Real Fiscal Responsibility

And we are underway: Henry Aaron, Nancy Altman, Kenneth Apfel, James Blum, J. Bradford DeLong, Peter Diamond, Robert Greenstein, James Horney, Richard Kogan, Jack Lew, Marilyn Moon, Van Doorn Ooms, Uwe Reinhardt, Charles Schultze, Robert Solow, and Paul Van de Water:

• agree that the nation faces large persistent budget deficits that ultimately risk significant damage to the economy,
• concur that policymakers should begin now to make the tough choices needed to avert such deficits,
• But the methods set forth in the Brookings/Heritage/Concord "Taking Back Our Fiscal Future" proposal strike us as misguided.

Specifically:

• TBOFF subjects Social Security, Medicare, and Medicaid to the threat of automatic cuts while giving a free pass to regressive open-ended tax-loophole and tax-break entitlements.
• TBOFF thus departs from the "shared sacrifice" approach that characterized the only successful budget deficit reduction efforts--those of 1990 and 1993.
• TBOFF does not focus adequate attention on the main driver of the forthcoming budget crisis: rising health care costs everywhere, not just in the public programs.
• Thus TBOFF's attempts to restrain public health care spending growth without taking measures to alter the dynamics of the private health care markets are misguided.
• Thus TBOFF places a large share of the burden of adjustment on the poorer members of American society: it hits the weak claimants, rather than those who have weak claims on federal spending and on tax expenditures.
• Moreover, TBOFF's strategy relies on automatic cuts--and congress has never in the past been willing to actually let the automatic cuts written into law take effect.

We believe that rather than spending time trying to design complicated budget procedures of dubious merit and effectiveness, we should focus on concrete legislative steps: policies that raise more revenue, increase economic growth, slow the rate of health care spending systemwide and nationwide, reform Medicare, and bring Social Security expenditures into balance with Social Security resources. Specifically:

• Slash farm supports.
• Slash tax loopholes and tax expenditures.
• Halt Medicare Advantage overpayments to private insurance companies.
• Adopt the other recommendations of the Medicare Payment Advisory Commission.
• Increase Medicare premiums for the well-off.
• Institute vigorous research programs to determine the comparative cost-effectiveness of different treatments and procedures.
• Institute vigorous research programs to determine the causes of the extraordinary nationwide variation in health-care spending.
• Use the results of research to devise policies to restrain health care cost growth without seriously compromising quality.
• Index entitlement benefits by a proper cost-of-living rather than a consumer price index.
• Index tax brackets by a proper cost-of-living rather than a consumer price index.
• Adhere to the time-tested and effective pay-as-you-go rules.

And I, at least, also say:

• Include mandatory private accounts in Social Security as an add-on, not a carve out.
• Uncap FICA.
• As the price of oil declines from its current peak, tax back 2/3 of the decline--and spend half the tax revenues in an across-the-board equal-dollar reduction in FICA, and half the tax revenues on infrastructure and climate-relevant research and development.

Great company to be in.

• Press Release: http://www.cbpp.org/7-9-08bud-pr.pdf
• Executive Summary: http://www.cbpp.org/7-9-08bud-summ.pdf
• Henry Aaron, Nancy Altman, Kenneth Apfel, James Blum, J. Bradford DeLong, Peter Diamond, Robert Greenstein, James Horney, Richard Kogan, Jack Lew, Marilyn Moon, Van Doorn Ooms, Uwe Reinhardt, Charles Schultze, Robert Solow, and Paul Van de Water (2008), "A Balanced Approach to Restoring Fiscal Responsibility" (Washington: CBPP) http://www.cbpp.org/7-9-08bud.pdf

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Comments

[MattY]

I wouldn't link any index to any entitlement. Make congress go through the pain of updates, or else delegate broad authority.

[christofay]

Roll back military spending by 20%.

Or give the generals a deal, the budget will be cut by 2% a week from now until labor day for every week that Osama has not been brought in, after labor day we'll start looking for adequate savings in that entitlement area

The Pentagon at this time is a part of the central govt that has been captured by the Republican Party, time for a diet, as the innovative finance sphere has captured the Fed Reserve

[jerry]

The press release itself was pretty interesting, and I skimmed the other papers. Just a small note then. When the press release constantly refers to you all as "the experts agree", "the experts also noted", and never saying "our experts", or "our panel", or "our findings", it makes it difficult for me to tell what the relationship of your groups conclusions are to those of the cbpp. For some reason the cbpp seems to want to make sure I understand your conclusions are not their official conclusions. That actually seems to carry through the other papers too where there is this strange contradiction between what the paper would claim and the fact that nowhere does the CBPP take some official stand on it, and yet, it says for more information to contact the Executive Director for the CBPP.

And also, the constant "the experts" is not just tiresome, it also reminds me of what I think I first heard Felix Unger tell me was the definition of an expert.

I don't know the CBPP from Adam, but it seems as though they were afraid to take a stand when they issued these releases....

(However, the content itself was actually enlightening, and from the quick overview, it seems as though TBOFF's sole purpose in mind is not reform but slow, painful death.)

[A]

"And I, at least, also say:
* Include mandatory private accounts in Social Security as an add-on, not a carve out."
Well, don't we already have that? It is called a 401k account.
Actually, mandatory private accounts are the start of the slippery slope; and there's a precedent:
401k s were also at the start an add-on to defined-benefit pensions.
But now a 401k is all I have (there's no other pension, unless you work for GM, or another unionized shop, and even there...)

[Anon]

I'm all for fiscal responsibility. But the price of oil is not going to decline. This is like funding healthcare based on taxing the decline in real estate values in Manhattan. If there is a decline, it is only temporary and brief. There isn't any more real estate in Manhattan, and there isn't any more oil, and both are strongly desired.

[Barkley Rosser]

A,

401ks and their relatives are not mandatory. I understand Brad's motive: do something about the low US savings rate, but this will not pass any more than a general tax increase will, which would bring about the same result effectively.

Brad,

I think the original statement is better than with your add-ons. As someone who really thinks there is no problem with social security I could have done without the rhetoric on it (especially given that it is still running a rising surplus, last time I checked), but they did little to screw around with it, only this changing of the index (and what is better than the CPI might we inquire?). Frankly, the less done to social security, the better.

[John Howard Brown]

As a professional economist in an academic position, I would be interested in subscribing to these principles. (Including Brad's add-ons.) Is there some mechanism for doing so?

[John Emerson]

"As the price of oil declines from its current peak...."

Assumes facts not in evidence.

[anne]

Essentially, the position taken is to raise Social Security taxes without raising benefits, raise Medicare costs, turn aside from defense spending, especially turn aside from spending on Iraq, Afghanistan, Somalia and Pakistan, implement pay-as-you-go financing which means we can simply forget about a move to universal health care among other needed social programs since Barack Obama is already committed to cutting income taxes.

What am I missing?

[anne]

http://krugman.blogs.nytimes.com/2008/06/18/baselines-shmaselines/

June 18, 2008

Baselines, Shmaselines
By Paul Krugman

Wise words from the Tax Policy Center: *

"There is an easy way to cut through this palaver. Forget the baseline. Just think about three numbers: How much would either candidate collect in taxes as a share of the Gross Domestic Product? How much is government likely to spend? And, how much would they have to cut that spending to keep the national debt from ballooning.

"TPC estimates that in 2013, Obama would collect revenues of 18.2 percent of GDP. McCain would bring in about 17.8 percent. Spending that year would be about 19.5 percent, according to the Congressional Budget Office, assuming the Iraq war will be winding down."

The key point, again: because of all those middle-class tax cuts in the Obama plan, he collects only 0.4% of GDP more in taxes than McCain. The tax collection comes from different people: lower and middle-income Americans would be substantially better off under the Obama plan. But where is the money for health care reform?

* http://taxvox.taxpolicycenter.org/blog/_archives/2008/6/17/3749641.html

[Ken Houghton]

Thank you for that one, Dr. DeLong. Especially good to see several sharp Health Economists (Aaron, Reinhardt) on the list.

[Jessica]

Long-term, we need to re-accelerate growth in the skill levels of our work force. That means supporting education and training.
Short-term, we at least need to get that on the table.

The past few decades, as a society, we have most rewarded financial imagination and what energy we put into production was largely about tapping into cheap labor overseas. (Arbitraging millennia of Indian and Chinese misery).
We need to shift away from both into creating goods and services with high productivity.

[save_the_rustbelt]

"Slash tax loopholes and tax expenditures."

Defining "tax loopholes" will be a real food fight.

[anne]

"But where is the money for health care reform?"

How do we get to universal health care insurance?

[Jessica]

Deeper structural view:
The leading edge of the world economy has run into a roadblock caused by our inability to handle intellectual production well*. A roadblock so fundamental that we can't see it.
Our economy should be expanding into intensely productive intellectual production but can not, so education levels stagnate and our skills are highly misallocated.

*Handle intellectual production well = support creation of knowledge and unleash nearly limitless distribution. Copyright/patent supports creation by hobbling distribution. "Piracy" unleashes distribution but fails to support creation. Creating a social mechanism that supports both creation and distribution of knowledge is actually the single most crucial economic task on the planet. But this task is comparable to the emergence of free markets from feudalism.

[Kolohe]

cost-of-living rather than a consumer price index.

For the bullet points that included this, would this mean the rates would be variable depending on where you live?

[Mark]

I fail to see the rationale in noting that the legitimate all-time home run leader endorses this critique. Oh. That Henry Aaron...

[bigTom]

I like the (semi) floor on oil prices. Even though I don't expect the price to go down enough to trigger the tax, the effect on investments in conservation and alternatives could be substantial. The perceived risk to such investments from potential future cheap oil has always chilled such investment.

The $800B gorilla (actually it is more like $1T, is our military security spending. This needs to be slashed by at least 75%. The country is probably too frightened of those many foreigners we have pissed off, to buy into this, but we need to start changing that.

The biggest challenge is to change our thinking and policy to be able to cope with the new global neo-Malthusian economy. Energy, and food supply will loom large here. Delusions about the sustainability of the growth of the materialistic economy will cause us great suffering if we aren't able to shed them in time. This will be a very challenging transition, but one that can't be avoided. Many of the old economic and political paradigms will no longer work, and figuring our and agreeing upon what will work in the new era should be paramount.

There are only two sorts of people. Those who know that resources are finite, and those who WILL know that resources are finite.

[economistmom]

Brad: I hope to comment on this tomorrow over on EconomistMom.com. I like this CBPP paper and the positions expressed, but of course I would, being a Democrat (and not just a fiscal hawk). I am familiar with the "TBOFF" group and how the position paper came to be, as I was a part of the group in its first year, while I was at Brookings. From my inside view I know how the paper's "proposals" came to be. More tomorrow, but for now I just wanted to correct your citation of TBOFF as a Brookings/Heritage/Concord paper; it is a Brookings-Heritage budget group paper and not a Concord position paper. Also, TBOFF is not a product of the Concord Coalition's Fiscal Wake-Up Tour, although some of the TBOFF signers are Fiscal Wake-Up Tour panelists.

[Matthew Austern]

Like others, I'm a little puzzled that military spending isn't mentioned in your list. It's spending, after all; military dollar comes out of general federal revenues like anything else. It's by far the largest component of discretionary spending, and it's even larger than Social Security. (Exactly how much larger depends on just what you count.)

If we're being fiscally responsible, if we're asking painful questions like how much health we can pay for and whether we should give retirees the pensions they were promised, surely we also ought to ask how many aircraft carriers and space-age fighter jets we can afford, and how many wars on the other side of the planet it's fiscally prudent for us to start.

[piotr]

I concur with the puzzlement about mandatory add-ons to Social Security. Voluntary systems of private contributions for retirement savings exist, employer plans and 401's, what is the benefit of making some form of them mandatory?

About military: we spend ca. 50% of global military spending, more astoundingly, big majority of the rest is spend by our allies, who heftily outspend our opponents. Slash military spending, negotiate some arms control with Russia and China (Russia complains, with justification, about breaking the previous regime of limiting military spending), and by golly, do we need a trillion to contain Iran and North Korea?

We cobbled an alliance that spends at least 6 times more than opponents, and 60 times more than opponents that we are "afraid of". This is a boondogle. This is a mother of all boondongles.

[Monte Davis]

piotr: You're using the old math. 9/11 changed everything. We must spend until there are no more angry young men with box cutters... anywhere.

[James Wimberley]

On bullet 8 in the last list - shouldn't there be a law about numbering lists more than four items long? - you have to look at the current model of pharmaceutical research, not just the details. This is secret competitive research, funded by sky-high prices on the very few new compounds that it produces, prices enforced by draconian IP laws. The alternative is the open-source, publicly funded model that works well for basic research: and the choice lends itself to large-scale policy experiment. Somehow I don't the inevitable lobby cry of "socialised drugs" would have much traction with the public.

[vtcodger]

Can we all please start distinguishing between "Social Security", OASDI and Medicare? Old Age, Survivors, and Disability Insurance (OASDI) is the retirement and insurance component of Social Security. It appears quite possibly to be in pretty good shape. It probably doesn't need incompetent "conservatives" fixing it. (Is it somehow possible to weaponize these guys and ship them off to advise our enemies?). Medicare is health insurance and it is mired in the same intractable mess that the rest of US healthcare is in. It probably does need major changes. But so does the whole healthcare non-system. Social Security includes both.

[steve]

How about enforcement of tax laws? Letting the IRS pursue the hundreds of billions due in tax payments, and strengthen its auditing of returns from businesses and wealthy individuals.

[Monte Davis]

"incompetent... 'conservatives' fixing it. (Is it somehow possible to weaponize these guys and ship them off to advise our enemies?)"

That would be a war crime overshadowing any so far. I won't be party to such an atrocity. We raised 'em, we elected 'em, it's our duty to create some Yucca-Mountain-like repository.

[robertdfeinman]

Under Bush military spending has gone from 50 to 54% of the discretionary federal budget. Both Obama and McCain want to increase this spending even more, although on what they don't say.

Not one case of cancer has been cured by building an F16, yet these supposedly liberal economists have gotten so blinded by right wing framing that they can only focus on cutting those areas which help people, not kill them.

Shame on all of you.

[baileyman]

The idea of "fiscal responsibility" is right now crazy.

Check it out, roughly 70% of US families are now effectively bankrupt. Take the Fed 04 consumer chartbook. Look up net worth by income. Subtract out nearly $100k overvaluation in the median house. Subtract out $50k for the PV of their now higher energy expenditures. Takes the median 60k to 79.9k income tranche's net worth to near zero.

A family with $70k income is at the 70th percentile for income.

These people will NOT be taxed. In fact, they're going to demand lots and lots of transfer, somehow.

You can try to restrain government here, but then you choose a much smaller economy.

[economistmom]

Today's post on this topic, over on my blog:
http://economistmom.com/2008/07/fiscal-responsibility-easier-under-benevolent-dictatorship/

[Maynard Handley]

"We agree that... Slash tax loopholes and tax expenditures."

Oh give me a break. Tell us exactly what these tax loopholes and to-be-slashed expenditures are, or don't waste our time. Is there a single person in America in favor of "tax loopholes"? The problem is always in their definition.

Personally I think a variety of crap, from the mortgage interest deduction to the preferential cap gains treatment of houses to the way inheritance can be squirreled away from tax in trusts all count as tax loopholes. I dare say plenty of Americans beg to disagree.

[Garett Jones]

Why would you want to reduce spending on health care, an area of massive innovation that gives us more of something we highly value?

The link in the URL goes to the Hall and Jones QJE 2007 paper, "The value of life and the rise of health spending."

Partial Abstract:
Health care extends life. Over the past half century, Americans have spent a rising share of total economic resources on health and have enjoyed substantially longer lives as a result. Debate on health policy often focuses on limiting the growth of health spending. Can we understand the growth of health spending as the rational response to changing economic conditions---notably the growth of income per person? [snip] In projections based on our parameter estimates, the health share reaches 33 percent by the middle of the century.

So, 33 percent: For or against? Looks like a lot of economists are against, but *literally* for the life of me I can't see why....

[Brooks]

Increase Medicare premiums for the well-off.

Brad and the rest of this group thus advocate means-testing Medicare. I agree. Who here agrees/disagrees? Come on, now, folks, don't be shy. Speak up. Takes a little guts, but you can do it (maybe).

[Brooks]

Increase Medicare premiums for the well-off.

Brad and the rest of this group thus advocate means-testing Medicare. I agree. Who here agrees/disagrees? Come on, now, folks, don't be shy. Speak up. Takes a little guts, but you can do it (maybe).