Why are budget issues urgent now?

by on January 19, 2013 at 7:40 am in Economics, Political Science, Uncategorized | Permalink

Paul Krugman considers that question, Matt comments also.  I would offer a few points:

1. One might prefer, for macro reasons, to start with fiscal consolidation a year from now rather than now.  But still the question can be considered with that slight shift of time frame if need be.

2. One major problem is that America is aging, and benefit cuts or decelerations will become successively harder to achieve as the years pass.  There will be many more elderly voters and the elderly as a voting bloc are already quite effective at getting their way.

3. As the years pass, our health care establishment becomes increasingly geared to require especially high revenue streams.  It becomes successively harder to back out of an excessively costly health care system.  Do you believe it would have been easier to put in a more unified and more efficient system of health care assistance in say 1969?  Probably so, and this is simply the mirror side of that belief.

4. Whether one likes it or not, U.S. politics phases in benefit cuts, or benefit decelerations, only slowly.  Grandfathering is much preferred, so that a critical mass of elderly voters will support the changes and arguably this is more fair as well.  That means one must start relatively early to have a significant cumulative fiscal impact over time.

4b. David Henderson makes numerous good points, here is one: “people can adjust better when they have more time to adjust. If the Social Security formula is altered for the future, people can have longer to save to make up for the higher benefits they would have got but will not get. That’s the argument for doing something about it now rather than later. Remember what happened in 1981 when OMB Director David Stockman tried to cut the early retirement benefit by about one third for people retiring only a few years later. That got nowhere. People looking at a one-third reduction in their retirement benefits who are planning to retire in a few years will not look on that kindly. But what if some previous Administration had announced in 1962 a gradual reduction in the early retirement benefit for people retiring in the early 1980s. Those people would have had much more time to plan.”

5. Krugman has written about why raising the retirement age is a bad way to make up for fiscal gaps and I agree with many of his arguments.  Nonetheless I would insist on taking the continuing survival of such proposals as a kind of datum, indicating just how many other (possibly more sensible) proposals are complete political non-starters.  Let’s learn and draw inferences from the popularity of “raise the retirement age” proposals rather than merely condemning them.

6. The threat is not that future benefits will have to be cut (if that were the case, cutting benefits now would be an odd solution, as Krugman notes).  The threat is that future benefits cannot be cut or slowed and that the U.S. will spend far too much on consumption and the elderly, along with having excessively high taxes and permanently slower growth.

7. I am puzzled by Matt’s argument that government cannot easily save for the future.  Even if one accepts it as stated, government could subsidize private consumption of health care and other amenities less than it does.  That would be easy to achieve.

8. Morgan Stanley estimates that most developed economies are, when unfunded liabilities are taken into account, in some manner insolvent.  Or ask how the fiscal picture would look if the standards for private pension funds were applied to the government.

Maybe my reading is missing it, but I don’t see that Krugman pays much if any heed to political lock-in arguments.  Overall I do not see entitlement spending paths as very easy to alter, mostly for political reasons.  One plausible scenario is simply that it is already too late and has been too late for some time (the rejection of managed care in the 1990s?), although denouement (which does not have to mean default) remains a ways away.  If you are fiscally and/or growth doomed anyway, hurry at the margin will indeed seem of not much extra value.  But that is on net hardly an argument for fiscal complacency.

Orange14 January 19, 2013 at 8:07 am

I think you largely have covered the salient points. I not pessimistic about Social Security as I think that can be dealt with by some simple fixes such as removing the current payroll tax cap, an aggressive means testing control of paid benefits (this would clearly have an adverse impact on my wife and I who are scheduled to receive over $50K/year when we turn 70), and coming up with an appropriate CPI calculation. Healthcare is something else and as I’ve argued in the past on this forum, the only way to address this is through a capital budget for everyone. It makes no sense at all to provide healthcare for seniors and not for everyone else. The ACA is at best a kludge and will not survive more than a decade (though it was the best Band-Aid that could be passed at the time). We are going to end up with some form of comprehensive healthcare for erveryone that will aggressively control costs. It’s either going to be done by the government via a single payer approach or by the private sector through vouchers for everyone paid for by a dedicated tax (where the payers control costs). I cannot see the current system existing as it just cannot control costs effectively enough (look at the current fight by the Republicans over the ACA IPAB which is only a modest effort in this regard).

In looking at the recent data on how people are draining their 401(k)s for various reasons, I’m quite pessimistic about how these folks will be able to retire. I know how much planning and saving went into my retirement and most underestimate how much will be needed (of course if you just want to live a minimalist existence the amount of money is pretty low but I don’t think one can get by on Social Security alone).

slash1001 January 19, 2013 at 2:39 pm

Politics aside, why would we not use both private sector AND public sector rationing? Like a Reese’s peanut butter cup, two great things that go great together.

foosion January 19, 2013 at 8:08 am

We have two major problems – healthcare costs and slow growth / high unemployment.

If we can solve healthcare costs, we don’t have a budget problem. If we can’t, how much of a difference does it make that most people have problems paying or many taxpayers have problems paying?

Our current slow growth and high unemployment require more spending today, not less. Cutting spending may decrease debt, but it also decreases GDP, likely worsening debt/GDP.

Derek January 19, 2013 at 10:33 am

The distortions created in capital markets by the exigency of keeping government borrowing costs low are actively restraining growth. Spending is the problem.

matt wilbert January 19, 2013 at 10:53 am

I am unaware of credible evidence (or even logic) supporting this.

Phil Perspective January 19, 2013 at 1:08 pm

There is neither supporting Derek’s claim. The most damning evidence refuting Derek is obviously Europe.

Derek January 19, 2013 at 1:58 pm

Do you know what the on balance sheet costs were in greece just before they fell apart? Market prices were quite high, but what were they were paying for existing debt?

Hint. Their problems were (and still are) solvency.

It may be that the ecb could print enough money to alleviate the crisis, but what remains are government cost structures that are too costly for the economy to support. The only discipline on government expenditures is the inability to tax or borrow. Removing that discipline creates an enormous distortion in the economy. It removes the necessity of actually producing goods and services to pay your own way.

Again lets start the argument from this statement: politicians should have access to unlimited resources to do whatever they want and it will have no negative effects on the economy in the mid to long run. If you don’t agree with that, what limits other than ability to tax our borrow are there?

Derek January 19, 2013 at 1:18 pm

I take it you are ok with the Fed manipulating the yield curve so that retired people can get their hip replacements done.

That is the starting point from which to argue. Then you can start convincing serious people to invest in growth in the face of the washington-new york nexus having lost their collective minds. And not to focus all their attention on profitable arbitrage opportunities. And how to latch on to the generous teat of government.

Price fixing by governments never works as intended, assuming honorable intentions.

derek January 22, 2013 at 11:04 am

soberlook.com/2013/01/low-money-multiplier-does-not-justify.html

Nik January 19, 2013 at 8:18 am

Isn’t Krugman quasi-MMT, i.e., believing that which adequately stimulative policy, growth can make the debt a non-problem? He’s always writing about how much of our deficit problem is just a result of the cyclical downturn. How plausible is the “grow out of it” view?

sam January 19, 2013 at 1:38 pm

We don’t need to fully ‘grow out of it’ – just grow at a pace greater then the debt. It reminds me of the parable that one need not be able to out run a bear in the woods. One only needs to be able to out run the slowest in your group. The ‘grow out of it view’ avoids being eaten but doesn’t technically shake the beast off our trail.

Turkey Vulture January 19, 2013 at 2:13 pm

Who gets eaten by the bear though? The terrorists? I hope it’s the terrorists.

kgus January 19, 2013 at 3:54 pm

Wake up, Turkey — the terrorists are the new bear.

JWatts January 20, 2013 at 10:58 am

“How plausible is the “grow out of it” view?”

No plausible amount of growth is going to fix our current deficits. The US Federal government has to reduce it’s annual deficits. I haven’t seen convincing evidence that we can grow fast enough to deal with our pre-2008 3% structural deficit. We clearly can’t grow fast enough the deal with a soon to become locked in 4%+ structural deficit.

mw January 19, 2013 at 8:22 am

Basically, this whole post presupposes that benefits need to be cut and taxes cannot or should not be raised, I guess because look at Sweden’s suffocating economy.

dan1111 January 19, 2013 at 8:56 am

Krugman’s post argued that, even accepting the conservatives’ premise, it is illogical to cut benefits now. Tyler is responding with some reasons why it could be logical to do so. So yes, it does presuppose a conservative viewpoint on benefits–that is intrinsic to the issue being debated. It needs to be read in that narrow sense.

Derek January 19, 2013 at 10:08 am

Now we are making progress. If the US emulated sweden government expenditures would be cut severely and taxes raised substantially as well. Tax structures would be set up to encourage investment, tax expenditures would be restructured our reformed yearly to find ways of doing things cheaper. A government that doesn’t feel the need to pass budgets would be pilloried by the press and citizenry.

The Swedish and all the other northern democracies learned the decades ago that Krugmanesque fiscal management doesn’t work and in fact impoverishes their people. Oddly that has been the experience in the US for the last decade our so.

A caveat; anyone who thinks a management style or program that works in a nation of 9 million or so can be applied to 300 million plus in the US is delusional.

Derek January 19, 2013 at 10:29 am

Throw in high taxes on income and consumption, dismantling the system of application of regulation by lawsuit, medical malpractice, the adversarial environmental regulatory structure.

As well as the ability to defend your country. Don’t even think about it. Maybe canada would take over the role of maintaining a military large enough to defend the continent.

Oh, low capital taxes and a focus on fees and royalties.

Excluding the military it isn’t the right in the US that would have to change their thinking to become more like sweden.

Orange mentioned above that the aca is a step in the right direction. Sorry, but if that is the thinking on the left, as a stepping stone towards a social democratic utopia, there is no hope for you.

Orange14 January 19, 2013 at 10:55 am

Derek writes “Orange mentioned above that the aca is a step in the right direction. Sorry, but if that is the thinking on the left, as a stepping stone towards a social democratic utopia, there is no hope for you.” I guess this only goes to show that his reading skills are not even up to 2nd grade levels. I did not say that it was a step in the right direction but rather a kludge that will not survive more than 10 years. Now maybe you are not in the individual insurance market for health care and don’t have any kind of medical conditions that would lead to high premiums. My only point is that eventually the US will migrate to some form of universal care that is either delivered by the private sector through vouchers or by the govt via a single payer in the same manner as England. There will be payment based on what works and those treatments that are of marginal or no effect will not be paid for. If the ACA had included a Medicare option for those under retirement age, you would see this as the preferred option for many. Most everyone I know who purchase individual policies pay a lot of money for them vs those who get theirs through their employer. Easing medical malpractice will do little if anything. We already have data from a number of states that have already done this and healthcare costs have hardly budged relative to the national average.

Andre January 19, 2013 at 11:46 am

Is there someone threatening the continent? I was unaware that the Venezuelans or North Koreans had fleets of ships poised to raid the coasts if we only had say 5 aircraft carrier groups instead of the 9 we have now.

The Original D January 19, 2013 at 12:23 pm

I was going to make the same argument except there are such a thing as cruise missiles.

Acting as Team America World Police does not help things.

Derek January 19, 2013 at 2:18 pm

Sure. A few years ago an island in the north of canada was claimed by the nation well known and feared for its imperial intentions, Denmark. The problem for canada was its inability to challenge the claim even by simply placing a military presence there.

You make a very common mistake thinking that things will remain as they are without taking into account the resources, hidden and unobtrusive, to maintain the status quo.

By the way, have you ever experienced having in your hand an official currency and being told by a vendor that it wasn’t worth anything? Due to inattention and carelessness by government, the canadian $100 bill was not accepted by many vendors because the advantage of a currency, a universal acceptance of its value, wasn’t there. Who would ever have thought?

byomtov January 19, 2013 at 3:32 pm

Are you telling us that you have had the experience, in Canada, of having Canadian currency refused by a vendor, and that the refusal was not based on inability or unwillingness to make change for a $100 bill, but rather on unwillingness to accept Canadian currency in payment?

derek January 19, 2013 at 5:34 pm

Yes. There were signs on the windows of shops. Due to the carelessness of the stewards of the currency, you couldn’t be sure whether it was a fake or a real one, so vendors would not accept them. If you got cash from the bank, denominated in $100 bills, you very well may have some duds. It is no longer the case now, the stewards of the currency made efforts to maintain the value by policing and other means.

What I would suggest in this debate is to consider the things we take for granted. There are lots of them, we live in advanced societies. We forget that things like a currency that has value, the full faith and confidence of the government purse, etc. need to be maintained.

So if the Treasury is borrowing more than a $trillion a year, much of it monetized by the Fed, these things are drawing down on the accumulated good will of the nation. There may be good that comes out of it now, but it will come to an end at one point. Far better to do it at your leisure than dealing with a collapse of confidence. A collapse of confidence is unpredictable and once it is the least bit apparent it is too late to do anything about it. The US hasn’t been in a recession since 2009.

Canada hit that point some time from the early 80′s to the early 90′s. The consequences were severe even with the steady hand of those in charge at the time. For all the borrowed money and promises of politicians, it just meant that most of us got poorer, especially those who were dependent on government for their livelihood or assistance.

Brandon Berg January 19, 2013 at 10:48 pm

Sweden is, in fact, markedly poorer than the US on a per capita basis.

Marton January 21, 2013 at 5:54 am

Sweden is, in fact, wealthier than the US on a per capita basis, having a wealth of $243,506 per adult as compared to the US’s £236,213 per adult (as of 2010).

You are confusing GDP with wealth. GDP is a pretty arbitrary construct that counts fixing hurricane damage as productive activity but having no hurricane damage as unproductive; that counts cooking/cleaning done by a cleaner/McJobber as productive, but done by a housewive as unproductive; that counts unnecessary medical procedures or litigation as productive…

ThoamsH January 19, 2013 at 8:38 am

“Morgan Stanley estimates that most developed economies are, when unfunded liabilities are taken into account, in some manner insolvent. Or ask how the fiscal picture would look if the standards for private pension funds were applied to the government.”

Private pension plans are not supposed to transfer income within generations; public safety net plans, are. The issue is how much now, and in the future.

bxg January 19, 2013 at 1:43 pm

It’s true that public plans rely on intergenerational transfer and so would look bad by private pension plan standards (they were never designed to work thatway). We can still ask the question. But this question is silly, and would be fairly mendacious, if we don’t at the same time consider any offsetting assets granted to the next generation (e.g. all our public infrastructure).
But on the asset side it quickly gets complex. If a government funds some research, which leads to some valuable technology, which it patents (and continues to hold these patents), we should have no qualms saying: “future generations, these patent rights are a real value we hold and bequeath to you (and should offset the value against the liabilities we pass to you)”. But suppose instead the government declines to patent the technology, but just releases the research into the public domain for the private sector to run with. In a strong sense this is also a gift from this generation to the earning power of the next generation (probably a more valuable and effective one that trying to keep the IP in government hands) – yet it won’t show up on any governmental balance sheet. That doesn’t seem right.
A variant of this: if you want to tally up all the “unfunded” liabilities our children have, surely you need to offset this – somehow – by the investment in education we make for them. But where does this investment show up in Morgan Stanley’s accounting? (Maybe it does, I don’t know).

Claudia January 19, 2013 at 9:06 am

Not to go even more meta, but it seems to me that the desired role or scope of government is the real issue in the current budget debates. The mash up of bad analogies to household’s or firm’s decisions hints at this fundamental disagreement. Compromise across the deeply opposing views gets us lots kludges (as Orange14 noted above with ACA) and lots of gradual moves. May be the right approach, but let’s be honest, until the underlying debate is settled, the results won’t make much sense through an economic lens.

And yes budget issues are urgent but are they more urgent than stabilization policy? Not everyone has thrown in the towel on the GDP growth. For those still looking for a healthy recovery now is a poor time to slam on the budget brakes. There is also the potential for a positive feedback loop…support growth now (or limit the drag) and this could also temper the budget tension down the road. By no means guaranteed but these two issues are not isolation. In isolation and with a more limited view of government, I would agree with most of the points in the post.

Orange14 January 19, 2013 at 11:12 am

I agree with what you have said here and I think that this is also the point that Krugman has been making in recent blogs as well. We seen clear evidence that housing appears to be rebounding both in terms of sales of existing stock and new starts. You can also see this clearly in the equity markets where companies linked to a housing rebound did well last year and continue to do well this year (only wish that I would have tripled my Weyerhauser investment!). If the growth is more than a mirage, a significant amount of the deficit issue will be solved with increased tax revenues. Secondly, our legislators need to get away from the kludge mentality and move on to fundamental policy debates. Certainly much can be accomplished by cleaning up the tax code as Bill notes in the post just following this one. That’s going to be a much more difficult pull because of the hyper-partisanship in Congress. Maybe if they just spend the rest of the year debating gun control we can all muddle through.

Claudia January 19, 2013 at 3:37 pm

And maybe the real urgency is not the problems ahead but the ones of the recent past http://www.nytimes.com/2013/01/20/opinion/sunday/financial-collapse-a-10-step-recovery-plan.html?partner=rss&emc=rss&_r=0 I like Blinder’s op-ed and another thing that comes out of it is the role of government, firms, and households in addressing through problems. I don’t see such inclusiveness in the budget/entitlement discussions.

BC January 19, 2013 at 4:31 pm

Agreed that the proper role and scope of government is the real issue in the budget debates. As for budget issues vs. stabilization policy though, I’m not sure how cuts in entitlements paid out to future retirees 20-30 years from now would constitute “slam[ming] on the budge brakes”. It seems like the discussion about entitlements for future retirees is inherently a long-term discussion that has relatively little impact on the short-term economic cycle.

As for Tyler’s broader point on political lock-in vs. Krugman’s view that we can always deal with this later, it seems that, unlike past generations, there is broad access among the current working generation to voluntary, defined-contribution retirement plans like 401(k)s and IRAs. Thus, the degree to which workers are contributing, or not contributing, to such plans provides us valuable data about the degree to which workers are, or are not, planning for potential cuts to future entitlements. If workers largely are sufficiently contributing to these plans to make up for anticipated future shortfalls in entitlements, then that would favor Krugman’s view. Why prematurely cut future benefits now if workers are already planning for the possibility/probability? We could always cut those benefits in the future, if necessary. On the other hand, if we see that workers generally are not contributing enough to their voluntary retirement plans, that would argue strongly in favor of Tyler’s view. We need to announce cuts in future benefits now so that workers will start planning and saving for the future. It would be interesting to see what the data says.

BC January 19, 2013 at 4:38 pm

One more point: if workers aren’t sufficiently contributing to voluntary retirement plans now, then Krugman’s argument actually works in reverse. We are better off cutting future entitlements now to induce workers to plan and save. If it turns out in the future that we didn’t need to cut entitlements after all, we could always restore those benefits, and the main effect will be that future retirees end up a lot better off than expected. That seems preferable to not cutting future benefits now, inducing current workers to save insufficient amounts in their voluntary retirement plans, and having it turn out in the future that the projected budget shortfalls actually do materialize. That seems like the disaster scenario.

Bill January 19, 2013 at 9:43 am

1. What seems to be off the table is the growth of tax expenditures (targeted tax deductions benefiting one firm or industry), and it should be on the table as well. During the periods of surplus (the period of Tom DeLay) the tax code was larded with tax expenditures which deserve phase out over time, or simple termination. We did a similar clean up in 1986. The tax expenditures (or special deductions for one firm or family) generally enjoy no constituency–typically, they are provisions tacked on to must pass tax legislation and are the price of a vote for one Congresspersons vote who has since left Congress. With some of the money saved, you can use it for lowering rates or reducing the deficit. If you can’t do it now, you can set a sunset for some provisions or establish phase outs.

2. Medicare. Businesses that self fund their health care benefits hire Administrative Service Organizations to oversee the health care expenditures of their employees. There are many firms that basically monitor doctors, hospitals, ensure that drugs are purchased cheaply, etc.

We could very easily introduce competition in medicare and achieve efficiency by having the government contract with ASOs to do monitoring. And, there can be competition between ASOs to get the job. And, ASOs could be paid on the basis of split savings or health care quality improvement. We do not need to go to medicare advantage type programs, which encourage carriers to cream skim the healthy elderly and leave the more costly seniors on regular medicare. We also need a better informed electorate on insurance economics. Once the pools get set up under the ACA, maybe in the future we could look at a similar structure for medicare, at least for elderly below 70 where you have more confidence that you won’t pick up too many outliers and sink your plan.

3. Multinational corporate taxation and tax policy will be a bigger issue in the future as developed nations, recognize that some of the companies in their jurisdiction pay no taxes, while their domistically domiciled domestic industries pay very high taxes. Look for OECD cooperation, look for multinationals lobbying to lower domestic corporate taxes because they will be driven from offshore shelters back to their home country or the place where they make their profits. If they see the tax strategies of the past disappearing, they will want lower domestic corporate tax rates, having paid very little taxes in the past.

4. The computer and communications technology have made it much easier for government to charge citizens and corporations for services. Look for more fees–such as higher inland waterway fees for barges to pay for dredging, insurance fees to cover disasters, etc., rather than relying on general taxes for services that primarily benefit business, some of whom do not pay taxes.

5. Eliminate farm subsidies. We are not living in the 1930s.

Bill January 19, 2013 at 10:25 am

You can see some of the research on item 2 of my comments above in todays NYT article by Uwe Reinhart: http://economix.blogs.nytimes.com/2013/01/18/comparing-the-quality-of-care-in-medicare-options/?ref=business

Derek January 19, 2013 at 10:43 am

Good heavens Bill, the insurance companies are specifically prohibited by law from doing what you suggest, and they have the economic incentive to do it. Doesn’t the aca mandate that insurers spend a set proportion of your premium?

So now the solution is to set up another structure with costs?

Bill January 19, 2013 at 10:54 am

Derek,

They are not prohibited by low from doing what I suggest–what are you talking about??? Give me the cite or authority for that statement.

If Congress creates a law to use ASOs for medicare oversight or healthcare management or healthcare review or best practices review or fraud detection, the law Congress creates is the law of the land.

If your objection is that it costs money to do ASO services to oversee medicare use and access, fine, but you are only looking at one side of the balance sheet and not the other: the benefit that exceeds the cost. You save money, and you use that to pay for the ASO services.

Steve Roth January 19, 2013 at 10:01 am

“Do you believe it would have been easier to put in a more unified and more efficient system of health care assistance in say 1969?”

Several efforts were made in the post-war years. None succeeded politically.

Given that reality, I would have to set my prior on this question very close to “No.”

rjs January 19, 2013 at 10:03 am

what good would raising the retirement age do in an era of high unemployment?

furthermore, you’re talking about a world occupied with just retired profs..
49% of us arent even making $50K, which makes that savings youre all advocating difficult;
& 30% of us reported that they had less than $1,000 in savings in 2012

http://www.decisionsonevidence.com/2012/02/want-to-know-your-household-income-percentile-ranking/
http://www.dailyfinance.com/2012/10/15/17-frightening-facts-about-retirement-savings-in-/

Ray Lopez January 19, 2013 at 10:04 am

Wrong, wrong, wrongsky! TC buys into the “gradualism” school of thought. No! Shock therapy is what is needed! Stockman was right. TC’s counterfactual “if we had started in the 1960s” is completely wrong. Back then, there was no urgency, hence nothing would have been done. My prediction: just like in Japan, where savings are transferred from the younger to the older generation, so too it will happen in the USA. Eventually the system will collapse, as debt ratios approach 200% govt debt to GDP (it’s not quite there in Japan since they have a savings surplus)–and collapse is good–then from the ashes (both in JP and in the USA) we can start anew. BTW for you “Great Stagnationists”: search “graphene” on this blog. Not a single mention except off-topic on a immigration topic. Mood affiliation?

Ray Lopez January 19, 2013 at 10:12 am

In a perverse way Krugman’s point: do nothing to Social Security now, and wait for adjustments later, is a sort of “starve the beast” strategy that will bring about collapse, and that’s a good thing. Mind you I’m not in favor of starve the beast as a general principle (since it fosters a rise in Big Government, short term), but as a second best principle it’s not so bad–much better than trying to ‘shore up the system’ and make it work. On this point the quote attributed to Lenin is apt: “the worse, the better”.

sam January 19, 2013 at 1:49 pm

How can you believe that? I’d be so much better to just do the right thing the first time. Letting entitlements multiply until reform is absolutely necessary isn’t a strategy; that’s laissez-faire. The Scandinavian social democracies did it right again, matching their largess with rational public finance from early on, with gradual liberal reform over time.

Ray Lopez January 19, 2013 at 2:17 pm

I don’t think the term “laissez-faire” should be applied to government finance, and the Scandinavian model will not work in a multi-ethnic country like the USA. Better to be a Barnburner (The name derives from the fabled Dutchman who burned his barn to rid it of rats; by implication, the Barnburners would destroy corporations and public works to do away with the abuses they foster.).

The Other Jim January 19, 2013 at 10:31 am

>>”The threat is not that future benefits will have to be cut (if that were the case, cutting benefits now would be an odd solution, as Krugman notes). ”

This is where Krugman crosses the line from being a useless partisan hack to a tried-and-true absolute moron.

If I told you that you were getting laid off in six months, would you start trimming your expenses and saving money? Yes, if you are over eight years old. But Krugman says, “If the problem is that I’ll have less money to spend later, why should I spend less now?”

Inexplicably, he gets paid to write down whatever occurs to him.

Philo January 19, 2013 at 11:03 am

You wrote: “I would insist on taking the continuing survival of such proposals [for raising the retirement age] as a kind of datum, indicating just how many other (possibly more sensible) proposals are complete political non-starters.” But what seems a non-starter now may be a full participant in a few years, or even months, *if only Krugman can get thoughtful, influential commentators, such as Tyler Cowen, to speak out in favor of it*. Judgments of political non-starterdom are specific to changeable circumstances; it would be a mistake to treat them as valid for all time.

joan January 19, 2013 at 11:10 am

The problem with acting now to solve budget problems in the future is that the projections are probably wrong, if they had been right in 1984 we would not have SS funding problem. A cure for alzihimers would reduce medicare and medicaid spending by over a $100 billion a year and diminishing effectiveness of antibiotics and increasing number of fat people may reduce life expectancy.

Yancey Ward January 19, 2013 at 11:50 am

If a comet hit and killed everyone, problem solved, too.

Mogden January 19, 2013 at 12:47 pm

Experience shows that government projections are usually far too optimistic. That makes sense, because there’s a negative incentive in the short term to make accurate long term projections.

joan January 19, 2013 at 2:41 pm

If the current projections are under estimates then the reforms we put in will not have fixed the future but only allowed us to avoid fixing the current budget deficits by pretending we did.

BC January 19, 2013 at 6:05 pm

There is an asymmetry, though, between over-optimistic and over-pessimistic budget projections. Krugman’s argument is actually backwards, especially given Tyler’s observation that it is and will be very difficult to cut benefits for present or soon-to-be retirees. The corrollary, and what Krugman’s argument doesn’t recognize, is that it will be easier to raise benefits in the future than to cut them. Thus, it is far preferable to cut future benefits now and restore them in the future if the budget projections turn out to be over-pessimistic than to do as Krugman suggests and leave future benefits where they are for now and try to cut them in the future if the budget projections materialize or even turn out to be over-optimistic. In the first case, workers will be induced to save more for retirement and will get a windfall if it turns out that budget projections were over-pessimistic. The main consequence will be that their retirements will be more comfortable than expected. In the second case, we end up with a huge shortfall in our ability to pay for over-promised benefits and no way to close the gap.

Consider two approaches to ensuring that your children will have a comfortable adulthood in the future. In approach (A), you emphasize the need for them to study in school, acquire job skills, etc., so that they will be able to earn sufficient income to support themselves in the future as adults. If it turns out that, for whatever reason, their income-earning ability in the future is limited, you can always try to help them out as adults to the extent that your own financial situation allows. In approach (B), you tell them that you intend to set up a trust fund that will take care of all their needs as adults. In addition, you’re not even sure that you will be able to adequately fund this trust fund, but you take great pains to assure your children that the trust fund will be sufficient. Which of these approaches is in the best interests of your children and will maximize the probability that they enjoy a comfortable adulthood? Now, replace children with future seniors, acquiring jobs skills with saving for retirement, trust fund with promised entitlement benefits, and adulthood with retirement.

Bill January 19, 2013 at 8:33 pm

From your example: Are you sure that the money won’t be spent on the Defense Department, rather than investing in the kids or that it won’t be used for corporate tax reform?

You can also flip this the other way: gradual rate increases in SS rate and gradual raising of the cap. Taxes, if you are not retired, are assessed on you, as you will be a future beneficiary. See AARP proposal:

“Employers and employees each currently pay a 6.2 percent tax to Social Security
on earnings up to $110,100. Self-employed workers pay both the employer and
employee share, for a total of 12.4 percent. One option to help close the Social
Security funding gap would raise the payroll tax rate for all workers and
employers. For instance, on a $50,000 annual salary, increasing the payroll tax
rate to 6.45 percent would increase both the annual employee and employer
contribution by $125 each. Changing it to 7.2 percent would increase the annual
employee and employer contribution by $500 each. The rate increase could occur
gradually or all at once. Increasing the payroll tax rate from 6.2 percent to 6.45
percent immediately is estimated to fill 22 percent of the funding gap. Increasing
the payroll tax rate gradually over 20 years on employers and employees from
6.2 percent to 7.2 percent is estimated to fill 64 percent of the funding gap.”

See debate between person from the National Academy of Social Insurance and representative of the Heritage Foundation re this at
http://www.aarp.org/content/dam/aarp/research/public_policy_institute/econ_sec/2012/option-increase-the-payroll-tax-rate-AARP-ppi-econ-sec.pdf

BC January 20, 2013 at 1:46 am

If you are concerned that money would be diverted to defense spending, then that would argue for lower taxes, with the money diverted to 401(k)s and IRAs, rather than higher taxes and higher promised benefits, which would tend to decrease savings in 401(k)s and IRAs. Money in individuals’ 401(k)s and IRAs can never be re-appropriated by Congress. Congress can change future benefits as well as play games with defining a mythical Social Security “trust fund” that is used to finance defense and other spending.

Money in 401(k)s and IRAs also cannot be reverse-redistributed from poor to wealthy. If everyone pays higher Social Security taxes, there is no guarantee that the wealthy won’t be able to use their political influence to get higher benefits than they contributed. Having the bulk of retirement savings deposited into individual 401(k)s and IRAs is much more transparent, ensuring the poor and middle class contributions aren’t given to the wealthy.

Bill January 20, 2013 at 9:11 am

401 ks rather than SS have more volatility, and actually require less contributions to assume the same level of security. One is an annuity with the counterparty as a sovereign, and the other is stock, with the market, in a recession, as the counterparty.

Now, the point of persons tampering with SS is a good one, but doesn’t support the argument you make as you are proposing to do that.

mwilbert January 19, 2013 at 11:11 am

What is urgent is continued work to reform the healthcare system and restrain medical costs. That is really the only part of the budget that is especially worrisome, and the problem extends far beyond government spending. To the extent that the budget can provoke beneficial change in healthcare at large, that could be urgent, but the rest of it really isn’t.

tomhynes January 19, 2013 at 11:18 am

Budget deficits are similar to global warming, but the players switch roles.

One side says we are going to have a serious problem with x in the future, and need to drastically change our behavior now to avoid it. The other side denies there is a problem, then says it will take care of itself, then says the cure is too painful.

Yancey Ward January 19, 2013 at 11:52 am

You just have to wait until a Republican is president, and Krugman will switch sides pretty quickly.

Rahul January 19, 2013 at 12:28 pm

I hope the next one is Republican just to enjoy seeing you eat Crow. Barbecued or stir fried?

derek January 19, 2013 at 5:41 pm

It seems the voters are rational after all. Divided government seems to bring the best and worst out of both sides, with the unintended effect that government growth slows down. The Clinton good times had a rather activist Republican Congress that if I remember correctly shut the government down for a short time. Good government seems to come only when both sides are utterly miserable.

Yancey Ward January 20, 2013 at 10:29 am

I won’t have to eat crow- unlike some people, I actually remember the deficit scold Krugman circa 2001-2009. I will welcome his return.

Rahul January 20, 2013 at 12:16 pm

A foolish consistency is the hobgoblin of……..

Different prescriptions for different times? :)

aadl January 19, 2013 at 12:28 pm

Government does not invest. All government spending is waste consumption.
Y = C + I – (G + T).

C + I = pirvate production
G + T = state depredation

Orange14 January 19, 2013 at 12:53 pm

You get first prize for the dumbest post of the day. Do you think the US would have won so many Nobel prizes (and associated technological advancements) without Federal funding of basic research? How do you think MDs and PhDs are trained, with money from heaven?

Sisyphus January 22, 2013 at 5:12 pm

Orange14, while aadl’s post was dumb, your response leaves a lot to be desired, too. R&D spending used to be 10% of the federal budget, but it’s almost a rounding error now. Research funding is almost irrelevant from a federal budget standpoint.

Our federal government spends the vast majority of its funds on transfer payments (mostly via entitlements), defense, and interest. Part of the reason for so many fights over spending and their intensity is that discretionary spending (including research funding) is in aggregate at its lowest level of GDP in generations. But no one is effectively dealing with the real spending problem, which as Tyler’s post alludes to is growth in entitlements generally and health-related entitlements specifically. Even to the extent ACA might have worked, it blew all its cost savings and then some on expanding health insurance for the uninsured and uninsurable. Until we at least slow entitlement expenditures growth to near inflation, we will spend less and less on things like research, not because we want to, but because we will have to.

Mogden January 19, 2013 at 12:32 pm

Government officials have repeatedly proved that they deserve no credibility, so their promises to do things in the future are immediately discarded as worthless. So the only way to affect expectations and improve projections for the future is to carry out actions today.

Rahul January 19, 2013 at 12:42 pm

“7. I am puzzled by Matt’s argument that government cannot easily save for the future”

Isn’t this answered by Krugman’s “Bush squandered the surplus on tax cuts and unfunded wars ”

theCoach January 19, 2013 at 3:19 pm

What I am assuming this is about is that the US government cannot put a whole bunch of money into an account and then withdraw the money decades later — or rather this would not really be saving money in a macro economy. ‘Saving’ in the macro sense is investing current resources into developing lasting value (education, infrastructure, etc.).

I am surprised at Tyler’s puzzlement. This seems like the difference between micro and macro.

CPV January 19, 2013 at 1:42 pm

One view of the entitlement picture goes like this:

–at any given time the economy can produce a certain output mix
–entitlements like SS give recipients an ability to bid on those outputs and affect their composition
–savings and other financial assets give holders an ability to bid on those outputs and affect their composition
–entitlements like Medicare force a certain portion of the economy’s output to be locked up in a specific sector, unavailable for other activities
–taxes are needed to fund SS and Medicare, income left after taxes gives earners the ability to bid on outputs and affect their distribution

So what is easy to see is that what is being argued about is a future allocation and composition of output problem. Things like taxes, entitlements, savings and investment will affect who gets what size claim on the future output, and what it’s composition is. Savings (deferred consumption) insulates savers from the whims of political generosity in the future, and by providing investment capital increases the size of the future pie. Mandatory entitlements will allocate a fixed portion of the economy to certain activities. If those activities are inefficiently provided, there is obviously a large loss to overall utility.

Ragout January 19, 2013 at 2:46 pm

Tyler Cowen writes: “One major problem is that America is aging, and benefit cuts or decelerations will become successively harder to achieve as the years pass. There will be many more elderly voters and the elderly as a voting bloc are already quite effective at getting their way.”

Even assuming that this is true, that is not an argument for doing anything now. Just because we pass a law now cutting benefits for the elderly in 2032 doesn’t mean benefit cuts won’t be rescinded sometime in the future when the elderly get more clout.

The evidence that this is what would happen is overwhelming, and is simply the fact that benefits for the elderly have been increased from time to time. For example, Medicare didn’t originally cover prescription drugs, but now it does. Big cuts in Medicare reimbursements are scheduled for next year, as they are every year, but every year Congress rescinds the cuts (the so-called “doc fix”). I also have a prediction: the increase in the Social Security retirement age, passed 30 year ago and just starting to phase in now, will be rolled back.

Joe Smith January 19, 2013 at 3:24 pm

“The threat is … that the U.S. will spend far too much on consumption and the elderly, along with having excessively high taxes and permanently slower growth.”

I am left mystified as to your utility function and your benchmarks for consumption, taxes and growth. I suppose I could vote to let granny die in the interests of making the Walton heirs richer 100 years from now but I do not see why I should. If I were voting on cutting consumption I would be: scaling back the military, scaling back doctors’ salaries and scaling back expensive end of life care for the terminally ill.

Hopaulius January 21, 2013 at 1:44 am

“If I were voting on cutting consumption I would be: scaling back the military, scaling back doctors’ salaries and scaling back expensive end of life care for the terminally ill.” What makes you believe that doctors will just continue being doctors while they watch you compassionately slashing their salaries? Why shouldn’t the most medical care go to the people who are the most sick? Have you filled out your advance medical directive, ordering your POA to eschew any expensive efforts to keep you alive?

Ryan January 19, 2013 at 3:32 pm

5. This survives because the political class have jobs that they intend to do past the retirement age. For most people in their social circles, retirement ages are mostly irrelevant, so it seems like a painless way to cut benefits. It is likely to be much less popular with the general population if they seriously try to implement it.

7. What’s so puzzling? Most of what society calls saving is redistributing goods and services between people rather than shifting them from one time to another. To first order, government debt doesn’t affect the amount of wealth. It just affects the distribution of resources going to bond holders instead of supplying government programs or staying with taxpayers. This may create distortions that make the future economy less productive, but this has to be balanced against people staying in the highly unproductive unemployed sector today.

mulp January 20, 2013 at 1:25 am

“4b. David Henderson makes numerous good points, here is one: “people can adjust better when they have more time to adjust. If the Social Security formula is altered for the future, people can have longer to save to make up for the higher benefits they would have got but will not get. That’s the argument for doing something about it now rather than later. Remember what happened in 1981 …”

So, in 1983, Social Security benefits were cut to give people time to adjust and save more.

Then the same people who advocated saving more for the future retirement then proposed all sorts of exemptions from taxes to promote savings, claiming easy 8% plus returns.

Plus the argued for reduced regulation on credit, arguing that increased leverage allows greater current consumption and also multiply the easy 8% returns to retire early really really rich.

Basically, Henderson et al became the experts the Wall Street shills used to sell their pump and dump ponzi asset churn schemes. Anyone opposed was countered with the expert wisdom of Henderson et al, who were the fiscal conservatives who assured us that the free market is smarter than government technocrats. When bankers were making ninja loans, Henderson et al were trotted out to explain bankers would never in a free market never ever make bad loans.

Now that the boomers are reaching retirement with no savings, often deep in debt on real assets that were pump and dump churned in the 00s until the ponzi scheme collapsed, Henderson now blames government and the liberal policies which he has successfully helped undermine over the past three to four decades.

And now he is calling for seriously dealing with the looming present problems by repeating the “reforms” of three decades ago??? Right, the Social Security reforms of 1983 have either:
1. made Social Security the least of our problems – the share of GDP for that program is projected to be essentially flat for decades with the past two decades
2. the Social Security is totally insufficient to the needs of the boomers given the steep decline in retirement asset over the past three decades of those over 55
3. Social Security is in a crisis because its current spending needs to be drastically cut to balance the budget.

Can anyone involved in setting retirement investment benefit policy/Social Security/retirement tax policy over the past three decades be allowed to have any say about the next three decades of policy??

Has the policy making over the past three decades made anything better?

Given the policy advocacy of “individual responsibility” in the “free market” worked for society at large?

Does society (business) support the premise that if you haven’t saved, well you just keep working until you drop, and cutting Social Security is good for business even if or because it merely requires more people keep working until they drop?

Andrew' January 20, 2013 at 9:36 am

One problem is that government ‘investments’ in the past are now being recognized as failures to deliver. For example, prior government involvement in healthcare is to some degree undeniably the reason (though actual degree debatable) the reason we are here. Simply taking money from those who have it is a bug rather than a feature to some people. So, further deficit spending comes into question RIGHT NOW in light of past results.

Brian Donohue January 20, 2013 at 11:29 am

Krugman is way out of his depth in understanding of global warming issues. I recommend he check out Matt Ridley here.

In some ways, this strikes me as some Hollywood bubble-head pronouncing on world peace.

Based on previous posts of his, I have good reason to believe he doesn’t think about Social Security properly either. (As Orange14 states above, this is a fixable red herring that can be fixed like it was in 1983, and should be fixed, now, apart from any other conversation.)

In essence, Krugman’s whole philosophy amounts to pitching leverage on the American people. I’m not saying there isn’t a case for governments to “gear” themselves financially to some extent, provided the proceeds are invested to produce value down the road, but let’s have the decency to speak frankly about what we’re proposing.

Anyone can tell you that financial leverage, useful at time, is also risky. History is full of examples of governments that borrowed themselves into oblivion.

But who needs history, when the world of 2013 offers many real-time examples of the siren song that is “governments aren’t households”? How fortunate we are are to have cautionary tales all around right now. I predict the economics profession will ultimately be judged harshly for its pusillanimity during this whole episode.

The reason for urgency in the US is a political calculation. Next year is an election year, and after that, Obama is a lame duck. If nothing serious happens this year, I think we’re looking at 2017 at the earliest, and a $20 trillion issue rather than $16 trillion, and a much less attractive set of policy options.

Brian Donohue January 20, 2013 at 11:44 am

Also, I want to frame this generationally. For most of the history of this country, there is no doubt that succeeding generations massively benefited from the efforts of their forefathers. And they reaped these benefits without having to assume a corresponding debt burden.

I don’t think the Baby Boom generation is coming close to upholding this tradition. ‘Don’t give me no hand me down world’ indeed. Jerks!

Here’s a way to think about it: everyone (and I mean everyone) figure out your income between 2002 and 2012 (eleven years). Multiply by 5%. Send check to government.

Brian Donohue January 20, 2013 at 11:50 am

OK, upon reflection, the Guess Who was Canadian.

But my point stands. I mean, any generation that adopts a credo like “don’t trust anyone over 30″… I mean, kinda suggests a lack of long-term thinking, no?

Jerks!

Willitts January 20, 2013 at 12:04 pm

Because Americans have the attention span of gnats.

When there is consciousness about unsustainable long term obligations, you have to strike while the iron is hot.

They are doing this at the state and local levels.

CPV January 20, 2013 at 12:15 pm

Gedanken Experiment:

Design a stable political economy and set of reproductive norms where everyone lives forever, starting now.

Is there a stable solution with finite resources without an infinite retirement age?

JonF January 22, 2013 at 4:32 pm

Re: Morgan Stanley estimates that most developed economies are, when unfunded liabilities are taken into account, in some manner insolvent.

Sure– and unless an individual is rich, his own unfunded liabilities (his expected living expenses until death) likely also dwarf his assets. But such liabilities are paid out of future income, so the wrong question is being asked. Instead we should be asking “how much income will be coming in by which those liabilities will be paid? Will there be enough”?

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