How True Fiscal Conservatives Talk About Tax Policy
October 9th, 2009 . by economistmom
Bruce Bartlett’s new book, The New American Economy: The Failure of Reaganomics and a New Way Forward, comes out next week. The New York Times’ David Leonhardt wrote a really nice story about Bruce’s current perspective on supply-side economics and tax policy and how the Republican Party has lost its fiscally-conservative way (emphasis added):
[P]erhaps the most persistent — and thought-provoking — conservative critic of the party has been Bruce Bartlett. Mr. Bartlett has worked for Jack Kemp and Presidents Reagan and George H. W. Bush. He has been a fellow at the Cato Institute and the Heritage Foundation. He wants the estate tax to be reduced, and he thinks that President Obama should not have taken on health reform or climate change this year.
Above all, however, he thinks that the Republican Party no longer has a credible economic policy. It continues to advocate tax cuts even though the recent Bush tax cuts led to only mediocre economic growth and huge deficits…
On the spending side, Republican leaders criticize Mr. Obama, yet offer no serious spending cuts of their own…
How, Mr. Bartlett asks, is this conservative? How is it in keeping with a party that once prided itself on fiscal responsibility — the party of President Dwight Eisenhower (who refused to cut taxes because the budget wasn’t balanced) or of the first President Bush (whose tax increase helped create the 1990s surpluses)?
“So much of what passes for conservatism today is just pure partisan opposition,” Mr. Bartlett says. “It’s not conservative at all.”…
True fiscal conservatives should be advocating a more balanced budget, certainly after we’ve recovered from the aftermath of this recession. (Bill Clinton made this his final point in his prepared remarks to the World Business Forum in New York City on Wednesday.) True fiscal conservatives understand that while the benefit of low tax rates is improved economic incentives for private-sector work and saving, the cost of low tax rates is the reduced public saving that arises from a larger budget deficit (or smaller surplus). The benefits were more likely to outweigh costs back in the days when marginal tax rates were very high. But now it’s a totally different story:
[Bruce's] conservatism starts with the idea that high taxes are no longer the problem, even if complaining about them still makes for good politics. This year, federal taxes are on pace to equal just 15 percent of gross domestic product. It is the lowest share since 1950.
As the economy recovers, taxes will naturally return to about 18 percent of G.D.P., and Mr. Obama’s proposed rate increase on the affluent would take the level closer to 20 percent. But some basic arithmetic — the Medicare budget, projected to soar in coming decades — suggests taxes need to rise further, and history suggests that’s O.K.
For one thing, past tax increases have not choked off economic growth. The 1980s boom didn’t immediately follow the 1981 Reagan tax cut; it followed his 1982 tax increase to reduce the deficit. The 1990s boom followed the 1993 Clinton tax increase. Tax rates matter, but they’re nowhere near the main force affecting growth.
And taxes are supposed to rise as a country grows richer…
Bruce argues that while the first goal of modern conservatism should be to keep government from getting too big, the second:
…should be to keep taxes from being increased in the wrong ways. Supply-side economics is based on the idea that higher tax rates discourage work and investment, two crucial ingredients for economic growth. But higher taxes on consumption don’t have nearly the same effect as taxes on incomes or companies. If anything, consumption taxes encourage savings, which lifts investment.
So Mr. Bartlett advocates a value-added tax — a federal sales tax — which most other rich countries have…
Even worse though, is to cut taxes in the wrong ways–such that even as public saving is harmed via deficit financing, private incentives to save and invest and work are harmed as well. Or such that most of the tax cutting agenda consists of a prior Administration’s tax policy that a new Administration understands has been proven to not pass the cost-benefit test.
Bruce Bartlett is a true fiscal conservative who’s telling us taxes have to rise. Concord Coalition Executive Director Bob Bixby is another one. From a CNN-Money story by Jeanne Sahadi:
It’s no surprise to Robert Bixby, executive director of the Concord Coalition, that the projections for tax revenue in fiscal year 2010 are fairly anemic.
“I think 2010 is already baked into the cake as a bad year,” Bixby said. “Part of the recovery will be continued high deficit spending because the economy will continue to need stimulus.”
But what he hopes to see in 2010 is at least a move toward revenue growth that picks up steam in subsequent years.
Based on current estimates, however, he’s not optimistic that will happen unless lawmakers take action…
“It’s important that there be a deficit reduction plan in Obama’s 2011 budget,” Bixby added.
He noted that having a plan doesn’t necessarily mean having to enact it right away if economic conditions aren’t right. But, he said, “We’re going to have to face tax increases eventually.”
Where is the progressives’ counterpart to Bartlett, the person who says that we have to cut spending in the right way, and who advocates specific major spending cuts analogously to Bartlett’s VAT proposal?
Going along with the new trend of awarding Nobel prizes as encouragement for future achievements, I will nominate the first progressive who forcefully advocates specific near-term spending cuts of more than 3% of GDP. There’s no prize for promising cuts in the distant future, since such promises have been made and broken many times before.
*Sigh*
So the argument runs like this.
1. Balance in the federal budget is good (at least on average). So far we’re all tracking
2. We must pay for currently committed social spending in perpetuity and that will require outlays that exceed 18 to 20 percent of GDP
3. Therefore we need more taxes and a VAT is less distorting than other taxes.
I’m sorry but I fall out on 2. I don’t accept that the government must continue to transfer huge sums of money to people who already have it. Nor do I accept that we need to subsidize the family farm, molehair and the other silly things we do. I don’t accept the government should spend $18 billion on high speed rail, subsidize Amtrak and the post office
I guess it’s hard for me to accept a conservative a perspective that seems, at its foundation, a discussion of how to fund a very large and very efficient government sector.
Oops, it’s probably obvious but the last sentence should say inefficient
“Warren Mosler, economist, perturbed by the misunderstanding of monetary policy by the current and past administrations, is running for President in 2012. He has been speaking at the Tea Parties, explaining to taxpayers that Washington is either at best ignorant of economic policy or at worst deceptive.” By Barry Ritholtz – The Big Picture, October 7th, 2009, 11:00AM
In 2008, Warren Mosler helped edit an article I had written earlier. The article, endorsed by a number of eminent economics professors, is as follows:
Is It Time For a FICA Holiday?
Traditional thinking has produced an economic disaster, which the same traditional thinking cannot solve. As the U.S. and world economies slip into recession, we must remember this ultimately is a bookkeeping crisis. The housing “market” was destroyed, but not the actual houses. They still exist. Nothing real has been destroyed. Instead, we are starved for money.
This problem should be easier to remedy than a food shortage, water shortage or wartime destruction, because a money shortage can be cured by the simple expedient of adding money – something the federal government is uniquely empowered to do.
We propose a FICA payroll tax “holiday,” whereby the U.S. Treasury will make our Social Security and Medicare payments for us. This will add about $10 billion per week to our take-home pay, and another $10 billion to business income, both of which urgently are needed. When we eliminate this partly double, severely regressive tax, we will give consumers the income they need to make mortgage payments, to pay bills, and to do the shopping American business craves. The FICA holiday also will provide business with money for jobs and investment.
In contrast, the “top down” approach (saving Fannie Mae, buying toxic mortgages), while necessary, does not directly address consumer/business money needs, and has had only modest effect.
Common knowledge holds that Social Security and Medicare will face bankruptcy even with FICA. So proposed fixes invariably include benefit cuts, reducing consumer incomes, or tax increases, cutting consumer and business spending power – the opposite of what our economy requires.
Many people fear federal deficit spending when it supports Social Security and Medicare, but not when it supports the military. Social Security spending for 2008 is approximately $600 billion, about equal to the defense budget. Ironically, both candidates for President believed Social Security will run out of money and the military will not. The $1 trillion in “stimulus” spending was authorized without increased taxes. Both candidates advocated tax cuts.
Even during the darkest days of the Great Depression, the federal government never ran out of money. Massive government spending, before and during World War II, helped lift us from the Depression.
In 1971 President Nixon eliminated any risk of government insolvency by ending the last vestiges of the gold standard. At the stroke of a pen, he assured that neither the government, nor any of its agencies, could run short of money. Social Security and Medicare, being two of those 400+ agencies, are immune from bankruptcy.
If Congress authorizes the Treasury to make our Social Security and Medicare payments for us, thus allowing our take-home pay to rise, the economy will begin to recover. The elimination of FICA deductions would provide consumers and business with more than a trillion additional dollars annually, exactly what a healthy economy needs.
Won’t this increase the federal deficit? Yes, but President Nixon’s signature guaranteed the government never will run short of money to service its debts. This act removed taxes as a necessary source of federal money. Together with federal spending, taxation became a mere tool to create optimal output and employment. Whatever deficit accomplishes that goal is the right size.
Doesn’t a large deficit cause higher interest rates? No, interest rates are set by the Federal Reserve. The government can set rates at any level it wishes.
Doesn’t a large federal debt create a shortage of lending funds? No, the more money the government pumps into the economy, the more lending funds are created.
Won’t our children have to pay for the increased deficit? No, the government owes the debt and easily services a debt of any size. Our children are not the debtors. (In many cases, they even are the creditors.) Because the “right” size debt will continue to grow forever as our economy grows, it never should be reduced or paid back.
Meanwhile, each year the increased debt will help keep output high and unemployment low, benefiting our children with additional income, goods and services.
Won’t increasing the deficit by eliminating FICA, cause inflation? President Carter had modest deficits and high inflation. President Reagan had the highest deficits in American history and modest inflation. Contrary to popular wisdom, federal debt has not caused inflations, recessions, high interest rates or any other negative economic effects. On the contrary, large deficits have been associated with economic growth.
In summary, we offer new thinking – an accounting fix to an accounting problem: Eliminate FICA and pay for Medicare and Social Security the same way we pay for Congress, the military, the Supreme Court and every other federal agency, by functionally folding these two agencies into the general fund. The economic crisis has presented us with the rare opportunity to accomplish two important goals: Permanently fix the seemingly intractable Social Security and Medicare problems, and energize our economy.
Rodger Malcolm Mitchell
Steve,
Your #2 is not what Bartlett says. I doubt he would say that we should spend as much as is projected on social spending.
Unfortunately, many on the right simply say “We can’t tax our way out of this problem (i.e., we can’t — or at least shouldn’t — fund ALL the projected spending with tax increases)*” and then leap irrationally to “So we shouldn’t increase taxes at all.” Obviously there is a middle ground, a combination approach of tax increases AND cuts in projected spending, and the latter certainly must include social spending (i.e., total spending on Medicare, Medicaid, Social Security, and discretionary social spending).
* A similar rhetorical point followed by irrational conclusion/implication, which I’ve even seen from Hennessey, who I think is an excellent, thoughtful blogger, is that (1) the growth in projected deficits as a percent of GDP is not due to lower projected revenues as a percent of GDP but rather to increases in spending as a percent of GDP (which is true), which is followed irrationally with the implication/conclusion that we therefore should focus only on the spending side rather than including any tax increases in the solution.
( There is no “(2)”, I just forgot to delete the “(1)”. )
Brooks,
My point 2 simply references the quoted paragraph above, namely
“As the economy recovers, taxes will naturally return to about 18 percent of G.D.P., and Mr. Obama’s proposed rate increase on the affluent would take the level closer to 20 percent. But some basic arithmetic — the Medicare budget, projected to soar in coming decades — suggests taxes need to rise further, and history suggests that’s O.K.”
That clearly does suggest that (most of) projected spending needs to be protected and further makes what I view to be a fallacious argument, the argument about history saying such a level of taxation is ok. That argument confuses tax rates with the government’s share of the economy. Tax rates have been higher in the past but the federal government’s share of the economy (tax receipts) has never been at the levels that Mr Bartlett envisions. This does not say that federal spending at that level is impossible, but certainly does not suggest that history offers us any guide. In fact, government receipts are probably higher as a share of the economy than at any moment in time other than the height of WWII and the trend line is inexorably upward.
Why would one believe that expanding receipts is a good idea in against a trend line of ever expanding spending? You would have to assume that spending will stabilize but there is absolutely no evidence of that happening. In fact, the only time the government ever spends time worrying about spending is when receipts fall short. A strategy therefore that raises receipts only tends to raise the level of spending faster.
I don’t consider myself an idealist. I fully recognize that cutting spending is not the whole of the solution. Without some assurance that spending can be constrained however, what is the point of raising receipts when a large deficit over time is the only proven and effective brake on spending? In my opinion, those who favor pushing up receipts without assurances on spending are only going to make a bad problem worse. A structural deficit of 3% is one thing with receipts at 18 or 19 percent of GDP. It is quite another thing with receipts at 22 or 23 percent of GDP. Were we to introduce a VAT as Bruce suggests, I’m willing to wager all I hold dear that, over time, the structural deficit would again expand to 2 to 3 percent of GDP. It’s simply the nature of Congress to spend more than they take in and there are no checks in our system of government that have proven effective in constraining this.
As to your contention that Hennessey’s conclusion/implication is irrational, I think it’s a lot closer to rational than not. You admit it’s true that spending is what got us to where we are and then make the argument that we should drive up receipts to close the gap. I know you’ll say the answer is both and I’m fine with that but try this as a thought experiment. What level of receipts and spending as a percentage of GDP would you suggest in “normal” times. That is the fundamental debate. I’m clearly in the 18 to 20 range (recognizing that state and local is another 20 plus on top). You believe (by implication) it should be higher. How much higher? And what is your plan when Congress overspends the new, higher level of receipts? To me, those are the central issues. My answers are as I stated, 18 to 20 and I have no plan but at least I’ll keep it to 3% structural off a lower base.
Oh, and then there’s this little gem, “And taxes are supposed to rise as a country grows richer…”. Pardon me, but says who? I spend the bulk of my life in business not government. In business, when a company gets bigger (richer), expenses as a percentage of revenue are supposed to decline not increase. It’s a ludicrous argument to argue that as GDP/capita increases, government’s share of the economy should increase. By what logic is this true?
Do people suddenly have new needs that can be met by government as they grow richer?
Are government services more expensive to provide for richer people than for poorer?
It would be one thing to argue that government’s share of GDP should stay the same as GDP/capita increases. This would be the same thing as assuming no returns to scale (no efficiency from size). To argue that we should keep investing in making something larger that actually has diseconomies of scale is an argument that would get you thrown out of every board room I’ve ever been in and yet, when it comes to government, in the minds of some it’s accepted wisdom.
Steve, if you accept the premise that government transfer programs are a luxury good, then the conclusion is inescapable that taxes rise as a percentage of GDP as the economy grows. If you believe that government transfer programs are counterproductive (a “luxury bad”, if you will), then you would not accept the premise. It’s clear to me that voters do indeed accept the premise.
Steve,
What I’m saying is simple:
Spending over the next few decades is projected to grow enormously due to demographics and healthcare inflation. It’s just not realistic — politically — to think that we will solve this problem entirely via cuts in projected spending, just as it’s politically unrealistic (and economically difficult) to solve it all via tax increases. The only politically and economically plausible solution is a combination of tax increases and cuts in projected spending.
Now, if you make the ideologically-convenient assumption that 100% of incremental revenues from a tax increase will cause 100% or more of incremental spending (rather than causing a reduction in deficits, ceteris paribus), then tax increases obviously wouldn’t make sense as part of a deficit-reduction stategy. But I see no reason to make that assumption, and it seems that most who have analyzed this “tax-spend hypothesis” (also called the “revenue-expenditure nexus”) have concluded that it is invalid. Check out comments and links at http://capitalgainsandgames.com/blog/bruce-bartlett/1106/why-spending-wont-be-cut#comment-3764 and
http://capitalgainsandgames.com/blog/bruce-bartlett/1106/why-spending-wont-be-cut#comment-3806
If one makes a different, also ideologically-convenient assumption that an effective tax rate above 20% would put us on the wrong side of the Laffer Curve, yielding lower revenues and lower GDP (and thus worsening our debt-to-GDP ratio), then such a tax increase would not make sense as part of a deficit-reduction strategy. But here, too, economists would generally consider that assumption invalid.
So, using apparently valid assumptions, increasing taxes to yield an effective tax rate above 20% can indeed yield higher revenues (I assume enough to yield lower debt-to-GDP despite the negative impact on GDP), and probably would lead to some degree of lower deficits, ceteris paribus (all the more so if part of some “Grand Compromise” including cuts in projected spending, with as close to Congress can come to checks on cheating one way or another over time). In other words, tax increases can indeed mitigate the problem, particularly if part of a combination deal.
And given the implausibility of resisting tax increases (or tax increases above 20% effective tax rate) over the next couple of decades means that holding out for as long as possible — perhaps to the point of crisis — will end up requiring more total sacrifice, sharper tax increases as well as more severe spending cuts, higher interest rates, probably problematic inflation, lower GDP and GDP per capita, and generally, to put it in technical terms, a real crappy situation for quite a while. The only possible benefit of such a strategy is to end up with more of the solution — in relative, not absolute terms — on the spending side. But even that result is questionable (coincidentally, see Bartlett’s latest post http://capitalgainsandgames.com/blog/bruce-bartlett/1163/now-time-deficit-reduction ), and it is one hell of an irresponsible and costly game of chicken.
Re: As to your contention that Hennessey’s conclusion/implication is irrational, I think it’s a lot closer to rational than not.
No, it’s not. It’s irrational to say that, because projected deficits are due to projected change on the spending side, the solution must be on the spending side. That’s not a matter of ideology, just logic. Obviously part of the solution can be on the tax side, and whether or not a society chooses to do so depends on what the trade-offs are and on what trade-offs they prefer. If a society prefers to cut as much projected spending as necessary to bring it sufficiently in line with historical (and projected) revenues as a percent of GDP, rather than sacrificing partly on the tax side and partly on the spending side, it can do so, but that has nothing to do with which line is the one diverging from its historical level. So all that argument (like the argument that we can’t/shouldn’t solve it ALL on the tax side, so we shouldn’t have ANY tax increases) is just silly, crude, irrational framing (which is the opposite of what Hennessey usually offers — he usually lays out very well-structured, rational arguments). Reminds me of the Simpsons episode when a bear wandered into town, and Homer led the residents to demand (expensive) “bear patrols”, and later, when the mayor told them that taxes had to be increased to pay for the bear patrols, Homer responded defiantly “I say: Let the bears pay the bear tax!”
…and yes, that was the longest comment I’ve ever posted that started with “What I’m saying is simple:”
Steve,
Unrelated, but I think you’ll like/find interesting this post on healthcare reform http://www.becker-posner-blog.com/index.html
if you accept the premise that government transfer programs are a luxury good, then the conclusion is inescapable that taxes rise as a percentage of GDP as the economy grows. If you believe that government transfer programs are counterproductive (a “luxury bad”, if you will), then you would not accept the premise. It’s clear to me that voters do indeed accept the premise.
That’s not clear to me at all — that is, it’s clear enough that voters approve the idea of receiving promised transfers, but it’s also pretty clear that as a group they have no idea at all how huge the cost of them will be … and, of course, that cost is going to drop on them.
Until now all these transfers have been promised pretty much as a free lunch — and sure, who doens’t want to get a free lunch? Or get mad when somebody talks about taking their promised free lunch away? But the lunch was never going to be free … only the promises were.
The real test will be when we find what the voters think of transfers when they see the cost..
At the end of last year the unfunded entitlement liability was about $58 trillion — a number so staggeringly large it doesn’t mean anything to anybody. (A fiscal version of Stalin’s, “one death is a tragedy, a million deaths is a statistic” — when you see people pulling their hair out over comparably tiny budget/debt amounts, but ignoring that … there you are.)
That amount will have to be financed with real tax money as the entitlements come due — and it is increasing every year, both as we add more liabilities and as interest compounds on the total (as it is an amount discounted to present value — this year it will be well over $60 trillion)
For perspective, just the annual interest on that amount, divided among the number of taxpayers in the US, works out to approximately 100% of household income.
How are the voters going to feel about having to pay that for their transfers?
Here’s a couple thought experiments about how voters seeing the cost of transfers — so they could accurately judge them on a cost/benefit basis — might’ve/could change things…
1) FDR orginally set up Social Security on an actuarially sound “out of the Treasury forever” basis that was funded, and wasn’t going to pay full benefits to anyone for 30 years as savings built up in the system to finance them.
He was highly insistent that there be *no* “burden on the future”, no inter-generational transfer in it. Benefits were progressive within retirement cohorts, but each financed its own, and each collectively was to receive the long-term rate on bonds as its return on tax contributions.
In the early 1940s Congress threw that model out the window and made SS “paygo”, over FDR’s veto, giving then-seniors far more than they contributed, assuring future seniors would get less while paying much higher taxes — and setting the financing model we’ve followed for entitlements ever since.
Now imagine that instead the polity had stuck with FDR’s model, internalizing it as a national standard — for all social spending full, actuarially sound pre-funding remained the standard of responsible finance that we all adhered to as the norm.
Then Ted Kennedy pushes Medicare through — with people pre-paying in taxes through their entire working lives enough to cover the cost of their projected benefits after age 65.
With them actually *paying* for their benefits up front, and all the accounts having to balance, do you think there might have been a lot more scrutiny about the whole program on a cost/benefit basis from day one? (Compared the the attitude we have today of “everything’s free! so give me more if you want my vote!” And the politicians going: “take! take! we’d never cut you back! give us your votes!”)
Perhaps in that case we’d today have the double benefit of not only a $0 unfunded liability for it, instead of $40 trillion+, but also a much more efficient health care system.
FDR , ‘the great liberal creator of the welfare state’, was far more fiscally conservative and responsible than, well, just about anybody in politics today.
2) Going forward from here, I’ve mentioned how impossibly huge the tax hit is on course to become.
One way to sharply reduce that in the future would be to start pre-funding benefits now. Savings today that pre-fund liabilities earn interest while unfunded liabilities incur interest. That changes the future.
Of course nothing like this is possibly going to happen, but let’s imagine …
The Archangel of Financial Responsibility with his Flaming Sword materializes before Congress and the American People and announces: “You will fully finance and prefund all unfunded federal liabilities, amortizing the process over 40 years, **or else**. (Pictures of mushroom clouds, because that’s what it would take.)
“To do this you may cut liabilities or increase taxes or any combination as you wish. But it will be done in full, on an actuarially sound basis … or else it will be “ashes to ashes” for you … because this is what FDR told you to do!!”
Well, at the end of last year the unfunded liabilities were just about exactly 4 X GDP. Use the 6% long-term interest rate assumed by the SSA actuaries, and amortizing 4 x GDP over 40 years takes an annual tax “payment” of 26% of GDP.
Taxes were 18% of GDP before the recession, so this would up them to 44% — a 144% increase.
For instance, the 15.3% payroll tax would become 37%, the lowest income tax bracket would jump from 10% to 24%, the highest and the corporate rate from 35% to 86% (all assuming no “leakage” to tax avoidance, no damage to economic growth, etc.) … or equivalent revenue raisers would be needed from other sources like a VAT, big hikes in national park admission fees, etc.
This is the *actual cost* of today’s promised entitlements — a 144% tax increaese, payroll tax rate 37%, income tax rates from 24% to 85% — as they would be seen *if* made visible to the voting public though a mechanism they understand, such as a 40-year mortgage.
Now here’s the question:
If, as per the Archangel’s instructions, the American people *saw* this huge new cost dropping on them starting next year, and for the next 40 years, just to keep getting the benefits they already have, for *nothing* additional, nore more than they are getting now (national health care not included) would they say…
[] “Yes, this is a good deal, fully worth it! Transfers are cool!” and vote to pony up the whole amount? or
[] “Yikes!!! @#$%!”, and start voting to slash transfers to get those tax rates down as much as possible.
If the latter, how much do you think they’d slash benefits to get their cost down to the point where the required tax increase for the transfers becomes “worth it”?
Your answer gives your real opinion about the degree to which you think “voters do indeed accept the premise”.
“For perspective, just the annual interest on that amount, divided among the number of taxpayers in the US, works out to approximately 100% of household income.”
Typo: 100% of average household income. Numbers through the link.
Jim,
You use that “unfunded liabilities” metric often, and although the general point you are making with it is valid and important, I have to say I cringe whenever I see you use it, because it’s an analytically unsound figure, and I would think that you would know that, given that you understand the bogus nature of trust funds and the irrelevancy of intragovernmental bookkeeping.
Perhaps the best way I can illustrate what’s wrong with that metric is to ask you if you think our fiscal outlook would be better if we just shifted tax rates around in a revenue-neutral way such that there were much less (or perhaps zero) unfunded liability. Let’s say starting tomorrow ALL tax revenues went into the Social Security and Medicare “trust funds”, or at least enough of total tax revenues were so shifted to provide full “solvency” for these programs. Now all of a sudden the “unfunded liability” for those programs is zero. Do we now have a better fiscal outlook? Of course not, because we have the same OVERALL fiscal imbalance.
The size of the “unfunded liability” is the difference between projected spending and dedicated revenues, but the amount of dedicated revenues is arbitrary and irrelevant to our overall fiscal imbalance.
What matters is our overall fiscal imbalance, and if you want to use a more relevant present value figure, it would be the present value of future overall deficits. Of course, we run into the problem of unsustainability which muddies up the validity of long-term projections on our current course (default or perhaps total monetization would ultimately result, and then the GDP assumptions are way off — in fact, even long before that point of literal collapse, interest rates would rise so high that CBO’s GDP assumptions would turn out to be extremely optimistic). But that doesn’t mean we should use a bogus metric, even if it does serve to provide some sense of scale of the problem to people.
By the way, another way to illustrate the conceptual/analytical flaw in the “unfunded liability” metric: Medicaid isn’t included. Why not? It’s a liability, right? We have projected spending for it, right? The reason it’s not included is because it doesn’t have a dedicated tax (and thus dedicated revenues) and a “trust fund”, so there’s nothing to subtract from the projected spending to get this “unfunded liability” figure. In other words, ALL projected Medicaid spending is an “unfunded liability” per this perspective. Yet, this “unfunded liability” metric excludes it. Ironically, if there were a dedicated Medicaid tax that was projected to “provide” dedicated revenues equal to some fraction of the projected Medicaid spending, you’d add the balance of the spending to your “unfunded liabilities” figure and it would jump even higher. But again, the intragovernmental bookkeeping is irrelevant. What matters is the gap between projected overall spending and overall revenues.
Jim,
Re: Until now all these transfers have been promised pretty much as a free lunch
It can also be said that until now the lower tax taxation relative to spending has been a free lunch. They are two sides to the same coin. In aggregate, we’ve been getting more than we’ve been paying for, or to put it more broadly, we have been taxed too little relative to current and projected spending. I’m not saying the “free lunch” should be spun either way, just that it really refers to a gap — a gap between what we get (and plan to get) and what we’ve been paying for (and plan to pay for).
So over the coming decades, when the choice becomes taking away even more Social Security income and healthcare coverage from grandma (probably along with reducing Defense spending and non-Defense discretionary spending and Medicaid spending, all well beyond eliminating “waste” in causing actual harm) vs. paying some additional taxes, there’s no reason to presume that Americans, through our political system, will opt for the former just because they now have to choose one sacrifice or the other rather than continue to enjoy a free lunch.
But Brooks, the choices aren’t equal unless you assume that the money we earn belongs to the government in the first place. Economically, your argument above is correct but to me they are not equivalent in principle if you start from the supposition that what I earn in the free market is mine. One choice requires the government to only spend what it has taken from me. Yes that means it gives less away but it never had that money to begin with. The other says it takes more of mine (and half of everybody else’s — the half that actually pay net federal income taxes)
As to the unfunded liability argument, sure money is fungible and therefore it’s a bit of a reach; however, there are statutory mandates that control both the spending and the taxes and thus, it is a legitimate debate. Defense and nondefense discretionary don’t fall into the same bucket because there is no statutory mandate to spend the money on an ongoing basis.
On Medicaid, I agree with you on the spending side, but it fails on the dedicated tax side. You could conceptually calculate the number using tax growth at current rates as the revenue base but you’d object rightly to that number. Also the population receiving Medicaid is much harder to predict than SS and Medicare because Medicaid is not explicitly linked to a demographic.
It’s right to point out the flaw in the unfunded liability argument but it’s hardly cringeworthy
Steve,
Re: “your money”, of course one can subscribe to an extreme libertarian philosophy/ideology that there should be zero taxation and zero government spending, except maybe, maybe to address clear externalities. And one can have a libertarian philosophy/ideology that is not quite that extreme as well. Where one believes America should be along that ideological spectrum is obviously a broad subject involving philosophy and morality as well as economics.
None of your money inherently “belongs to the government”, but, through our political process, however imperfectly, the people, as a whole, decide how much of your money government will take to spend to benefit some or all of the people, including in some cases, you and people you’d like to see helped. All I’m saying is that a responsible approach to fiscal policy will take a realistic view of what results from that political process are plausible and what results are likely, and adopt other valid assumptions (e.g, re: the tax-spend hypothesis; dynamic effects and degree of revenue feedback effects from tax changes) to the extent possible, and seek to optimize within those constraints (or if you prefer, to pursue strategies based on well-calculated risk, being realistic about probabilities of various policy outcomes and their effects).
It is unrealistic (1) to think — as a matter of politics — that taxation can be held to under 20% of GDP over the next couple of decades, (2) to think that above 20% we would necessarily (or even likely) be on the wrong side of the Laffer Curve, (3) to think that incremental revenues from tax increases will necessarily (or even likely) cause an equal or greater amount of incremental spending, particularly if part of some “Grand Compromise” deal involving a plan and pledge to reduce projected spending, or (4) to think that resisting any tax increases for several years or more — and thus digging us deeper into the fiscal whole — will yield results that you’d want in terms of GDP, GDP per capita, employment, eventual level of taxation, etc.
I think it’s reasonable (and preferable) to use the prospect of tax increases to some extent as a bargaining chip to achieve reductions in projected spending (a plan, a pledge, and the best Congress can muster in terms of “enforcement” mechanisms and budget process reform). But to resist even such a deal seems quite unwise and irresponsible to me.
Re: the “unfunded liabilities” metric, it is indeed cringe-worthy if conceptual confusion is cringe-worthy. Sure, we have our current tax structure with dedicated taxes at current levels applied to currently designated income, but going forward any or all of that can change, and it just doesn’t make sense to view those programs in isolation as if they weren’t part of the whole (total spending and total revenues), which they are, of course, and which is what matters.
Brooks, your items 3 and 4 are misstatements. Steve argues that higher taxes relieve some pressure and result in higher spending than would have otherwise been the case. His claim is much narrower than your statements.
Progressives have a matching fear: spending cuts will relieve the pressure for tax increases, leaving taxes lower than they otherwise would have been.
The solution is not your proposal of tax increases now for promised spending cuts. It is tax increases now for policy changes now, where the policy changes inevitably cut spending. The enforcement mechanism would be that reversal of the policy change automatically triggers cancellation of the tax increase, ideally retroactively.
For example, the top tax rate could be set at 60% minus the federal share of GDP, with all the lower rates set in proportion to the top rate. As spending is restrained, tax rates increase, and vice versa.
At the top of this page, I asked: “Where is the progressives’ counterpart to Bartlett?”
Has there ever been a progressive apostate willing to advocate major cuts in their favorite programs? If not, why not?
AMT,
Re:Brooks, your items 3 and 4 are misstatements. Steve argues that higher taxes relieve some pressure and result in higher spending than would have otherwise been the case.
Yeah, that’s what my #3 is. As for my #4, I’m addressing the position and strategy of resisting any tax cuts for as long as possible, whether that is Steve’s position or not (and he seems at least to oppose raising taxes above what would yield more than a 20% effective tax rate).
Re: The solution is not your proposal of tax increases now for promised spending cuts. It is tax increases now for policy changes now, where the policy changes inevitably cut spending.
The former is not what I’m proposing, although I should have been clearer. Yes indeed, some immediate policy changes would ideally be included in such a deal, but (1) most of the reduction in projected spending would have to be phased in (e.g., raising the retirement age and reducing seniors’ benefits levels) in order to be viable politically and to allow people time to plan and prepare for the change, and (2) no future Congress is bound by legislation of a previous Congress, so the key is a plan, a pledge to stick to that plan, and as I said, as much as Congress can muster in terms of “enforcement” mechanisms and budget process reforms to maximize the probability of sticking (or sticking reasonably closely) to the plan.
The enforcement mechanism would be that reversal of the policy change automatically triggers cancellation of the tax increase, ideally retroactively.
Something along those lines might be good, both in getting to a deal in the first place and in encouraging sticking to the plan. Of course, again, any future Congress can do anything it wants, so the key in “enforcement” (which I put deliberately in quotes) is to place high hurdles for overriding (e.g., 70 Senate votes), to create rules that will be politically costly for politicians to abandon (by making them look fiscally irresponsible), and that will provide political cover for sticking to the plan even though it means imposing sacrifices that are unpopular with some (or even a majority) of a given politician’s constituents.
AMT,
Correction: what you said is indeed different from my #3. But Steve may be implying my #3, and even if not, the point is that tax increases can reduce deficits rather than just producing an equal or greater amount of incremental spending.
Jim, You use that “unfunded liabilities” metric often, and although the general point you are making with it is valid and important, I have to say I cringe whenever I see you use it, because it’s an analytically unsound figure…
Well, it’s prepared by the Treasury every year based on info from the SS and Medicare trustees et. al., so get mad at them — not me!
Perhaps the best way I can illustrate what’s wrong with that metric is to ask you if you think our fiscal outlook would be better if we just shifted tax rates around in a revenue-neutral way such that there were much less (or perhaps zero) unfunded liability. Let’s say starting tomorrow ALL tax revenues went into the Social Security and Medicare “trust funds”, or at least enough of total tax revenues were so shifted to provide full “solvency” for these programs. Now all of a sudden the “unfunded liability” for those programs is zero. Do we now have a better fiscal outlook? Of course not, because we have the same OVERALL fiscal imbalance.
Exactly — the unfunded liability of the federal govt would remain *exactly unchanged*, the very same $58 trillion at the end of 2008 as it was.
Take all regular income tax revenue and credit it to Medicare to run a huge Medicare “surplus”. That creates an “asset”, as far as Medicare is concerned as a line item.
But then where does the money to run the Agriculture Dept, Defense Dept., et al come from?. Well, from Medicare “loaning” its surplus to them by issuing all those new trust fund bonds — which creates a massive new unfunded liability for the govt that exactly offsets that new asset.
Net change in result for the finances of the US govt: exactly $0, as you note.
The “unfunded liability” of the govt is very simply its total promised future expenditures minus its total expected future revenue. I don’t see anything unsound about that.
The only way to change it is by changing total promised future expenditures or total expected future revenue (or the interest rate used to discount them to present value).
The line item amounts for Medicare, Social Security, federal/military pensions and such are merely components of the total unfunded liability. Of course one my change the numbers for them individually by allocating revenue to “here” instead of “there” — but while doing so reduces the unfunded liability “here” by $X it increases the unfunded liability “there” by an exactly offsetting $X.
The only way to change the govt’s total unfunded liability is to change its total future liability or revenue amounts — total future spending, total future revenue. If neither is changed then reducing the unfunded liability for one component item must increase it for another by an exactly offsetting amount, by arithmetic, leaving the total unchanged.
If a total unfunded liability is big enough eventually it will bankrupt even the biggest corporation, like General Motors, and even the biggest governments. And at circa >$60 trillion and growing, ours certainly is.
I consider this not only a “sound” concern, but what should be by far and away the #1 fiscal concern in politics — probably the #1 concern of all in politics — far ahead of “national health care” and all the rest, meaning that all the others should be addressed only in a manner consistent with resolving the coming unfunded liability calamity.
Because if the govt crashes in 25 years — or to prevent it from crashing, all the programs of today have to be ripped apart, shredded and reworked from the leavings — what will have been the point?
Brooks,
To take your points in turn.
On (1), I do not agree it is unreasonable to hold taxes and spending to 20% of GDP. I think this is not only a reasonable goal but a necessary one. If you don’t like 20%, pick a number, any number and let’s stick to it. I can easily construct a budget at 20% through working on means testing entitlements and reducing subsidies to almost everyone else. 20 percent is a laydown if you want to do it.
On (2), perhaps you misunderstand me, I have no Laffer curve argument to make. I’m not arguing we cannot raise taxes but rather that we should not raise them substantially above historical levels.
On (3), AMT has my argument correct and I even think you agree, spending will be higher with higher taxes. That is basically the point. Will it be dollar for dollar higher, maybe not, but maybe so.
On (4), we profoundly disagree. The only way to place pressure on spending in the current political context is, in fact, to promote a crisis. Imagine a world whether spending were 27% of GDP continuously. Now imagine taxes at 24, 22, and 20 percent of GDP. At 24%, there would be mumbling about spending but no action. At 22%, there might be action, depending. At 20, there would be action. Pick any numbers you want, it’s the same dynamic.
Fundamentally, my issue is simple. Until someone offers a remotely sustainable (meaning flat to declining share of GDP) approach to spending, I will personally resist any and all increase in revenues. It’s a simple matter of leverage. The more I raise revenue, the less leverage I have on spending.
As to your and AMT’s musings on “enforcement”, I do not believe in any approach that is not statutory. We either need a line item veto or a balanced budget amendment. Anything else will fail. I’ll happily vote to raise my taxes once something like that is in place.
You may think it fiscally irresponsible to resist because it deepens the hole. I think you are being naive to assume that increasing revenues will decrease the hole in our current system.
Again, I ask you to consider the following thought experiment. How much larger would the stimulus bill be and the cost of current health care legislation if the budget were currently in balance. If you believe they would be the same size or smaller, I’ve got a few nice bridges to sell you.
But seriously, we need to think in a dynamic rather than a static fashion and consider feedback loops. We’d all love to see more balance in our fiscal situation but it’s a game of chicken. AMT’s description of the impasse is correct but if I am only given a choice between chasing spending up with revenues or pushing taxes down with spending cuts, my choice is clear since neither affects the final outcome and one leaves me a whole let better able to cope with the crash when it comes.
One liberal who has talked for many years about the need to cut entitlement programs is former Colorado Gov. Dick Lamm. He’s still at it. See here: http://www.huffingtonpost.com/gov-dick-lamm/the-crime-of-the-century_b_309841.html
Steve, you wrote:
On (4), we profoundly disagree. The only way to place pressure on spending in the current political context is, in fact, to promote a crisis.
The current spending splurge, including the real effects of the health care bill once its hard edges are smoothed by more spending, will almost certainly produce a crisis that screams for higher taxes. I believe that your strategy has been anticipated and co-opted by progressives.
Bruce, thanks for the link. Dick Lamm colorfully describes the problem but he does not advocate large and specific spending cuts as a crucial part of the solution. If he did that, he would be a counterpart on the progressive side to your advocacy of a VAT. Unfortunately, it’s quite common for politicians to decry policies that they have no plans to change.
IMHO, progressives realize that it is far too early in the game of chicken to make pressure-reducing concessions on spending. Instead, the name of the game is to increase spending, so as to add to the pressure for tax increases. Once the maximum achievable tax increases are in the bag, they will finally be ready to consider cutting spending.
This is the mirror image of the “starve the beast” tactic the low-tax people play. Both versions are very effective in advancing their goals, but of course both increase the risk, IMHO now near certainty, that the government’s finances will go off the cliff into hyperinflation.
For a great discussion of why hyperinflation can actually make sense when push comes to shove, listen to Rudy Penner’s presentation at http://www.urban.org/events/Exploding-Debt.cfm
Jim,
You present “unfunded liabilities” as a valid — and ideal — metric of our overall long-term fiscal imbalance. As I’ve explained, it is neither. It is not an analytically sound measure of our overall long-term fiscal imbalance.
It’s hard for me to explain much more clearly than I already have, but I’ll try.
First, I noticed you did not respond to my explanation and question as to why projected Medicaid spending is excluded from this figure, and how that doesn’t demonstrate that the metric is invalid. Please re-read that part of my prior comment. What is your response?
Second, you didn’t really provide a response to my other illustration (shifting around revenues to eliminate the “unfunded liabilities”) that makes sense, as far as I can tell. I illustrated that, by merely shifting around the same level of revenues, we could greatly diminish or even eliminate the “unfunded liabilities” to which you refer, and yet our overall long-term fiscal imbalance would be no better (it would be unchanged). That illustrates the analytical flaw with that metric. Rather than measuring the present value of future overall budget deficits, the “unfunded liabilities” metric largely reflects arbitrary intragovernmental bookkeeping: how much of our overall tax revenues are carved out and dedicated to particular programs per the current tax structure. It totally ignores what happens to all other revenues and all other spending, and thus cannot reflect overall budget deficits, which is what our overall fiscal imbalance is all about, not the bookkeeping “deficits” of some group of programs that happen to be “funded” via dedicated taxes.
The “unfunded liabilities” figure would not be reduced at all if we totally eliminated Medicaid, Defense, and all other spending outside of those programs the “deficits” of which are included in the “unfunded liabilities” metric.
Similarly, projected income tax revenues could be doubled and it would not diminish the “unfunded liabilities” figure.
I could go on with even more illustrations, but the point really should be clear by now.
Re: Well, it’s prepared by the Treasury every year based on info from the SS and Medicare trustees et. al., so get mad at them — not me!
Not mad at ya’, Jim (although I do find it lame that you never responded to me at http://www.capitalgainsandgames.com/blog/bruce-bartlett/1106/why-spending-wont-be-cut#comment-3788 despite my request on a couple of occasions). But the trustees do what they have to do to comply with the internal bookkeeping that I’ve explained is irrelevant to measuring our overall fiscal imbalance. Obviously that doesn’t make it any more relevant.
Jim,
Just to offer another illustration, if we stopped having dedicated taxes and “trust funds” and just sent all revenues to the general fund and used the general fund for all spending, we’d have zero “unfunded liabilities” (for the same reason projected Medicaid spending is excluded from “unfunded liabilities”), right? Would that mean our long-term fiscal imbalance was any less? Of course not.
Jim,
Also, what is the point of quantifying our long-term fiscal imbalance? It’s to let people know how much (or how much more) in tax revenues it would take to fund projected spending (with or without consideration of dynamic effects), so that we can discuss the trade-offs associated with alternative policies (how much of that projected spending we want to cut and how much we want to preserve and fund with additional taxation. So what’s relevant? Our overall fiscal imbalance, meaning our projected overall deficits and debt-to-GDP. Not some fabricated bookkeeping gap between projected spending on a particular subset of programs and projected dedicated revenues for those particular programs based on the current tax structure. So again, the relevant metrics should be derived from projected overall deficits.
Brooks,
Now you’re being a little disingenuous yourself. You know I agree on the general point that the overall gap is what matters; however, if we are going to set up systems with “dedicated” tax streams and sell them as such, the insufficiency of those tax streams to meet the need is relevant relative to the construction of those programs and as an indication of government to forecast costs and revenues over time
Steve,
I’ll be brief b/c at sports bar watching Vikes and using blackberry.
1) “Disingenuous” means saying something one doesn’t really believe. You’re charge is incorrect, has no reasonable basis, and is therefore inappropriate, but no biggee.
2) You are missing my point, which is that “unfunded liabilities” is an unsound metric of our overall fiscal imbalance. Maybe I’ll elaborate later (and I intend to reply to your other comment as well within next day or two)
“Your” charge, that should read
Brooks,
Enjoy the game. I accept your point in 1. I think you are missing his point, and he does have one, on purpose.
I agree with point 2 so you don’t need to respond; however, unfunded liabilities is a fair measure of the degree to which the government establishes long term programs with insufficient funding mechanisms and ought to make us suspicious of things like health care reform.
Government is no different than private companies doing pension forecasts…they are almost always wrong. Hence the issue with SS, Medicare, Medicaid and any other defined benefit program the government chooses to offer.
Steve,
If your point is simply that the existence of huge gaps between projected dedicated revenues and projected spending for some entitlements should make us skeptical when some folks proposes a new entitlement or expansion of an entitlement or for that matter any category of new spending that they claim will be fully paid for via some particular incremental taxation (dedicated or not), I agree.
As I think you are acknowledging, that is an entirely separate point than someone presenting the “unfunded liabilities” figure as an analytically valid metric of our long-term fiscal imbalance.
Brooks,
Yep, sounds right
Jim, You present “unfunded liabilities” as a valid — and ideal — metric of our overall long-term fiscal imbalance…
“Ideal”? Hello?? You’re going to have to quote me saying that, because I sure missed it.
As with almost any data, there are lots of way to present it to make it comprehensible, each with its pros and cons. (Last night I saw a science show on how geologists now convert data from ground movements caused by volcanoes into music because they can hear things they can’t see in charts and graphs — much less in rows of numbers).
My own favored “metric” for the size of the budget gap, which I use most often, is the size of the tax increase from today’s levels just to maintain the current fiscal position — particularly in relation to historical tax increases. Such as: “50% income tax increase by 2030, 7 times larger than the Clinton tax increase of 1993, which passed the Democratic House by one vote and Senate on a tie-breakers, with the Democrats getting wiped out in the next year’s election.” As here, with details.
This is both far more easy to understand, ISTM, and more accurate for technical reasons. So why you imagine I believe the “unfunded liabilities” measure is “ideal” is beyond me. Perhaps you confuse me with someone else?
Let me expand a bit on the faults of the “unfunded liability” number. I take it from the Treasury, so as to use official numbers only –but governmental accounting leaves, let us say, much to be desired.
The govt until quite recently used only “cash in/cash out” accounting — entirely illegal in the private sector — with no auditable books (balance sheets, etc) for anything. In 1990, not long ago by govt standards, new law pushed through by Bush I created the Federal Accounting Standards Advisor Board to start beating this horrid mess into something the private sector would recognize as a “set of books”. It doesn’t have power of course, but uses jawboning and embarrassment to make progress — slow progress.
Under the 1990 law, all govt departments are to have an auditable set of books. Today many still don’t, but it’s only been 19 years. Auditable, btw, doesn’t mean something that would withstand an audit examination — it means a coherent, consistent accounting presentation. Any dept that doesn’t have that can’t even say, for instance, whether or not it is missing a division of Abrams tanks.
The biggest issue for the FASAB, obviously, has been getting accrued liabilities recognized. Under Generally Accepted Accounting Principles these are an expense subtracted against income on the income statement and a debt owed on the balance sheet — since, obviously, they are owed. And in the private sector when they are not so recognized it is “go directly to jail”, literally: see Enron. But of course the politicians have resisted and refused. (Here, e.g., is a USA Today article on this.) It still publishes its official deficit number on cash accounting basis.
The progress the FASAB has made in this direction consists of getting the Treasury to also publish a supplementary accrual accounting budget deficit number (*not* including accruals for Medicare, Social Security, etc.) plus another supplementary “Statement of Social Insurance (SOSI)” that reports the total accrued liabilities for Medicare and Social Security at present value — but *not* a host of other accrued liabilities. “Ideal”? Not!
As a result of all this the 2008 deficit reported in the news everywhere was $455 billion, the accrual basis deficit was $1,009 billion … and the accrual basis deficit including change in accrued Medicare and Social Security net liability was over $ 3 trillion!
Perhaps we can see why the one thing that Democrats and Republicans do agree upon in a 100% bipartisan manner, wholeheartedly, is keeping accrual accounting out of sight and out of the government! How would they sell voters the joy of more new entitlements and more tax cuts if annual deficits over $3 trillion were visible to all? (And since they write the law, they don’t have to join the Enron people in jail!)
I noticed you did not respond to my explanation and question as to why projected Medicaid spending is excluded from this figure, and how that doesn’t demonstrate that the metric is invalid. Please re-read that part of my prior comment. What is your response?
Medicaid isn’t counted in the SOSI because it is one of the many accruals the FASB hasn’t been able to talk the government into accounting for in its financial statements, present value basis. That doesn’t mean it isn’t accruing a liability or have a big accrued one — it just means the govt isn’t reporting it even in the supplements to its books. (Another “Enron moment”)
If your objection to the “unfunded liability metric” is that it thus understates the government’s real unfunded liability, that’s certainly true enough. Fine with me.
OTOH, CBO does project increased annual spending for Medicaid, and from that one can easily figure the annual budget gap growth needed to be covered with tax increases/ spending cuts as a percentage of GDP to keep the current budget deficit stable. (In fact, CBO does that itself.)
That’s my preferred way of presenting the picture, as I did at the link above with the number for Medicaid included, because as I said, IMHO it’s not only more accurate but also easier for the average person to understand. (”50% income tax increase in 20 years!?!”).
If your objection is something else, you’ve lost me.
“Unfunded liability” is a perfectly clear and valid concept detailed in GAAP. Businesses calculate theirs all the time. The government has a total one too that we’d know if it used GAAP — but it doesn’t so we don’t. But it does calculate the SOSI, and the question, as with most all things, is not “is it perfect?” but “is it good enough?”. And since the message it gives us all — this budget course is totally unsustainable — is clear enough, and would not change if the measure were “perfected”, ISTM that yes it is valid enough and good enough.
When you say….
you didn’t really provide a response to my other illustration (shifting around revenues to eliminate the “unfunded liabilities”)
… and similar statements, well, no, it is not true that shifting around revenues would eliminate the govt’s unfunded liability, it would only eliminate the measurement of it. As I said before, the govt’s actual unfunded liability would remain totally unchanged. Being unmeasured we wouldn’t know the size of it now, but we’d certainly learn about it later!
Such statements seem to indicate that the measurement creates the thing measured — but I’m sure you don’t believe that so I won’t go there.
Finally, I wrote:
“The ‘unfunded liability’ of the govt is very simply its total promised future expenditures minus its total expected future revenue. I don’t see anything unsound about that….
“The only way to change it is by changing total promised future expenditures or total expected future revenue”
To which you responded:
“What matters is the gap between projected overall spending and overall revenues.”
Do you see any difference between those statements worth arguing over?
BTW, what’s your favorite metric?
For a great discussion of why hyperinflation can actually make sense when push comes to shove, listen to Rudy Penner’s presentation at http://www.urban.org/events/Exploding-Debt.cfm
Some of that discussion was excellent, thanks for the link.
I’m not sure that he was really pushing the benefits of hyperinflation though, the way he said they ended up with a barter economy.
And in the US the entitlements that are causing all the problem are inflation indexed (Social Security literally, Medicare and Medicaid are payable “in kind” so effectively) so it doesn’t make any sense at all for the govt to start inflating to get out of them.
Moreover, contrary to the popular belief, countries really can’t and don’t inflate their way out of deficit problems.
This is because lenders aren’t totally stupid. If a govt starts inflating, lenders increase the interest rate they charge it (plus as in the US experience of the 1970s and 1980s an additional risk premium). And since the government is still running a deficit it must roll over all its old debt as it matures, and gets hit with the higher interest rate on that too.
So what’s it get? Generally, nothing or worse, as
the data show. So inflating out of debt is pretty much a myth.
(You can inflate out of old debt after you stop rolling it over and incurring new debt by stopping running deficits and going to a surplus — but the key is changing policy to run a surplus, and how likely is a nation to have hyperinflation while running a surplus, orto benefit on net from doing so?)
Of course if you actually destroy the economy down to a barter level, that’s one way to reneg on Social Security and Medicare, even with them being inflation-indexed. But it seems like lot of needless extra pain compared to just agreeing to reduce benefits.
On a different issue, I enjoyed the comment…
“European governments tax the poor to make payments to the poor”.
… the end point of “progressive” political logic.
And the glory of the VAT.
Jim,
Re: your 10:48pm, you present a great deal of irrelevant detail, and you are still showing either conceptual confusion, using varying and conflicting definitions, or perhaps just being extremely unclear in a way that gives such an appearance.
And I said that you presented “unfunded liabilities” as “a valid — and ideal — metric of our overall long-term fiscal imbalance”. Your response is that you don’t consider it ideal. Are you agreeing with me that it is NOT a valid metric of our overall long-term fiscal imbalance (for reasons I’ve explained and illustrated pretty clearly, IMHO), and are you saying that you haven’t presented it as such? (Not that I really have much interest in meta discussion for its own sake, but give me some clear, straight answers please).
If you do still consider it a valid metric (measurement) of our overall fiscal imbalance, and if you don’t see a huge difference in nature and validity between that metric and what I am saying would actually be a valid metric (a measure based on future overall deficits, including the “fiscal gap” metric to which you seem to be referring in your 10:48 comment), frankly, I think I’ve explained this stuff fairly clearly already, and I don’t think I can improve upon what I’ve already said (and I’d have to be largely repetitious) to address it further.
Jim,
In case this recap and analogy makes my point any clearer:
I’m saying that “unfunded liabilities” is not a valid metric of our overall fiscal imbalance because “unfunded liabilities” (1) pertains to only parts of the budget rather than the whole, and (2) is a function of irrelevant intragovernmental bookkeeping (the fact that some programs are funded via dedicated taxation and others not, and the current particulars in terms of which programs, tax rates and applicable income.
It’s like, amid a discussion of your ability to afford a meal at McDonald’s, you pointed out (and emphasized) the gap between how much money you had in your right pocket for French fries vs. the price of the French fries, even though you also have money in your left pocket and you also would like to buy a burger and a beverage.
Now, you could go into enormous detail over your system for deciding which money you put into your right pocket vs. your left, your procedure for transferring money from one pocket to another, whatever, but none of that changes the reality that how much money you happen to have at the moment in your right pocket relative to the price of the French fries is not a valid metric of your ability to afford the meal you desire or planned, nor of any gap in your funds for that meal.
@SteveinCH,
“I will personally resist any and all increase in revenues”.
Whoa, Steve In Critter Holler is going to be leading an insurgency against the tax man. Watch out, people!
You know, you don’t get to decide the level of Federal revenues. Now you might be able to scare people into your position that “20% is too much”. However, it’s very likely that the past eight years has pretty much convinced people that Laughable Curve arguments that lowering taxes automatically results in a healthy economy are just so much hooey.
As much as you’d like to wish for the elimination of all those Inconvenient Peons, there is not a damned thing you can do about the demographics of America. A gigantic bulge is about to enter the exit end of the snake and until it “passes” the snake is going to have serious constipation.
Because of the short-sighted greed of the people who play the organ grinder so you can do your monkey dance, the vast majority of the members of that bulge simply do not have sufficient assets to survive without those unjust and oppressive entitlements you want to eliminate. It’s a problem, isn’t it?
So the solution. Is it more bombs for Iran, less bread for Granny? I understand you don’t plan to actually kill Granny. That’s the job of “liberal” Death Panels. Instead you’ll allow her to die of natural causes (like maybe severe malnutrition or freezing from homelessness or maybe diabetic collapse; there are a million ways to deal with Granny, aren’t there?)
@SteveinCH at #17,
Actually, all the money is the government’s, or more specifically, the Federal Reserve’s. They’re merely lending it to you at 0% interest.
It doesn’t have your name on it, does it?
P.S.
This is of course a silly argument, but it highlights the fundamental principle that no one in America except thugs would be rich without government. And don’t go off about saying “oh, I’m fine to pay taxes for law enforcement and the military, but that’s all!!!!“. Modern nations are so much more massively complex than the agrarian vassalage you idolize, you have no idea the results should your John Galtish wet-dreams come true.
Jim, Re: your 10:48pm, you present a great deal of irrelevant detail, and you are still showing either conceptual confusion, using varying and conflicting definitions, or perhaps just being extremely unclear in a way that gives such an appearance.
And I said that you presented “unfunded liabilities” as “a valid — and ideal — metric of our overall long-term fiscal imbalance”. Your response is that you don’t consider it ideal…
No, my response was that I never said anything like it was an “ideal” metric — and asked you to show anything posted by me that might be taken the other way. I also showed you my alternative, preferred metric (and my using it).
Just to make you happy, here’s another criticism of “unfunded liability” that I’ve often made elsewhere (particularly in some back-and-forth with Andrew Biggs): that projecting such liabilities over 75 years or the infinite horizon or whatever is nonsensical — because when the huge cash flow crunch hits circa 2030, all these programs and their funding is going to be totally reworked, making all projections made today for their costs decades beyond that time (and their discounted to present value amounts) totally “academic”, in the very worst sense of the word. Absolutely irrelevant at best, harmful by distracting from the real problem at worst.
The real problem being how to finally rework and stabilize these programs circa 2030. (Projecting costs in 2070 on present law is worse than medieval monks arguing over the music that angels on the heads of pins would dance to.)
Surviving the 2030s is what counts. That’s why my preferred metric generally is the funding gap in GDP terms to be filled by policy changes in the 2030s — and the practical political/economic implications.
Fell free to use that debunking of the 75-year unfunded liability at present value any time you want.
OK, now that you should really, really be able to admit that I never said anything like the claim you dropped on me — that unfunded liability is an “ideal” metric — I am frankly puzzled by some things in your posts…
1) Why have you appointed me the defender of the “validity” of a metric you know I don’t particularly like, so that you want to keep arguing about it?
2) As you go on about whether unfunded liability is “valid”, dDo you recognize *degrees* of validity — such as that between “valid” and “invalid” there is “good enough for a given purpose”?
Moreover, do you recognize that the same metric may be both valid and invalid for different purposes, inferior for one and superior for another? (This was my point of the geologists studying recorded ground movements in terms of music rather than charts and numbers. Perhaps you thought that was “irrelevant” — but it wasn’t.)
A metric must have a purpose. For instance, if I want to estimate the govt’s financial difficulties in 2030 then its “unfunded liability” is no help while the “2030 revenue gap” says a lot.
But if my purpose is learn how much it would cost to avert bigger future problems by prefunding benefits, then the future revenue gap is no help and “unfunded liability” (even if only for Medicare and Social Security, omitting Medicaid) is key to the answer. You do see that?
3) Do you imagine you disagree with me on anything meaningful in all this? Because if you don’t, then …what’s your point? If you do, I’ve been reading your posts trying to figure out what it is.
To learn that, I’ve asked you some simple, clearly defined, easy to comprehend questions that you’ve ignored. I’ll quote them now, and maybe you can answer them to see if there really is any difference to so go on about…
Well, do you?
Do you have a problem there?
How much of that do you disagree with?
Well? Be sure to answer this last one.
For if you think “unfunded liability” is such an inferior metric to describe the problem, and you also don’t like the “revenue gap” metric I generally prefer to use, such as here, then you must have something else you think is better.
What is it? (And for what purpose is it better?)
Otherwise, really, what are we supposed to be talking about?
Jim,
I must admit, I got half-way through your comment and lost interest. You spend an awful lot of time (words) not directly answering straight-forward questions and not> addressing related arguments, and offering various irrelevancies, as well as creating a mess of an impression that fundamentally different concepts/assertions are essentially the same. I’ve explained it all well enough, I don’t think I can do so any more clearly, and I don’t want to just repeat it all in response to the above.
“Unfunded liabilities” simply doesn’t make sense as a measurement of our overall fiscal imbalance, for reasons I’ve provided and illustrated quite clearly (IMHO). I’m not saying it’s an imperfect metric; I’m saying it doesn’t make sense. After all your typing, I still don’t know if you agree with that conclusion and reasoning, nor, if you disagree, how you would respond to my arguments, but I’ll stop asking.
You offer a lot of great commentary, but it seems that you cherry-pick the questions you wish to answer and you aren’t willing to admit being wrong about anything. (Case in point, your lack of response at http://www.capitalgainsandgames.com/blog/bruce-bartlett/1106/why-spending-wont-be-cut#comment-3788 , despite a few requests from me, I assume because if you actually do view that minute or two of video, it would be hard to respond without admitting that you were wrong.)
Oh, I do notice that question about my favorite metric. Although I don’t have a favorite present value metric (I usually refer to charts showing deficits and debt-to-GDP spiraling out of control), as I said in my earlier comment, I think the “fiscal gap” would be valid (broadly speaking, meaning at least conceptually somewhat sensible, even if flawed by limitations in its assumptions, most notably the disregard for dynamic effects). It is somewhat useful in giving people a sense of scale of the problem — of what percent of GDP it would take in additional revenues and/or lower spending (leaving aside dynamic effects, which is a serious limitation) to maintain the current level of debt-to-GDP. By the way, though, one needn’t have a preferred metric to describe a nonsensical metric as such.
Anyway, if you really don’t get what I’ve been saying, I’ll leave it at that. Maybe going forward you won’t continue to frequently state/imply that the “unfunded liability” figure is a valid measure of our overall fiscal imbalance, and maybe you’ll explain whatever meaningful relationship you think that metric has to our overall fiscal imbalance.
Oh but Jim, if you’re concerned about the “unfunded liabilities” figure, maybe you should push for changing the intragovernmental bookkeeping such that there are no more dedicated taxes and trust funds, and instead all taxes go to the general fund and all spending comes out of the general fund. That would completely eliminate our “unfunded liabilities” (just as projected Medicaid expenses add nothing to the “unfunded liabilities” figure), and you’ll therefore feel better about our overall fiscal imbalance. ok, I realize you would realize that our overall fiscal imbalance would be unchanged, but for some reason that realization doesn’t lead you to realize that the “unfunded liabilities” figure is an invalid metric for our overall fiscal imbalance and is largely just a function of intragovernmental bookkeeping as I’ve explained…repeatedly and in various ways I would think would suffice. Again, the gap between the price of the French fries and the money in my right pocket doesn’t give me a measure of any gap between the total money in both my pockets and the entire meal I plan to purchase.
Slight correction: In my scenario above, we’d still have the current debt held by the public as our “unfunded liability”. But the point is still the same.
Brooks,
Here’s a good example of why my version of the issue with “unfunded liabilities” does matter.
http://www.washingtonpost.com/wp-dyn/content/article/2009/10/12/AR2009101202389.html
Anandakos, your argument (post 44) is analogous to that of an abusive husband: “I bring home the money that this family needs to survive, so don’t complain that I get drunk and slap you around now and then.”
Just because some aspects of government are necessary, that doesn’t mean that all aspects of our current government are. Politics is all about the debate of how much government should do. It’s a legitimate debate.
Anandakos,
Just curious, do you troll on multiple blogs or just here. I have every bit as much right to a perspective on the appropriate level of federal taxes as you or anyone else. It actually has little to do with my personal tax burden (already a good deal higher than 20%) and more to do with a perspective on the role of government in the economy and whether the private economy is better at making investment decisions than the government.
For what it’s worth, and not that I expect you to read and understand this, I have no issue with government assistance to those who are poor; however, a fair portion of government activity has nothing to do with the poor. A lot of what government does is implicitly subsidize intergenerational wealth transfer. Paying SS and Medicare benefits to people with income or wealth such that they don’t need those benefits is wasteful and only serves to leave them with larger amounts of income to pass on to their heirs upon death. That hardly seems like a worthy goal.
If you had any interest in data, you would note that Federal receipts have never appreciably exceeded 20% of GDP and if you had read my posts you would note that I explicitly don’t believe in the Laffer curve argument (which parenthetically has nothing to do with economic growth but rather concerns the relationship between tax rates and tax receipts).
And nowhere did I suggest eliminating entitlements. I do favor means testing them because I don’t believe in taking Peter’s money and giving it to Paul when Paul is wealthier than Peter. Maybe you do and that’s fine but you aren’t even reading what I’ve posted.
The solution as you ask is to constrain spending to what we are willing to tax as a nation. We can debate what the point we are willing to tax is and no doubt you and I will disagree. I would love to see that debate happen rather than the incremental way in which the debate happens today. It really isn’t about whether program X or Y is worthy, rather it’s about living within the means we are willing to give up to the government.
And to your silly argument, the physical currency is guaranteed by the government but it does actually belong to me once someone pays it to me. If people believed as you do, the currency would collapse overnight.
Lastly,it’s unfortunate that rather than debate the merits of an issue, you choose to attack people. I’ve seen you do it several times. It’s a pretty poor way of arguing, but, if it’s the only one you know, I guess we’ll all learn to live with it
Jim,
If this helps, since you’ve tended to get lost in irrelevant intragovernmental bookkeeping technicalities, I’ll use my McDonald’s analogy to try, hopefully for the last time, to get this point through to you.
Let’s say I’m concerned about my ability to pay for the meal I plan to purchase. Our dialogue follows.
You: Hey, you really should be thinking about the deficit between the price of French fries and the amount of money in your right pocket.
Me: Why? That tells me nothing about the total amount of money I have relative to the total amount I plan to spend on this meal.
You: Well, it tells you at least what the deficit is between the price of those French fries and the amount of money in your right pocket.
Me: Uh, yeah, by definition (you’ve constructed that metric and it is what you say it is), but what’s your point? Again, what I care about is my overall funds vs. my overall projected spending, not however much money I happen to have in one pocket vs. the projected spending on some particular subset of my meal.
You: Well, it’s not my favorite metric of your ability to afford the entire meal, but that doesn’t mean it isn’t conceptually valid and useful. It at least tells you how far you are from affording those French fries.
Me: First of all, you cite that metric often in the context of discussion of my ability to pay for my entire meal (my overall fiscal imbalance for the anticipated meal) and sure seem to imply that it’s a valid and useful gauge of my ability to pay for my entire meal. Second, no, it isn’t even a valid basis for measuring my ability to pay for the French Fries, because it tells me nothing about my overall amount of money (total in both pockets) relative to the overall cost of my planned meal (French fries, a Coke and a burger). Having a “deficit” between my right pocket and the price of the French fries tells me nothing about the existence of or size of any overall deficit (because it ignores however much money I have in my left pocket and my planned spending on other meal items), and given that my money is fungible [as are future tax revenues], the “French fries deficit” is meaningless. It’s not just that it’s an imperfect metric; it’s fundamentally conceptually invalid. It could understate my “overall meal deficit” or it could overstate my “overall meal deficit” (the latter if the money in my left pocket exceeds the total cost of the Coke and burger), but in any case, it tells me nothing about the existence or size of any “overall meal deficit”, nor how any such deficit changes over time.
You: Well, I was talking about your overall meal deficit. There’s no difference between what I was saying and what you are saying. [I wrote: “The ‘unfunded liability’ of the govt is very simply its total promised future expenditures minus its total expected future revenue." To which you responded: “What matters is the gap between projected overall spending and overall revenues.” Do you see any difference between those statements worth arguing over?]
Me: No, your metric obviously pertains to only a subset of my planned spending and only a subset of my money, whereas I am obviously speaking of the totals. Obviously the two are not the same, and obviously that is my point.
Jim, I must admit, I got half-way through your comment and lost interest….
And yet, rather than stop me from wasting your time by moving on to better things, you come back with three more posts!
That can only encourage me.
You spend an awful lot of time (words) not directly answering straight-forward questions and not addressing related arguments, and offering various irrelevancies, as well as creating a mess of an impression that fundamentally different concepts/assertions are essentially the same.
Well, Brooks, any who want to waste their time deciding who between us has been best at all that can decide for themselves by looking at our respective comments above, so I’m not going to argue.
“Unfunded liabilities” simply doesn’t make sense as a measurement…
I’ll use my McDonald’s analogy to try, hopefully for the last time, to get this point through to you…
You: Hey, you really should be thinking about the deficit between the price of French fries and the amount of money in your right pocket.
Me: Why? That tells me nothing about the total amount of money I have relative to the total amount I plan to spend on this meal…
… your metric obviously pertains to only a subset of my planned spending and only a subset of my money, whereas I am obviously speaking of the totals. Obviously the two are not the same…
It’s not just that it’s an imperfect metric; it’s fundamentally conceptually invalid.
Brooks, really, the cost of french fries is so trivially small compared to the cost of a meal, and to the amount of money in one’s pockets, that it is totally unrealistic as an analogy.
Yes, the gap between the cost of fries as an “unfunded liability” and the money in your right pocket might not mean much — but the gap between, say, an unfunded $200,000 balloon mortgage liability and the money in both your pockets might mean rather more!
So let’s rework the “you & me talking” analogy on a rather more realistic scale. [I'll even footnote the numbers used in it to show their scale v reality.]
Your situation is this: You are 55 years old, your earnings apparently have peaked at about $50,000 per year, you have no particular cash savings and are planning to retire in about 10 years (though maybe not), at which point with the pension you have plus Social Security your income will drop to about $40,000.
You come to me as a financial attorney for help on a matter [it happens!]. For some reason inexplicable to you, your credit card company has decided your credit risk has increased, raised your interest rate and cut your credit line. Considering all vacations and nice meals you put on your card, and don’t pay off, this matters to you and you want to see if you can reverse it.
Me: “Geeze, do you realize you have a liability of 4X your income, $200,000, coming due in 10 years on the balloon mortgage you put on your house? And you aren’t saving anything at all towards paying it off then. That’s a totally unfunded liability! Moreover, it’s growing with interest faster than your income, when it comes due it will be 5X your income, $250,000! [1]
“At that point by the loan’s terms you will have to start servicing it with cash at market rates. IF you can refinance at 6%, that’s $15,000 a year and will be 30% of your income. Your spending money will drop by 30% … by almost 40% if you retire! Moreover, who knows, your rate may be much higher than that thanks to that unfunded liability piling up on your balance sheet, ruining it — or you might not be able to refinance at all. [2, 3, 4]
“Are you prepared for that? And what if you have some other unforeseen expenses, have an accident, get sick? Things could be even much worse.
“As that date gets closer, with you doing nothing at all about it, *and* you still spending more than you earn via your credit card, your creditors get more and more concerned about it — and about the downside risks of unforeseen events. That’s why your credit rating is dropping.
“Really, you should start saving and paying that debt down now, funding it now — or it’s only going to get much worse later.”
You: “I reject your ‘unfunded liability’ metric entirely. It is totally bogus. First, it represents only a subset of my liabilities. Hey, I also owe another $100,000 balloon loan on a vacation home that’s not included in my credit report because it is seller financing from my Uncle Charlie, not a bank. [5]
“Moreover all those travel and meal costs I put on my credit cards over my income, they aren’t included in your ‘unfunded liability’ number either. Ha! Look at what a minor subset your number is. How can it be ‘valid’ when it is so arbitrary about what is included in it — and what won’t be if I arrange things just a little differently — due to such inconsistent accounting rules? Like if a loan is from my Uncle Charlie or not. Bogus. [6]
Me: “Holy cow. Do you realize that the $250,000 unfunded liability is a real dollar amount that has a maturity date upon which you will be required to service it with cash money to, yes, fund it? We can even calculate the specific dollar amount you’ll need. Ten years from now: 30% of your income, and 40% if you retire! Is that a bogus, meaningless concept to you? Or is ‘preparing for that day’ the meaningless concept to you?
“Moreover, ahem, the fact you have other big liabilities not counted in this particular unfunded liability does not mean the concept of “unfunded liability” is meaningless, it means your actual unfunded liability is that much worse. When we change ‘your future increase in annual cost = 30% of your income’ to ‘> 30% of your income’ , that ‘>’ does not mean ‘you can now safely ignore’.
“But by starting now, 10 years ahead, you can safely lock in a good rate on a loan to finance that unfunded liability, which will save you money in the long run, and I’ll even give you the exact monthly payment and how many dollars it will save you later …”
You: “Nonsense, you can’t do that because ‘unfunded liability’ is conceptually invalid, so it is impossible to use in a real-money calculation. You willfully refuse to admit my point which is perfectly clear. Moreover, there is a second reason why unfunded liability is a bogus measure. It does not at all consider changes in my future income!
“How can taking only a subset of my liabilities, and not even measuring them against my actual income, possibly tell you anything at all?? How do you know how much money will be in all my pockets 10 years from now? That is all simply fundamentally conceptually invalid.”
Me: “Oh. Do you have any plans to increase your income?
You: “No. None at all. But don’t keep introducing irrelevant facts to confuse things. The thing that clearly matters is that measuring only a subset of liabilities against an unknown amount of income can be nothing but fundamentally conceptually meaningless!”
Me: “Um. I’m going to have to raise the rate I quoted you before. Also, FYI, your creditors certainly believe ‘unfunded liability’ is a perfectly valid concept, defined in GAAP, applied as a standard matter in determining credit ratings across the private sector — and they are applying it to you, which is why your credit rating is going down. [7]
“You may believe they are all obviously wrong — but when I find myself in a position where it is my opinion against that of all the professionals in the world, I apply Occam’s Razor.
“Thus, my professional advice to you is to take that unfunded liability seriously as a real-dollar debt, and to start a specific dollar amount per period program that you can afford to finance it, beginning right now!”
You: “Well, I certainly won’t be paying any fee to a person so willfully obstinate as you, who repeatedly refuses to see something so clear as the fact taking a subset of one’s liabilities, without even having a number for income to measure it against, is worth nothing at all.
“As I like to say: It’s not just that it’s an imperfect metric, it’s fundamentally conceptually invalid. So I am out of here, to get advice from a person no too obtuse to see this.”
Me: “Well, good luck to you — and see ya’ later. I also earn money as an administrator of bankruptcy estates. So I’ll be seeing you again in about ten years time — and you’ll be paying me then.”
~~~~
Now, Brooks, if after our conversation above you still think the concept of “unfunded liability” is simply invalid, please don’t continue your mistake of arguing with me about it. Who am I? I’m nobody, with no influence.
Be sensible and effective. Complain instead to the actuaries and trustees of Medicare and Social Security who compute and publish the figures; and to the Federal Accounting Standards Advisory Board which has pushed them to do it; and to the people at the Treasury and CBO who publish the numbers each year. Tell them!
Because as long as those dummies keep publishing the tallies for unfunded liabilities in the annual Financial Report of the United States Government — somehow without realizing that “‘unfunded liabilities’ simply doesn’t make sense”, that the numbers for it are “not merely imperfect but fundamentally conceptually invalid” — well, you know … there are always going to be plenty of naive people like me about who are duped into thinking they actually mean something. There’ll be no end of us.
And with this confession of naiveté I think I’ve wasted all of our host’s bandwidth that I dare waste on this subject. So that is all.
Except for the footnotes:
[1] The federal govt’s unfunded liability today is 4X GDP and rising steadily. (Rather more than the cost of french fries relative to one’s personal income.)
[2] The SSA Trustees project 6% as the govt’s future long term interest rate.
[3] The growth rate of GDP is projected to decline as the baby boomers retire, reducing future growth of national income.
[4] The govt’s ability to fund the “unfunded liability” at 6% as it becomes due of course could be jeopardized by financial crises, deteriorating credit markets, and other “bad things” that become increasingly likely risks as the govt’s balance sheet deteriorates.
[5] The govt’s “unfunded liabilities” total does not include Medicaid.
[6] The govt’s “unfunded liabilities” total does not include regular govt operting costs in excess of revenue, as may be projected.
[7] A most memorable lesson from law school: “What do you do when a client is being impossible?” “A client who doesn’t respect your opinion isn’t paying enough. Raise your rate until he is forced to value what he is paying for, or decides to leave to be impossible for someone else.”
~ Finis ~
Jim, that last post was a real hoot. When is your next stand-up show?
Jim,
Wow, either you are being surprisingly thick on this matter or you really do work hard to avoid admitting that you are wrong. I skipped most of your comment, just scanning enough to see that it is full of confusion and irrelevancies, deliberate or not. Either (1) you somehow still just don’t get what I’ve been saying and won’t no matter how clearly I explain it, or (2) you do get it but cannot bring yourself to admit that you erred or even to resist maintaining the pretense that you didn’t err at all (#2 seems to have occurred at http://www.capitalgainsandgames.com/blog/bruce-bartlett/1106/why-spending-wont-be-cut#comment-3788 as well, so it wouldn’t be the first time; if that’s what’s going on here, you should know that if someone posts many excellent comments, often refuting the arguments of others, but can’t bring himself to admit when his own arguments have been refuted or he has otherwise erred even when he realizes it, the overall quality of his contribution is diminished, as will [and should be] others’ view of him).
Either way, I think I’ve done all I can. And perhaps you’ve learned something and I’ve had some positive effect on your future commentary vis a vis the “unfunded liabilities” metric, your defiance (sincere or otherwise) notwithstanding.
Hey Brooks, if you can’t be bothered to read what Jim writes, why should he read what you write? His posts make a lot more sense than yours.
Try my version: If you are a few fries short of a Happy Meal, then you can’t expect to be dining on a Happy Meal plus a shake.
I recommend that you read Jim’s entire last post, as slowly as necessary, if only because it’s funny as hell.
AMT,
Re: His posts make a lot more sense than yours.
Wrong. And who is making more sense is not a matter of democracy, so two against one in this case just shows that there are two people just not gettin’ it (or possibly one guy not getting it — you — and one guy finally getting it who can’t bring himself to admit that he was initially wrong — Jim).
AMT,
And if this helps you understand, ya’ know what our “unfunded liability” for Social Security is? Every dollar we plan to spend on Social Security, not the gap between that projected spending and dedicated Social Security revenues (nor that plus “repayment” of the “trust funds”). Same for Medicare and all the other items included in that nonsensical “unfunded entitlements” metric. ALL the projected spending is “unfunded”. We have no funds set aside to cover that projected spending. And the same applies to all other categories of projected spending. Future spending will be funded by future taxation, and obviously the extent to which projected overall revenues fall short of projected overall spending, we have an imbalance, and obviously a problematically large one. But that doesn’t mean that gaps between projected spending on a subset of programs and the projected dedicated revenues for those programs serves as a valid metric for our overall fiscal imbalance, nor does it even measure part of this overall fiscal imbalance in a meaningful and useful way. It’s largely just a function of the current structure of intragovernmental bookkeeping (how much of our overall revenues are carved out as dedicated taxation for those programs), which is meaningless, given that future tax revenues are fungible from the perspective of the present.
Hope that helps, but my guess, based on your last comment, is that it probably won’t. Anyway, maybe it will help someone else who is similarly confused.
Hey Brooks … I recommend that you read Jim’s entire last post, as slowly as necessary, if only because it’s funny as hell.
Aw, thanks, it’s nice to be appreciated.
A couple decades of doing tax law can turn a middle-aged white guy into a veritable Chris Rock.
~~~~
who is making more sense is not a matter of democracy, so two against one in this case just shows that there are two people just not gettin’ it (or possibly one guy not getting it — you — and one guy finally getting it who can’t bring himself to admit that he was initially wrong
Yeah, that would be the guy who made up out of whole cloth what was somebody else’s “ideal”, propped it up on a straw man, and then proceeded to argue against it in post after post after post.
Without ever saying “Ooops, you never said that at all, and from your own blog it’s clear you never believed it. Sorry. My bad. Still, regarding the subject in general…” — and instead just going on and on and on like it were true.
Well, Brooks … look … if after throwing post after post at me you’ve decided you can only read “nutshell” responses, here’s your “McDonald’s french fries” analogy “in a nutshell”. Just so you can know what you are disagreeing with:
–~
(Remember “unfunded liability” = “liability” that you haven’t set aside any means to pay, that’s all. So we’ll just call it a “liability”.)
You open your hand and find in it a *liability* you must pay of …
1) 99 cents (at present value, accruing interest annually) for an order of French fries. You look in your left pocket but there is no money there! You get *alarmed* … but then realize you might have 99 cents in your right pocket — and it’s not much at all compared to your income, you can always put it on your debit card.
You relax, and realize your feeling of alarm was fundamentally conceptually invalid.
2) $200,000 (at present value, accruing interest annually) for whatever. You look in your left pocket but there is no money there! You get *alarmed* … but then remember to look in your right pocket — and there’s only enough money in it for a Big Mac Meal, no more!
And freakin’ @#$%!, that $200,000 is five times your annual income, and you’ve saved nothing and made no other provision to pay for it. Nothing at all. You have no way to handle it other than to slash you living standards (or head out of town ahead of the marshall).
Do you see any reason why a feeling of alarm about the liability in this second case might be fundamentally conceptually more valid?
Now the analogy to the federal government works like this:
The government opens its hand and finds in it a liability of $60 trillion (at present value, accruing interest annually). It looks in its left pocket to see if there is $60 trillion to pay it, but finds there is no money there. Then it looks in its right pocket….
~~~
There — I do think that is comprehensible. And if you read it all the way through, and still want to say I am wrong, well, now you can at least disagree with something I actually wrote.
[end -- finis -- done -- kaput]
Jim,
You are getting quite pathetic at this point, at least to anyone with a correct grasp of the concepts and who has followed our respective comments.
If Z is our overall fiscal imbalance (or the gap between my total money in both pockets and the amount I plan to spend for my entire meal), then if we divide up Z per the arbitrary basis of this “unfunded liabilities” metric:
Z = Current debt held by the public + [projected dedicated revenues for programs with dedicated revenues] - [projected spending for those programs] + All other projected revenues - All other projected spending
“Unfunded liabilities” measures only the first three elements, and tells us nothing about the latter two, nor will changes in either of the latter two be reflected as changes in “unfunded liabilities” (No increases [vs. projections] in income tax revenues will be reflected, nor will cuts in discretionary spending, etc.) And it’s a wholly artificial, bookkeeping construct, reflecting how much of overall revenues are carved out and dedicated to those programs per our current tax structure, which is meaningless since future revenues are fungible.
It seems that the best you can say about this “unfunded liabilities” metric vis a vis our overall fiscal imbalance is that if we know the values of the latter two elements, and if they increase Z (in which case “unfunded liabilities” represents at least a lower bound on the size of the problem) or have negligible effect on Z, and if those facts won’t change, then this metric is valid and useful in assessing our overall fiscal imbalance. Geez Louse, first of all, you are presuming all those premises to make the metric useful despite it’s conceptual invalidity (like Winnie the Pooh doing something dumb but stumbling into a solution to a problem), and second, if you know all that, why use “unfunded liabilities” at all, as opposed to a metric that incorporates those other elements?
Re: my assertion that you present the “unfunded liabilities” metric as the “ideal” metric for our overall fiscal imbalance, you do seem to have done so, at least implicitly, by the contexts and manner in which you’ve presented it in the blogosphere. You say you don’t consider it so, and I accept that. Whether or not you intended to give a different impression previously is something only you know, but it’s possible that I was wrong in attributing that view to you. But the more important point is that you consider it either a valid and useful metric as we gauge the magnitude of our overall fiscal imbalance (and presumably, improvement/worsening of our overall fiscal imbalance). It isn’t, because it excludes large categories of revenues and spending, and because it has a practically meaningless basis for the revenue it includes. And again, your best argument for its validity and usefulness is essentially to say “Well, if we know everything that it excludes and adding all that wouldn’t make a difference now or ever, in terms of magnitude or direction, then the metric is good”. Well, gee, why don’t I just randomly pick, say, projected corporate income tax revenues and projected Medicaid and Medicare spending, point to the gap in “funding” between the two and then say the same thing about that metric and point people to it whenever people are discussing the size of our long-term fiscal imbalance and say “Hey, this ‘unfunded liability’ (projected corporate income tax revenues less projected Medicaid and Medicare spending) is really something we should be thinking about as we assess and deal with this problem” ? Yeesh.
Re: A couple decades of doing tax law
Maybe that explains why you are lost in the trees and can’t find your way through the conceptual forest (thanks for all the irrelevant technical minutiae you’ve provided on this thread).
Jim / AMT,
By the way, I wish that metric were something legit, because I think it’s an effective rhetorical device in raising the alarm the American people should have regarding our overall long-term fiscal imbalance, so I get no pleasure nor do I have any agenda-related or professional interest in exposing it as nonsense. Quite the contrary across the board, which is why I haven’t gone out of my way to comment on it and have resisted doing so on many occasions. But on this occasion, at least, I just felt compelled to try to set Jim (and anyone else) straight.
Oh, and Jim,
Re: Remember “unfunded liability” = “liability” that you haven’t set aside any means to pay, that’s all.
Yeah, that’s why, as I’ve said above, the actual level of unfunded liabilities for the programs that are included in your “unfunded liabilities” metric is the projected spending for those programs (since no funds have been set aside to pay for this future spending), not, as this metric asserts, the gap between that projected spending and projected dedicated revenues for those programs. So maybe you can use your own statement as a window or pathway toward understanding what I’ve been saying (and the errors you’ve been making).
Now, you may be thinking “Oh, so that means the ‘unfunded liabilities’ metric just understates the actual level of unfunded liabilities”, but that would be missing the point, since projected spending that has not been pre-funded is not per se a fiscal imbalance problem, only if projected revenues fall far short of projected spending, but then we’re back to the irrelevancy of the basis for which revenues are included in the metric and which revenues are excluded (as well as the exclusion of all other projected spending).