StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



Social Security, Medicare, and the Current Fiscal Mess

23 Feb 2009
Posted by Andrew Samwick

I have been very careful to stay away from making a link between the current explosion in the deficit and the reform of entitlement programs like Social Security and Medicare.  It's not that I don't think that a link exists -- it's that I don't think that the case for entitlement reform depends on what part of the business cycle we are in.  The case makes sense to me based on the long-term cost projections for those programs.

In today's Washington Post, Robert Kuttner laments that so-called* deficit hawks in Congress are trying to make the link.  He opens with:

With the enactment of a large economic stimulus package, fiscal conservatives are using the temporary deficit increase to attack a perennial target -- Social Security and Medicare.

It may be that the recent increase to the deficit is temporary.  But even a temporary increase in the deficit is a permanent increase in the debt unless there is enacted some way to specifically repay that debt in the near future.  Note the word "repay."  It is not enough to just stop running ridiculously high deficits.  To repay them, we need to run surpluses.  We are nowhere near that.  What we got from the Obama Administration was yet another weak use of the phrase "cut the deficit in half" by 2013. 

So Kuttner is out of his mind if he thinks that we haven't permanently increased the debt burden on future generations.  This is where the link to entitlement programs comes in (for those who need one).  From the point of view of future taxpayers, a dollar of debt is a dollar of debt, whether it is debt held by the public or the unfunded obligations of entitlement programs that we refused to reform.  This was a problem for President Bush, who insisted that we had a Social Security cost problem that we had to fix but refused to acknowledge that Medicare Part D that he signed into law and the defcits ensuing from the 2001 and 2003 tax cuts each created debt that was larger or comparable to the projected unfunded obligations in Social Security. 

It is likewise a problem for those like Kuttner who simply refuse to acknowledge that what we are doing with so-called stimulus bills is spending the next generation's money on things that don't particularly benefit the next generation, just like we do when we pass along unfunded entitlement obligations to them.  There is no economic reason, and certainly no moral justification that Kuttner seems to imply, for excluding reforms of entitlement programs that lower cost in progressive ways from public discussion.

*Deficit "hawks" is Kuttner's terminology.  Those who voted for the 2001 and 2003 tax cuts or the various bills to make them permanent don't qualify.  Those who voted for Medicare Part D don't qualify.  Those who voted for the recent stimulus bill also don't qualify, unless they actively tried to remove the pork, tax giveaways, and other elements that were not related to public investment.  Are there any of them actually serving in Congress today?

Stimulus

Everybody relax, our problems are over, BIDEN is in charge of the "Stimulus Package". Now our president must figure out how many people he needs that have paid there taxes that will be in charge of BIDEN.


IF the stimulus bill includes

IF the stimulus bill includes significant infrastructure repair, how does that not benefit the next generation? This seems like a boldly counterintuitive (ie kooky-sounding) assertion.


Infrastructure Repair

I am a big fan of using infrastructure repair and investment during business cycle downturns.  See these two op-eds from last year:

http://www.washingtonpost.com/wp-dyn/content/article/2008/01/25/AR2008012502593.html

http://www.riponsociety.org/forum108L.htm

There is some infrastructure repair and investment in the bill, but not nearly enough.  For example, it is not clear that even with these new projects, we will have invested a net positive amount -- a net when depreciation and population growth are taken into consideration.  It is also very difficult to assert that funding thrown together this hastily adds as much value as funding that proceeds through a carefully planned investment program that we could develop outside of a crisis.


Sustainable deficit

It is not enough to just stop running ridiculously high deficits.

Yes it is.

To repay them, we need to run surpluses.

We do not need to eliminate the debt.

The deficit is too large now, though. Cutting it in half in four years would be a great accomplishment.


Growth anyone?

Does the author not understand the relationship between long-term debt, GDP growth, and inflation?

So long as debt as a percentage of GDP is going down, we don't need to run surpluses. From the end of WWII until 1980, we ran deficits but the amount of money we owed as a function of our ability to pay decreased virtually every year (there were some small outliers) simply because GDP consistently outpaced the growth of the deficit. That is to say, every administration from WWII up to Reagan cut the taxpayers debt burden - even during Korea and Vietnam.

The problem we face in the near term is that the deficit is skyrocketing at the same time that GDP is stalling. If the economy gets back on track, and spending and tax receipts allow for a smaller deficit, smaller than the growth in GDP, then that's a reasonable first goal and will reduce the debt burden.

Now, if the author is arguing that we're going to see a long-term stall to GDP, or worse yet, decline in GDP, then yes, surpluses are needed, but I suspect that he knows all this and only sees the need for surpluses to balance out a desire for lower taxes and lower tax receipts.


The Author ...

... has on many occasions articulated a budget target of a balanced budget over the business cycle or no upward trend in the ratio of total debt to gdp.  The latter is just a bit more cumbersome to explain each time.  Here's a longer discussion:

http://voxbaby.blogspot.com/2007/07/how-to-advise-on-fiscal-policy.html

I would like lower taxes and lower tax receipts, but only if that can be accomplished within this framework.


Oh please . . .

A permanent, finite increase in the debt is decreasingly onerous over time, since the interest on any fixed increment to debt is progressively smaller relative to GDP, income, and the tax base over time.

I am glad to see you not try and hijack the stimulus debate with bloviation about the national debt, unlike a certain former comptroller-general, but I still find you needlessly exercised about deficit finance.

Others, present company excepted, predicted catastrophe from the Clinton budget of 1993 and were proven hopelessly wrong. But before that, all sorts of folks were predicting disastrous spikes in interest rates from deficits. They never happened.


Really Miracle Max?

Really Miracle Max? Progressively smaller only if you don't cement your logic and continue the increases. Your academic theory hits the road when seen in practical light. Long-term debt tends to live up to its name, long-term, when it comes due and is just rolled over (also, what happens when the GDP contracts?). One third of targeted, temporary and transparent is the temporary part.
As for disastrous spikes, what about 1944 and 1974?


Yes Really

Professor Samwick was lamenting a temporary increase in the deficit as a permanent increase in the debt, and so it would be. But it is not a BFD. As for uncemented logic and increases, it all depends on the increases. If debt grows no faster than GDP, the ratio of interest to GDP stays roughly the same. If bondholders are content to suffer a 50% ratio, doubling of debt and GDP should leave them no more apprehensive. As to long-term debt, your disastrous spikes (sic) in 1944 and 1974 ended up with a nice low ratio until Mr. Reagan came to town -- when Andrew was in middle school by my calculations -- and blew up the budget.

This is all well-known, not least by the eminent authors of this illustrious blog.




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