April 25, 2005
Matt Miller: Why Are Republican Economists Averse to Raising National Savings?
Matt Miller--professional centrist Democrat--is an unhappy camper. He looks for fiscal policy hawks among Republican policy advisors, and is disappointed.
The New York Times > Business > Your Money > Economic View: Private Accounts, and Priorities: If the White House and its allies think that private accounts are such a good idea, why don't they propose paying for the fiscal hole that the payroll tax diversion creates, rather than borrowing a fresh $200 billion or so each year for a few decades? Why isn't the idea of paying for the accounts - through spending trims elsewhere, or, more likely, through some new tax stream - even part of the debate?... It wasn't always this way. As privatization proposals kicked around in the 1990's... Edward M. Gramlich, the Federal Reserve governor who previously served on a presidential commission on Social Security, wanted to require individuals to pay for new accounts atop Social Security out of their own pockets. In President Bush's first term, Treasury Secretary Paul H. O'Neill lost his battle to preserve the budget surplus rather than use it for big tax cuts, so that it would have been available to pay for a potential Social Security transition. Today, Laurence J. Kotlikoff, an economics professor at Boston University, has a plan that would divert more of the payroll tax to private accounts than the president's plan would. But Professor Kotlikoff would finance this without new borrowing by enacting a 12 percent retail sales tax that phases out over several decades.
So why don't today's brand-name G.O.P. economists consider paying for these accounts? Recent conversations with Mr. Boskin and Mr. Mankiw suggest that they view this as an almost unintelligible question.
Their first answer is that we are 'paying for it' already, because the president's plan would reduce people's future Social Security benefits dollar for dollar with what they chose to put into private accounts today. As Mr. Mankiw, who recently stepped down as Mr. Bush's chief economic adviser, explains, this makes the plan a wash, or 'financially neutral to the government in a present-value sense. There's no reason why making an implicit liability explicit should change the path of taxes or of other spending behavior,' he said.
But one can acknowledge Mr. Mankiw's point and still think that it's a bad idea to soon add $200 billion or more a year to today's sky-high deficits. For one thing, it's not clear that financial markets will agree that huge deficits today are fine because our leaders have instructed their successors 50 years from now to cut benefits, and thus future deficits....
(A parenthetical remark: there are two reasons to think that spending behavior will change. The first is, as Matt Miller says, if participants in financial markets do not have full confidence that the plans set in motion today for what will happen in fifty years will be honored. That's one reason to think that the Bush proposal should change spending behavior. The second is that if account holders regard their private accounts as closer substitutes for their other savings than Social Security benefits are, then they will change their savings behavior.)
[W]ith deficits already topping $400 billion, the borrow-it-all approach essentially says that it is O.K. if we run $600 billion deficits before long. Does Mr. Boskin really want to make that assumption explicit? In response, he asserts that deficits above today's $400 billion range simply aren't in the cards. The Congressional Budget Office's forecast, he notes, shows deficits shrinking to a manageable 2 percent of gross domestic product, or in the low $200 billions, in the years ahead. But... the budget office's forecast also assumes that all of President Bush's tax cuts will expire, that doctors' fees paid by Medicare will be cut by 35 percent and that a host of other budget fantasies will come true.
Moreover, if the president's approach is enacted, it will mean that the energy and political capital absorbed by Social Security reform will come and go without seizing this moment to increase the paltry national savings rate - which we could do if we offset the gap created by the diversion of payroll taxes. That means we would be likely to squander the chance to enlarge the economic pie out of which all retirement needs must be met. Mr. Mankiw and Mr. Boskin say that they share this concern, but that it's a question we should address later....
A CYNIC would say that today's top Republican economists have found fancy ways of staying on message - which means not questioning the wisdom of making Mr. Bush's tax cuts permanent, and justifying the president's plan to Leave Huge Debts Behind.... [I]t's hard not to scratch your head when conservative Republican senators like Lindsey O. Graham of South Carolina and Charles E. Grassley of Iowa talk about finding new revenue for Social Security so we don't borrow fresh trillions, while the policy professionals trumpet the miracle of the free lunch. They don't call it 'political economy' for nothing.
Posted by DeLong at April 25, 2005 02:13 PM