The Social Trampoline.

In 2012, 46 percent of the US Government’s non-interest spending went to Social Security, Medicare, and Medicaid; by 2030 it was projected to rise to 61 percent.  That is, these safety-net programs either will crowd out spending on other things or force a substantial increase in in government spending over-all.[1]

One driver here is the retirement of the “Baby Boom.”  In 2012 there were 49 million people on Medicare (and presumably s slightly smaller number receiving Social Security).  By 2030, that number is projected to grow to 80 million.

Another driver is high medical costs.  In 2011, Medicare spent $560 billion.  By 2022, Medicare spending is projected to rise to $1.1 trillion.

“Reforming” entitlements really means cutting someone’s income.  Whose ox is going to get gored?

Hoping to avoid this ugly reality, people grasp at straws.  Medicare is already “means-tested” (that is, individuals/couples making more than $85,000/$170,000 a year pay higher premiums).  Raising the Medicare eligibility age from 65 to 67 would cut costs by about 5 percent over the long run because those people are basically still healthy.  Raising the Social Security retirement age to 70 would cut spending by 13 percent by 2060.

Cutting medical costs would involve reducing the incomes of medical personnel, hospitals, and drug manufacturers.[2]  Democrats want to do this through government regulation by bureaucracies subject to pressure from elected representatives.  Yea, right.  Republicans want to do it “through the market:” by giving everyone some miserly sum and making individuals bargain with big corporations.  Yea, right.

Avoiding these fights by just raising taxes on the wealthy could have a certain broad appeal.[3]  However, rich people are adept at defending themselves.  Even if they had to put up with higher taxes for a while, they would eventually get them over-turned.  Democrats are always going on about how high taxes on the rich were commonly accepted for a long time after the Second World War.  Where do they think that the Reagan and Bush II tax cuts came from if not from simmering resentment of high income earners?

The simplest fix for Social Security would be to raise or remove the cap on payroll taxes on incomes over $110,000 a year.  That would solve the problem for 75 years at least.  Additionally, reducing inflation-indexing of Social Security could save a lot of money.  Depending on how far it was pushed, this could save $100 billion over ten years.  Probably one would have to do both to limit the political reaction by high-income earners.

One argument against raising the retirement age is that it would disproportionately penalize lower class and middle class people.  They generally don’t live quite so long as do rich people.  So, it would cut into their retirement “golden years.”  Doctors and nurses aren’t going to want to give up a big chunk of their income.  Rich people aren’t going to want to pay an even more disproportionate share of taxes.  “Baby Boomers” have a notion that they have a bargain with America and that America needs to honor its “promises” to them.  However, the truth is that they promised themselves these benefits and that they promised that a younger generation—which had no voice in the bargain—would pay the costs.  The simple human truth here is that people are selfish.  Not much sign of civic solidarity.

[1] “Fixing the safety net,” The Week, 21 December 2012, p. 9.

[2] See: “Single Payer.”

[3] “A poor man with a ballot box can rob you as easily as a rich man with a pen.”—Woody Guthrie.

Against a Balanced Budget Amendment.

Some Republicans argue that the current deficit is the product of legislative indiscipline. From time to time, they have proposed a “Balanced Budget Amendment” to the Constitution as the cure for this indiscipline. Sort of like fiscal gastric by-pass surgery.[1] Allow me to disagree.

First, the whole economic history of the Twentieth Century argues against the sanctity of balanced budgets. An obsession with balanced budgets made the Great Depression of the 1930s much worse than it need have been. “Hoovervilles” were the packing-box shanty towns named after the budget-balancing president of the United States in the early Depression. Massive deficit spending—which would be outlawed by a balanced budget amendment—got the Imperial Japan, Nazi Germany, and the United States out of that Depression. You don’t have to like the company we kept to recognize what worked. Since the Second World War all countries have used deficit spending to counter down-turns in the economy. It has turned out to be a crude tool, but it has been effective. Our current problems exist because the Democrats flinched before the cost of getting us out of the mess created by the housing bubble. The stimulus package needed to be twice as big and front-loaded into the first year. Then Republicans imposed the “sequester” that further reduced government spending.

Second, a balanced budget amendment will do nothing to resolve the fundamental disputes between Democrats and Republicans which stands at the center of our current dead-lock. Republicans rightly complain that the Democrats will not address the exploding cost of entitlement programs, which cannot be supported by any model of economic growth or taxation of the rich.[2] Democrats rightly complain that they cannot sell austerity to their constituents without some tax scalps from the rich to brandish. How will a balanced budget amendment solve this basic dead-lock? Making the budget an issue subject to judicial review merely passes the buck from the legislature to the courts. If you think abortion or gun-control are subjects best avoided at the Thanksgiving dinner table, just wait until taxes and spending get on the docket!

Third, about 22 percent of federal spending goes to defense, about 22 percent goes to Social Security; and about 22 percent goes to Medicare/Medicaid. That’s two-thirds of federal spending. About 7 percent goes to debt-service. Everything else that government does is crammed into the remaining 25+ percent of federal spending. What do people want to cut? Social Security? Medicare? Defense? I would bet not. OK, we could do without the Department of Education and the DEA. What about other things? Air traffic controllers? Paving the highways? The federal courts? The Coast Guard air-lifting injured commercial fishermen off heaving decks at night in the Bering Sea? Cuts to welfare won’t do it.[3]

If the vast majority of legislators do not want to make these cuts, then the only solution that would be imposed by a Balanced Budget Amendment would be big tax increases on a very wide basis. Basically it would involve undoing the George W. Bush Administration’s tax cuts.[4] Republicans should be careful about the things for which they wish. A balanced budget amendment has a snowball’s chance in Hell of solving those problems.

[1] For a recent example, see:

[2] Republicans conveniently fail to provide any detailed plans on how they would contain entitlement spending. There are a bunch of ways of doing it, but not without somebody’s ox getting gored.

[3] In fiscal 2014, SNAP added $74 billion to a$3.5 trillion budget. I can’t even calculate that small a percentage.

[4] They should best be called the Bush-Obama Tax Cuts because President Obama fought hard to have 98 percent of them made permanent. According to the NYT, two-thirds of the federal revenue lost from those cuts came from people who make less than $250,000 a year.

Character Test.

Eduardo Porter has argued that Americans have been guided by a shared disdain for collective solutions and a belief individual responsibility. The conservative argument offered by Charles Murray and others is that the welfare state has undermined the character of its beneficiaries. The liberal argument offered by Eduardo Porter and others is that America has relied on continuing prosperity instead of a real welfare state. When long-term economic troubles hit, many Americans plunged through the cob-web of a “safety net.”[1]

On the right, in line with the moral corruption argument made by Murray, Republicans propose to repeal the Affordable Care Act and cut a bevy of other programs for the poor. This will end the culture of dependency that many conservatives blame for creeping social pathologies that came to light after the recent Baltimore riots that followed the arresting-to-death of Freddy Grey. The Republican budget plans seem like a dead-end. For one thing, they target relatively low-cost programs aimed at the poorest Americans. In reality, defense, Medicare/Medicaid, and Social Security are the big drivers of government spending. As Willy Sutton explained when asked why he robbed banks, “That’s where the money is.”

For another thing, these categories of spending are widely popular with the American middle class. Once again, as with opposition to gay marriage and to immigration reform, Republicans are picking the losing side of an argument. Takes Social Security as an example. As the Baby Boom retires, it places a mounting pressure on the system. When current revenue through withholding is inadequate to meet obligations, the System draws on the Social Security trust-fund (built up from revenue surpluses in the past). At the moment, the trust-fund is expected to be exhausted by 2033. After that happens, retiree benefits will be reduced to perhaps 75 percent of expected benefits.[2] Senators Elizabeth Warren and Bernie Sanders favor raising or removing the cap on Social Security withholding to greatly increase revenue for the supplemental retirement income system. However, they favor going beyond stabilizing the finances of the present system to create an expanded national pension system.[3]

This seems likely to emerge as a powerful issue in future elections. In 2005, 26 percent of still-working Americans expected “to rely on Social Security as a major source of income” in retirement. In 2015, 36 percent of still-working Americans “expect to rely on Social Security as a major source of income” in retirement. Among currently retired people, 73 percent are receiving reduced benefits because they retired early.

There are several possible explanations for the growing place of Social Security in the retirement income of Americans. One explanation could be that the Great Recession devastated both the savings and the income of ordinary Americans. Another explanation could be that a decade of aging forced many Baby Boomers to confront their own lack of thrift over the course of a lifetime. Similarly, the huge number of people who took early retirement could be explained by either the moral corruption argument or by the ravages of globalization over the last 25 years.

If conservatives want to sustain the moral corruption argument, they will have to openly apply it to middle class entitlements. Of course, cannibalizing the Affordable Care Act could provide some of the revenues to shore up middle class entitlements. However, this would require the middle class to turn its back on the poor. So, a test of character.

[1] Eduardo Porter, “Income Inequality Is Costing The Nation on Social Issues,” NYT, 29 April 2015.

[2] “Social Security worries mount,” The Week, 22 May 2015, p. 32.

[3] This strikes me as equivalent to the sort of defined-benefit system that American companies found to be unsustainable and abandoned in favor of the defined-contribution systems. Perhaps I’m wrong.

Toward the cliff.

In brief compass, the “supply side” theories of the Reagan administration de-stabilized the traditional budget by cutting taxes without cutting expenditures.[1] Deficits expanded. However, observers were more concerned about the budget deficits that would be driven by the cost of entitlements—Medicare, Medicaid, and Social Security—for Baby Boomers. If one takes as a given that government can only account for some fixed share of GDP, then the growth of entitlements will crowd out spending on other areas: defense and the wide range of government functions labeled as “discretionary spending.”[2] These entitlements are so popular and the mythology surrounding them so powerful that the elected representatives in a democratic polity were unwilling to address them. The problem festered.

Then came the Great Recession. In 2009, the government’s deficit peaked at over 10 percent of Gross Domestic Product (GDP). By 2013 the Congressional Budget Office (CBO) projected that the deficit would fall to 2.1 percent of GDP. Moreover in September 2013 the CBO projected that short-term government deficits would shrink, thanks to the economy’s recovery from the Great Recession and the cuts enforced by “zee zequester.” So, the deficit has been mastered. We’re good, right?

Well, no. The deficit arising from the Great Recession has been mastered. However, that was a matter of course. Counter-cyclical deficit spending has been the normal response to recessions for half a century. Economic activity revises, spending falls, and tax revenues increase, so the deficit goes away.[3]

However, the deficit arising from entitlement programs has not been mastered. Or addressed. Or even acknowledged. Social Security, Medicare, and Medicaid are about to rise sharply in total cost as the fabled Baby Boomers begin to retire in droves. From 1973 to 2013, spending on Medicare, Medicaid, and Social Security averaged 7 percent of GDP per year; the CBO projects that they will rise to 14 percent of GDP by 2038. By 2023, government spending will rise to 3.5 percent of GDP; by 2038 it would reach 6.5 percent. The trouble is that the economy will not grow as much as does government spending. Moreover, federal revenues are projected to rise by only 2 percent of GDP over the same period. Hence, this will drive up the deficit from the 38 percent of Gross Domestic Product (GDP) that formed the average from 1968 to 2008 to 100 percent of GDP in 2038.

Neither Republicans nor Democrats have shown any willingness during the Obama Administration to address this important long-term problem. The administration has concentrated tis efforts on raising taxes on the higher income groups, rather than on trying to contain or reduce costs. The Republicans have concentrated on trying to repeal the Affordable Care Act, rather than on trying to address the ballooning costs of entitlement programs.

Nor is it likely to emerge as a major issue in the 2016 presidential election. Older people vote in larger percentages than do younger people. No one has yet formulated a way to deliver the same quality of medical care or retirement income at a much lower cost. No one yet has formulated a way to raise substantially larger tax revenues from all Americans.

[1] Jackie Calmes, “Budget Office Warns That Deficits Will Rise Again Because Cuts Are Misdirected,” NYT, 18 September 2013.

[2] Obviously, one does not have to agree that some fixed share of the economy should be devoted to government spending. Certainly Senator Sanders does not.

[3] See Paul Krugman’s terse, withering evaluation of President Obama’s performance in this regard in NYT, 8 May 2015.

Red ink as far as the eye can see.

The US government has been running deficits almost continuously since 1970.[1] So we’re used to them. Things even started to look like they were improving during the late 1990s. Hi-tech industries went through a rapid run-up in value. This produced a lot of extra tax revenue without anyone complaining about it. Bill Clinton left George W. Bush a budget surplus of $236 billion in 2001. By early in 2002 the government was back in deficit by $150 billion.[2]

What we’re not used to are the immense deficits of recent years: the 2009 deficit was $1.4 trillion, the 2010 deficit was $1.56 trillion.

Where did these gigantic deficits come from? They came from a combination of the Bush-era tax cuts with a massive expansion in government spending. Some of the spending could have been avoided: the Iraq war and the Medicare prescription drug benefit proposed by President Bush and passed by Congress in 2003. Some of the spending could not be avoided: enhanced national security after 9/11, the invasion of Afghanistan. However, the biggest source of the deficit is related to the 2007-2008 recession. On the one hand, tax revenues fell during the slow-down by $400 billion (17 percent of revenues). On the other hand, the government pumped money into the economy: $154 billion for the TARP under the Bush administration and $202 billion for the stimulus bill under the Obama administration. That is a total of $756 billion added to the deficit without even counting the lost revenue from years after 2007.

Things got better as the recession ended: government revenue rose while spending fell. Soon, things will get worse again. According to Congressional Budget Office (CBO) forecasts in January 2015, the deficit will start to rise in 2017 as the costs of Social Security, Medicare, and Medicaid increase.[3] The CBO projects that deficits will bottom-out at $467 billion in 2016. Then deficits are projected to rise: $486 billion in 2017; $953 billion in 2023; over a trillion dollars in 2025. The real burden of these rising deficits will depend on the growth of the economy. Here again, the CBO has bad news: projected growth rates for 2014-2018 are at 2.5%, while those for 2020-2025 will fall to 2.2%.

How large a share of the Gross Domestic Product (GDP) will be represented by the deficits? Between 2016 and 2025, Social Security will rise from 4.9% to 5.7% of GDP; health-care spending will rise from 5.3% to 6.2%; and paying the interest on the debt will rise from 1.5% to 3.0%. Discretionary spending—everything else—will fall from 9.2% to 7.4%.

Still, the absolute dollar amounts don’t matter. Ratios between debt and GDP do matter because it is the ability of the underlying economy to support the debt and maintain the credibility of the government’s ability to service the debt that makes deficits supportable. The 2009 deficit amounted to 10% of GDP and the total debt amounted to almost 100% of GDP.

Why does this matter? The government has to borrow the money from private lenders in order to cover a part of our national expenses. IF there is a fixed pool of private savings (capital) from which to borrow, then expanding government borrowing reduces the amount of capital that is available for all other borrowers. (Capital in-flows from the rest of a troubled world can off-set this in large measure–in the US.)  People investing in business or buying homes will compete with the government. The government can and will pay whatever interest rate it needs to in order to not go bankrupt. As a result, interest rates will go up and the total pool of capital available for private investment will go down. Capital is one of the factors of production determining the state of the economy. High interest rates slow down the economy.

[1] “Deficits as far as the eye can see,” The Week, 16 April 2010, p. 11.

[2] So the Bush tax cuts cost the United States Government about $400 billion a year in revenue.

[3] Jonathan Weissman, “Budget Forecast Sees End to Sharp Deficit Decline,” NYT, 27 January 2015.