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Finding the “Relatively Easy” in a World of Hard Choices

April 26th, 2010 . by economistmom

low-hanging-fruit-flickr

A Wall Street Journal article by Corey Boles describes the tough work cut out for the President’s fiscal commission, meeting on Tuesday for the first time:

The commission must report back by Dec. 1 with suggestions about how to bring into line the federal government’s deteriorating finances. Groups representing both ends of the political spectrum are already decrying the panel as unlikely to succeed.

“We’re afraid the solutions they focus on will be entitlement cuts which are completely unwarranted,” Roger Hickey, co-director for the Campaign for America’s Future, an umbrella organization of liberal groups.

Brian Darling, director of Senate relations at the Heritage Foundation, a conservative think tank, said he feared the Obama administration would use the panel to justify tax increases.

“The bottom line is if you give politicians an easy way out they will take it,” Mr. Darling said. “And the easy way out in this case is tax increases and not cutting spending programs.”

The comments from both men illustrate the difficulties the panel’s members will face in trying to cobble together a bipartisan agreement…

Well, tax increases are certainly not the “easy way out.”  Just ask the Democrats in Congress why they weren’t lining up to sign onto Senator Conrad’s budget resolution.  I was told by a prominent aide to the Democratic leadership that this AP story by Andrew Taylor was “the article that killed the budget resolution.”

The WSJ story on the commission goes on to quote Concord’s Bob Bixby (based on this Concord blog post):

According to Robert Bixby, executive director of the Concord Coalition, a non-partisan fiscal watchdog, the panel should narrow its focus if its members want to succeed.

He said they should drop the goal set by Mr. Obama of seeking to bring the budget deficit down to around 3% of U.S. gross domestic product by 2015, something Mr. Bixby said was overly focused on short-termism.

“They might have the greatest success with social security,” Mr. Bixby said. “That would be wildly successful by modern standards.”

…but it left out the best part of the Concord statement (via blog) regarding Social Security (emphasis added):

They could begin with Social Security, which oddly enough has gone from being the “third rail of American politics” to the low-hanging fruit. Everyone knows what needs to be done but no one wants to do it. The commission could have a powerful effect by making an obvious recommendation to phase-in benefit reductions and increase dedicated revenues.

Let’s face it:  the President’s commission isn’t going to find “easy choices.”  (If there were such truly “low-hanging fruit”, it would have already been picked.)  Nope, they’re going to have to settle for the “relatively easy” among a universe of sufficient choices, all of which are pretty hard.

23 Responses to “Finding the “Relatively Easy” in a World of Hard Choices”

  1. comment number 1 by: Brooks

    Robert Kuttner writes:

    Tuesday is the opening meeting of President Obama’s National Commission on Fiscal Responsibility and Reform. And Wednesday, the billion-dollar Peter G. Peterson Foundation convenes its National Fiscal Summit, featuring prominent budgetary conservatives from both political parties, including key administration officials. Both groups are likely to come to the same conclusion: If Congress fails to hit a specific deficit target, then a cap on federal spending should kick in. Budget hawks tend to blame outlays such as Social Security and Medicare, and they are eager to put a lid on them.

    But there’s a problem with all this fiscal alarmism. It confuses three entirely separate concerns: the current large deficits, which are caused by the deep recession; the long-term health of Social Security; and the inexorably rising costs of Medicare and of healthcare generally. If you unpack these issues, a different picture and set of choices emerges. http://www.latimes.com/news/opinion/la-oe-kuttner-20100427,0,1732790,full.story

    First let me quickly note that it’s conceptual and algebraic nonsense to speak of “the long-term health of Social Security”. I’ve explained this before many times on this blog and elsewhere, so I won’t again (and I don’t have a link handy), but suffice to say that SS is just part of the whole. Whatever we want to spend overall, we have to have a total level of tax revenues and borrowing to pay for it, and we can sort out those funds however we wish.

    Now on to my main irritation. Once again we have an apparent hyperpartisan of the left (no worse than hyperpartisans of the right, by the way) erecting the straw man fiction of “the deficit hawks” as generally insistent on minimizing deficits at all times, over even short periods, regardless of circumstances, in particular this recession or its initial recovery period, as opposed to the reality that we are concerned about the longer-term. One (of many) previous examples of the use of this straw man — and a particularly silly one, considering the writer thinks he is “breaking” with some group that exists only in his imagination was that by Stan Collender months ago, for which he was appropriately smacked down by HREF=”http://crfb.org/blogs/thanks-stan”>CRFB as well as by yours truly http://www.capitalgainsandgames.com/blog/stan-collender/1332/breaking-deficit-hawks-very-personal-story#comment-4990 (that was before Stan apparently started rejecting some comments that made his arguments look bad, which has apparently become his practice).

  2. comment number 2 by: Brooks

    Here’s that CRFB link I meant to put in comment above.

  3. comment number 3 by: AMTbuff

    Bill Clinton used the mantra “Save Social Security first” to defeat tax cuts. And he did it without ever proposing or agreeing to any fixes. It was a brilliant strategy politically, although a disservice to our long-term fiscal future.

    Could the Republicans use the same method to defeat tax increases now? They might try it, although the press will not give them the same pass that Clinton got for his failure to propose any changes at all.

    I find this whole exercise meaningless entertainment, like the NBA regular season. Once the government bond market crashes the serious work will begin. Not before.

  4. comment number 4 by: SteveinCH

    Well to be fair to Kuttner, with whom I disagree on almost everything, it is right to separate the cyclical and structural deficit. After that, his column is a steaming pile of poo but he gets half credit on the first question ; )

  5. comment number 5 by: SteveinCH

    Actually, in line with Brooks’s point above, I have a good solution to social security. Let’s devote a portion of future Medicare taxes to pay for social security. We’ll record it as future cuts in the growth rate of Medicare to balance the Medicare books and then the SS problem is solved.

    After all, it worked for health care reform, why not for SS?

  6. comment number 6 by: Brooks

    Steve,

    Yes, I realize that this distinction is important. My point is that, like Stan Collender and others erecting this straw man mischaracterization of “the deficit hawks”, Kuttner is pretending that most (and/or the most prominent and serious) deficit hawks are missing this distinction. They are trying to mislead people about the message from deficit hawks such as you, I, Concord, CRFB, The Peterson Foundation, etc., because they want people to be dismissive of such voices calling for fiscal responsibility — including development and commitment to a plan today to address the long-term imbalance — so that they can get the spending they want and/or defend Obama/Democrats and/or play to the audience that sees any serious effort at fiscal responsibility as a grave, evil, sneaky threat to social programs.

    Re: your point on SS, why should we even presume that SS spending must be funded via solely (or at all) by payroll taxes. Maybe that’s optimal, maybe not. I realize there is a formula connecting each individual’s payments to their supposed future benefits, but that need not preclude consideration of whether or not payroll taxes at a given level are part of the optimal mix of forms and levels of taxation. And of course SS and Medicare are essentially pay-as-you-go transfer payments, not like money going into some savings account for the individual (nor in aggregate). So it’s strange whenever, amid recession, I hear people saying that reduction of payroll taxes might be the best form of stimulus, but asserting that it’s problematic because it will harm the “solvency” or increase the “gap” in SS. Just silly.

  7. comment number 7 by: Brooks

    Steve,

    Just re-read your comment (less quickly this time) and I realize you may have meant that just tongue-in-cheek.

  8. comment number 8 by: Jim Glass

    Bill Clinton used the mantra “Save Social Security first” to defeat tax cuts. And he did it without ever proposing or agreeing to any fixes. It was a brilliant strategy politically, although a disservice to our long-term fiscal future.

    Actually he did have a proposal, which amounted to dropping a lot more bonds into the SS Trust Fund, although the mechanics of it was carefully obfuscated so the public would only understand SS was “saved” without comprehending the cost.

    This resulted in an entertaining hearing before the Senate Finance Committee during which Larry Summers testified about the plan. Chairman Moynihan tried to get Summers to explain where the money the plan intended to use to save SS was to actually come from. Summers, who normally was bluntly plainspoken well beyond a political fault, refused to answer and ran round and round the mulbury bush. Finally Moynihan went: “Larry, say ‘taxes’”.

    I have a good solution to social security. Let’s devote a portion of future Medicare taxes to pay for social security.

    A much simpler idea: Just increase the interest rate paid on the Social Security trust fund bonds. Up it by a couple points and SS is paid for forever. Increase it a couple more than that, and it will pay for Obamacare and start covering the Medicare funding gap too!

    (A friend suggested this to me a few years ago as a joke. Since then I’ve seen more than one person on the left suggest it seriously.)

    We can note that Obamacare follows the Clinton solution to “strengthen Medicare”. The new tax on investment income to be spent on Obamacare is called a “Medicare tax”, although it isn’t spent on Medicare, so that many more bonds can be dropped in the Medicare trust fund.

    Great political ideas never die!

  9. comment number 9 by: Brooks

    Jim / all,

    Re: raising that interest rate, that is indeed amusing and is one more way to point out the conceptual folly that is the whole focus on SS “solvency” and “gap” as supposedly key factors in deciding how much to spend on SS and in determining how much SS contributes to our overall fiscal imbalance. Why don’t they just say we should continue the current structure of FICA SS taxation and supplement those revenues (and “repayment” of the “trust funds”) with even more revenue from the general fund, because that’s what raising that interest rate — and thus increasing the “balance” of the SS “trust funds” over time — would mean?

    I wish people would get that future revenues are all fungible, period. We can choose how much we want to spend on each program (balanced against conflicting objectives regarding levels of taxation, deficits and debt) and how we want to finance it. Whatever the size of the projected SS “gap” is, it has no rational relevance to the policy decision of how much to spend on SS, nor for that matter on how much to tax via payroll taxes, since we can fund SS any way we wish (as this interest rate example illustrates).

  10. comment number 10 by: SteveinCH

    Brooks,

    Yes it was tongue in cheek but I appreciated your first response nonetheless.

  11. comment number 11 by: SteveinCH

    Jim,

    Loved that example. I hope you don’t mind if I borrow it for another thread at the Atlantic.

  12. comment number 12 by: SteveinCH

    Well, not everyone who reads the Huff Post is insane, although some appear to be.

    http://www.huffingtonpost.com/lynn-parramore/the-deficit-nine-myths-we_b_553527.html

  13. comment number 13 by: Brooks

    Steve,

    Thanks for that link.

    “Myth #1″ spends a couple of hundred words on the good news that the government spending isn’t constrained by income and ability to borrow as is a household because it can print money, then in the end states:

    Government is constrained only by the inflation it can create by over-spending, but its ability to spend is numerically unlimited. Households are constrained by their ability to get dollars from some form income and from borrowing, and both of those have real limits.”

    Well, aside from that, Mrs. Lincoln, how did you like the show?

    I only took a quick glance at the next couple of “Myths”. Seems like silly stuff that could have been written by a couple of recent commenters here (or perhaps one person using two handles — or three: remember that nutjob Rodger Malcom Mitchell who seemed to be hawking his nutjob “book”?).

  14. comment number 14 by: Brooks

    I could just about imagine Alan Simpson months from now, frustrated and irate in the face of vocal, passionate, stubborn resistance to any set of major sacrifices, standing in front of a microphone and saying:

    I have two messages to people who aren’t willing to accept major sacrifices or who are only willing to accept them if they perfectly fit their end of the ideological spectrum:
    1. Grow up.
    2. Grow the f### up!

    Of course, the third type of objection must also be dealt with — distrust that if one side compromises and accepts the sacrifices that clash with its ideology, the sacrifice won’t be wasted by the other side to avoid/reduce their compromise sacrifices. We discussed that type of objection from the right the other day: distrust that incremental revenues from tax increases will really go to deficit reduction rather than largely/completely toward incremental spending. The left also has this type of objection, as in “We’re not going to accept cuts in social spending just so the rich can get another tax cut (or end up spared from on a planned tax increase).”

    So in summary, there are 3 types of objections among the public that must be overcome to get a fiscally responsible plan adopted and implemented:

    1. Objection to major sacrifices in general.

    2. Objection to ideological compromise in the set of sacrifices (presumably with either the mistaken belief that their preferred, ideologically pure solution is both economically and politically feasible or the willingness to let the ultimate cost and risk of imbalances worsen in hopes of getting a better deal — i.e., less compromise — later, perhaps in anticipation of an ideological shift among the public, perhaps as a “game of chicken” as a crisis nears).

    3. Suspicion that if their ideological “side” accepts ideological (or economic) compromises in the set of sacrifices, the sacrifice will be wasted as “the other side” takes advantage of that contribution to get more of what it wants.

  15. comment number 15 by: AMTbuff

    4. Fear that any grand compromise will change as soon as the other side gains power. For example, the 1986 Tax Reform was a trade of lower rates for killing tax shelters. By 1993, the rates were most of the way back to where they had been, but the tax shelters were still gone.

    The only durable deal is one that the public adamantly demands. I don’t believe that the public will ever demand large middle class tax increases. However the public will demand large spending cuts as the fiscal vise tightens. A deal that does not slant toward spending cuts will not be sustained. The middle class does not see government as a good steward of its tax money.

  16. comment number 16 by: Brooks

    AMT,

    I think your #4 is part of my #3.

    Re: your second paragraph, time will tell. If you extremely slanted, I’m inclined to disagree. For one thing, the senior block will grow substantially over the next couple of decades, and they vote, and to the best of my knowledge, they vote largely on the basis of their benefits, not to mention that they are the parents and grandparents of younger segments. I wouldn’t be surprised to see the ultimate solution skewed somewhat in either direction (and of course the concept of the 50-50 point depends on some chosen baseline)

  17. comment number 17 by: B Davis

    They could begin with Social Security, which oddly enough has gone from being the “third rail of American politics” to the low-hanging fruit.

    I agree. The main argument that I hear against reforming Social Security is that its projected shortfall is relatively small compared to Medicare. Now, if the benefits of the Social Security and Medicare programs were going to different segments of the population, there would be an argument against reforming Social Security while leaving Medicare largely unreformed for the time being. But the benefits of both programs are largely going to the same segment! In the interest of shared sacrifice, it therefore seems more than reasonable to pick the “low-hanging fruit” of Social Security so that we can go more slowly and carefully on reforms to the Medicare program.

    Speaking of Medicare costs, I just looked through the long-run budget projections from the last budget and posted some information on them at this link. I was surprised to see how large the deficits and public debt are projected to be in 2085. I was also surprised that Medicare costs are projected to be 117 percent of revenues in that year! Of course, this is a projection following current law, not a prediction. Something will have to give long before the budget reaches that point.

  18. comment number 18 by: Brooks

    Re: Social Security being a “problem” that is one of the easier ones to solve, I understand that it’s possibly smart political strategy (because of the widespread conceptual confusion I’ve discussed over the past couple of years) to “solve” that “problem” first, but not because it makes any sense to view it as a “problem” (it doesn’t), to measure the size of that “problem” by the degree of projected “insolvency” or “gap” in SS (which are irrelevant to our choices over how much to spend on SS and how much to tax via payroll taxes and via other taxes), or to view the “problem” (which doesn’t exist anyway) as “solved” by restoring “solvency” or eliminating the “gap”.

    I’ve explained it in all sorts of ways before, including upthread and at http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=02&year=2010&base_name=more_failed_airthmetic_at_the#comment-6314617 , but here’s a short version of one illustration I’ve used: Joe projects that his total income over the next several years will fall far short of his total expenses, and he thinks trying to borrow more and more to finance the difference would be a terrible option, so he wants to reduce the imbalance. Joe has two jobs, one of which exactly covers the amount of his rent, and he has that employer use direct deposit to put his wages into a checking account of Joe’s that Joe considers his “Rent account” because he considers those funds dedicated to his rent and once it’s in that account he promises himself he won’t use it for anything other than rent. But Joe projects that his rent will increase more than his wages for that job, so his “Rent Program” will become “insolvent” and a “gap” will emerge. It so happens that there is also an imbalance between Joe’s wages from the other job and all of his other expenses, and this other projected imbalance is actually much larger than his projected Rent “gap”. Now, it’s all his money and it’s all his expenses, and there is no rational reason for him to prioritize (in choices or sequence) “solving” the Rent Program “gap” “problem” over any other changes in his projected income and/or expenses, because it is irrelevant to such decisions that he has the policy of segregating his income and dedicating a particular amount, and that the size of the Rent “gap” per that particular amount of funds is smaller than the “all other” gap. What matters is the overall imbalance and what his priorities are in terms of categories of spending and efforts at more income. Yet for some reason people still tell Joe that the “easiest” “problem” to “solve” is the “gap” in his Rent Program, since that’s smaller than the “all other” gap*.

    * As a note, in fairness, another reason SS is considered easier to “solve” than Medicare or health spending in general is that SS spending is more predictable and controllable, as opposed to the unknowns of healthcare cost containment. And by the way, it’s worth noting that people don’t talk about “solving” Medicaid simply because it has no dedicated revenues. Why not say then that ALL projected Medicaid spending (and indeed all projected spending on all programs that don’t have their “own” projected dedicated revenues) represent “insolvency” and “gaps”.

  19. comment number 19 by: Brooks

    Oh, but all that said, and circling back to where I started in comment above, if the best way to get Joe started on addressing his overall imbalance (which is the problem) is to confuse him conceptually (or abstain from correcting his conceptual confusion) such that he works extra hours and earns incremental income from that job that deposits his wages into his “Rent account” and/or move to a lower-rent apartment, that would be better than nothing and perhaps a useful stepping stone toward solving the problem — the larger overall fiscal imbalance. So if “fixing” SS serves either of those purposes, I’m ok with it even though I generally don’t like it when people do the right thing based on nonsensical assumptions/perspectives/frameworks.

  20. comment number 20 by: SteveinCH

    Brooks,

    I think your fear from the right and your fear from the left are asymmetrical. Let me try to explain why.

    The fear from the right is that spending will expand to fill the revenue allotted. In other words, today’s tax increases will result in higher spending than would have been the case had the tax increase not happened in the first place. While this isn’t true dollar for dollar, it probably is true in aggregate. Since Congress appropriates every year, it is hard to ensure this won’t happen.

    The comparable fear from the left would have to be that “the rich” will get some future tax cut to drive us into deficit. This, on the one hand, leaves aside the issue that the last tax cut was not primarily for the rich and instead skewed the Federal tax code more to favor the relatively less wealthy. Remember though that major changes to the tax code are not part of the yearly business of Congress but instead are major, discontinuous acts.

    To me, this suggests that the fear on the right is more realistic than the fear on the left as the former only requires Congress to increase spending faster than they otherwise might have whereas the latter requires a discontinuous action.

    As to SS, I think the notion of “fixing” SS is actually a step backward in the overall process. In effect, it takes a part of the budget off the table for adjustments. Actions that make more substantial reductions in SS will be excluded because SS is already fixed.

    To use your analogy, it’s like Joe, having a monthly budget gap of $2000, decides to fix his housing budget by moving to an apartment that costs $50 less per month since his “housing budget” is only $50 in the red. If housing is 25% of his total budget, he has now foregone the opportunity to save $250 on housing because he considers his housing budget fixed.

  21. comment number 21 by: Jim Glass

    I was surprised to see how large the deficits and public debt are projected to be in 2085. I was also surprised that Medicare costs are projected to be 117 percent of revenues in that year!

    Of course, this is a projection following current law, not a prediction. Something will have to give long before the budget reaches that point.

    Something will have to give by 2030, believe it.
    Projections to 2085 are meaningless because these programs have to be changed by the 2020s … or else. And if we go the “else” route, that will change them too, the hard way.

    To paraphrase Sundance and Butch: I can’t swim to 2085 … Don’t worry, the fall to 2030 is going to kill you.

    Your figures also show the fundamental problem is spending. You can add a new VAT, whatever other taxes one wants. As Gene Steuerle (and no tea partier, he!) says, if spending increases never stop taxes can never catch up.

    Greece has a VAT and is going down the fiscal tube. Portugal, Spain, Italy do too, and are circling the drain. Germany, France, and the UK do too and are projected to be junk bond issuers at the same time the US is, in the late 2020s.

    “”Tax increases” do not equal “Fiscal Responsibility”.

    Fiscal Responsibility equals Fiscal Responsibility

  22. comment number 22 by: Brooks

    Steve,

    That objection (#3 in my comment above) is essentially suspicion that one’s own side’s compromises in some “grand compromise” will actually be implemented, but the other side will renege on it’s side of this medium/long-term plan. It is quite conceivable to me that either side could get the bad end of things playing out that way: either actual implementation closer to the plan for spending-side sacrifices enabling the right to avoid the same degree of implementation vs. plan of tax-side sacrifices, or vice-versa.

    As a note re: your point regarding annual appropriations vs. “discontinuous acts”, first of all that point could work against your assertion: one could argue that sacrifices requiring discontinuous acts are less likely to get implemented, so that discretionary spending gets cut per the plan, while tax increases don’t happen to the same degree vs. plan. Second, even leaving aside that first point and assuming, say, the argument is that most of the sacrifices will be made upfront (unlikely, but just hypothetically) and the point is that backtracking that would require discontinuous acts is more likely, that would be a fair point, but a limited one, since backtracking on entitlements would similarly (like on the tax side) require discontinuous acts, and of course entitlements are where most of the money will be.

  23. comment number 23 by: B Davis

    Your figures also show the fundamental problem is spending. You can add a new VAT, whatever other taxes one wants. As Gene Steuerle (and no tea partier, he!) says, if spending increases never stop taxes can never catch up.

    Can you provide a source for Gene Steuerle’s statement so that I can see the full context of what he said? Otherwise, I can only guess that you’re referring to a USA Today editorial on January 27, 2010 titled “The U.S. is broke. Here’s why”. Following is the related excerpt:

    For the first time in U.S. history, in 2009 every single dollar of revenue was committed before Congress voted on any spending program. Meanwhile, most of government’s basic functions — from justice to education to turning on the lights in the Capitol — are paid for out of swelling, unsustainable deficits.

    Blame the recession for some of this dip. But even a recovery only temporarily restores a bit of financial freedom, not enough to reverse the downward trend.

    No more annual appropriations are needed to fuel this vicious cycle. On our current path, Rip Van Congress could take a 50-year snooze, and the entire budget (and then some!) would still be spoken for. Tax revenues would rise with economic growth, but not as fast as spending and deficits.

    Hence, he is saying that, given our current tax structure, all future revenues are already spoken for. He is not saying that this is the case regardless of any new taxes. Further on he states:

    Both Democratic and Republican presidents and Congresses have presided over this shocking decline — fighting mainly over which downward path we’d take: by cutting revenues without reducing spending or increasing spending without raising revenues commensurately.

    Regarding the first downward path, I think that, at least in retrospect, the Bush tax cut was a terrible mistake. Every near-term projection that I have seen (such as a recent 10-year one by the CBO referenced at this link) shows that the extension of the tax cut will greatly increase the debt. Now that middle and low-wage earners have adapted to the lower tax rates, however, it will be very difficult not to extend at least their portion of it.

    On the other hand, I agree that the biggest long-run problem is the promises that we have made regarding entitlement spending. There is no possible way that Medicare and Medicaid costs can grow at 2 percent above GDP forever. It simply is not mathematically possible. This will eventually swamp any level of taxes. However, not extending all of the Bush tax cuts is projected to make the necessary adjustments to entitlements somewhat less.

    Greece has a VAT and is going down the fiscal tube. Portugal, Spain, Italy do too, and are circling the drain. Germany, France, and the UK do too and are projected to be junk bond issuers at the same time the US is, in the late 2020s.

    “”Tax increases” do not equal “Fiscal Responsibility”.

    Agreed. But neither do unsustainable tax cuts or unsustainable entitlement spending.