One reader’s reaction to the fiscal deficit drama to begin
There will be plenty of reactions to the draft release of the fiscal draft proposal, but one caught my eye as I just came home. Reader HW at TPM has this reaction
I took a very quick look at this document and what’s amazing to me is that they came up with these draconian cuts in Social Security, which is off-budget and currently in the black, but have barely anything for Medicare, where the government is hemorrhaging money.
They have several pages of material with almost no concrete ideas that adds up to minor savings (they claim savings that rise to $47 billion in 2020, but $13 billion of that comes from vague promises like “reform the sustainable growth rate” and “enact tort reform.”)
If you look at the spending side of the federal budget, Medicare is the single item that drives growth out of proportion with the nation’s population and income growth. Yet these guys seem to be hacking away at every other part of the federal budget more to make room for Medicare rather than contain it.
One other thing: they call for a cap of 21% of GDP for revenues and spending. But doesn’t that exceed the mandate here? We are looking to these guys to tell us how to bring the budget into balance, not what the role and size of government ought to be. I would think liberals and conservatives ought to be able to agree in saying, who the hell are these guys to put their finger arbitrarily on the number 21% and tell us that’s where it should be (I’d assume conservatives would like to see it lower, and I don’t necessarily disagree with the number, but don’t know why we’d set it in stone)? Its like my accountant telling me how much my income should be, in addition to how I should balance my family budget.
I wish I shared your optomism, but MSNBC is already calling it “daring” even if it is just the co-chairs wet dream.
Terry–Who on MSNBC has called this plan “daring”? I’m listening to it now with one ear and I ain’t hearing nothing like that. Unless….was it Chris Matthews? He seems to need some larnin’ on the subject of the TF and national debt. NancyO
The increase in retirement age represents about a 18% reduction in lifetime benefits, the change from adjusting initial benefits from wages to inflation would over time result in maybe another 30-40% in lifetime benefits and break the compact that allows retirees to share in lifetime improvements in productivity with their still working children and grandchildren. Plus the increases in the payroll gap slap around the professional class (i.e. some of you) while giving the pure investor class a free pass.
Lifted fromn e-mail from Bruce Webb tonight.
They had said that the health care reform took the fat out of medicare.
Note that the big proposals are set up to ensure that the folks who voted Nov 2 won’t be greatly affected, In fact that folks affected by the age 69 item are not yet in school and the 68 by 2050 are only 28 now. So the ramp up is not at all fast relativly. I would have thought they would go to 68 by 2040 not 2050.
Actually there is a cut that would help medical costs going forward, forbid all medical research, (made in the spirit of Johnathon Swift). All drugs would become generic, life expectancies would stabilize. The of course implement real hospice panels to decide if someone be sent there rather than ultra heroic treatment.
HW: “If you look at the spending side of the federal budget, Medicare is the single item that drives growth out of proportion with the nation’s population and income growth. Yet these guys seem to be hacking away at every other part of the federal budget more to make room for Medicare rather than contain it.”
The problem with Medicare is the problem with medical costs in general. That’s where to focus. Medicare compares well with private insurers. 🙂
Besides, medical costs are sustainable if they remain constant as a percentage of GDP, right? Well, we have had such an episode in recent years: the Clinton years. In 1980 our percentage was about the same as for other developed economies, and then they pulled away. The graph that shows this appeared on Mark Thoma’s blog: http://economistsview.typepad.com/economistsview/2010/10/one-of-these-things-is-not-like-the-others.html .
So what were we doing right during the Clinton years? Leigh Caldwell pointed out that GDP growth was a likely reason. 🙂
One problem with the focus on the deficit is that people say that the deficit per se is not a problem, but the deficit/GDP ratio, yet focus on reducing the deficit rather than on increasing the GDP. In times like these, increasing the GDP should be our main focus. Reducing the deficit is likely to retard the growth of GDP, right?
Well, I expect that our main focus should be on jobs, but putting people back to work will increase GDP. 🙂
Well, Min–That’s what we all think. Amazing how this sort of nonsense gets in the way. NancyO
“….while giving the pure investor class a free pass.” RDan
Isn’t that really the entire point of this charade. Simpson has been making noise all along that this is goping to be the end result. He must have been prescient being able to know the result before the results of their “study” had been clear. The purloined scientist knows what he’s looking for and bett\er yet knows how to find it.
it’s worse than that. it’s having two years added to your sentence.
but the good news is that it will reduce SS costs from all the old folks killing themselves.
Nonsense? Of course. But Why do so many supposedly intelligent people seem to take it seriously? For instance, a cap of revenue or spending at any percentage of GDP makes no sense , unless you believe in pro-cyclical policy. I suppose that there are people who believe in pro-cyclical policy, but I don’t know who they are. Do the deficit hawks say, We need pro-cyclical policy? All I have heard is, Deficit bad!
Obama has said more than once that the U. S. gov’t has run out of money. He has a slew of economic advisors. Why don’t any of them tell him the truth? It was easy to see the insanity of the Bush-Cheney White House. But Obama actually appears reasonable.
buff – “I noticed that Obama’s catfood commission went after SS with gusto and totally ignored Medicare.”
The commission didn’t go after anything. It hasn’t voted on any recommendations, draft or final.
Now, if you want to say that the two guys running the commission put something on the table for the commission’s other 16 members to consider, well…that’s true.
I am sorry. I was referring to the website.
Our economic problems can be boiled down to this: as a group, we consume more than we produce. It really is that simple: policies that increase borrowing and consumption and discourage savings and production make the hole deeper.
Are yawning federal deficits a problem? Yes, not because of their size per se, but because they are largely fuelling overconsumption. It’s hard to argue that most of the health care expenditures, defense expenditures, etc. etc. aren’t consumption. Our leaders in Washington also constantly mistake consumption with investment. How often have you hear that “we need to invest in _____”, where _____ is really just more consumption? Take the stimulus – it was sold as an investment in our nation with visions of infrastructure projects and upgrades, but the lion’s share of the cash just went to prop up the unsustainable payrolls of state and local governments. I don’t see anything like the TVA, Hoover Dam, or Golden Gate Bridge being built. In other words, I don’t see the deficits being used to produce things, public or private, that will have lasting value and will pay us back more than their cost over time. It’s not like we don’t have plenty of such projects that need doing. Our energy infrastructure alone offers plenty of opportunity.
SS isn’t much of a problem. I tried one of the many on-line “fix it” games, and found it quite easy to make the system solvent. A fraction of a percent increase in the tax, a 20% bump higher in the cap, and a 1-2 year bump in the retirement age pretty well did the trick. No cuts in benefits to existing recipients, no massive increase in marginal tax rates.
I see a VAT in our future. Beyond a certain point (which IMO we’re close to), further rises in income taxation become self-defeating as they discourage productivity. Once you’re at that point, the only things left are spending cuts or taxes on consumption. I will observe that most western social democracies, which we seem bent on emulating, already have VATs in place, having essentially maxed out what they can squeeze from income taxation (the US is at similar taxation levels when state income taxes are included). Although I think there’s plenty of room for cuts, especially in pension plans for government workers that private workers can only dream about, cuts alone can’t solve the long-term problem. This is because, in the out years, medicare is driver of the lion’s share of the deficits. The new health care legislation will ultimately make this problem even bigger.
Note that these are already projected as percentages of GDP using fairly aggressive assumptions about GDP growth; growing our way out of them seems unlikely – the mature US economy would have to reach EM levels of growth to avoid the problem. Please stop pining for the Clinton years – those years corresponded with the peak earning years of the boomers. In contrast, the Obama years (and his successors) will correspond with the peak drawdown years of the boomers for SS and Medicare.
“Beyond a certain point (which IMO we’re close to), further rises in income taxation become self-defeating as they discourage productivity.” We are not near that certain point — the Clinton rates resulted in significant GDP growth and balanced budgets — plus, those tax increases occurred during a recession without torpedoing the economy as predicted by the Republicans. Furthemore, marginal rates until the 1980s were well over 50% and there was substantial GDP growth !
IMO, we should be return to the Clinton rates (including eliminating the disparity between earned income and sitting-on-your-ass-dough) and after the budget gets balanced, implement any tax cuts on a Paygo basis.
when you saw that a fraction of a percent increase in the tax would solve part of the problem, why did you go on to raise the cap and raise the retirement age?
is there somethng about an extra diime a week in taxes that is too hard a burden to bear to avoid having to work an extra year at a job you hate.
you might be going to live longer, but that doesn’t mean your knees will hold out, or that you will like what you are doing so much that you want to keep doing it until you are ready for the nursing home.
and raising the cap is just a stupid way to try to get someone else to pay for your retirement.
you can pay for it yourself.
I’m assuming the higher income-tax rates are coming, since it’s currently in the pipeline. Nevertheless, I strongly disagree that higher tax rates translate to higher GDP growth. Perhaps you can explain the mechanism by which imposing higher income taxes will boost production? Because most economists seem to think taxes are a drag on GDP.
BTW another phrase for “sitting on your ass dough” is “putting your life savings at risk to earn a return”. Your attitude towards income and savings is IMO revealing of the type of thinking that got us into the current mess. Namely, that those earning high incomes somehow don’t deserve them, those that have savings to invest somehow didn’t earn it and don’t deserve to earn a return for investing it (instead of immediately consuming it on useless luxuries).
I’m not counting on SS for my retirement – I’m trying to fund it myself using the extremely poor tools our current tax laws provide, and with the extremely poor investment climate created by my own government. To explore that further would be way OT. Staying on topic, the issue at hand was the solvency of the SS system, as it pertains to the overall budget imbalance. All I’m pointing out is that SS is not in as much trouble as is commonly believed. I’m assuming we’ve agreed as a society that we need to keep SS – scrapping the system is another OT debate. But with SS as it now stands, a combination of relatively minor changes are sufficient to keep the system solvent. Why the bump in the cap? Because it was simpler and cleaner than instituting a goofy “donut hole” and then imposing a punitive rate above $250k (or some other such bullocks) to make up the shortfall. Why not simply raise the base rate by a larger amount? I was trying to keep the hit to working-class people as low as I could get away with. Why raise the retirement age a little bit? Well, because it’s already been done (my age cohort saw it bumped from 65 to 67), and seemed better than outright cuts in the benefits. My thinking is that the system is, at bottom, an annuity, and bumping the age is an adjustment in keeping with the fact that people are living longer.
Actually there are hints at making the efforts of health care reform stronger. One item that the new commission could do is to say which treatments are cost effective and which are not. (You can still get them but you have to pay yourself). Actually this could be done under the rubric of Malpractice reform. Provide that it is by definition not malpractice if you follow defined standards of care from say Mayo or Clevland clinics. Of course this means we don’t need physicians with as much training in a lot of cases, because medicine becomes a more follow the proceedure than the current art. The physicians guild will object because it will reduce their income just like they object to nurse practicioners. Another step is to provide that if you go to a hospital all treatment is done by hospitalists who practice only in the hospital. That is you are an outpatient or inpatient physician only. Electronic medical records would make the transfer much easier.
Actually saving for retirement as the early retirement forum is very simple live below your means. It might mean for example living a 1980s lifestyle now. For the young more and more they are deciding that children can not be afforded. ( Or a minimal number of them). Among items is not playing on the housing treadmill of moving up in housing as well. Keep autos until the wheels fall off (if you buy them new and do this, the cost is low and you know how the vehicle was cared for)
“most economists” know where their bread is buttered. economics is a profession that was created to rationalize the profits of capitalists and rationalize away the suffering of workers.
taxes that pay for what the government does to provide a well ordered society are what makes “the economy” possible. without them you’d be digging for your supper with a sharp stick. and having to fight off the other thugs who would rather steal yours than dig their own.
in the current situatioin a 3% higher income tax would pay for the debt created by the tax cuts that were going to pay for themselves but didn’t. that would, one guesses, boost production the same way the Clinton tax raises boosted production when the Republicans to a man… if you can call them that… said they would tank the economy.
i certainly never argue that those who have money don’t deserve it. i do argue that you can’t let them run the country on the theory that they should never have to pay taxes.
they may or may not be living longer. doesn’t mean they will be able to work longer, or want to, or be able to find a job if they do. the fact is they can pay for their own retirement and would do so if they understood that was the choice.
it’s fine to “keep the hit” as small as possible. but when you are trading pennies a week for years of your life you are not thinking clearly.
no one “depends on” SS. it’s there as a safety net… which turns out to be needed by 80% of the people who live real lives.
good advice. but your savings can be wiped out by inflation or a bad day on the stock market. Social SEcurity protects your savings from that.
all good ideas. but the non partisan experts think of Medicare as a line in a budget. All they can think of is to reduce that line by cutting Medicare. doesn’t matter that people will need to pay the costs whatever they are.
the people meanwhile are just as dumb. they think they should get medical care as a “right” and someone else should have to pay for it. they could pay for their own medical care by raising their Medicare tax an amount that would be high, but if all predictions are borne out, it would amount to buying one less new car, or one less vacation in Vegas. people don’t want to make that choice. that is they think “their money” ought to go to Vegas. someone else should pay for their medical care.
I don’t think the people are thinking someone else should be paying for their medical care. The people are thinking they don’t want to be paying for someone else’s medical care. They are being manipulated rather cleverly into believing they are actually footing their own bills while all those other people who for whatever reasons (and none of those reasons are allowed to be rational or worthy in this manipulative discussion) do not have health insurance are running up the costs.
Rational, full-spectrum discussion of medical costs just does not take place outside of certain journals and websites, as far as I can see. People are really quite ignorant about Medicare, Medicaid, and health insurance in general. Nor do they have any full understanding of how the delivery of medical care is structured and funded. Yet people are encouraged to think that their personal experience is some sort of benchmark.
How would you propose to keep the system solvent then?
Living below your means and saving, sounds good. However, with the current limits on 401k and IRA contributions, and with virtually no real return on any investments, it’s not possible to accumulate the $millions needed in tax-deferred accounts. Save in taxable accounts? There you are subject to inflation and high taxes, with the taxes extracted from things like interest income which are mostly just inflation. This “taxflation” effect prevents most people from accumulating the savings needed. Government workers with union pensions don’t have this problem – they accumulate an “off-books asset” (a COLA’ed for life pension) that would take big bucks to replicate privately.