I've been reading a lot over the past few days about the current federal budgetary issues. One of the more interesting things I've found is this working paper from Alan Auerbach (UC Berkley economist) on the mid and long term debt projections. He calculates deficit projections under the assumptions of perpetuating the AMT and Medicare Doc fixes and compares it to the CBO scores. Essentially it shows that the CBO score for the budget likely underestimates total deficits over the next 10 years by about $5 trillion. And that's assuming Bush tax cuts expire as does stimulus spending. If those assumptions are reversed it adds another $5 trillion over 10 years.
But for me the real story is Figure 3 (page 22). Under every projection, revenues (as a percent of GDP) will be flat after 2013 and spending (as a percent of GDP) will linearly increase. All non-mandatory (i.e. non-social) spending will fall, as a percentage of the budget as more and more money (absolutely and proportionally) goes to providing social goods.
The good news is Auerbach is reportedly on Obama's short-list to replace Austen Goolsbee as the head of the Council of Economic Advisers. So if he's appointed, and he manages to avoid being captured by Washington interests, maybe he can bring some sense to the budget process.
Do we need to curtail federal spending? If so, how? The paper linked above doesn't make it totally clear, but the tables found here make it clear that the only sector of spending that is increasing (as a proportion of GDP) is mandatory social spending (Medicare, Medicaid, SS, SSDI, etc.). So, for those PVSers who support liberal federal economic policy, can you propose some way of making social spending sustainable?
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Also, I'd be interested in a discussion of how much (as a proportion of GDP) people feel we should be spending on various activities. Paul Ryan's budget targets 18% of GDP as the appropriate spending level, which is pretty close to the historical average over the past 75 years. Do people feel that's too low, too high, or about right?
Just a few common-sense ideas, and mind you I'm sure there's fat that can be trimmed here too.
1) Raise the top tax bracket to pre-1986 or even 1981 levels.
2) Make it harder for people to avoid paying taxes.
3) Raise retirement age.
4) Decrease military spending.
As for how to sell these to the American people, I don't know, but for starters on (1) you'd have to convince those that would be in higher tax brackets that their tax dollars are an investment in the mechanism that helps them create and sustain wealth, and that they will actually benefit by investing more in the system. Of course, there's also an argument that flaws in the system allow certain wealth to be misappropriated, and that we should therefore re-appropriate it by taxation. But I suspect it will take a much harsher economic climate for America to be able to look past its socialism paranoia enough to give either argument fair consideration.
Now, for a few ideas that I haven't said before, and that I actually haven't even really thought through that much. Can we require corporations from which we import goods and services to prove that those goods and services are being provided on an equal playing field with companies that produce those goods and service domestically. I.e. that workers are enjoying certain standards of living and freedoms that our government requires of domestic countries. I wonder if, in so doing, we would be killing several birds with one stone--making domestic companies more competitive and at the same time increasing the standard of living in other countries, thereby reducing the amount of money we have to put into "fighting" immigration and solving the world's problems.
Idea 2, and mind you everything in my mind is against this idea, but I'd still like to see some investigation on it: Can we effectively run the country in perpetual deficit?
Idea 3, (and this is type of bad idea I put on record just to make sure that I never become president or hold political office, which I'm sure wouldn't have been a problem anyway) war with China. Not that I have anything against China aside from human rights (and mind you, I'm not advocating this idea), but wouldn't that have the effect of canceling a big chunk of our debts? I mean, if we built up a reasonable excuse for war, it'd be kind of absurd for us to go back to the status quo and repay those debts once the war is over, right?
Hmmm, strike Idea 3. Should have done more research. Chinese debt accounts for only 1.1 trillion (just a drop in the bucket). I suppose that's what I get for trying to spice things up.
Oh, and typo alert. I meant "domestic companies" instead of "domestic countries" in paragraph 4.
A few things in response to Karl:
1) Raising the top tax bracket to pre-1986 or even 1981 levels won't solve the revenue problem. The amount of revenue generated through taxes has been remarkably constant over the past 75 years, regardless of precisely how we place the brackets: we always take in between 17 and 20% of GDP (until Bush tax cuts; but the real impact, from a revenue standpoint, of those was the tax cuts for the middle class, not those for the wealthy).
2) Make it harder for people to avoid paying taxes. I'm not sure what you mean by that. I could take it in three ways: 1) increase IRS enforcement, including more auditing and stiffer penalties. This has been shown to have a significantly positive effect on revenues; 2) encourage repatriattion of corporate earnings by lowering our corporate tax rate (something most people feel we should do); or 3) decrease tax credits and subsidies, particularly expensive ones like child care credit, mortgage interest deduction, and so forth. I think those are all merit consideration.
3) Raise retirement age. I think this is the single most important thing we could do. The real growth in the budget is from paying social services for retirees. Both SS and Medicare have drastically changed (in terms of percentage of population enrolled) from the original vision.
4) Decrease military spending. Again, this won't buy back much. Military spending before 9/11 was 3% of GDP; it's gone up to about 5% now, but will drop back down as we draw down in Iraq and Afghanistan. But even if we entirely get rid of all defense spending it would only buy 30 additional years of entitlement growth at the current rate.
Idea 1: I think barriers to trade fundamentally hurt standards of living. I think this idea would have perverse consequences. Consider, for instance, how much standards of living in China, Vietnam, Korea and other industrializing nations went up as a result of Western consumption. Billions more people (some of them in the US) would be living in poverty under this regime. A little bit of development goes a long way to improving quality of life.
Idea 2: That's the current plan. To do that, though, either spending growth would have to be contained or taxes would have to increase (as a share of GDP). Neither of those things has ever occurred before, so I'm skeptical it's feasible.
Idea 3: Besides that most of our debt is owed to ourselves, war with China would significantly impact our quality of life. Everything, from gas to food to clothes, would dramatically increase in price, leading to rapid inflation. So maybe it would be good for the debt :)
1) It seems to be counter-intuitive, but I'm certain there are a number of factors in play that I'm not considering, so I'm going to take you at your word that raising the highest tax brackets wouldn't have much of an impact on revenue. Here's another thought, though. What effect would it have on expenditures for social services? Would shifting the tax burden even more away from the poor lessen the extent to which they are dependent on social services.
2) I was focusing on tax credits and subsidies and tax shelters, but I can't argue against enforcement. Of course, if we simplify the tax code, enforcement becomes easier and less expensive. I'm reluctant to lower the corporate tax rate, though I've been reconsidering my position on that lately.
3) Amen. What we need are a few kamikaze politicians who are willing to go into Washington and commit political suicide to solve this problem.
4) Well, again I guess I spoke without doing much research, but it's still true that if we were to reduce our non-discretionary military spending to that of China (whose military budget is, mind you almost double that of any other country besides the U.S.), we could save over .5 trillion a year. I'm not entirely confident on my sources, but I think there's .7 trillion of discretionary military spending we could try to put a dent into as well.
Idea 1) Normally, I'm against trade barriers. But this seems like a novel approach to me. Rather than trying to level the playing field by making companies pay us to play, we'd be leveling the playing field by making companies pay their workers to play, and hopefully in the long run decreasing the global economy's dependencies on our consumption. We wouldn't want to do it all at once, of course.
Idea 3) Maybe Canada instead? :)
I ran across an argument that raising the eligibility age for Medicare isn't as straightforward a solution as it would seem. Basically, the argument is that life expectancy for those who need Medicare the most, i.e. the very people it was designed for, isn't going up nearly as much as we think. The article's a little skimpy on statistics, but it raises a good question.
One number I was interested in was the figure of only 125 billion in savings from raising the Medicare age by 2 years. The number seemed disappointingly small (especially in comparison to the defense spending numbers I put in my last post), but it made me wonder what other numbers the Congressional Budget Office has calculated. Fortunately, the article had a link to its source, which is a 216 page report from the Congressional Budget Office in March 2011 that appears to estimate the effects of all sorts of budget cuts. Anyone have time to read it and tell me what to think:)?
The CNN article linked says that average life expectancy at 65 has gone up 5 years (from 14 years to 19 years). That indicates to me we should immediately raise the Medicare and SS eligibility by the same amount (on average), from 65 to 70, and propagate that increase forward based on actuarial projections. Combined, this would save on the order of $1 trillion over the next 10 years, and (if it were done continuously) it would significantly improve the long-term solvency of those programs.
As to the diversity of experience and poor people's life expectancy being less than wealthy people's, I'd be fine with a rule that once you hit X years of remaining life expectancy (based on demographics, family history, health assessment, etc.) you can be entered into the Medicare and SS programs. Under this model, rich people who will live longer have to wait longer to enroll, and poor people who are in worse health could enroll earlier. As a side benefit, I imagine this would encourage white collar workers to stay productive longer, instead of spending 10 productive years recreating (if you believe the Flomax commercials).
On the numbers in your previous post: I'm not aware of what is meant by non-discretionary military spending. In the "mandatory spending" portion of the OMB report you linked it doesn't list any (non-healthcare) military spending as mandatory. All cost of operations in the 2010 budget (including, I believe, the current wars in Iraq and Afghanistan and the kinetic action in Libya) is included in the discretionary budget, which is about $700 billion. That will probably decrease to $500 billion as the Iraq and Afghanistan wars wind down, and we could save a lot by cutting it further.
But I would push back a little on the idea that defense spending should always go down while social spending should always increase. That's how it's been for the past 60 years, and that's how it's projected to go for the next 20. Eventually (in 10 years according to Jon Huntsman) social spending alone will account for spending equivalent to 18% of GDP. How long will we let social spending go before we start budgeting it in the same way we do all other spending: give the cognizant agencies a fixed amount of money and have them determine how best to cover their mandate within that budget.
So, I feel like my original question still stands. How much is "the right amount" (as a proportion of GDP) 1) for the federal gov't as a whole to spend and 2) for them to spend specifically on social programs. Do we ever get to a point when we're spending too much on SS, Medicare and Medicaid?
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