Guest Blogger: Bob Hormats

We are very pleased to have Bob Hormats guest blogging at MR this week.  Bob is currently vice chairman of Goldman Sachs (International).  Bob has extensive experience in finance and politics having served in the State
Department as assistant secretary of state for economic and business
affairs, ambassador and deputy U.S. trade representative, and senior deputy assistant secretary for economic and
business affairs, among other positions.

Bob’s latest book is The Price of Liberty: Paying for America’s Wars, a superb history of wartime fiscal policy and a warning that entitlement programs and war spending are pushing America towards fiscal catastrophe

Welcome Bob!


I haven't read Bob's book, but does the book combine war spending and
entitlements into the same category of spending; if so why? if not, no
explanation needed. Just curious.

"We are living in a post-9/11 world with a pre-9/11 fiscal policy." Hormats, WP.

I reckon the US could have easily responded to 9/11 while maintaining its current fiscal policies. There was no reason whatsoever to spend money invading useless third world countries. A simple beef-up of border security, crackdown on immigration, and bribing of hostile governments and stateless groups would have been sufficient.

Does Mr Hormats have any opinions on the efficacy of bribing foreign entities? It would have made much more sense fiscally and politically in my view, democracy in the Middle East invariably results in Hamas type victories.

"We are living in a post-9/11 world with a pre-9/11 fiscal policy."

Well, the increased military spending raised the percentage of GDP spent on the military to around 4.0%. During the Cold War, the low point for defense spending was 4.7% of GDP for two years under Carter.

It's difficult then for me to argue that the levels of inefficiency there are so much greater, nor that the spending is unsustainable.

2006 had a deficit of 1.9% of GDP, and 2007 is projected to come in even smaller. Again, those are not unsustainable numbers, so it's difficult to argue that the "right now" military spending is causing economic catastrophe, unlike the projections in the future when the entitlements grow.

Lauding the war economics of FDR is also a bit unusual. Surely we spent quite a bit more our of money on WWII, not to mention had all sorts of price controls and other things. Of course, he's really just lauding the economic rhetoric of FDR; but FDR himself promised a balanced budget and cut spending even when taking office in 1930.

There are many good reasons to cut government spending, largely because of the deadweight losses and inefficiencies it causes. The debt itself would be rather immaterial if the spending were perfectly efficient. There would be no particular reason to prefer paying with taxes now as opposed to debt, considering that government debt interest rates are the lowest around and approach the standard discount rate. But it's efficient, and hence that's the problem. The amount of government spending (roughly, depending on program) measures the amount of deadweight loss; how it's paid for is largely unimportant.

And along with maybe lumping war and entitlement spending together,
there is the more detailed matter of lumping medicare and social
security together as a single "crisis" oif entitlement spending.
While the medicare fund is currently running a deficit, and its cost
side is zooming, the social security fund is still running a rising
surplus, and if growth remains even mildly above historic rates, it
will run a surplus forever. But most of those doing this "lumping"
seem to rush about screeching about doing "something" about social
security while serenely saying very little to nothing about medicare,
or what is more the source of the problem, health care in general.

Now we need a guide on how to tell Bob Hormats from Alex Tabarrok and Tyler Cowen! Oy vey!

My question for Mr. Hormats is this: Are you the Bob Hormats who was at Camp Pocono with me in 1954?

Barkley Rosser,

Fair enough, I was just asking indirectly if you were part of the Medicare-for-all crowd- a cohort I find everywhere in healthcare discussions.

On Social Security, I guess we will have our answer in about 10-12 years, however, Social Security counts on interest payments to the Trust Fund from the General Fund ($91 billion dollars last year, I think the number was), but FICA alone provides an excess over outlays today. Do you mean that the optimistic scenarios project that FICA alone will always cover outlays, or do you mean that a combination of FICA, the "interest" income, and/or partial liquidation of the fund itself will always be sufficient to pay? In other words, does the low-cost projection (or even the "even-better" present trend that you wrote of) simply show that that Social Security Trust Fund need never be depleted? This is my understanding of the low-cost scenario, not that FICA alone can cover all future outlays. I am willing to be proven wrong.

Why entitlements? What about tax cuts? Aren't they another possible reason (along with war?).

The standard projections have mild increases in life expectancy, not 10 to 15 years.
Of course some very recent data suggests that the baby boomers are not as healthy
as their parents. Life expectancy might not go up at all or even decline.

Of course, there are all kinds of combinations here that lead to all kinds of outcomes.
It is not zero probability that the social security system might start doing in 2017
what the medicare system is already doing right now. But we clearly have plenty of
time to wait and see which of the various scenarios look likely to happen without
doing anything. There simply is no need or reason for any kind of push now on that
front. However, both medicare and medicaid are fiscal problems right now and clearly
getting worse.

My own theory why we saw this bizarre bipartisan push this winter (which failed) to
"do something" about social security involved a higher level political calculation.
I note that this was led by Treasury Secretary Paulson for the Republicans with Senate
Finance Chair, Kent Conrad, for the Dems as his main partner. I think they were
looking at the whole budget and saying, "we need a combination of spending cuts
and tax increases."

So, there are basically only five large spending items in the budget
(noticeably over $100 billion per year): social security, defense, interest on the
national debt, medicare, and medicaid. Now, the last two are rising rapidly, but it
is unclear what to do about them, and indeed solving them probably means doing
something deeper and more fundamental about health care, which is even more difficult
and not in their bailiwick anyway (and, no, I do not have the magic bullet solution).
Interest on the national debt cannot be fooled with and can only be lowered either
by the Fed lowering interest rates or by getting the budget to have a smaller deficit,
which is what they were trying to do anyway. And, regarding defense, well, there is
a war going on, whether one likes it or not, so cutting that was not going to happen
this year.

Which leaves us with social security, which conveniently a majority of the US population
has been convinced is in fiscal "crisis," thanks to the repetition for a decade of the
constantly disproven claim that it is. So, the public might be willing to accept some
cut in its benefits in order to "save" it, since the ignorant morons don't know any
better. And, of course, Congressional Republicans are pretty much against raising
any taxes, but if one packages a social security tax increase with a social security
benefit cut, ah ha! One might just be able to pull it off politically, especially if
the tax increase is done very sneakily, such as through raising the income cap on
paying fica, which being "progressive" can help buy off Dems angry over the benefits
cut. Of course, in the end it did not happen, with the real killer coming not from
the side that said "we don't need a benefit cut," but from Grover Norquist and Dick
Cheney saying, "no tax increase on our watch, naughty naughty." So, end of deal.

So, I do have a bit of sympathy for those like Hormat who supported this (and I checked,
and it does seem indeed that he has been going around doing exactly as I said, warning
everybody about an "entitlements crisis" and then focusing on "doing something about
social security"). The point is that in fact social security itself is not in crisis
and nowhere near being in crisis and very unlikely to ever be in crisis. But because
the public has been bamboozled into thinking that is, it becomes the politically
easiest large part of the budget where a budget balancing deal becomes possible.

indiana jim,
it seems to me there are two kinds of people. the kind who can do arithmetic. and the kind who think in blocks of sound bites. you appear to be one of the latter.

if you could do arithmetic you would be able to calculate that even under the "intermediate projection" the necessary raise in the payroll tax starting in 2042 or so would be about fifteen dollars per week for a worker who would then be making at least a hundred dollars a week more than he is now. and the increase would be needed to pay for his own living expenses when he gets old, not for any government black hole.

and, if you could do arithmetic, you would be able to calculate that paying back the Trust Fund the money the mostly rich taxpayers have borrowed from it will cost about fifty cents per taxpayer per week starting in 2016 or so, and rising about fifty cents per week each year until about 2045 or so.

but mostly, once you got in the habit of thinking arithmetically you would realize that the Social Security money is money that people pay out of their own paychecks in order to have the government save for them and insure agains inflation so they will have something they can count on when they get old, or disabled, no matter what. it is not money robbed from you, or a burden upon the young, or a burden upon the economy.

what Hormats appears to be trying to do is steal granny's social security (her own money) in order to preserve the tax cuts Bush gave to the wealthy and still be able to buy that nuclear submarine to save us all from Osama.

indiana jim

no. but i can tell the difference between a calculation and a stock salesman running his calculator to show me the miracle of compound interest.

when you get through adjusting your returns on "low risk" vehicles for inflation, fees, risks, insurance, and what happens when two hundred million people try to get in on the same "sure thing," not to mention what is going on in the real economy (goods and services) at the same time, social security is by far the most rational way for people to hedge their retirement bets.

and the marvel of it all is that it leaves you plenty of money left over to invest in those "sure things."


Since almost all health care in America is paid by insurance, and most of that insurance is paid by employers who got in the habit when it was the one pay raise they could give without taxes, and since the "uninsured" are paid for out of the prices charged by care givers to the insured so they can cover the "free care" they give...

it seems to me that using the government as the center of the system rather than the multiple centers we now have (the employers) would in the first instance change nothing. the employers would give the money to the government instead of to the insurance companies. the government would have the insurance companies bid for the business of randomized blocks (without regard to prior condition) of people.
by using the money already in the system to extend coverage to those presently uninsured, and using the power to tax to force the free riders to pay their share, and taking advantage of the fact that the government is a big enough player to get a fair deal from the insurance companies, while preserving the competition between insurance companies, and the independence of the providers, we would begin to see efficiencies, and by covering everyone we would begin to stop seeing the disefficiencies that come from people ignoring preventive care until they have very expensive problems.

i think i can defend this idea in more detail, but it seems to keep bumping up against unexamined preconceptions.

Indiana Jim

my modest proposal would INCREASE competition. By having the government act as the clearing house, or "employer" in a health care system otherwise unchanged from what we have now, the insurance companies would be forced to compete with each other by bidding for blocks of business, without being able to use their market power to force exhorbitant rates on individuals with prior conditions and companies which would have a high risk of becoming bad risks because their employee pool was so small that one person with a serious illness could kill the profit on the whole contract. for large enough blocks or random (within area) individuals the risks to the insurance companies would approach the average risk of the whole nation (region)...

Indiana Jim

i don't mind the sarcasm, but you need to work harder to understand what is being proposed.

I worked for the Highway Division for years in an honest state. The construction companies who built our roads and bridges were very competive. All we did was draw up the plans and specifications, solicit bids, award the contract, and monitor the actual construction for compliance with specifications.

That is very much the model I have in mind for the health care - insurance business. There are times when government is necessary.


no doubt. can you see the difference between having the government collect the money and pay the insurance companies on the one hand and having the government run the hospital?

i would never let the government build the roads. i would never let the contractors build the roads without government oversight.


corruption is always a possibility. something as big as the u.s. government should get a lot of scrutiny. and it should be possible to design a program without a lot of dark corners where corruption can grow.

try to remember "the government" is just people doing together what would be inneficient or impossible if they tried to do it as individuals.

i am all for keeping a leash on government. but failing to use that big dog to herd your sheep is just stupidity. just now the insurance companies and the "providers" are the wolves in the fold.

i don't like your use of the "clearinghouse" word. it begs the question. we did not think of ourselves as a clearinghouse when we designed a bridge and then asked for bids from contractors to build it.

indiana jim

no doubt you are right. but i worked for a fairly honest if not particularly efficient government agency that did more or less what i am proposing. inefficiency is a fact of life. the question is whether the costs of government supervision in this area (medical insurance) would outweigh the gains. that's the gains to the people. i have no doubt that the INCREASED competition would result in lower profit margins for insurance companies...unless of course the miracles of free enterprise would teach them how to make money without the "pay or die" advantage they now enjoy.

as for Custer, I think you have been reading a screed that altered the facts to fit a political agenda. Custer behaved the way he always behaved. And it was not a war party he encountered. It was a "large village" he attacked. There is plenty of real history about this. You ought to read it before you conclude it was another case of government worker self seeking behavior.

By the way, if you keep reading, you may find out that Custer might have won the Civil War. as it was his attack on J.E.B.Stuart that kept Stuart from appearing at the rear of the Union forces at the same time Pickett was charging from the front.

oh, but within limits, of course public employees are self seeking. mostly they seek to get through the day in a boring as hell job. their bosses are mostly seeking promotion. with a reasonably honest government that self seeking turns into doing the job the public is paying them to do.


are you suffering from a logic failure? what words did i put in your mouth? I can't see where I even quoted you, or are you saying you were not saying that Custer came to grief because of self seeking on the part of a government employee?

I have no idea if Connell's history is honest or not. I do know I have read a good bit about Custer, and he wasn't mislead by false intelligence into encountering "the largest war party..." So I guess you would have to understand I am saying you need to read MORE history before you accept Connell's version as the truth.

Your summary of governmental agencies... is self serving and wrong. No doubt it is true of some of them. But I energetically pursued building a bridge on time, on budget, and on specifications for nothing more than my regular pay and pride of accomplishment. And I had to work with private sector employees who were only in it for the money and would have built a bridge that fell down if the government hadn't been watching them closely.


you wrote: "I energetically pursued building a bridge on time, on budget, and on specifications for nothing more than my regular pay and pride of accomplishment."

I have no reason to doubt you about this. When I worked for the public sector I also energetically pursued my tasks. But I also observed tremendous waste and inefficiency that I think would not have persisted in the private sector. For example, I left a food service job in the private sector to do the same thing at the VA for about 3 times the wage per hour. There's an old saying about these types of jobs: they are great jobs, if you can get them. I don't think that the value of my output tripled when I went to work at the VA.

okay, i read your site. looks like a political screed to me.

if your read what i said more carefully you will see that i did not accuse you of not reading appropriate background materials. i said there is plenty of real history, you ought to read it. generally one book is not enough. you need to read a few before you can get a feeling of who knows what and who is making it up as he goes along.

longer i play this game (you are not the only one) the more i am convinced that for most people, maybe all people, there are two critical factors in the opinions they hold. the first is the inability to hold enough facts in mind long enough to examine the connections between them. the second is their desperate need to confirm some deep seated psychological view that confirms their basic rightness in the world, probably with respect to some early perceived threat.

and no, i am not going to psychoanalyze you. i am just reminding myself why i am wasting my time.


hard to do without the psychobabble completely, i am trying to understand why this is so futile. part of the answer may be that when i use the expression "game" you instantly assume i am doing it for laughs. no. game is a figure of speech. but what i am learning is that some people cannot cope with figures of speech...certainly not other peoples. and they seem to be on such a thin shell of self esteem (damn that psychobabble) that they overreact to everything whether they understand it or not.

by calling it a "game" i was disparaging myself, my own waste of time. i really began by wanting to understand better... and yes, explain better to people who didn't know as much as i do. sorry, that happens sometimes.

i don't worry too much about displaying my "intellectual substance"... is that your psychobabble?

I had no wish to attack Connell's history. I read the synopsis in the place you cited. if I had never read anything else about Custer, and if I had a predisposition to despise public employees, I might have been more impressed. I have no way of knowing if his "facts" are correct. I can say that the implications he draws from his facts are wildly at variance with what else I have read about Custer and the battle of Little Bighorn. That's why I suggested you might want to read more.

But the other thing I have learned from playing this game is that when some people see (read or hear) something they don't like they see red, or they go blank, or their attention wanders, or they forget it immediately. Now I don't know if any of that describes you. But when I was in the game, it seemed to be born out by the research.


My patrons are the fluttering leaves
That shudder in the cold,
As winter is approaching--Eve´s
Disastrous pretext bold

Has cast us out from Eden then
To scrounge the vast world´s floor--
A poet the least prone of men,
No wonder that I´m poor!

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