StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Taxing Our Way Out of a Problem

23 Apr 2008
Posted by Andrew Samwick

Greg Mankiw directs us to David Leonhardt's article on John McCain's chief economic advisor, Doug Holtz-Eakin.  I've known Doug for a number of years and admired his scholarship and his policy work.  It's got to be frustrating to be pushing the McCain economic agenda.  From the article, here's the crux of the problem:

In all, federal taxes now equal about 19 percent of the nation’s economic output, which is in line with the historical average. But the costs of Medicare and Medicaid, on their current path, would require that number to rise to an unmanageable 30 percent, and beyond, in coming decades.

“We as a nation cannot tax our way out of this problem,” Mr. Holtz-Eakin says. “It’s just not an option.”

It is true that we cannot tax our way out of all of this problem.  But we could untax ourselves today into a bigger problem tomorrow.  As I've said before in the context of entitlement reform, all dollars matter:

If concern over tax burdens on future generations is what motivates you, then it is completely inconsistent with that motivation to pass a Medicare prescription drug bill that generates a projected unfunded obligation that is bigger than the projected unfunded obligation in Social Security. It is also completely inconsistent with that motivation to run General Fund deficits that are not balanced by later surpluses, raising the debt burden on future generations. This sort of inconsistency will doom any chance at prudent reform of any of the programs.

Medicare Prescription Drug Fiasco

This was what Bush had to do to insure re-election in 2004 (the political reward was too great to pass it up -- the coveted senior votes).

Your post is excellent. I wish more Americans understood this, and politicians had a mission of educating, not just spewing "we won't tax you but the other guy will" sound bites to get elected.

There is no motivation to 'come clean' with the voters. Most Americans can't think their way out of a paper bag when it comes to budgeting anyway (that's why they're fine with massive credit card debt and bad loans).

Economics (personal budgeting as well as macro) should be a required part of high school curriculum.

The 19% of GDP (closer to

The 19% of GDP (closer to 20% for FY 2008) of Federal spending is only part of the picture, of course. State and local spending is another 16% of GDP, for total government spending of 36% of GDP:

Big state and local budget items are schools, police, and health care not covered by Federal spending.

Why would McCain's agenda be more frustrating?

Andrew, I agree with your point about entitlements being frustrating for policy makers, but I don't see why it would be more so for Doug as McCain's economic lead.

It seems to me that the real issue is ignorance (ostrich-like?) regarding future costs, and our demonstrated inability to control them. It seems to me that this applies to the Democratic candidates as well.

Since I have read that we pay ~20% more per capita than other nationalized health care states, it seems reasonable to assume that there are efficiency improvements to be had. The outsized health care inflation needs to be addressed as well.

I have two hypotheses regarding healthcare inflation: (1) we are trailblazing healthcare for the rest of the world (and therefore shouldering the lion's share of advancement costs); and (2) our lack of customer-to-care- giver price transparancy drives inefficiency even worse than central planning (ie socialized healthcare).

Both issues probably play some role in the problem.

Health care Inflation

There are many factors that drive health care inflation. One of the main causes is consumer desire to have health care that is comfortable, convient, and easy. In a health care system based on competition, the main goal has been to deliver the kind of care the customer wants. The cost to the consumer is secondary. Hence, we have industry developing an MRI machine to replace the dreaded colonoscopy. The MRI version is more expensive and less effective. But, it does make the patient happy so it also drives demand. Glasses are safer than laser eye surgery. But the prospect of being able to throw away glasses is too tempting. So, people pay thousands of dollars. Three percent end up worse off. The other 97% have improved vision but will eventually need glasses anyway.
Medical technology doesn't last long as each health care facility tries to out do the other in terms of care and comfort. Transparency in pricing would help. But, when I broke my wrist last year I didn't call around to the various ERs to see who was having a sale on casts. Instead, I went to a hospital that I knew and trusted. Gradually moving to a system that makes the consumer responsible for the first few thousand dollars would motivate some cost conscious behavior.

Re: "It is true that we

Re: "It is true that we cannot tax our way out of ALL of this problem. But we could untax ourselves today into a bigger problem tomorrow." (caps on "ALL" are mine since I can't bold letters here)

Thank you, Andrew! If I had a dime for every time some opponent of tax increases (or advocte of tax cuts) said simply -- and simple-mindedly -- "We can't tax our way out of this problem", implying that we therefore should not raise taxes AT ALL as PART of the solution (or that cutting taxes won't make things worse), I'd be a billionaire. It's amazing what people can get away with in political debate. Thanks for calling Holtz-Eakin on it.

I am increasingly disappointed in McCain on fiscal policy, and in turn, integrity, responsibility, and commitment for what is good for the country. I still plan to vote for him, but it's getting to be another one of those "hold my nose and vote" elections, since I have no fiscally responsible candidate to vote for. Wish I could vote for the McCain of 2000. Come back, McCain!

HTML tag info below Comment window

For those who are new to HTML tags for this blog, there is a nice explanation below the comment box. Bold is accomplished with the "strong" tag.

Note that the HTML tag link may be out of alignment once you jump there (it was for me anyway). Copying the whole page into Word solved this problem for me though.

Perhaps Andrew, Stan, or Pete can fix the page?

Good Tip, Keith

Can't say that I'd ever actually looked at that formatting tips page -- it definitely doesn't work so well with the right-hand sidebar. So that's been fixed.

-TKS (the silent partner on Capital Gains & Games)

We're resorting to hidden taxes

This sort of inconsistency will doom any chance at prudent reform of any of the programs.

I agree. We have seemingly decided that we are not going to pay for our spending via overt taxes and we are not going to impose discipline on tax cuts and increased spending by restoring PAYGO. The government is therefore forced to turn to borrowing money and increasing the money supply. According to the first graph at, M3 is now increasing at about 17 percent annually. Hence, we have essentially turned to hidden taxes, via inflation and the debasement of our currency.


"It's got to be frustrating to be pushing the McCain economic agenda."

Well, it's got to be frustrating to be an honest economist pushing any candidate's economic agenda. Ask Austan Goolsbee.

Right now Hillary and Obama are competing with promises to cut the deficit and give us all national health care with no new taxes on incomes under $250,000. Good luck with that.

The first item on any candidate's agenda is getting elected. The second is securing the support of the party to be able to get things done and keep one's job and power. Third, maybe, is sound economic policy or some other issue of substance.

When Hillary "it takes a village" Clinton came to my state to run for Senator the very first thing she did was announce her support for a cartel of milk producers that raised the price of milk for children in poor families, along with everyone else. I have no doubt at all that she really, genuinely cares for poor children. And in her heart she's probably opposed to cartels too. But to be able to help the children and fight cartels she had to get elected first, and if that meant getting upstate farmers' votes by supporting a cartel that raised the price of milk for children, well ... priorities.

In 1992 Bill Clinton ran promising a "middle class tax cut" he had no intention of delivering. Instead in 1993 came his big tax increase. FDR ran in 1932 on a platform of balancing the budget by cutting waste, and in 1940 with his famous promise of keeping the US's young men out of foreign wars. Politicians say what they need to say to get elected. Examples are endless. But what choice to they have? It's amazing that anybody takes their campaign promises seriously enough to charge them with hypocrisy.

So let's not pile on McCain in particular. He has no choice any more than anybody else. But on Holtz-Eakin's track record and his own, McCain probably is the remaining candidate who is actually most concerned about the deficit itself, while the Democratic candidates are probably more concerned with finding ways to finance their national health insurance and related programs.

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