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Funding the Feds
FUNDING THE FEDS....Via Matt, Pete Davis reports on a lunch talk yesterday from spending guru Alice Rivlin:
Her most striking remarks were how forcefully she warned that we should undertake long-term deficit reduction measures now. Without them we will face rising interest rates before the economy has enough time to recover as foreign purchasers of U.S. Treasury debt balk at buying a lot more of it. She boldly asserted "Now is an excellent time to fix Social Security and Medicare."
....Rivlin predicted we will need a new revenue source to cope with our long-run deficit problem, a value-added tax. I'm biased on this subject. I formulated House Ways and Means Chair Al Ullman's VAT proposal in 1979. There's no way to protect the poor and the elderly from such a tax, and it could become quite a money machine for a lot of government spending I would prefer to avoid. Rivlin has promoted a VAT for a long time because it is a more efficient tax and because it would harmonize our trade with the rest of the world, almost all of which has a VAT.
I have a lot of sympathy for Rivlin's view. Here are a few random comments to add to what she says:
I'm all for fixing Social Security now if it will get the issue off the table once and for all. It's a distraction. What's more, the fixes needed are fairly minor and doing it while Democrats have a big majority is good timing. But — although the fixes can be legislated now, they should be scheduled to phase in slowly starting around ten years from now. The last thing we should be doing is pouring more money into the trust fund right now.
If we're looking for a new revenue source that won't hit us in the pocketbook immediately (while we're in a recession), but will provide a medium and long-term funding source, how about passing cap-and-trade? Even if we move full speed ahead, the machinery takes a while to implement, which means it won't start up until 2012 or so.
And even if part of the revenue is rebated to low-income families, it still provides a steady and growing revenue stream after that.Oh, and it helps to keep us from destroying our planet, too. Just a little side benefit.
I'm a big fan of using a VAT (in addition to the payroll tax and other existing funding) to fund national healthcare. Economically, it's a pretty good tax; it can be made progressive if it's properly implemented; and it's a universal tax for a universal program. More details here.
I am, oddly enough, not really in favor of vastly increased funding for other social programs. Some increased funding is OK, but it should be kept under pretty strict scrutiny — and not just on the generic grounds that all spending ought to be monitored carefully to make sure it's effective and pruned away when it's not.
Here's why. I'm obviously more open to high government spending than most conservatives, but even liberals think there's a limit to how much of the economy ought to be under government control. Speaking for myself, I'd put that limit at 40-45% of GDP. Somewhere in the low 40s, anyway. Currently, total government spending (state/local/federal) is in the low 30s, which means we can afford to increase spending by about 10% of GDP. I figure that changes to Social Security will eat up about 2% of GDP and funding a true national healthcare plan will eat up around 7-8%. That doesn't leave room for very much more, and even reductions in defense spending only give us another point or so to work with. So we should be pretty careful with other long-term spending commitments.
That's my take, anyway. This is a pretty good time to be talking about these changes, even if they don't get phased in immediately. We desperately need credible plans for future reductions of our current account deficit (which is tied to the federal deficit), and this is a good time to do it even if the plans don't get phased in immediately. I expect Obama to kick off a rollicking discussion of this stuff later this year.
Friday VAT Blogging....
Eliminating the payroll tax cap will buy us a lot of time on Social Security, it's politically palatable, and it could be done now.
Moving to a single payer health care system would eventually result in a significant savings, in effect returning money to the economy. It's a steep path, but good things rarely come easy. We should do it without delay.
A VAT (or any type of national sales tax)is a non-starter. There is no political will at either end of the spectrum; it just won't happen. A better idea, and one that has support, is increasing taxes on imports in a way that creates a level playing field for U.S. manufacturers.
I think government spending is closer to 40% based on recent expenditures- small VAT= healthcare? I like it. Unlocking the CAP on SSA will destroy its philosphy and thus open it to tinkering. If it is a retiremt account, why should Bill Gates contribute more in a year than he would if he was to live to a 1000. In other words- it is not a retirement plan- it is an income tax.
***cricket chirping*****
z-z-z-z-z-z-z-z-z-z-z........
Great post, KD.
"spending guru"? Is that like Paris Hilton? Imelda Marcos?
"Rivlin predicted we will need a new revenue source to cope with our long-run deficit problem, a value-added tax."
Why is it we need a "new" source of funding? How is that better than just raising the rates on taxes we already pay? And there are no new, magical sources. It's just us taxpayers.
But [1]although the fixes can be legislated now, they should be scheduled to phase in slowly starting around ten years from now. [2]The last thing we should be doing is pouring more money into the trust fund right now.
No. 2 is absolutely correct, but no. 1 will never, never work. Why not just pass a resolution saying, "We'll look at this every 10 years," and forget about it.
I have just finished reading "Predator State", by James K. Galbraith.
Among the arguments he makes in that book is that foreign governments worldwide make a practice of accumulating foreign reserves in US currency. They rely on these reserves to stabilize their own currencies, adjusting its value as they need to in response to inflation or recession.
These dollars flow outward, and in return foreign countries supply us with a surplus of imports - the trade deficit. So the US trade deficit actually underpins the world financial system.
The surplus dollars abroad must be held in some kind of dollar-denominated asset. Either the federal government must run a budget deficit so it can sell Treasury bonds abroad, or the private sector must do the same. That either means massive private debts (not good) or continued sale of US assets (property, equity etc) to foreigners. Of all those options, the federal deficits strike me as the least harmful.
Nor does the current crisis change this - we have seen a worldwide flight to safety to Treasury bonds, which virtually require the US government to run huge deficits to avoid total panic. The private sector can't borrow abroad now, not even if it tried.
So I don't think we should be formulating plans to reduce the current account deficit. The only way to do that is to either go back to the gold standard (probably impossible now), or have another worldwide reserve currency. The euro cannot fulfill that role without a single European government to issue bonds, and China and India do not yet have a large enough economy and will not for decades.
One thing I'd like to see is a long term strategy for reducing defense spending. The data I could find was 4.4 of GDP. The crazy liberal in me wants that go to down to Japan levels (about 1 percent), I'd take 2.2 percent with the other 2.2 percent going toward reducing our dependence on foreign oil.
Kevin Drum: I'm all for fixing Social Security now if it will get the issue off the table once and for all.
I'm all in favor of fighting the war in Fredonia if it will be the War To End All Wars.
Social Security will always be an issue, and always should be - it's an enormous program. Right now though it's one of the least important issues. If all government programs were in as good a shape we'd be mighty well off. Doing anything to address SocSec now would, at best, be like redecorating the living room while the house is on fire.
Social Security is a red herring. There is not much of an issue here. A small adjustment to the payroll tax or CPI inflator fixes the whole thing.
Medicare is a totally different story...which takes us right back to health care reform.
I'm starting to get angry every time I see "Social Security" and "Medicare" in the same sentence. They have different problems but, unfortunately, the two programs are easily lumped together because they both receive revenue from the payroll tax.
A VAT (or any type of national sales tax)is a non-starter. There is no political will at either end of the spectrum; it just won't happen.
Actually, some conservatives have been pushing a national sales tax - with dishonest numbers, of course.
The problem with excluding a VAT is that raising 6-8% of GDP is unappealing no matter how it is done. In 2006 the IRS collected about 8.5% of GDP from individuals. Making the PIT the main revenue would mean collecting 14-16%, which would require top marginal rates well over 50%.
At the risk of blogwhoring, click on my name for some (bad) graphics illustrating the problem. You can play with the data yourself by downloading "historical.xls" from the CBO.
tyronen: I don't think we should be formulating plans to reduce the current account deficit.
Instead we should just ignore it until it blows up? Talk about a fool's paradise. There's never been a country that's run enormous trade deficits like us for long periods without having it blow up. And there's no guarantee that the USD will always be the world's reserve currency.
foreign governments worldwide make a practice of accumulating foreign reserves in US currency. They rely on these reserves to stabilize their own currencies, adjusting its value as they need to in response to inflation or recession
Some foreign governments also accumulate USD far beyond any reasonable need for stabilization or emergency reserves. Think China, and in the past, Japan. They use these excess reserves to keep the exchange rate of their currency down, and hence our trade deficit up.
There is an argument that because the USD is the world's reserve currency we can run a moderate trade deficit indefinitely. Some people put the sustainable trade deficit at 3%/GDP (though that sounds improbably high). Our actual trade deficit though is twice that high estimate. Not a time for complacency.
social security doesn't need "fixing". at most, as someone above noted, it could use a small adjustment, but some projections show it needs nothing at all. for example http://angrybear.blogspot.com/2009/01/recalculating-nothing-social-secur...
"nothing" is a simple plan, easily executed, and costing no political capital.
medicare, that's a different story.
I have just moved back from London where I lived for 6 years. Their public spending had, by designed, climbed to about 43% of GDP. There was an embarrassing amount of badly spent money, and quite a bit of malfeasance by public servants. I don't know if there's an ideal percentage of GDP that developed countries should allocate to public spending, and if there is one I don't know what it is. But I think that the process of getting to that percentage needs to be looked at quite carefully. We can manage quite large increases in the automatic stabilizers that combat recession, and I think we will be safest if we stick to those--unemployment, social security, etc. But unless we put together a transparent process for new public spending, we risk trashing our brand because sadly, we probably have as many humans on our side as the not-so-honest conservatives had on theirs for the past 8 years.
There are a number of problems with Kevin's analyis.
The first is that the realistic numbers (SS Administration's "Low-Cost" Scenario, has Social Security piling up huge surpluses in the long-term. It is likely that any "fixes" we put in now will only make those surpluses even larger. We'd just have to rebate that back to the public at some point in time, and the moneys wouldn't necessarily go to the right people.
Second, If we brought health care in line with other economies, an efficient national health care plan would end up adding 4 to 5% of GDP, not costing us 7 -8% as Kevin claims.
This health care reform would also take care of our Medicare "problem."
As of 2002, our tax burden weighed in at some 28.5% of GDP (For comparison: Sweden-50.6, France-44.2%, Germany-36.3, UK-35.9, Turkey-33.2, Ireland-28, Japan-25.3). (I don't remember where I got these numbers from, but it was some reputable organization like the OECD).
As Kirk pointed out, if you want to reduce government, the place to concentrate on is Defense Spending, which eats up something like 50% of our Federal tax dollar. A large chunk of this is spent on stimulating economies overseas, and there is probably substantial waste inherent in these large-dollar expenditures.
Leave Social Security alone. It is fine. Yeah, we can look at it again in 10 years. It will be fine then, too.
Really, Kevin, you would rather do something stupid with Social Security so lying conservatives will shut up? Please. They will never shut up.
1. social security is fine
2. medicaid/medicare is what we need to fix. Allowing the bargaining of drug prices would help to reduce the drug benefit costs. A single payer system might help to further reduce the cost of medicare but I have my doubts.
3. To raise revenue, how about a tax on financial transactions. A tenth of one percent on stock transactions. Bonds would be exempted or have a lower tax rate due to their sensitivity to small changes in price and hence yield.
Don't focus on gov't spending as a percent of GDP. It's a question of what do we get for the money. Our "low tax" (high borrowing) regime provides us with an awesome military plus lower-than-whale-shit social services. How is that superior to "high tax" Scandinavia?
Absolutely we need single- payer national health care. Get the insurance companies out of it entirely.
If we're going to bail out the car industry, may as well nationalize it and then we can have small, efficient cars.
Finally, I'm with you, Kevin, about some of the other stimulus stuff. Specifically, I have a friend who went on foodstamps. OK. But how much do they give you? She is a single woman and she is getting $272/month! Since when do you need that much for food basics?
But no, food stamps now is accepted at some restaurants. Yup, you have this credit card now for food stamps, so no shame in using it-- which *should* be a tiny part of it-- not humiliation but if it is obviously welfare you might be encouraged to get off it if you can-- and some restaurants accept it!!
So this is not your basic, milk, cheese bed, veggies foodstamps. And if a single person gets $272, why on earth does an individual need MORE?
Maybe I'm misunderstanding and the proposal is to give foodstamps to more people not more money in foodstamps to each person. Because they seem awfully generous to me right now.
Forgot to mention that Medicare Part D, the abomination pushed thru by drug and insurance companies, is the biggest thing threatening Medicare.
It should be totally scrapped.
Any drug plan that is instituted needs to start from square one.
Can't think of a worse piece of legislation than Medicare Part D.
Cap and trade will only create another financial futures markets without addressing the underlying problem.
Much, much better would be a Tobin / Pigou tax on all financial market transactions, which would squeeze out short term speculative trading, and force the time horizons of financial capital to begin to edge back to the long term time horizons of actual industrial enterprise. It takes four or five years to build an industrial facility; how can that be done when hundreds of millions or even billions of dollars can be moved from one country to another in a few seconds?
And, financial trading is now so huge - some 60 times GDP, compared to 1.5 times GDP in the 1960s - that it a tax on financial market transactions would raise hundreds of billions of dollars.
Finally, setting some off-the-cuff percentage for government's role in the economy misses the major issues entirely. As Jimmy Galbraith pointed out, the government basically took over the entire economy in the World War II wars, with the impact on prices and wages largely ameliorated through the Office of Price Control, which was run by his father.
The real fundamental problem is the important part of Keynes nobody seems willing to talk about - the difference between speculation and enterprise. If the financial system continues to be allowed to reward speculation, usury, and economic rent, while industrial enterprise and physical infrastructure continue to be starved for funding, we're never getting out of the hole we let Wall Street dig us into. The American Society of Civil Engineers just updated their Report Card on Infrastructure - we need $2.2. trillion just to get up to an acceptable level of functionality. That's before we can even begin thinking about building for the future, like increasing the density of urban rail transit in the Los Angeles metro area by a factor of ten.
I am becoming very, very disillusioned with Drum's retreat.
"...and even reductions in defense spending only give us another point or so to work with."
I guess that depends on how much you cut defense spending but even if that is true there has to be a qualitative determination about spending.
Removing defense dollars and directing them elsewhere at least has the added potential benefit of actually accomplishing something constructive that you and I and our neighbors may benefit from. Refusing to consider rejiggering defense spending makes VAT arguments seem almost rational.
I am curious to hear how those proposing taxes on financial transactions plan on keeping those transactions within the tax jurisdiction of the US government. Such a tax would probably do more to raise the standard of living in London than anything the UK government could do on its own. Financial markets are extremely porous; I can't even begin to imagine how much capital flight would occur if such a tax were to be even hinted at, but it would make the current financial meltdown look like a minor issue in comparison.
One thing for sure... they should outlaw offshort accounts. No more Cayman Islands so that Goldman Sachs pays taxes of l%. That is scandalous.
Or if they want to bank in the Cayman's, they can't work in U.S. They can pick.
evgen embarks on a line of inquiry very, very few people are willing to follow. The fear of the implications, I believe, is the primary force which is propelling Kevin Drum away from progressive economics, even though he may be unconscious of the fact.
There are a number of tools which a nation state can use to defend its sovereignty, which may be placed in the following broad categories: criminal prosecution; diplomatic pressure; economic measures of retaliation; covert operations including black bag jobs and wetworks; military shows of force; and outright use of military force.
The U.S. public is rapidly beginning to conceive of the present economic troubles in terms of Wall Street versus America. Once critical mass is reached - once it is understood that the present international financial system is by its nature hostile to the sovereignty of the nation state - I believe events will happen frighteningly quick, with actions at the covert and military ends of the spectrum.
The real problem is going to be the City of London, since Britain has nuclear weapons, including Trident submarines.