January 02, 2005
Why the Bush Administration Couldn't Find Anybody Who Wanted to Replace John Snow
Edmund Andrews sums up Bush administration fiscal policy:
The New York Times > Business > Economic View: The Meek Shall Inherit the Bill: [Bush's] agenda follows a familiar path: borrowing today and leaving the bills for future generations to pay. Start with Social Security. Mr. Bush regularly warns that the system will come up short in future decades, because the total amount paid out in benefits will soar as baby boomers reach retirement age. But the proposed solution often cited by White House officials would put none of the burden on today's taxpayers or retirees. Instead, it would fall on people who retire 40 or 50 or 60 years from now....
[M]ost analysts agree that private accounts would do little to reduce the projected Social Security shortfall, which the government estimates at $3.7 trillion over the next 75 years. The government would lose trillions over the first few decades, as people diverted payroll taxes to their private accounts, and it would likely have to borrow up to $2 trillion to keep paying benefits to existing retirees.... The burden on future generations would arise from the second and less-discussed component of most proposals: a steep reduction in future benefits, well beyond the amount being put into private accounts. The most frequently posited way to pare future benefits is to change the formula for calculating them. Instead of indexing a person's initial benefit amount to the growth in wages, the formula would index benefits just to consumer prices.... [A] median-income worker who retires today can expect Social Security benefits of... about 42 percent of his or her preretirement income. If the benefit were indexed to prices rather than wages, the Congressional Budget Office says, a person retiring in 2065 would get only 21.7 percent of his or her preretirement income - even including benefits expected from private accounts....
Th next major component of Mr. Bush's economic agenda is tax reform. Administration officials say that they have no specific plan yet, and that they will wait to receive a recommendation from a bipartisan advisory panel sometime this year. But White House officials have made it clear that they favor some kind of consumption tax... a significant expansion of tax-advantaged savings accounts.... Administration officials say that these and other measures would stimulate savings, which are crucial to increasing long-term growth. N. Gregory Mankiw, chairman of the White House Council of Economic Advisers, says tax cuts on capital are much less costly than they appear.
But other analysts are skeptical. C. Eugene Steuerle, a senior fellow at the Urban Institute and an architect of President Ronald Reagan's tax overhaul in 1986, noted that personal savings plunged during the last four years even though tax subsidies for retirement accounts increased modestly over the same period. The reason, he theorized, is that many people do not use tax-advantaged accounts to save more money. Instead, they simply move their existing savings into new tax-advantaged accounts when the opportunity arises....
Perhaps the biggest issue for future generations is the third big item on Mr. Bush's economic agenda: fiscal discipline and deficit reduction. Federal debt ballooned by about $1.8 trillion during his first term, as the federal budget swung from a surplus of $127 billion in 2001 to a record deficit of $413 billion in 2004. Mr. Bush has vowed to reduce the deficit by half by 2009, but many analysts predict that the federal debt will swell by at least an additional $2 trillion and possibly by $4 trillion over the next decade. Among the long list of looming bills are... $1 trillion over the next 10 years to make Mr. Bush's tax cuts permanent... $500 billion to prevent an increase in the alternative minimum tax... $500 billion for the new Medicare prescription drug program... $100 billion for war costs in Iraq in 2005, and additional costs likely in the future....
To reduce the deficit, administration officials are essentially freezing spending for domestic discretionary programs.... But those programs account for only about 17 percent of the $2.3 trillion federal budget.... Taken together, the upshot is a big government on low taxes. Federal responsibilities under Mr. Bush are bigger and more global than ever. But tax revenues account for a smaller share of the gross domestic product - 16.2 percent last year - than at any time since the early 1950's.
Posted by DeLong at January 2, 2005 11:35 AM
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Those who would stop indexing Social Security to AVERAGE wage growth – to put a stop to increases in retirement benefits beyond inflation adjustments – should consider promoting the same end more stealthily by a switch to indexing for MEDIAN wage growth instead -- the American median (50 percentile) wage looking like it is going nowhere for a long, long time.
American hourly wages, all the way to the 70 percentile mark, stand virtually unchanged since 1973 (40 percentile pay actually dipped a dollar an hour by 1995, whence the dot.com bubble lifted all boats)*. Progress in yearly income was eked out working longer and longer hours, only. [*See “The State of Working America 2000/2001”, p. 124, table 2.6.]
It is a safe bet that overstretched toilers cannot devote much additional time to work – nor is a stock market boom about to race hourly rates close to productivity’s pace again, anytime soon.
A kinder, more gentle approach to retirement system solvency -- than indexing benefits to wages which wont rise -- would be to restore fair and balanced paydays where most wages keep pace with growing labor productivity – but, first, Congress would need to drastically re-set the power balance in the labor market by something on the order of broadly mandating collective bargaining.
The Republican approach to (de)funding Social Security remains matching frozen majority pay with frozen retirement payments -- even while overall income in America goes on expanding at four times the rate of population (8 to2), for foreseeable generations.
Posted by: Denis Drew at January 2, 2005 01:48 PM
"C. Eugene Steuerle, a senior fellow at the Urban Institute and an architect of President Ronald Reagan's tax overhaul in 1986, noted that personal savings plunged during the last four years even though tax subsidies for retirement accounts increased modestly over the same period. The reason, he theorized, is that many people do not use tax-advantaged accounts to save more money. Instead, they simply move their existing savings into new tax-advantaged accounts when the opportunity arises...."
This brings up a question. I recently read in an investment newsletter the claim that the rate of savings isn't nearly as low as is normally alleged, because investments in mutual funds are counted as expenditures, not as savings, in the calculations. I find this hard to believe, but just in case--is there any substance to this argument?
Posted by: David at January 2, 2005 03:48 PM
Is Bush really creating a mess for future generations? Is the day of reckoning for his irresponsible policies so far off that it's not relevant to current generations?
I don't like seeing this mess described as a problem for "future generations," because I have little doubt that most people today would gladly screw future generations if it benefitted them.
Posted by: rps at January 2, 2005 10:01 PM
We can safely set aside any quibbles about whether the standard measure of the US savings rate is right or wrong in its details, at least when discussing the big picture. The current account and trade deficits are evidence that the national savings rate is low, relative to demands for investment funds. We either need to consumer a smaller share of GDP, invest a smaller share of GDP, or fork over an every larger share of GDP as payment on borrowing from foreigners.
Mr C. Eugene Steuerle probably recognizes the pattern of shifting savings to tax protected categories, rather than having tax-shelted savings schemes generate more savings, from his time under Reagan. This is not a new finding.
Posted by: kharris at January 3, 2005 05:14 AM
David -- there is no substance to the claim
Posted by: spencer at January 3, 2005 05:36 AM
What sort of eats at me is the "why".
I suppose its the notion of an "ownership society" which in itself has some merits. I would like to see all folks with some retirement money in a broad index like the wilshire 5000....that way when they serve on juries or elect people who set policy they'll know that actions against industy will hurt their own retirements a bit so the actions taken must be carefully weighed.
However the notion of great amounts of public stewarded funds owning idustry stike me close to a purer socialist state. You know that will entail congress to greater reveiw of corporate activities and next thing you know you get congress people planning the economy in the name of retirees. (and if you share most economists notions on the efficiencies of markets you'd feel that would end up making us a lot poorer...my feeling too would be the cost of corruption and power politics would extract a huge excise on industry and reward poorer players in the name of the "greater good"...pure elesworth toohey)
Perhaps the Bush admin doesn't see the potential corruption their system would create or perhaps they really hope for a less contolled investment sytsem.
That brings me to the second worry I have and I'd love to have fleshed (or flushed) out.
My sort of pondering on whether the notion of capital investment and return on that savings is still valid in our day of highly evolved credit markets and huge improvements in the supply chains that require far less capital to acheive similar production and distribution.
With fiat currencies that can be increased as fast or faster as any economy will grow*, do we really have investment needs going unmet or will extra money forced into equity investments tend to decrease the return available (to perhaps negative rates) on those "investments".
If we're going to stimulate and grow our economy through over investment, thats going to make it hard to be an investor even in broad indexes.
To take a system of tranfer payments that generally works well (perhaps some age level tinkering would be appropiate with increased longevity) and force people into a diminishing returns situation risks the very basis of notions of individual ownership outside the purview of techncats.
Basically, I fear that Bushes notion of "privatization" really is a method that will give connected people a greater stranglehold and take away a saftey net for many that allows them to to act freely with the security of the safe landing when they get older.
(depending on what sort of monetary inflation and hiding of economic efficiency gains by monetary inflation you are willing to take on and how many hundreds of bilions of your currency will be willingly stock up and lent back to you at rates that won't keep up with the real value of money)
Posted by: Tom Norian at January 3, 2005 11:59 AM