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Simon and Matt: More Taxes All Around–or At Least On Our Kids (Along with Everything Else That Will Screw Them)

June 18th, 2012 . by economistmom

I found this very nice video of Simon Johnson explaining to CNN-Money’s Lex Haris why taxes will have to come up for everyone–not just the rich. (Simon’s video was embedded in an also-nice CNN-Money column by Joe Thorndike on the topic of “fairness” and taxing the rich.) Simon explains the basic math that I have emphasized over and over again here: (i) the fiscal gap is just too large to put just on the backs of (even) the rich; and (ii) yes, taxes will have to be part of the solution (no matter what you think about their role in creating the “problem”), because the spending paths are not something we could or would choose to flat-line, even as we try our best to damp them down. (BTW, I’m now reading Simon’s new book on the national debt, White House Burning (with James Kwak), which is excellent–particularly in putting the current problem in historical context and making common-sense recommendations that emphasize that “fiscal sustainability” depends on the paths of both the numerator of the debt and the denominator of the size of the economy.)

And what of the fact that the “Just Raise Taxes” solution is not yet gaining enough traction? Matt Miller explains the consequences in his Washington Post column:

Hear me, Americans under 35!

There’s plenty that divides the parties in this pivotal election — from taxes to drones, from public workers to private equity. But there’s one uber-policy that brings Democrats and Republicans together that doesn’t get the attention it deserves.

That policy involves you, younger Americans. You’re in big trouble. You don’t even know it. You’re busy trying to get a degree, land a job, start a family, save for a home. You don’t follow the news. But trust me — you’ve been taken for a ride by your elders.

The question isn’t whether such talk will stir up generational war. That’s already being waged — and you’re losing. The question is whether you’ll wake up and engage in a little generational self-defense. Let me see if I can motivate you.

How are you being swindled today? Let me count just some of the ways…

There’s no cash for such investments in the future because pension and health-care programs for seniors (plus a bloated Pentagon) take up so much of the budget. At the federal level, seven dollars go to programs supporting elderly consumption for every dollar invested in people under 18. Nationally (after taking account of the fact that most education is paid for at the state and local level), the ratio is still 2 1 / 2 to one.

And that’s just today’s elderly tilt. We have trillions in unfunded liabilities in these programs coming due as more and more boomers retire.

Yet amazingly, both parties would exempt every current senior from participating in the inevitable adjustments in these programs. Paul Ryan and Barack Obama lock arms in agreeing that everyone over 55 must be spared such changes, even though most of these Americans are getting back far more than they paid into the system. And millions are well-off…

The solution for the young people?  Matt (with the help of Alan Simpson) explains you gotta fight fire with fire (emphasis added):

There are answers to these challenges that are fair to young and old alike. But we won’t hear them until younger people wake up to what’s happening.

In 1995, when I was a (younger) generational equity worrywart, I asked then-Sen. Alan Simpson how to fix what was clearly coming. Simpson told me nothing would change until someone like me could walk into his office and say, “I’m from the American Association of Young People. We have 30 million members, and we’re watching you, Simpson. You [mess with] us and we’ll take you out.”

Simpson was right then. He’s still right now.

All this talk about what’s “fair” to burden the rich with, and so little mention of our kids.  That’s what’s really outrageous about the partisan bickering about deficit reduction, spending cuts, and tax increases:  the politicians like to claim they are all about doing what’s right for our kids and grandkids–but when you pay close attention, you see their specific actions don’t match up with their vague words.  I think the kids have to get more involved.  The so-called “grownups” aren’t getting it done.

10 Responses to “Simon and Matt: More Taxes All Around–or At Least On Our Kids (Along with Everything Else That Will Screw Them)”

  1. comment number 1 by: rjs

    fair is fair; we’re gonna screw the younger generation by leaving them our debts, just like my parents screwed me by leaving me the debts for WW2, the WPA, and the interstate highway system; debts which, by the way, have yet to be paid back..

  2. comment number 2 by: Jason Seligman

    But past debt left the economy with a:
    WWII -
    global trade system
    strong dollar
    a forum for international diplomacy

  3. comment number 3 by: Jason Seligman

    WPA:
    infrastructure

    Eisenhower Interstate System:
    A way for us to get to work and a buttressed interstate trade and defense network

    Each of these debts has generated opportunities to pay for them. They all had positive ROI. Whereas the ROI on medicare is no where near as good.

    Generally Public Goods can be better be paid for over longer useful lives than transfer programs which tend to have shorter time frames for returns.

    So I think that the new kids will have a tougher time.

  4. comment number 4 by: B Davis

    rjs wrote:

    fair is fair; we’re gonna screw the younger generation by leaving them our debts, just like my parents screwed me by leaving me the debts for WW2, the WPA, and the interstate highway system; debts which, by the way, have yet to be paid back..

    I agree with the prior comments that the war and WPA represented more of an investment than much of the deficit spending that we’re doing now. Also, as you can see from this table of past deficits, the huge war-time deficits changed to surpluses as soon as WW2 ended. Hence, the deficit at that time was fully due to the war. We currently have no war that can end and deliver us unto surpluses. Our current deficit is much more structural.

    Secondly, it’s a mistake to look just at current dollars. If you look at this graph and table of the federal debt, you’ll see that the gross federal debt dropped from a high of 121.7% of GDP at the end of WW2 to a low of 32.5% of GDP in 1981. It then rose to 67.1% of GDP by 1996, dropped a bit to 56.4% of GDP by 2001 and has since risen sharply to 98.7% of GDP. And this is occurring just as the Boomers are starting to retire.

  5. comment number 5 by: Vivian Darkbloom

    “Secondly, it’s a mistake to look just at current dollars”.

    and

    Thirdly, it’s a mistake to look just at “the federal debt”.

    According to this source, federal “unfunded liabilities” currently (as of 2010) amount to about $62 trillion. The only quibble Polifact gave this assertion by Mitt Romney (via USA Today) was the use of the term “unfunded liabilities”. The objection here was that these promises can be broken. But, that’s exactly the point when discussing the inter-generatonal issue: if we expect to keep these promises (as most politicians, particularly progressives, insist we will) then the official “federal debt” is trivial in comparison. If we don’t, then we’ll need to conclude via the political process that seniors have been over-reaching and will need to give back some of those unjustified benefits.

    The only way the younger generation(s) “can continue to be screwed” is if we continue to increase the size of that segment of the pyramid, because this is essentially a pyramidal scheme. This strategy has worked for a several decades; but it is the nature of a pyramid scheme that it collapses suddenly. The idea of increasing the base is also predicated on the idea that those increasing younger members are productive, taxpaying younger members and not merely collectors, of federal student aid, Medicaid, SNAP, unemployment and other transfer programs.

    http://www.politifact.com/florida/statements/2012/may/22/mitt-romney/romney-says-debt-plus-unfunded-liabilities-equals-/

    This, of course, does not include the expectations we have of the younger generation to service the debts and “unfuded liabitiies” of our state and local governments.

  6. comment number 6 by: Patrick R. Sullivan

    Well, Simon is a fickle dude. His latest enthusiasm is Jihad against Jamie;

    http://baselinescenario.com/2012/06/14/an-institutional-flaw-at-the-heart-of-the-federal-reserve/

    and, he’s not exactly scrupulous with his facts;

    ‘He [Tim Geithner] used the diplomatic language favored by finance ministers, but the message was loud and clear: Mr. Dimon should resign from the board of the New York Fed.’

    In fact, Geithner, asked three times by an interviewer on the Lehrer NewsHour if he agreed with Elizabeth Warren that Dimon should resign, declined to agree. So, it’s not like Simon has much credibility to spare.

  7. comment number 7 by: AMTbuff

    Diane, you might want to blog about Tom Coburn’s quiet negotiation on a grand deal to close the fiscal gap, as described at http://www.nationalreview.com/blogs/print/303339

  8. comment number 8 by: John Bailey

    It is interesting that everyone keeps saying that the problem will be kids or grandkids.

    The problem is now. Unless you are planning to die within the next year or two, you will be involved in the consequences as well as in the attempts at solution.

    John Bailey

  9. comment number 9 by: Gipper

    Yes, taxes are part of the solution. But so are spending cuts. Republicans will not cooperate raising 25% of GDP as tax revenue for the federal government. Democrats cannot expect that federal spending of GDP will continue at 25% of GDP or higher. It’s time to admit that the New Deal and Great Society were and continue to be big promises with no responsible funding mechanism. Social Security and Medicare are broken and it’s time Democrats admit that.

    I laugh when Economistmom pops in those graphs showing that deficits wouldn’t be so bad if Bush just hadn’t cut taxes so much. Remember, that Republicans don’t really care about deficits. They care about spending! Interest on the deficit only serves to make it easier for Republicans to cut social spending programs we won’t be able to afford.

    I’d rather make payments to bondholders than to AFSCME members clogging the federal workforce with unsustainable pension obligations.

    When Democrats put forward a real plan to cut entitlement programs and reduce the federal share of GDP to around 20%, then Republicans will cooperate on the revenue side.

    But I don’t see Economistmom or other Democrats contemplating such a bargain. Too bad Obama walked away from Simpson-Bowles. That was a great proposal. If he led on that instead of Obamacare that is about to be ruled unconstitutional, this country would be much better off.

  10. comment number 10 by: Underwriterguy

    As a leading edge boomer becoming eligible for Medicare this year and collecting SS already I certainly have a vested interest in these New Deal and LBJ programs.
    However, I favor means testing both programs so that benefits are not free to those who can afford to pay their own way.
    Never in my working life did I expect to live on Social Security; not the case for my parents and grandparent. I prepared to support my spouse and self in old age. Means testing to zero could be an option for large numbers of Boomers.
    Healthcare is a different matter. There is no market for health insurance for the elderly absent Medicare. But the premiums charged are modest, even for Part B at the highest income levels.
    I believe many of my generation would forgo some benefits and pay more for others if we believed the savings would go to deficit reduction, not some other government scheme.