December 24, 2003

Worst Fiscal Policy Ever

The Congressional Budget Office awards the "Worst Fiscal Policy, Ever" prize to George W. Bush, Trent Lott, Bill Frist, and Dennis Hastert:

ArgMax Economics Weblog: Long-run Fiscal Condition of the US: This Congressional Budget Office report looks at a range of possible paths for federal spending and revenues over the next 50 years and combines them into various hypothetical scenarios. Analysis of those scenarios suggests the following conclusions: [...] Unless taxation reaches levels that are unprecedented in the United States, current spending policies will probably be financially unsustainable over the next 50 years. An ever-growing burden of federal debt held by the public would have a corrosive and potentially contractionary effect on the economy. [...] If taxation is restricted to the levels that prevailed in the past, the growth of entitlement spending will have to be substantially reduced. Restricting the growth of outlays for defense, education, transportation, and other discretionary programs would not be enough to ensure fiscal sustainability. Likewise, economic growth alone is unlikely to bring the nation's long-term fiscal position into balance. Moreover, issuing ever-larger amounts of debt or dramatically raising tax rates could significantly reduce growth...

It is hard to imagine what former deficit hawks like John Snow, Stephen Friedman, and Greg Mankiw think they are doing in this administration.

Posted by DeLong at December 24, 2003 11:44 AM | TrackBack

Comments

"It is hard to imagine what former deficit hawks like John Snow, Stephen Friedman, and Greg Mankiw think they are doing in this administration."

Rubbing up against power, my dear. Rubbing up against and loving influence and thinking they might just spend career futures as Henry Kissinger. Remember Henry Kissinger? When did you imagine these folks had principles?

Posted by: lise on December 24, 2003 11:59 AM

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Cutting the deficit in half? Sending Xmas presents to the well connected? Looking for that revolving door to 7 figure incomes?

"God Bless the Child That's Got His Own". Happy Holidays.

Posted by: bakho on December 24, 2003 12:25 PM

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lise, you got there before me.

Brad, I think that by now, there's no excuse. Nobody 'works within the system to change it from the inside', when it's the Bush II system. Nobody with power is interested in listening to any economist who's not on the AEI/WSJ payroll.

Posted by: Barry on December 24, 2003 02:37 PM

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If you look at the CBO report, you'll see that the problem it addresses have little or nothing to do with President Bush. The CBO cites the rising costs of Medicare, Medicaid, and Social Security. Bush didn't create those programs. If you're looking for a President to blame, try FDR and LBJ. They were the ones who set up programs that would become extremely expensive over time.

It's true that Bush increased the cost of Medicare by adding prescription drug coverage, but that step was supported by Democrats. They would have preferred a different structure for Medicare reform, but their approach would have been just as expensive as Bush's. In fact, Bush wanted a cheaper structure -- to cover only needy seniors. It was the Dems who insisted that drug coverage be available to all seniors.

Nor can Bush's tax cuts be blamed for rising costs of benefits. The specific problem cited is that future taxes will have to be raised to unheard of levels to pay for the predicted cost of these entitlement programs. This would be equally true if today's taxes hadn't been reduced. (More precisely, Bush's tax cuts had two small, opposing impacts on this problem. They raised the national debt, thus increasing the ongoing cost of interest. OTOH they produced an economic recovery, which will increase federal tzx revenue.)

As an actuary, I've long been familiar with the coming problems in Social Security and Medicare. The aging of the population will drive up the costs of these programs immensely. Current funding formulas are already inadequate on an actuarial basis, and they will soon be inadequate on a cash basis. Ultimately, taxes will have to be very high, or other government programs will suffer, or benefits to seniors will have to be cut or the national debt will become enormous. These are all politically unpalatable. One possible solution is to raise the age of eligibility, but that will be politically difficult.

Posted by: David on December 24, 2003 05:21 PM

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With all these domestic problems looming, the Iraq operation looks even more unnecessary and irrelevant, to say the least.

Posted by: Bulent Sayin on December 24, 2003 07:37 PM

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But...but...but,.....we got Saddam!!!

Posted by: marty on December 24, 2003 09:28 PM

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To David: virtually all the criticism that's been made of Bush's tax cuts (including that by Delong) is that:

(1) Those taking effect right now, which really did contribute to the recovery, were very small -- the overwhelming majority of them don't take effect until later, in the non-recessionary part of the business cycle, at precisely the time when they will NOT be economically helpful.

(2) Both those tax cuts Bush instituted now and those that will be activated over the next few years are directed overwhelmingly at the rich -- which means both that the already-activated ones encouraged consumption to end the recession far less than they would otherwise have done, and that most of the benefits from the coming tax cuts will be directed toward the rich (whereas the harmful effects of the deficit they produce will hit everybody).

There is no denying that we will be faced with an enormous problem over the coming decades even without the Bush tax cuts. Pouring a few buckets more gasoline onto an already-roaring fire, however, is not usually regarded as a helpful fire-fighting technique.

Posted by: Bruce Moomaw on December 25, 2003 02:20 AM

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Bruce Moomaw, you have a point, but it's not the point made by the CBO report. You're addressing the deficit, which is a serious problem. The problem that the CBO was talking about was the predicted level of federal spending, as baby boomers enter the Medicare and Social Security systems. Higher taxes today would reduce the deficit, but they wouldn't affect the future cost of these programs.

Regarding the impact of Bush's tax cuts on the recovery: The tax cuts help the economy in two ways. You addressed their impact as Keynesian pump-priming. The Keynesian effect begins to take place when the money is in people's hands and is being spent.

However, there's also the Supply-Side impact. Reducing the tax rates increases after-tax Return On Equity, thus encouraging businesses to expand. Business decisions are based on multi-year projections of results, so even though some of the tax decrease will come about in the future, it encourages more business activity right now.

Bulent Sayin, I agree that the cost of Social Security and Medicare makes it harder to afford the war in Iraq. But, it's not just defence. As these programs grow, they will indeed compete for money with all federal programs.

Posted by: David on December 25, 2003 04:50 AM

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The supply-side effect of upper-income tax cuts is minimal to non-existent, if existing capacity is fully 25% unused. Last quarter's GDP would still have been over 7% without it. A lower-income consumer-demand stimulus would've kicked up the recovery earlier, and helped a lot more people than to-date. Social Security is presently in good shape and can be continued at least to the half-century. The Bush plan would seem to be to bleed the Social Security lockbox for general expenditures, and kill the program. The present shortsightedness is to keep a paper bubble expanded, and fool the populace with wealth-effect
solvency, until something else happens. Insofar as that is true, the tax cuts have helped the recovery.


Posted by: Lee A. on December 25, 2003 10:38 AM

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David, the issue of Social Security was addressed very nicely years ago by Business Week. Briefly, there is only a problem if growth is below historical norms. Even under the worst scenarios (short of nuclear war), Social Security can pay 75% of its obligations.

I strongly commend this article by Aaron Bernstein, in the Feb 10, 1997 issue.

Medicare is a genuine problem. But the problem has little to do with government policy. It has to do with health care cost inflation. US health care costs are far out of line relative to the rest of the industrialized world.

It's time for the government to stop subsidizing gold plated care. Global data make it clear that the level of spending is not related to outcomes. Half of one's lifetime medical expenses are incurred in the last six months of life. This strongly suggests that patients are being financially exploited.

If we could simply replace pointlessly heroic measures with compassionate death counseling, that alone might be enough to bring Medicare back into balance. Most important, patients might endure less agony than heroics are wont to impose.

Posted by: Charles on December 25, 2003 11:02 AM

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David, Social Security is entirely solvent for the next 35 years without doing anything. Charles is correct that Medical costs are more of a problem, but that is because of soaring costs. One solution is to educate and empower people to do more to take care of their own health needs.

As for the deficits, the problem is obvious. Mr. Bush and his GOP buddies havve pushed spending to over 20% of GDP and are only collecting about 16% of GDP as revenue. This makes a deficit of 4% of GDP. Either the GOP raises taxes or quits wasting money on stupid stuff like missile defense, pointless weapons systems and insane adventures like Iraq or does some combination of raise taxes and cut spending.

It is not as if people in the US pay a high tax rate. The US wealthy pay nothing like the taxes in Canada or in Europe. When the bills come due, maybe we will have the political will to tell the rich to pay up. A top rate of 50% would help.

Posted by: bakho on December 25, 2003 08:06 PM

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Why can't you foolish liberuls understand?

The best way to solve all of our problems is to ignore them and to solve imaginary problems, as St. Ronald proved in the 1980s.

If we eliminate the immoral taxes on high net worth individuals, they will be motivated to work much harder, as the Laffer curve convincingly shows. Unlike the lazy luck duckies, who take American's hard-earned dollars and waste them on alcohol and drugs, the moral giants who uphold the world order will invest their earnings back into the economy, plus they'll give some to charity, too.

Why don't you libruls get it?

Posted by: praktike on December 25, 2003 09:47 PM

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Bakho, Charles, and Lee A.: An insurance company is deemed to be solvent if has enough assets so that it could stop collecting money today, and still pay all it accrued obligations. Social Security could never meet that standard, for a number of reasons. So SS adopted a special definition. "Solvency" means that a projection of income and outgo shows they could continue to make full payments throughout a 75-year period. By their own definition, SS is not solvent.

Medicare had a similar problem, even before adding prescription drug coverage. Historically, actuaries have tended to underestimate the cost of Medicare benefits, so the situation there could be even worse than the official projections.

Incidentally, there is no "SS lockbox." The term is essentially meaningless. It's worrisome that Gore, Bush and other political leaders discussed the "lockbox" as if it existed.

Posted by: David on December 26, 2003 06:10 AM

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Re gold-plated medical, I'm intrigued by the chart on healthy life expectancy in the emerging-markets tables of the Dec 20th Economist (I can't like, don't ask me why). It gives familiar life expectancy data PLUS data on percent of lifespan spent in good health. So: South Korea, China, Russia, all score lower than US on total life expectancy, but higher on percentage spent in good health. Does this imply that these countries are less likely to gold-plate the final hours? (Russia? Yes, Russia. Odd, I had assumed the problem in Russia was that men got s***tfaced at the age of 14 and stayed that way until they died -- which does not sound like good health to me).

Posted by: jda on December 26, 2003 12:00 PM

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David says, "Bakho, Charles, and Lee A.: An insurance company is deemed to be solvent if has enough assets so that it could stop collecting money today, and still pay all it accrued obligations. Social Security could never meet that standard, for a number of reasons. So SS adopted a special definition. "Solvency" means that a projection of income and outgo shows they could continue to make full payments throughout a 75-year period. By their own definition, SS is not solvent."

But, as Bernstein's article points out, the projections are ridiculously conservative.

I really do recommend you read the article before simply making this reflexive response.

>>Medicare had a similar problem, even before adding prescription drug coverage.<<

Recalculate assuming that medical cost inflation tracks general inflation. The result is, I believe, that Medicare is solvent.

Yes, the unfunded prescription drug coverage did exacerbate the problem. But that-- failure to fund spending-- is what one gets when one elects Republicans.

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jda, I am not familiar with the medical systems you cite nor why the costs should be so high. In the US, half of costs are incurred in the last 6 months of life. If those were simply reduced by half, US costs would be in line with the rest of the industrialized world.

Posted by: Charles on December 26, 2003 01:21 PM

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Re Charles' response on gold-plating, are we identifying the same inference here? My take is that we at great cost extend life but not good life. Charles, are you saying that we pile on the cost without extending life at all? But if this were true, we would at least show up with a higher "percentage of good health" number, not so? I ask this in a friendly spirit, I am not certain I am identifying the problem right myself.

Posted by: jda on December 26, 2003 03:23 PM

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A "lock-box" these days is just an account, in electronic digits.

Posted by: Lee A. on December 26, 2003 03:53 PM

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Charles- I believe you make the salient point that health care costs in this country are spiraling out of control partly because of very advanced technology. We are now very good at extending life span in a temporary setting, say, a few weeks to a few months. As of yet, however, the medical professor has no formula for risk-stratification, i.e., how likely is it that the 85 year old who suffered a major heart attack and is being mechanically life supported will be able to go home and walk back and forth to the store as he used to. That - expensive procedures at the end of life- is what costs a lot of money.

As a physician, I can't recall how many times I have seen the situation happen where because of medico-legal considerations (i.e. lawsuit prevention protocols) Doctors and Hospitals end up doing A: what they think is wrong for the patient and the family and B: what they think is wrong from a medical standpoint just because of legal considerations. Not that I believe the problem should be solved from a legal standpoint.
Indeed, I believe the problem should be solved from a combination of medical and economic standpoints. If medicare could put some pressure on the medical profession to establish viable end-of-life criteria such that insurance wouldn't pay for procedures unlikely to be able to return the patient back to a reasonable level of functioning, then families with means could always be given the option of paying out of pocket for medically extravagant procedures.

I think this would really solve a lot of problems, and indeed, be a lot more humane than the current system where doctors promise hope even when none exists.

Posted by: non economist on December 26, 2003 06:30 PM

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jda asks, "Charles, are you saying that we pile on the cost without extending life at all? But if this were true, we would at least show up with a higher "percentage of good health" number, not so? "

The two points are separately true, though the causal connection is not clear. We do pile on costs at the end of life, yet overall, life expectancy is not better in the US. If there were a causal connection, I'm not sure what one would expect. Perhaps people who normally live 3 months living 4 months. That wouldn't affect life expectancy statistics significantly.

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non-economist says, "Charles- I believe you make the salient point that health care costs in this country are spiraling out of control partly because of very advanced technology.... If medicare could put some pressure on the medical profession to establish viable end-of-life criteria such that insurance wouldn't pay for procedures unlikely to be able to return the patient back to a reasonable level of functioning, then families with means could always be given the option of paying out of pocket for medically extravagant procedures. I think this would really solve a lot of problems, and indeed, be a lot more humane than the current system where doctors promise hope even when none exists."

Humane treatment of patients, not days of life nor cost, should be the bottom line. I agree that health care providers should be off the hook for providing heroic measures to the very elderly. But I don't think it's just a matter of developing criteria. I think that too many Americans are afraid of death. As anyone who suffers chronic pain can say, death can be a release.

Posted by: Charles on December 26, 2003 07:57 PM

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