Funding the Feds

| Fri Jan. 30, 2009 10:32 AM PST

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.

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