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Gee, Maybe They ARE “Good for Nothing”

September 17th, 2010 . by economistmom

Over on the Fiscal Times, check out two recent columns on the Bush tax cuts written by experts considered to be fiscal conservatives.

Today Bruce Bartlett says the Bush tax cuts “had little positive impact” on the economy:

The truth is that there is virtually no evidence in support of the Bush tax cuts as an economic elixir. To the extent that they had any positive effect on growth, it was very, very modest. Their main effect was simply to reduce the government’s revenue, thereby increasing the budget deficit, which all Republicans claim to abhor.

And a couple days ago (also from the Fiscal Times), the Tax Foundation’s Gerald Prante and Bill Ahern wrote about “five myths about the Bush tax cuts” (a slightly different set of “five myths” from Bill Gale’s Washington Post piece–so that makes at least ten now!), pointing out that the myths abound from both parties and even on a bipartisan basis in terms of the worst ones!  This is yet another reason why the Bush tax cuts, and continuing them as the new (but really just “reheated”) Obama tax cuts would be bad for our country: these myths and misinformation would be perpetuated along with these far-from-wonderful tax cuts.

51 Responses to “Gee, Maybe They ARE “Good for Nothing””

  1. comment number 1 by: Gipper

    Economistmom,

    Your reheated pizza analogy with the “Bush” tax cuts makes as much rhetorical sense saying that expenditures on Social Security are just reheated policies of FDR. It’s a dumb analogy, and it’s only virtue is to deflect responsibility that Obama and Democrats possess for refusing to allow tax rates to increase.

    Bush wrote law so that cuts expired. That’s how the CBO scoring game worked. The pizza has been eaten. Dinner is finished. Are you urging the Democrats to bake a new pizza?

    Now for the constructive side. An update of my idea for Right and Left think tanks to offer a proposal(s) that could make it safer for politicians to abandon their entrenched fiscal positions.

    Set target date of 2030 to balance the budget.

    Require that 50% of current CBO projected gap must be closed by revenue increases and 50% by spending cuts.

    Must be as politically viable as possible (i.e. Britsh style NHS, flat tax rates, repealing Social Security are probably not under consideration).

    Concord Coalition and Petersen Foundation can fund the contest.

    Have Brookings, AEI (and whoever else wants to participate) draft 20 year budget plans that accomplish that goal.

    Balancing the budget in 20 years is quite aggressive, but let’s face it, the economists have to set aggressive goals for the politicians. It’s only an exercise.

    I’d wager that Brookings and AEI would independently develop very similar solutions. The fiscal mathematics is going to crowd out the political ideology.

    What are you afraid of?

  2. comment number 2 by: economistmom

    Gipper: Your idea is a good one, and in fact, it’s just the kind of dialogue–between liberals and conservatives, Democrats and Republicans, and debating concrete proposals trimming the deficit using both sides of the budget–that Concord is committed to furthering, not just through our position papers that emphasize the need to both rein in spending and increase revenues in economically-efficient ways, but also through our general outreach/grassroots strategy, the latest manifestation of which is our new “Fiscal Solutions Tour.” (Here’s some information on the Solutions Tour from Concord’s website.) And it’s really NOT that I’m afraid or organizations like Concord or the Peterson Foundation are afraid. It’s really that the politicians are afraid because they believe Americans don’t want to hear what these tough and balanced fiscal solutions have to be. And of course politicians aren’t in the business of telling the voters what they don’t want to hear! That’s why our grassroots approach is so critical. It can’t just be coming from think tanks on high talking into the wind; it has to be a change in attitude that starts from the ground up.

  3. comment number 3 by: Gipper

    Economistmom,

    With all due respect, your Solutions Tour is a far cry from a document comprised of actual solutions.

    Screw the dialogue. We don’t need more talking. We need to seen pen put to paper. Numbers are what we need to see.

    A solutions document could actually be a blueprint that the National Commission could use in their deliberations and draft report due later this year.

    It’s time the economists take the lead so the politicians can follow.

    We know why the politicians are afraid. They have to face voters in elections. The puzzling thing is why are you afraid?

  4. comment number 4 by: SteveinCH

    Diane,

    FWIW, I’d rethink the structure of the solutions tour if I were Concord. When attempting to form some consensus around complex topics, it is far better to start with one or two integrated solutions than lay out the Chinese menu of options. Yes the former approach allows you to put your thumb on the scales a bit but it tends to lead to consensus. The latter approach is usually chaos and results in no decision being taken.

    Maybe I’ll see it when it comes to CH although I’m worried I would just leave frustrated.

  5. comment number 5 by: Gipper

    Economistmom,

    Just look at how much attention Paul Ryan attracted when he put out his Roadmap. Why? Because he’s the only one I’m aware of who actually tried to balance the budget, albeit over 60 years from now.

    If Brookings and AEI could jointly come up with their own proposals that split the difference between taxes and spending cuts, 50/50, that would generate even more attention. It would not be merely “talking into the wind.” It would not be ignored.

    People are very, very hungry for actual proposals with concrete details. I think that most of this blog’s contributors are the kind of folks who understand that there are no pain-free solutions. The public needs to hear budget experts and economists develop a consensus that, in fact, great pain is involved.

    Once the public hears enough of the mathematically sound options that are available, then the politicians will feel freer to broach difficult topics without so easily being run off the stage in contests with soothsaying demagogues who wave their hands claiming we can tax the rich or grow our way out of the problem.

    SteveinCH is correct. People find it much easier to respond to something rather than creating a solution.

    The eventual “solution” may not be a 50/50 split. However, the premise of using that as a starting point for purposes of drafting a solution is to ask each “side” to sacrifice equally, in a political sense. That allows the economists to retain some semblance of non-partisanship engaging in the exercise.

  6. comment number 6 by: Brooks

    Just a geeky comment: The Tax Foundation piece points out that “correlation does not prove causation” in refuting the argument that the increasing revenues 2004-7 were attributable to the Bush tax cuts. But those contending that causation are even more analytically challenged than that: They don’t even understand the basic concept of correlation, which is to observe how the value of Y differs when the value of X differs.

    It is asinine for anyone to point to point to rising revenues after a tax cut (or after a few cases of tax cuts) without considering changes in revenues in the absence of a tax cut or even after a tax increase (e.g,. after the 1993 tax cut).

    It’s like if I said that after every 10 years living in Vermont the average person looks older than at the beginning of that period, and concluded that living in Vermont causes people to look older, without asking the same question re: living 10 years elsewhere.

  7. comment number 7 by: Brooks

    meant 1993 tax increase

  8. comment number 8 by: economistmom

    Gipper: Yes, I agree with you, and in fact there are lots of budget experts and economists working on this as we write–for example, all the experts and their staff who are serving on either the President’s fiscal commission or the Bipartisan Policy Center’s “Debt Reduction Task Force.” Brookings and Heritage have indeed worked together before to come up with recommendations for fiscal responsibility, but the Heritage Foundation is typically reluctant to recommend any plan that involves raising revenue as a share of GDP above current policy extended–no matter how the revenue raisers are specified. In this report involving experts from both organizations as well as others, they were not able to include discipline on tax expenditures (and the need to pare back on those) to the same extent they were able to focus on reducing direct spending programs–and the report was more about budget process to help make hard choices possible, rather than specific recommendations on the hard choices (e.g., cuts to Medicare benefits, eliminating some tax preferences) themselves. So in the recent past we have not been so successful in getting agreement even among the policy experts who are not politicians–who we should hope would be less ideological and more objective about the facts and hence more able to come out and recommend such hard choices on both sides of the budget. That’s why it’s not enough to just have the President’s commission or even the more dispassionate experts staffing it to work on coming to agreement on these choices. It has to become clear to policymakers that the public is willing to accept some of these hard choices, before these policymakers would have the nerve to suggest them, and before the experts advising them will feel that the best options (which are already fairly well understood) will be actually taken seriously.

    And by the way, I personally don’t believe that a 50-50 approach is optimal, not unless you count reduced tax expenditures as cutting “spending” (rather than as “raising taxes”). I have a strong sense that Americans are not willing to cut entitlement benefits by as much as we would have to in order to even meet halfway on taxes vs. spending–in other words, that the desired level of these benefits/GDP is something that would require taxes to come up by much more than spending can be cut (because of the demographic pressures and rising health costs–even w/ decently-successful health reform). And I personally don’t think it’s that hard or costly (in terms of economic impact) to raise more revenue; there are so many tax reform options available to us that are well-studied and better-understood than the options to bring down health costs.

  9. comment number 9 by: SteveinCH

    Diane,

    Your last paragraph is assertion. Your strong sense is not evidence unfortunately. Since the public has been sold a bill of good that they can have what they want without paying more, I’m not sure how relevant your sense of their willingness to cut benefits is anyway.

    As I have point out to you many times before, it is quite easy to balance the budget between 20 and 21 percent of GDP without hurting anyone who actually needs the social safety net. The fact that you and others (mostly on the left) refuse to even consider that option is what makes some of us doubt that you are serious.

  10. comment number 10 by: SteveinCH

    Further to the point 50/50 is a meaningless concept since it depends on what you consider to be the baseline level of receipts and expenditures. Let’s agree on a percent of GDP and go from there.

  11. comment number 11 by: Gipper

    SteveinCH

    Point taken on the baseline. Suppose we take Percentage of GDP spent on Federal Government in fiscal year 2007-2008, just before onslaught of recession. Then take percentage of GDP projected to be spent in 2030. Take the average of those 2 figures as the percentage of GDP target for balancing the budget by 2030.

    Economistmom, the problem with that paper you cited is that the two sides tried to reach a consensus. I doubt that’s possible.

    I’ve proposed something very different. I propose to set the target, revised according to SteveinCH’s excellent point, to be a percentage of GDP.

    We could amend the challenge to include two parts. Part 1 is to produce a balanced budget for 2030 using the averaged federal spending as a percentage of GDP. Part 2 could be, produce a balanced budget in 2030 at whatever level of federal spending you desire.

    Now AEI, Heritage, CATO, or whichever right of center think tanks can accept the challenge or decline. If they decline, then that will prove that the right side of the spectrum is not serious about balancing the budget in 20 years.

    If Brookings or another left of center think tank accepts the challenge and delivers a solution, then it will prove that the left is more serious about deficits than the right.

    Economistmom, then you would need to broadcast the fact that one side of the political spectrum isn’t serious about the deficit. That seems to be Bruce Bartlett’s mission. However, I think it’s worthwhile trying to engineer a test or a contest to actually prove it once and for all.

    What we need more of is embarassment and confrontation and less dialogue.

  12. comment number 12 by: AMTbuff

    I see no reason the set of solutions should not cover the full range as a percent of GDP. However I agree that the solutions near Gipper’s midpoint are more likely win voter approval.

    There’s one substantial risk with this approach. Voters might approve a painful compromise, and then the market for US government bonds might collapse, making the fiscal plan impossible to execute. Voters on both sides would be angry at having to make additional sacrifices after having been assured that the compromise was a permanent solution to fiscal problems. The result could resemble Argentina.

    I am coming around to the view that the best course of action for our very long term future is to let events play out under current policy, let the collapse of borrowing ability force the government to scale back its activities and its promises, then rebuild from that new, sustainable base. Since this is a bubble, it has to pop and there’s no way to avoid the associated pain.

  13. comment number 13 by: SteveinCH

    AMT,

    In practice, I suspect you are right. It would represent a massive failure of leadership but I suppose that is to be expected at this point.

  14. comment number 14 by: SteveinCH

    AMT,

    In practice, I suspect you are right. It would represent a massive failure of leadership but I suppose that is to be expected at this point.

  15. comment number 15 by: SteveinCH

    Not sure how a double post happened, apologies to all

  16. comment number 16 by: Jim Glass

    Suppose we take Percentage of GDP spent on Federal Government in fiscal year 2007-2008, just before onslaught of recession. Then take percentage of GDP projected to be spent in 2030. Take the average of those 2 figures as the percentage of GDP target for balancing the budget by 2030.

    A little while back I did this exercise on the back of an envelope, using CBO projections. From which…
    ~~~

    … What if Congress does what it instinctively does in such situations, produce a political deal to cut the baby in half,er, “split the difference” — to close the funding gap 50% with tax increases and 50% with benefit cuts?

    For instance, this is exactly what Congress did in 1983 to save Social Security the last time, increasing taxes (on the young) while reducing benefits (for the young) by nearly precisely offsetting amounts (thus converting Social Security into a such a bad deal for the young … but that’s for another post).

    Well, Medicare cost is projected to grow by 3.2 points of GDP by 2030, to 5.9 from 2.7 in 2007. “Split the difference” thus would require reducing its cost then by 1.6 points of GDP to 4.3 points. But since 5.9 points is projected as needed to continue providing the current level of benefits, “split the difference” requires reducing Medicare benefits provided to individuals by more than 25% from today’s levels (how are seniors going to like that?) while also increasing income taxes by 27% across the board (including on seniors, of course — their pensions, IRA distributions, investments, and so on). And 2030 is just the start of the process.

    This not pretty.

    And it does not consider other very significant unfunded costs coming due at the same time (federal employee/military pensions and benefits, state and local government pensions and retiree health benefits, etc.), which make the situation even worse…

  17. comment number 17 by: Gipper

    Jim,

    Yeah, it’s not pretty. It’s not going to be easy, but here’s a start………

    The only way to radically curtail the demand for medical services is to adopt policies that drastically reduce the morbidity of the population. Here’s the most sure fire way of reducing cancer, heart disease, diabetes, stroke, arthritis, and other ailments that drive up demand for healthcare.

    Set a high standard Medicare tax (say 8%). Then offer discounts to persons who pass a battery of annual exams that measure body fat percentage, blood pressure, and cholestorol. So a male with 15% body fat, 110/60 blood pressure and a 160 cholestorol count might pay 3% instead of 8% Medicare tax. A female with 30% body fat, 130/100 blood pressure, and a 200 cholestrol count might pay 6%. Those who avoid taking the tests pay the highest rates.

    For those currently receiving Medicare, their co-pays and percentage of costs covered should be adjusted according to a similar schedule.

    It’s criminal for taxpayers to be paying tens of thousands of dollars to subsidize the healthcare costs of immobile, TV-watching, beer-guzzling, steak and sour cream with mashed potatoes gluttons. If they don’t care enough about their health to change their behavior then I believe that there would be strong political support for curtailing the funding for their medications and hospitalization.

    The idea is to offer a tax incentive for people to adopt behaviors that will reduce their demand for the medical services that are the main drivers of cost for those over age 65. I fear that anything short of a direct intervention of this nature is not likely to ameliorate our healthcare cost affliction. Nationalizing healthcare like the UK does nothing to change the underlying health or reduce the morbidity of the population. It only hides true economic costs by using waiting lists and political connections as the mechanism to ration care.

    For social security, let’s just count those benefits as ordinary income for purposes of taxation. Turns it into a means-tested welfare program.

    These 2 suggestions would go a long way toward solving our fiscal problems.

  18. comment number 18 by: Brooks

    Gipper,

    You’re overlooking something. All those lifestyle changes means seniors living longer (and more people reaching retirement age), which means more years with Medicare-paid healthcare and Social Security, and eventually decline in health and need for costly treatment later, all of which, based on the one or two studies I recall seeing, make the claim of net savings dubious.

  19. comment number 19 by: Jim Glass

    Brooks: You are right, mortality is 100% in the end.

    I mean, I’m rooting for genetic engineering — pretty soon I’m going to need age-reversal pills too — but there’s nothing really promising yet.

    In the meanwhile, as we cure the diseases that used to be the inexpensive mass killers of the elderly, like pneumonia, we are left with conditions that are far more expensive killers of the slightly more elderly.

    The fact is that we’ve been quite successful at keeping most people alive *and* healthy for ever-longer periods — see steadily rising life expectancy, and the steadily risiing number of healthy years after age 60 — but on a lifetime basis it has only increased medical costs per person.

    (There are studies that say smoking saves the government money by reducing its long-term costs for Social Security and Medicare. Perhaps that Russian Finance Minister who said, “Smoke! Drink!
    Support your government!” had a point on the expenditure side as well as on the revenue side.)

  20. comment number 20 by: Gipper

    Brooks, Jim,

    OK, I don’t want to bore everyone with all my solutions, but it will dribble out bit by bit. For Social Security, convert it to a defined contribution plan versus current defined benefit plan.

    With the usual provisions for age cutoffs and gradual conversion based on age, establish personal investment accounts were the social security contribution is invested in a Treasury managed pool of outstanding Treasury securities. Here are the advantages:

    1. Taxpayers will feel they have an ownership stake without having to trust in the “Trust Fund.”

    2. Risk of stock market won’t be an issue.

    3. No fiscal impact because current Social Security tax contributions will go straight into general fund as they do today to finance current operations.

    Not sure what the Democrats will be able to say to oppose this recommendation, but I’m sure they’ll come up with something.

    There will be regulations preventing you from emptying your account immediately to take a world vacation. The usual provisions you’d expect to ensure you don’t outlive your savings will apply.

    Expecting to live to 100? Then you might have to work until age 75. It’s up to you. Concept of retirement age evaporates within this plan.

  21. comment number 21 by: SteveinCH

    The problem with that one Gipper, as GWB found out is the math doesn’t work during the transition. It’s currently a PAYGO transfer, not a defined benefit plan. That’s the root of the issue, not defined benefit versus defined contribution.

  22. comment number 22 by: Gipper

    SteveinCH

    The math does work because individuals are forced into Treasuries. GWB allowed investment in stock market and that’s what got his plan into trouble. Because SS contributions essentially are financing the deficit under my plan, there are no transition problems.

    The difference between my plan and the current SS system is that I’ve substituted a contractual obligation (shares in a Treausry Mutual Fund) for a phony Trust fund obligation to pay a life-annuity of an amount that is subject to the vagaries of the political process.

    From a bookkeeping perspective, the outstanding publicly held debt will increase faster because we’ll dispense with the fiction of a Trust Fund. It will be a more honest accounting. However, from a cashflow perspective there is no short-run impact. The long-run impact is that we’ve capped our liabilities instead of making promises to pay life annuities without knowing how long people will be living.

  23. comment number 23 by: Arne

    Gipper: “The only way to radically curtail the demand for medical services is to adopt policies that drastically reduce the morbidity of the population.”

    Jim: “on a lifetime basis it has only increased medical costs per person.
    (There are studies that say smoking saves the government money…”

    The studies I have seen do not answer the question of whether morbid habits increase the average annual expense. They simply show that it shifts it away from government coverage.

  24. comment number 24 by: Arne

    “But since 5.9 points is projected as needed to continue providing the current level of benefits, “split the difference” requires reducing Medicare benefits”

    5.9 percent in 2030 (updated to 5.6 percent in 2033) is not how much it costs to provide current levels, but rather how much CBO predicts it will cost the services if the growth rate continues to increase at the rate it has been growing.

    Split the difference requires not allowing Medicare benefits to keep growing at the same pace. Fewer added procedures is not the same as fewer procedures.

  25. comment number 25 by: SteveinCH

    No Gipper, here’s the problem with the math.

    Right now, all SS taxes and then some are paid to current retirees with nothing held in reserve. We cannot simultaneously use that same money to establish a defined contribution pool for future retirees.

    What Bush was forced to do was massive (temporary) borrowing to finance the transition. One could have argued it would have worked at that moment in time. One cannot make the same argument today.

  26. comment number 26 by: Jim Glass

    The problem with that one Gipper, as GWB found out is the math doesn’t work during the transition….

    Because SS contributions essentially are financing the deficit under my plan, there are no transition problems.
    ~~~~~~~~~~

    Oh, there is a serious “transition” financing issue to resolve — yet, as Milton Friedman explained, there isn’t!

    The *entire* need to reform SS comes from the fact that going forward from today SS participants will receive $15 trillion *less* in benefits than they will pay in taxes — take a $15 trillion loss, present value.

    This is the root of all “rate of return”, “intergenerational equity”, “underfunding” problems, etc. Hey, if SS was going to keep paying everybody more than they pay in, as in olden days, who’d want to reform it?

    SS is a “paygo” program, so benefits must = taxes paid for the program overall. Thus, if at a given point in time participants have received benefits exceeding the taxes they’ve paid by $X, then later participants *must* receive benefits totaling less than the taxes they pay by $X.

    The SS Trustees say that as of today $X = circa $15 trillion, and thus future SS participants will receive back from SS $15 trillion less than they pay in taxes to support it.

    It is impossible to eliminate this coming loss to today’s workers. Not through private investment accounts or any other way. All we can do is decide who is going to pay it and how. For instance…

    [] Under current law, SS benefits will be cut about 25% after the trust fund runs out. Result: Future benefits will total less than future payroll taxes paid by $15 trillion.

    [] Promised benefits can be preserved by increasing future payroll taxes by $15 trillion. But increasing both taxes and benefits by $15 trillion nets to zero. Result: Future taxes still exceed benefits by $15 trillion.

    [] A new dedicated tax — such as the VAT proposed by Kotlikoff — can finance promised benefits. Result: VAT payers pony up $15 trillion for no benefits.

    [] SS is totally repealed as of 9/21/10, no more taxes or benefits. Now all of today’s workers get zero benefits for all the taxes they’ve paid, and living retirees have their benefits cut off. Result: As a group they pay $15 trillion more in taxes than the benefits they get.

    There’s no way around it, somebody has to pay the $15 Very Large. Ida May Fuller, after receiving $22,888.92 of benefits on her $24.75 of taxes paid in, has moved on. She and her cohorts took that $15 trillion and left. It is a sunk cost that cannot be unpaid, and has to come from somebody.

    However, whatever we do, that $15 trillion doesn’t change. Milton Friedman pointed out that this has two interesting consequences:

    (1) The “transition cost” argument against privatization is bogus. Yes, it is true that if payroll taxes are diverted from funding current retirees’ benefits to private accounts, new taxes and/or debt must go up by the same amount to fund the benefits — so one generation must incur the “transition cost” of paying for two generations’ benefits, its own and those of past workers.

    But it also is exactly as true of the status quo. Under it, workers going forward will pay for their own benefits *and* for past workers’ benefits — through payroll tax, which is why they will get back $15 trillion less than they pay. And a cost created in the status quo is not a transition cost, it is a “status quo cost”.

    Privatization proposals must include an explicit way of covering the $15 trillion. Defenders of the status quo slam this as a “transition cost”. But the status quo must cover the $15 trillion too — yet status quoers make no proposal to do so, so the cost isn’t seen, so people think it isn’t there. Friedman called this a “confidence game”.

    (2) Because there is no transition cost, we are free to reform SS as we wish right now. E.g.: Friedman calls the $15 trillion transfer to Ida May & Co. a national expenditure creating an obligation on the part of taxpayers like any other. But we’d never even imagine paying off WWII, the moon mission, Obama stimulus debt, etc., just with workers’ payroll taxes. We use general revenue.

    Now imagine if the $15 trillion “backward transfer” of SS were financed with general revenue, future income taxes:

    * The income tax base is much larger than the payroll tax base, so the amount could be paid with a much lower tax rate — which is economically efficient.

    * The tax burden would shift up and away from low-income workers towards Gates and Buffett — which is progressive.

    * Workers get can get a “new SS” retirement plan that is funded with real investments and provides bigger benefits on smaller contributions — and are much better off, because getting a positive return on say a 6% payroll tax is a lot better than getting a negative return on 12.4%! Which is progressive.

    Many people would consider this win-win-win, and there is *no* net transition cost because the $15 trillion increase in income taxes is exactly offset by the $15 trillion reduction in payroll taxes.

    Yet nobody even thinks about it — as progressive as it is — because the “transition cost” is so high, and we just must fund olde SS debts to the past with payroll taxes out of future workers hides.

    Well, to make your own perfectly sound proposal for SS reform, start by deciding two things…

    #1: Who should pay the cost of that unavoidable $15 trillion tax bill, and how.

    #2: Upon adopting #1, how should a national workers’ retirement savings plan operate.

    That’s all you really have to do. The rest is details. But you do have to make somebody cough up that $15 trillion. There’s no way to cap it at anything less.

  27. comment number 27 by: SteveinCH

    I agree in the long run but not in the short run. In the short run, the transition costs are actually higher if you convert the system. It still may net out to the same number but the timing of the contributions varies based on the approach.

    Thus, to your point at the bottom, I actually think we would need to do number 2 before number 1 because the cost in any given year depends on the approach to number 2 taken which, in turn, constrains the options in 1.

  28. comment number 28 by: Gipper

    Jim, SteveinCH,

    $15 trillion transfer under my plan occurs through counting SS benefits as taxable income. Future beneficiaries, on net, will get less than they paid in by 15 Trillion.

    SteveinCH, think about it in terms of debits and credits instead of PAYGO and funds. Under my Social Security tax payment is booked as debit: cash, credit: mutual fund share in the Treasuries Pool for Future retirees. Today, it is booked as debit: cash, credit: revenue with an additional notation to increase the “Trust Fund.”

    Under my plan, the cash doesn’t go away into a “fund.” The treasury spends the money on current expenditures. The problem of how to pay for that future obligation is a problem for future taxpayers. All my plan does is make that obligation and explicit legal obligation to an individual, whereas the current system has a BS concept called a Trust Fund without any contractual obligation.

  29. comment number 29 by: SteveinCH

    But Gipper,

    You still have the same problem. Instead of a Federal “trust fund” with treasuries in it, you now have individual accounts with the same currency. It still has to be paid for with future taxes and so forth, and in the short term, it requires a heck of a lot more borrowing (since those treasuries are the government borrowing whether issued to individuals or to enterprises)

  30. comment number 30 by: Gipper

    SteveinCH,

    3 things: 1st, the “it” that has to be paid back is a defined amount, not an open-ended lifetime annuity based on whatever the politicians may want to pay based on vote-buying. So that part has been controlled.

    2nd: Under my plan, there isn’t a “retirement age.” There is a minimum age at which you can first start drawing income. However, most people will probably have to continue working well past age 65 or even age 70 to make ends meet in the future. Therefore, Jim’s $15 Trillion assumption will probably be adjusted because the assumptions about what people will be paid under Social Security’s current structure won’t pertain in my world.

    3rd, the drawdowns on the Treasury Mutual Fund will be taxable income. It’s not a pass-through, PAYGO system. Essentially, these earnings are just like any ordinary income, and will be taxed accordingly.

    Yes, there is “a heck of a lot more borrowing” in a legal sense because we’ve substituted issuing Treasuries for building a “Trust Fund.” However, from the perspective of generally accepted accounting principles, our liabilities for future tax payments have not changed. Except of course, to the extent that my regime caps the maximum amount someone could receive (whatever they’ve paid in plus interest), and that I would tax their receipts as ordinary income.

    The CASHFLOW of the federal government has not been altered one iota by my regime in the short-run. It’s ability to pay for programs and entitlements hasn’t been changed. All I’ve done is make the obligations for future payments explicit and legally enforceable by an individual in the form of issuing Treasuries instead of a Trust Fund.

    My system will, ceteris paribus, stimulate the average taxpayer to work longer and pay more income taxes than under the current system. That’s Jim Glass’s $15 Trillion transfer.

  31. comment number 31 by: Arne

    Your concern about the $15T transfer is misguided. A paygo system works out just fine. The $15T is a meaningless mathematical construct. After an infinite number of years, when we all live forever and spend most of that time in retirement, the amount will become infinite as well. Alternatively, when the rapture comes, a comet hits, or some less dramatic end of SS, the $15T (which will be much bigger by then) won’t matter.

  32. comment number 32 by: Gipper

    Jim,

    The entire premise of Social Security is that individuals are too stupid to save for the future. My preference is that if I have to suffer that progressive ideological nonsense, I’d rather invest my forced savings into the non-governmental sector of the economy, as you and Milton Friedman recommend.

    However, I’m trying to be politically realistic. I just think of payroll taxes and income taxes as one unified whole, not as separate pools funding different programs. If payroll taxes could be diverted into private sector investments, then the federal government’s aggregate tax revenue declines and we exacerbate the CURRENT cashflow, and deficit.

    Plus, we’d have to deal with the benevolent dictators in our political ruling class who will scare us into thinking that stock market crashes will wipe out retirement savings. Of course, those demagogues don’t understand that it’s the income flow from the asset (dividend payments) not the daily mark-to-market fluctuations of a portfolio’s value that really matters for retirement.

    As much as their distrust of the citizenry gnaws at my psyche, I do accept the political reality that libertarian ideas like mine can’t muster a majority vote of the House and Senate. So I propose what I think is feasible.

    Creating individual retirement accounts with shares in a treasury fund accomplishes an important political goal for libertarians. The taxpayers will get a first-hand look at how lousy their portfolio performs over a 20-year period compared to their other investments. Hopefully, that will build a political consensus to eventually overthrow the system.

  33. comment number 33 by: SteveinCH

    But Gipper, the timing of the cash flows has been altered which was my point all along.

    Let’s do a simple example.

    Today the government collect X in SS taxes and pays out 1.02X in benefits.

    Tomorrow, if the government still has to pay out 1.02X or near enough but instead of collecting the X and paying it out in cash, it collects X and buys treasuries for each individual citizen, it now needs to borrow X in addition to the .02X in order to pay current benefits.

    The problem with your argument is the “trust fund” pays a small portion of the total benefits. It doesn’t pay them all, therefore you can’t substitute one for the other.

    My response to you is the same as my response to Jim. In the long-run you are both correct, in the short-run, you are both incorrect and the short run concerns me a lot more than the long run at this point.

  34. comment number 34 by: SteveinCH

    LOL Arne, nice angels on the head of a pin argument. If $15 T is irrelevant than I propose we increase SS payments by 200%. That might make the problem $115 T but, by your logic, we wouldn’t care.

  35. comment number 35 by: AMTbuff

    >With the usual provisions for age cutoffs and gradual conversion based on age, establish personal investment accounts were the social security contribution is invested in a Treasury managed pool of outstanding Treasury securities.

    Can you give us a concrete version of this? For example, would today’s 50-year-olds get anything from the “old” SS system? How about 55? 60? To the extent that they get benefits similar to those in the current system, where is the increased incentive to retire later? (Today people tend to grab the early retirement benefit at age 62.)

  36. comment number 36 by: Arne

    Steve,

    The $15K is sunk cost. Your strawman is not.

  37. comment number 37 by: Gipper

    SteveinCH,

    You’re confusing an individual transaction for the aggregate effect. It would be easier to envision if we just had the Treasury bypass the public auction process and simply place treasuries securities into the mutual fund. The treasury receives cash and issues an IOU (share in a treasury mutual fund) to the taxpayer for his “payroll tax.”

    You’re thinking that because the Treasury goes out and purchases outstanding securities from the market with the payroll tax, that this revenue is somehow “lost” to the government. In fact, all that happens is that the Treasury will issue more debt to replace the debt it has purchased. No net change in liabilities.

    The only reason to go through the process of purchasing the debt on the open market is to establish a pricing for the shares in the mutual fund that is open kimono. If the Treasury issued the Treasuries directly to the mutual fund, then it could establish its own valuation of the shares, and that would create enormous conflicts of interest.

    So if you focus on this aggregate picture, you’ll see that my plan has not effect on the government’s cashflow in the short-run.

    Long-run cashflow will improve because liabilities are capped by a defined contribution system and tax revenues increase by taxing benefits as ordinary income.

  38. comment number 38 by: SteveinCH

    Sorry Gipper, I just don’t see it. Let me simplify the system and tell you why. Imagine there are only two people, me and Bob. Today, I pay SS taxes and Bob collects all the taxes I pay as benefits. As it relates to this closed system (recognizing it isn’t really a closed system but is c.p.), there is no debt incurred by the government.

    If I adopt your system, the government still has to pay Bob his cash, still collects my cash but also issues debt to me in the amount of my cash contribution. The rest of the system remains unaffected. It certainly appears to me that the government has to issue more debt in your system than in the current system.

    Maybe I’m wrong, but, as I said, I just don’t get it.

  39. comment number 39 by: Gipper

    SteveinCH,

    Exactly correct description. So the short-run impact is the incremental interest expense on an ACCRUAL BASIS on the debt issued for the trust fund. But you’re confusing accrual with cash basis accounting.

    From a cashflow basis, to where does that interest expense flow? It is simply a credit on the taxpayer’s mutual fund shares. It’s not an actual outflow of cash from the treasury to an individual.

    Once again with feeling: all that my plan does is exhange the Trust Fund with publicly held treausury debt. The economic liabilities and short-term cashflow aren’t affected. Long-term cashflow improves.

  40. comment number 40 by: Gipper

    …..per your example. You pay SS taxes to Bob. Government issues you treasury debt. As interest payments come due on the treasuries in your account (actually a fractional share of a broad portfolio, but skip the details), the treasury credits your mutual fund and increases your fund balance by the amount of interest due. You cannot draw cash on that until you reach the minimum withdrawal age (say it’s 62). Therefore, there’s no cash outflow from the Treasury to you, even though they incurred an interest expense on an ACCRUAL basis.

    When you reach age 62, you can start withdrawing the principal and interest you’ve contributed. Then there is an impact on cashflow. Same as today’s system. Except under my system, whether you live to be 100 or 70, the goverment pays out the same amount in present value terms. In today’s system, your increased life expectancy creates a larger liability.

  41. comment number 41 by: SteveinCH

    But the stock of debt increases which is my point.

  42. comment number 42 by: Gipper

    SteveinCH,

    Wrong. The stock of “debt” in an economic sense is the same or lower under my regime. The obligation to pay future Social Security recipients exists whether we want to explicitly recognize it or not.

    My method is simply a more honest and open accounting of this obligation. The Trust Fund method is cheesy. Actually, the way the debt limit is calculated today, it includes the Trust Fund. My method simply eliminates incremental additions to the Trust Fund and instead recognizes them as increases in publicly held debt. From an aggregate debt limit perspective, my method doesn’t change a thing.

  43. comment number 43 by: SteveinCH

    It’s not a debate about the trust fund. As I’ve explained, the trust fund doesn’t fund SS. Stock goes up because the trust fund only covers to whole of SS for about 4 years.

  44. comment number 44 by: Gipper

    SteveinCH,

    You started on this thread claiming that my method entailed transition costs. I think Jim and I pretty well refuted that argument.

    Now you’re reduced to claiming that it increases the stock of debt. Anyone familiar with generally accepted accounting principles will tell you that the stock of debt exists whether or not you want to explicitly recognize it on your balance sheet.

    Now I don’t know what point you’re trying to make other than you have a congenital inability to recognize a mistake and move on.

    Future SS obligations create a stock of debt not fully recognized in the government’s accounts (although the SS Boad does put out some kind of a publication that tries to put a present value on this liability).

    So the Trust Fund isn’t this full liability figure. Yeah, so what? What exactly is your point?

  45. comment number 45 by: Jim Glass

    “I agree in the long run but not in the short run. In the short run, the transition costs are actually higher if you convert the system.”
    ~~
    “My response to you is the same as my response to Jim. In the long-run you are both correct, in the short-run, you are both incorrect and the short run concerns me a lot more than the long run at this point.”

    Hmmm … Let’s look at completely replacing SS with a fully-funded retirement savings system right away and see.

    Here’s the plan: Immediately replace the SS payroll tax with income tax dollar-for-dollar to pay all benefits earned until today through SS ($15 trillion worth, present value). With the “surplus” now gone, payroll tax receipts today effectively equal benefits currently being paid, so the equal-amount new income tax receipts will too.

    Because the income tax base is about 1.7 times the payroll tax base, we replace the 12.4% payroll tax with a lower 7.2 points of income tax added on to the tax bills of all income-tax payers.

    Then we adopt some sort or other of new funded retirement plan for workers, effective going forward from tomorrow.

    What is the *short term* transaction cost of this? Let’s look at the result:

    Time 1, today:

    1.) All of the 12.4% SS payroll tax is used to pay the benefits of current retirees.

    2.) No provision at all is made for funding any future benefits for current workers.

    Time 2, tomorrow:

    1.) All of the additional 7.2% income tax is used to pay the benefits of current retirees.

    2.) No provision at all is made for funding any future benefits for current workers.

    Where is the short run transition cost from Time 1 to Time 2?

    Being that the receipts of the new 7.2% income tax = receipts of the former 12.4% payroll tax, I don’t see it.

    The exact same amount of tax revenue is being collected and is being used on the exact same expenditure. The only difference is that the revenue is being collected through a lower-rate, more progressive tax. Where’s the extra cost in that?

    Now at this point I would expect defenders of the status quo to object: “Ah, but the status quo program makes provision for today’s workers to receive benefits in the future, while your new proposal doesn’t. Thus, to provide future benefits to today’s workers you’ll have to incur some new expense, such as by buying bonds to fund the future benefits — an additional transaction cost!”

    Except the status quo program doesn’t make provision for today’s workers to receive benefits in the future.

    See #2 above, “No provision at all is made for funding any future benefits for current workers”, both after the change and before.

    The only thing the status quo does regarding providing future benefits is, while funding $0 of them, make a verbal promise that they’ll be paid.

    Well, hey, we can do that with our reform plan too! While funding $0 of them, we can verbally promise that its future benefits to today’s workers will be, oh, twice as large as under the status quo. So now we’ve got a reform plan better than today’s SS! :-)

    And where is the short-term transition cost in it? I still don’t see any.

    OK, now both plans, the status quo and the reform plan, are in the exact same situation: both are using current taxes to pay current retirees (albiet the reform plan is doing so more progressively and tax-efficiently), and neither is doing anything to fund current workers’ future benefits.

    But self-evidently, both must fund those future benefits somehow. How they do it, among the many methods that are possible, is a CHOICE — not a cost to be incurred by one and not the other!

    We could end right there. No transition cost. But a bit more detail …

    Say the reform plan has workers save 6% of pay through a private savings account invested in anything they want (including T-bonds) if they wish. Where’s the “transition cost” now?

    Well, to the government there sure as heck is *none*. Not short-term or long. It never has to collect or pay another penny for SS, more than the original $15T. No cost there to it at all. In fact, it’s future costs are greatly *reduced* during the coming fiscal crisis years circa the 2030s.

    With no transition cost to the government, the “transition costers” now are reduced to saying that people saving money in their own accounts is a transition cost — but really, what sort of argument is it that “saving” is a “cost”? (”I just deposited $10,000 in my savings account. Boy, that cost me a lot!”)

    Are workers who escape paying 12.4% on which they will receive a negative return in exchange for paying 6% on which they will get a positive return going to think that their costs are going up? “I can’t afford that!”

    Bottom line:

    1) Via the 7.2 point income tax hike, the rich from Warren Buffett and Bill Gates on down through the upper middle class pay the *exact same* tax currently being paid by bottom-wage workers at Buffett’s Dairy Queen and up through 12.4% payroll tax, to pay the exact same accrued benefits to SS retirees. Total, the same $15T each way, year-by-year the same amount annually

    2) Going forward, workers relieved of the 12.4% payroll tax instead save 6% of pay in savings accounts.

    Really, in that, where’s the big short-term transition cost we can’t afford?

  46. comment number 46 by: Gipper

    Jim,

    Love the plan. Are you saying the 7.2% is added on top of the existing schedule? Does the upper 35% bracket increase to 42.2%

    From a pure policy perspective, I prefer your plan. However, I believe that my plan is more realistic politically. The voters don’t believe their neighbors are capable of making good decisions about their retirement.

  47. comment number 47 by: Jim Glass

    Jim, Love the plan. Are you saying the 7.2% is added on top of the existing schedule? Does the upper 35% bracket increase to 42.2%?

    Yup. But it’s not a plan, just an illustration. There’s no more “transition cost” in any other privatization proposal than you see in this most extreme one.

    SS going forward has two elements: Paying off the backward transfer of $15T one way or another, and then 100% funding all benefits going forward one way or another. Both must be done, status quo or reform plan doesn’t matter, it is arithmetic. Once one separates these two things in one’s head, the whole subject becomes much simpler. Then one can consider the best ways to do the two things: how to pay for the $15T for the past, what benefits we want to provide for the future and how to fund them.

    The purported “extra transition cost” is nothing but the cost of funding benefits being earned now that have to be paid in the future. But they *must* be funded one way or another, in the status quo too, so this can’t be either an “extra” or a transition cost.

    Saying it is an extra transition cost that we can’t afford is no different than saying:

    “I just bought a property using a balloon mortgage with all interest and the principal becoming due at one time at the at the end. Why? Because if I used a regular mortgage, the annual interest payments would be an ‘extra’ cost, and I just can’t afford it!”

    Which is the way benefits are being funded in the SS status quo. Come the 2030s, when the country will be least able to afford it, the balloon payment comes due.

  48. comment number 48 by: Arne

    Jim,

    The $15T backward transfer is only a legitimate estimate for the transistion cost if you maintain the assumption that benefits going forward are exactly equal to what they would have been if you maintained paygo forever. Since you are explicitly breaking out of paygo, even the 75-year $5.4T number would be far too high. If you are willing to tell 64 year olds who have not retired that they are going to get zero, then you could make it zero.

    This is why I say the backward transfer is just a mathematical construct of no particular use.

  49. comment number 49 by: Arne

    Sorry, you would have to stop paying current retirees to make the transistion cost zero, but I was partially responding to an earlier comment that implied that people who retired last year have a totally different claim on funds than people who are going to retire next year.

  50. comment number 50 by: Jim Glass

    The $15T backward transfer is only a legitimate estimate for the transistion cost if you maintain the assumption that benefits going forward are exactly equal to what they would have been if you maintained paygo forever…

    This is why I say the backward transfer is just a mathematical construct of no particular use.

    No, it is an objective number. Ida May Fuller (with her $23,000 of benefits on $25 of contributions) & Co recevied a net transfer of $15 trillion from the U.S. They received that amount of cash and are gone, it is paid and done.

    This was a cash cost to the US no different than World War II’s cost of $X trillion. Somebody has to pay it via taxes.

    Now, WWII could have been paid for a lot of different ways: by dropping a huge income tax increase on the people of the 1940s, or issuing bonds to be rolled over forever to spread the tax cost over future generations forever through debt service, or by some other means such as creating a dedicated VAT, or collecting it through an increase in workers’ payroll tax on the SS wage base.

    It is exactly the same with this $15 trillion. Friedman’s point is that it as illogical to drop this $15T on workers’ payroll taxes as it would have been to pay the cost of WWII thru workers’ payroll taxes. He says that SS could be returned to its original design — as a defined benefit retirement plan paying what FDR promised would be a “fair return”, the bond rate on contributions — by moving the $15 trillion to a general revenue tax. And that this should be done because the $15T transfer, in excess of the amount FDR promised, should be viewed as a sunk cost national expenditure, like WW II, made by the politicians of the time.

    Moving the $15T trillion out of payroll tax financing into general revenue financing provides no “free lunch” as privatizers sometimes claim — but neither does it create any “transaction cost” as the status quoers always claim, because the status quo has to come up with the exact same $15T … on current law, by cutting future benefits so future payroll taxes collected will exceed future benefits paid by $15T, present value.

    But while moving the $15T from payroll tax cost to general revenue cost has $0 net cost on the govt, it could have the great practical benefits of giving workers a SS plan that makes them richer on a lifetime basis rather than poorer, and having the rich pay the $15T rather than the poor, and slashing the tax rate needed to collect it.

    One would imagine progressives would deem those good things — so it is interesting to see how violently they reject the idea. A tribute to the power of status quo institutions in politics (or of the “confidence game” as per Friedman).

  51. comment number 51 by: Arne

    $15T is NOT an objective number. It IS a mathematical construct. And it changes every year - this years number is $16.2T.

    It works like this. The unfunded liability to the infinite horizon is $16.2T. Since a paygo system must have income=outgo over an infinite horizon, that means past overpayment must be equal to the same amount. Calling it a “backward transfer” is just marketing.

    While there is a number for what it would cost to transition away from paygo, there is no reason it should be the same amount.