"

Agreed. Agreed. Health care is a major employer and provider of fine secure jobs, a major exporter, a major source of life enrichment. We could afford to spend far more on health care, and indeed there is no reason to believe we will not demand far more helath care services for years and years.

There is an expecially pernicious argument made about health care spending in Africa, that country spending on health care must be limited to allow more essential spending for development. Absurd! South Africa and Nigeria could develop major health care industries, as Brazil, and use these as a development force as well as saving endless number of people for the sufferings of AIDS.

Here is a small bit of evidence against the fatality of ever-rising health costs. My employer, the Council of Europe, an international organisation based in France, has managed to opt out of the French state medical insurance scheme and now buys exactly equivalent cover commercially (plus a top-up for convenience services that is standard practice here and hasn't changed). The cover includes retirees. The premiums are less than half the previous rate.

Part of this is due to the end of a redistributive cross-subsidy inherent in payroll taxes, as we have higher than average pay. But actual health costs for a selected, well-educated group of workers are still pretty low, to the end of our embarrassingly long lives (the pension scheme is in trouble). French health care is universal, insurance-based, consumer-driven and subject to moderate cost controls, and has the highest user satisfaction in the world (nothing like the mean and Stalinist British National Health Service, which however does a terrific job on gouging pharmaceutical firms). Costs are rising at 6% or so a year.

Someone should check out the cheerful hypothesis that economic transformations, with the decline of traditional farm and factory work, will lead to healthier lifestyles and lower medical costs for the chronic illnesses that drive up the costs. Workers and farmers eat, drink and smoke too much, and they are on their way out. I know you have to factor in technical progress, but this may go both ways: screening, vaccines and complete cures, against scanners and life-support. The US system seems structurally biased towards high-cost diagnosis and palliation.

Jason McCullough wrote, "German and Canadian health care spending keeps going up".

Right. And in neither of those countries are the *doctors* working for the national health care system. This is entirely congruent with my claim that doctors are even more the problem than insurance companies.

To many of the posters above: I claim that the health care system, *at the aggregate level*, is _extremely_ inefficient, and that the medical establishment, not just insurance arrangements, is largely to blame. That's the problem with spending more GDP on health care---it's grossly inefficient as currently structured.

"French health care is universal, insurance-based, consumer-driven and subject to moderate cost controls, and has the highest user satisfaction in the world.... Costs are rising at 6% or so a year."

That is exactly my finding and direct experience.

James Wimberley contines in asking whether life-style prevention can be a significant component in reducing health care costs. Again, my knowledge of the Japanese health care system suggests this may well be so. There is evidence that early intervention to prevent the development of serious illness is a significant cost control tool.

We have to ask why there is far less concern with the health care costs of aging in France and Japan than in America.

Again, the British health care system has idiotic administration problems.

anne wrote, "Again, the British health care system has idiotic administration problems."

What idiotic problems? Are they any worse than the bizarre provider system *we* have? How do their outcomes compare to ours, and what fraction of GDP do they spend on health care?

One thing that is worth pointing out is that the drug companies in the US consistently make high profits.

Economics 101 - a sector where there are consistent high profits is clearly inefficient.

Ian Welsh wrote, "Economics 101 - a sector where there are consistent high profits is clearly inefficient."

Correct---in this case, it's because of rent collection.

Quoting Stephen Fromm:

"Either
(a) the government plans on honoring its trust fund commitments (not defaulting and not changing the law regarding the intended dispositions of the funds), or
(b) the government has no such plans, in which case Federal taxes are far less progressive than they appear to be. (See also the Republican party line on not providing tax breaks to people who don't pay federal *income* taxes.)"

I just wanted to point out Kent Smetters' recent NBER working paper entitled "Is the Social Security Trust Fund Worth Anything?" http://papers.nber.org/papers/W9845

Per the abstract:

"With over $1 trillion in assets, the U.S. Social Security trust fund is the largest pension reserve in the world, and potentially a model for other developed countries facing future financing problems. But are those assets actually worth anything?' This question has generated a heated debate in the U.S. as policymakers debate options for Social Security reform, with the understanding that the characterization of the trust fund influences these decisions. Some observers claim that the trust fund is not worth anything while others argue that it is valuable. However, different reasons are given for the same position. This paper provides a unified conceptual framework for thinking rigorously about the assets accumulated in the trust fund. Multiple perspectives of the trust fund are identified and are summarized under two categories: (I) storage technology arguments and (II) ownership arguments. Storage technology arguments focuses on whether the trust fund surpluses actually reduce the level of debt held by the public or, alternatively, are used to hide' smaller on-budget surpluses. Ownership arguments focus on property rights, i.e., how trust fund credits should be allocated regardless of whether they reduce the debt held by the public. Only the storage technology argument can be empirically tested, as we do herein. We find that there is no empirical evidence supporting the claim that trust fund assets have reduced the level of debt held by the public. In fact, the evidence suggests just the opposite: trust fund assets have probably increased the level of debt held by the public. Moreover, the adoption of a unified budget' framework in the late 1960s appears to play a statistically significant role in this result. We show how this counterintuitive result can be explained by a simple split the dollar game' where competition between two political parties exploits the ignorance of voters who don't understand that the government's reported budget surplus actually includes the off-budget' Social Security surplus. To be sure based on a limited annual time series (1949 2002) and so the results should be interpreted with caution. But the empirical tests are, if anything, biased toward finding a reduction in the level of debt held by the public, and not the increase that we find."

Essentially federal taxes are flat rather than progressive. A household with $1 million or $700,000 in income should pay about the same percent as a household with $100,000 or $70,000 in income. If you pay more, find a decent accountant. These new tax cuts have given us a flat tax.

Stan,

Re the passage, "In fact, the evidence suggests just the opposite: trust fund assets have probably increased the level of debt held by the public. Moreover, the adoption of a unified budget' framework in the late 1960s appears to play a statistically significant role in this result. We show how this counterintuitive result can be explained by a simple split the dollar game' where competition between two political parties exploits the ignorance of voters who don't understand that the government's reported budget surplus actually includes the off-budget' Social Security surplus. "

There's some truth to that. IIRC, the decision to present information as a unified budget grew out of LBJ's attempt to have a guns-and-butter war.

But that doesn't mean *we* have to be ignorant. Liberal commentators like Krugman are thoroughly honest about the issue (especially concerning the main problem, the huge "implicit debt"). Conservative and Republican commentators are often, if not always, dishonest---my read of a lot of PR concerning the recommendations of Bush's SS commission was that they intentionally obscured the issues.