February 04, 2003
Alan Murray Bangs His Head Against the Wall

Three years ago it looked as if finally, at long last, after much heavy lifting and a lot of very hard very public-spirited political work by people who had the long-term welfare of the country at heart, that America's long-term spending plans were about to be brought back into balance with the long-term resources of America's government. It looked as though the large budget surpluses now (and in the near future) needed to begin the process of financing the public sector's share of the costs of the retirement of the baby-boom generation were firmly in place.

Now, of course, these surpluses are gone--casually destroyed by the Bush administration, which argued first that we could afford tax cuts without endangering the surpluses, argued second that temporary deficits in the midst of war and recession were necessary, argued third that there was really no reason to think that deficits were a problem, and now argues... I'm not sure: I can't keep up.

As Alan Murray points out, the really big budget decisions the U.S. government faces over the next two generations boil down to choosing one of three options:

  1. Ramp up federal spending from 20% of GDP today to 25%-30% of GDP as the baby-boom generation retires.
  2. Severely cut back on everything else the federal government does in order to keep federal spending at its current level as the baby-boom generation retires.
  3. Default on what the baby-boom generation and its elders believe to be the government's promises on the level of support that it will give Medicare and Social Security.

The third of these is simply not going to happen: the baby-boom generation (and its elders) simply have too many votes, and we are (mostly) a democracy. The choice is between the first and the second. And the Bush Administration's budget is another step in increasing the difficulty of undertaking either long-run fiscal strategy:


WSJ.com - Political Capital: The big fiscal question facing the nation is this: What is the appropriate size, role and purpose of American government -- not just during the next two or three years, but over the next 20 or 30. The current partisan squabbling over deficits and tax cuts is merely a diversion from that bigger question. President Bush takes seriously his role as the leader of the world's remaining superpower. But what sacrifices does he think the nation must make in order to bear the cost of that heavy burden? The president needs to devote some time and energy and political capital to telling us not only which functions he wants government to keep but also which he wants it to shed.

The president's budget addresses this issue in a chapter entitled "The Real Fiscal Danger." Social Security and Medicare are underfunded to the tune of $18 trillion, this chapter estimates. "As our population ages and health-care costs continue to escalate, the costs of these programs will grow enormously, in fact, so rapidly that they will threaten to overwhelm the rest of the budget." The Congressional Budget Office has said that without changes, spending on the two programs will more than double as a share of the economy, to 14% or higher from 7%.

That will leave three choices: 1) sharply reduce spending on Medicare and Social Security; 2) sharply reduce spending on everything else the government does; or 3) let federal spending grow in the next three decades to a size equal to 25% to 30% of the economy, up from just under 20% today.

Mr. Bush's aggressive tax cuts are part of a strategy to take option No. 3 off the table. But his actions during the past two years suggest he doesn't have much of an appetite for option No. 2 either. That leaves Medicare and Social Security. The president says he's solidly in favor of revamping those programs for the elderly, but he's still sorely short on the details of how his changes will save money.

The politics of this are easy to grasp; people like free lunches. But in his State of the Union address, Mr. Bush made this promise: "We will not deny, we will not ignore, we will not pass along our problems to other Congresses, other presidents, and other generations." On the fiscal front, he still has a long way to go to fulfill that promise.

Posted by DeLong at February 04, 2003 04:50 PM | Trackback

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One quibble. We are not (mostly) a democracy. Or a republica. We are (mostly) an authoritarian state, an oligarchy, that would instantly fall apart without the constant prevarication of the good puppy media and the passive acquiescence of all too many potential leaders of opposition.

Posted by: Charles Utwater II on February 4, 2003 06:04 PM

I bet the only reason Snow got the job at Treasury was that Bernie Ebbers was otherwise indisposed.

Anyone else see the Wall Street Journal article about Ebbers' insane personal borrowing? Lord, if that isn't what Bush has in mind.

Actually, what Bush has in mind is what he's always done before: drive it into the ground, then wait for his buddies from Skull & Bones and Saudi Arabia to write checks and bail him out.

Posted by: Jon H on February 4, 2003 07:25 PM

Brad, I got the impression from _Fuzzy Math_ (Krugman, 2001) and Laurence Kotlikoff's "The Coming Generational Storm" (also 2001) as well as scattered pieces by Auerbach and Gale that even though Clinton-era fiscal policies were certainly much, much better for the long-term health of the government's budget sheet, they weren't perfect and taxes would still need to be raised to pay for outstanding obligations in Medicare/Medicaid, Social Security, federal pensions, etc.

This doesn't change the stark analysis in the Murray piece, however. Thanks for pointing this out.

Posted by: Paul on February 4, 2003 08:50 PM

Did I blink or did Brad miss a fourth possibility, namely increasing payroll tax rates high enough to keep the system solvent, even if this imposes a huge burden on middle and poorer America? They, after all, will be a much smaller share of the electorate, and it is less likely that they will be registered or will bother to vote given the all-too feckless nature of both major parties.

Charles has it right--the democratic institutions in this country (elections, checks and balances, judicial review, etc) have been bypassed by various means (campaign financing, corporate control of the news media which also encourages voter passivity, and now private corporate control of the electoral process through electronic ballot machines), creating a government that in effect operates as a corporate oligarchy. Don't be surprised if in the future they are able to sell or force through a large hike in the payroll tax rate in the same manner they sold the massive tax cuts of 2001.

Posted by: andres on February 4, 2003 09:17 PM

Brad misses the key to his third possibility.

If we are going to have a healthy republic and not a society where the old leech off the young and the talented abandon the country in the face of 50% payroll tax rates, we must sharply cut Medicare and Social Security. The old are just getting older and greedier all the time. If we continue on our present course adolescence will end at age 62 because that will be the youngest most of the next generation can afford to slip out from under its parents' wings.

But politicians need votes and old people are the only ones who will be delivering. So the mostly painless solution of means-testing rich benefits like Medicare for the richest group in the nation -- seniors -- will be hard to invoke. Politicians would rather trim a bit here and raise taxes a lot there.

Taking benefits away from the extremely rich class of seniors in order to spare poorer working people the burden of paying for them can be accomplished, though. What we need is a fiscal crisis so that seniors fear their safety net may fall apart altogether. Then they will rally in the streets for means testing. After all, the majority of seniors are rich and don't need any help to pay for their luxury lifestyles; they're hanging on for the principle of getting something for nothing from younger workers.

When the Bush program of tax cuts and fiddling with reform is in place for a decade or two, Social Security and Medicare will be in such bad shape that their future will be in dougt. The bills we be coming due and there will be no money saved at all for the big bill.

The longer we can prevent any real planning for the inevitable crisis, the worse the situation will get. And big deficits along with giant tax cuts will put us in the perfect position. The crisis will be solved by politicians, with much feigned regret, cutting benefits for the majority of seniors who have outside means to fund a generous retirement.

The truly needy and any who lose their assets in a crisis will be taken care of forever. The rich majority of seniors who are simply redistributing wealth from poor workers to themselves will have to be satisfied with the richness they have earned. The nation will find paying benefits for only those who need them is very cheap and doesn't even require a tax increase. Everyone will be better off when the grey mafia pork-barrelers are cut off.

But it won't happen unless the Bush plan can precipitate the crisis that makes it viable. If the fisc is in good enough shape to ruin the whole country to protect the old, the geezers will take us all down with their greed. It's only when the oldsters face losing benefits themselves that we will find compromise.

Posted by: Newt on February 4, 2003 10:41 PM

I've never understood why Brad is so convinced of (3). The "default" we are talking about is pretty trivial in life terms; a five year increase in the retirement age would do most of the work. I just don't find myself believing that this would be politically dead in the water.

Posted by: dsquared on February 4, 2003 11:16 PM

"I've never understood why Brad is so convinced of (3). The "default" we are talking about is pretty trivial in life terms; a five year increase in the retirement age would do most of the work. I just don't find myself believing that this would be politically dead in the water."

Doesn't it rather depend on what you're retiring from?

An attorney or banker might easily cruise on into her mid-70's. But someone who does more active or physical work?

Posted by: Jon H on February 4, 2003 11:28 PM

Moreover, what evidence is there that, in the face of such a crisis, we would, in fact, cut benefits for the old generally and keep benefits for the poor old specifically? On the contrary, it seems that benefits for the old are considered inviolate in our society, and benefits for the poor are considered expendable. I would think it more likely that we do something involving linking the payout from Social Security to payments into the system, a la a pension fund (giving rich more money in SS), rather than cut benefits to the elderly who don't need such social security benefits.

Though, on the principle of the thing, I think Social Security is a stupid program, incentive-wise, social justice-wise, and all that. Then again, I'm only 18: ask me again when I'm 64!

Posted by: Julian Elson on February 5, 2003 02:37 AM

WSJ: "The big fiscal question facing the nation is this: What is the appropriate size, role and purpose of American government -- not just during the next two or three years, but over the next 20 or 30."

I've often wondered when the right wing would start asking this question, instead of just using tax cuts to buy votes.

Posted by: Amos Newcombe on February 5, 2003 03:22 AM

>>I've never understood why Brad is so convinced of (3). The "default" we are talking about is pretty trivial in life terms; a five year increase in the retirement age would do most of the work. I just don't find myself believing that this would be politically dead in the water.<<

It's not politically dead in the water if we do it now--announce now that the Social Security retirement age is going up between 2025 and 2050 by five years due to increasing life expectancy. If we try to do it in 2020 however...

Posted by: Brad DeLong on February 5, 2003 06:42 AM

Ah yes, Newt gives us the old

"The Bush Administration's seeming fiscal irresponsibility is really a deviously smart plan to surmount the insurmountable political economy problem of social security" argument.

Newt your argument may have been tongue in cheek but the posting name allows me to assume it is not, and others have proposed this quite often so my following questins are directed at you or other proponents of this theory.

I have two questions:
1) Does this mean that the seemingly idiotic rulers of Argentina were actually embarking on a highly sophisticated way of bringing about fiscal reform?

2) If the goal is to bankrupt the country so that the fiscal situation is resolved under some bizarre Chapter 11 type scenario, can we at least pick the ways in which to go bankrupt? I mean do we have to do it by cutting dividend taxes, instead why don't we just give everyone a permanent payroll tax holiday? Have national champagne brunch day? I mean I would like a piece of the action of this sophisticated plan too.

Posted by: achilles on February 5, 2003 07:13 AM

Please please please. Can you imagine the President happily telling us that Social Security and Medicare are not going to begin until we are 70? Just keep on working gals and guys. Lots of good stuff for for the richie rich and the rest of you will just have to work harder longer and stay healthier to make sure the richie rich gets whats theirs. Duh.

Duh.

Posted by: anne on February 5, 2003 12:12 PM

Brad:

It's not politically dead in the water if we do it now--announce now that the Social Security retirement age is going up between 2025 and 2050 by five years due to increasing life expectancy.

You are just so far wrong when you say that, it makes me blush. It is a routine Democrat requirement that you can't run for even dogcatcher on the Democrat ticket if you don't pledge that the retirement age must remain inviolate and never, never rise. I have been to democrat primary debates and it seems like the number one requirement even for conservative D's. There can be no bipartisan cooperation on retirement ages until a crisis hits and thus no action.

Achilles:
1) Does this mean that the seemingly idiotic rulers of Argentina were actually embarking on a highly sophisticated way of bringing about fiscal reform

That is too awful to imagine. But things that cannot go on forever will not, and we need give no credit to the argentine rulers for foresight when they lacked courage to reform when it would have done some good. Ultimately the people are to blame for punishing any hint of fiscal probity.

The difference in the United States is that the Bush craziness will be easily reversed by simply defaulting on the so-called obligations to the elderly rich. Argentina could not so easily default on its obligations to foreign creditors and the sinecured. A real leadership would have tried defaulting on promises to civil servants and foreign bondholders before falling into a currency crisis, however. It was essential for the nation to hold the value of the peso whatever the disappointment of holders of other obligations.


2) If the goal is to bankrupt the country so that the fiscal situation is resolved under some bizarre Chapter 11 type scenario, can we at least pick the ways in which to go bankrupt? I mean do we have to do it by cutting dividend taxes, instead why don't we just give everyone a permanent payroll tax holiday? Have national champagne brunch day? I mean I would like a piece of the action of this sophisticated plan too.

I agree one hundred percent. The dividend tax cut will be beneficial to corporate governance, though. Let's keep it and just abandon the Bush income tax cut phase-in and cap the estate tax exemption at $10 million. Then we'll abolish the FICA tax entirely to benefit working americans; who imagined a tax that punishes work but rewards stock shenanigans and exempts the wealthy, anyway? Must have been Democrats.

Serve the champaigne with cantalope and fresh strawberries and you've got my vote for Republican presidential candidate in 2008.

Posted by: Newt on February 5, 2003 12:21 PM

Speaking of compassionate conservatism -

February 5, 2003

Aid to Poor Faces More Scrutiny
By ROBERT PEAR - NYT

WASHINGTON - President Bush's budget proposes new eligibility requirements that would make it more difficult for low-income families to obtain a range of government benefits, from tax credits to school lunches.

Arguing that much of the federal money intended for poor people is diverted through error and fraud, the administration wants to require families to supply more proof of their income and living arrangements before they can qualify for aid....

Brad - What were you saying about Social Security and Medicare? Duh.

Posted by: anne on February 5, 2003 12:22 PM

Newt,

I agree that Democrats won't easily come out and say 'let's raise the retirement age' but I find it really hard to believe that the Republican's are going to come out and say it either. So this wish that when the system goes broke some brave Republican is going to say 'okay let's default on the largest voting bloc in the country' is pretty tenuous.

More power to whoever takes the bold step of indexing social security to life expectancy but right now cowardice on this issue is not just a Democratic domain. I think the difference here is not who's more afraid to talk about raising the retirment age. It is more about who's more ready to bury their head in the sand and policies that benefit some in order to preciptate a crisis that will be felt by all.

I still want to know why we need to worry about distributional unfairness of free school lunch programs but not about the distributional unfairness of a tax cut that is at least ten thousand times larger. Anyone want to take a stab at that?

Posted by: achilles on February 5, 2003 01:19 PM

Past patterns suggest that when a generation formed in one shock of history moves on, things change materially and it is almost as though they had never been, from the point of view of continuing input. In the USA the young men of the US Civil War moved on in the early 20th century. In the UK it was noticeable how things changed with the passing of the last of the Edwardians in the 1960s. The whole world has changed with changing mindsets coming through over the last decade or so, as the young of the Second World War left the stage.

None of this means "died", just that as the last of them ceased to be active and cast a shadow a few years after retiring, say around the age of 70 for the groups considered as a whole, they ceased to set the pace. It was always an omission, not an introduction of a new thing but the allowing of other things to prevail.

Anyhow, I fully expect that baby boomer driven politics will silently but swiftly fade from the scene in all countries they ever were significant somewhere around 2035. (Britain had a very damped down baby boom, smaller and briefer; by age I would be a boomer had I spent those years here in Australia or in the USA, but in fact it all preceded me.)

Posted by: P.M.Lawrence on February 5, 2003 02:37 PM

Did I blink or did Brad miss a fourth possibility, namely increasing payroll tax rates high enough to keep the system solvent, even if this imposes a huge burden on middle and poorer America?

What about raising the income cap? That way the really well off are paying extra instead of the poor and middle class. Currently ONLY the poor and middle class pay for Social Security! (OK, a pittance of a percentage for the rich, compared to what the rest pay as a percentage.)

Also, simply subsidising Social Security from the general treasury. Social Security has certainly been subsidising the general treasury for some time.

If we hadn't been borrowing to give tax cuts to the rich we wouldn't have a $300 billion/year (and rising) interest obligation - and THAT would certainly cover any future shortfall.

My prediction? We're going to find ourselves with a great big WEALTH TAX in a few years. "Get the money from where the money went" is going to be a very popular slogan.

Posted by: IssuesGuy on February 5, 2003 03:28 PM
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