In Search of a Plan

I posted initial reactions to the Ryan plan a few days ago. To recap, I said it was a good starting point for discussions, although I have problems with the lack of defense cuts (they need to be significant in my opinion), the lack of attention to eliminating tax expenditures (I would eliminate ALL tax expenditures benefiting corporations and the top half of the income distribution and would not turn to a discussion of rate cuts until debt was reduced to levels comparable to  2000 levels), and the rosy economic assumptions.

I have problems with Bowles/Simpson as well. But I would sign on to the core message of the letter recently written by ten former chairs of the Council of Economic Advisors regarding Bowles/Simpson: “It is tempting to act as if the long-run budget imbalance could be fixed by just cutting wasteful government spending or raising taxes on the wealthy. But the facts belie such easy answers.”

Grover stirred the hornet’s nest over at Lawyers, Guns and Money by reporting the core message of my post. Thankfully, the responses have helped clarify what an alternative plan would look like. In Scott Lemieux’s words:Here’s my alternative plan — let the Bush tax cuts expire; already, we’re ahead of the Ryan plan.”

Later, he draws on John Cole (Balloon Juice) for a more developed version of the alternative plan.

Here is my plan- I AM NOT CUTTING TAXES BY TRILLIONS FOR RICH PEOPLE, AND THE TAX CUTS WE JUST EXTENDED WILL EXPIRE. Voila! We are automatically better off than we would be under the GOP Ryan plan. This GOP/RYAN plan is so ridiculous, so transparently absurd and based on flawed assumptions, magical thinking, and cheap parlor tricks that if you are really concerned about the debt and the status of our fiscal well-being, DOING NOTHING is a better option by light years.

See update below on placing Cole in context.

So, just to get things straight: to return to a course of fiscal balance, all we need to do is eliminate the Bush tax cuts?

Let’s check the math (2011-2012). The OMB projection of deficits=$2.75 trillion.  The cost of extending the Bush tax cuts = $544.3 billion. Two-year deficit without extension of Bush tax cuts=$2.2 trillion

Now, I understand that these are extraordinary years and the deficit is projected to decrease after 2012. But then it is projected to explode as a product of entitlements and interest payments on the debt. Clearly, doing nothing is not an option.

Given that a few of the LG&M consumers read my post and went on point out that Ryan’s plan does not do what I think is needed (a point I led with), let me pose a set of questions and answers.

Q1. What is the problem you are trying to solve?

A1. The growing debt burden being faced by our nation. Between the end of World War II and the end of the Carter presidency, we reduced debt from around 121% of GDP to 33% of GDP. At that point, a combination of tax cuts and expanded spending (thank you Reagan revolution) almost tripled our debt in three decades. As entitlement spending increases in the future, we can expect the debt to continue to grow to an unsustainable level. At some point, debt markets will no longer support our debt. Don’t believe me, ask the OMB, the CBO, and the former chairs of the CEA.

Q2. Do you really believe that we can address this problem through tax cuts? Are you going to rely on the Laffer Curve to solve our national problems?

A2. No, quite the opposite (you can see my critique of Reaganomics here). In my perfect world we would eliminate all of the tax expenditures that deliver benefits to corporations and the top half of the income distribution (this does not include the Earned Income Tax Credit but does include sacred cows like the mortgage interest deduction, employer provided health care, and literally all corporate welfare delivered via the tax system). This would significantly raise the stream of revenues at current rates. If the increase is insufficient, a return to Clinton era rates seems quite reasonable as a first response.

In my perfect world, I would also press for a carbon tax, devoting the revenues to support existing entitlement programs while addressing long-term problems of climate change and dependence on foreign oil (you can see my earlier post on this issue here).

Q3. But shouldn’t we cut defense?

A3. Absolutely. With annual defense spending in excess of $700 billion, it is essential. I don’t know what the correct number is, but I could imagine a 50% cut as a reasonable target.

Q3a. But we are currently involved in two wars and something close to a war in Libya. We have international security commitments that must be honored.

A3a. Yes, as a result, we should begin a withdrawal from Iraq and Afghanistan before sundown and be out by the end of 2011. We should begin systematically closing bases across the globe, beginning in Europe. These bases are largely an inheritance of the Cold War.

Q4. What about corporate welfare?

A4. Eliminate it in all of its forms. Public Citizen claims that we spend some $125 billion a year on corporate welfare. My guess is that this is a gross under-estimate, particularly when you consider tax expenditures.

Q5. Do we have to reduce the growth rate of Social Security?

A5. Yes. I would cut benefits for high earners through progressive indexing and increase revenues into the system by raising the earning base or income cap well above current levels. I would not cut expenditures by increasing the retirement age given that life expectancy varies by race nor would I change the indexing formula for low wage earners who are far less likely to have personal savings.

Q6. Do we have  to reduce the growth rate in Medicare?

A6. Absolutely. I am not an expert in health policy so you will have to excuse the lack of a detailed program. But a first step to reducing growth in Medicare is to apply a means test to make certain that the cuts that occur fall on wealthier recipients. Obviously, you would need to phase in the changes so that individuals could adjust their savings patterns.

Q7. What about Medicaid?

A7. If we address Medicaid, it should be as a last resort. Current plans to block grant Medicaid seem to be primarily an exercise in cost-shifting to the states. There is evidence that Medicaid is relatively efficient when compared with alternatives. But more to the point, I do not think that means-tested programs should be targeted for reform when the largest beneficiaries of the welfare state are found in the top half (and in the case of tax expenditures, the top quintile of the income distribution).

Q8. But Paul Ryan’s Plan for Prosperity does not do all the things you think must be done! In fact, in many cases it is silent on some of these issues or proposes to do the opposite!

A8. Yes, this is why the Ryan Plan–like the Bowles/Simpson plan–should be used as a starting point for a serious debate rather than being viewed as a take-it-or-leave-it proposition. In the areas where these plans fall short, we should search for serious alternatives. By the way, I would have the same response to a Pelosi-Reid plan.

Q9. Do you think any of this will happen?

A9. In the long run, we are going to have to make significant changes. If we start earlier, we can make changes through a process that is informed by data, reasonable economic assumptions, and sober deliberations. Anyone who believes that the solution can be found in cutting spending OR raising revenues may have to concede that both will be necessary and neither will be pleasant or politically palatable. It would be best if they came to this realization before debt markets collapse and crisis forces rash decisions that we might not have made under better circumstances.

The bottom line: there are good reasons to challenge the recommendations of the Ryan Plan and Bowles/Simpson. There are good reasons to challenge the underlying assumptions. These are weighty issues that demand serious deliberation and engagement. There are no simple answers.

Update: John Cole reports in the comments that I have mischaracterized his position and that this quote should be understood in the broader context of a debate he has been having with Sullivan. When I read the quote, I took it in the context in which it was being deployed on LG&M. Mea Culpa. Readers interested in placing Mr. Cole’s situating Mr. Cole’s quote in the context of the larger debate should go to his blog, Balloon Juice.

15 thoughts on “In Search of a Plan

  1. Sullivan, despite claiming to want an honest debate, completely distorted what I said, and you are as well. I never said, and never would say, that to restore us to fiscal balance all we need to do is roll back the tax cuts and do nothing.

    What I did say was that if we had two choices, rolling back the tax rates and doing nothing would be better than the GOP/RYAN Path to Prosperity. I mean, you quoted me at length there.

    The point was to demonstrate just how silly, unserious, and fanciful the Ryan plan is, and not to provide an actual working plan.

    1. My apologies if I mischaracterized what you said. My reading of the passage was framed by the way it was being deployed at LG&M in support of a position you apparently do not hold. I have noted this fact as an update to my post and directed readers interested in seeing your larger argument to your blog at http://www.balloon-juice.com/

  2. > Do we have to reduce the growth rate in Medicare?

    Well, one off steps like means testing do nothing to the rate – that’s just cosmetic. And efforts to force a healthier lifestyle won’t change the picture either (see http://healthitnerd.blogspot.com/2008/12/mightiest-champion-of-them-all.html).

    Nationalising the healthcare system would have a longer term impact – it might save you about 50% of costs on an ongoing basis (based on how other countries do it, though it seems that it’s culturally impossible to replicate that in USA).

    The only way to contain healthcare costs is to contain the delivery of healthcare. It’s only a question of how it’s contained – it’s going to be immoral and probably dishonest however it’s done.

    1. Perhaps. Like I noted above, I have limited competence in health care. The broader principle, however, is that when we seek to restrain costs we should strive to do so in a way that has the least impact on those least capable of bearing the burden.

  3. I appreciate the honesty here, in that, instead of advocating for government subsidizing EVERYONE with money they don’t have, you want to save the core of American socialism by stealing from the future rich to pay for the poor of the distant past, thus enabling people to live beyond their means for a few years longer.

    Now for a reality check: we are NEVER paying back that debt. Never. It doesn’t matter if you find a way to tax income at 100%. You can’t cut benefits meaningfully anymore. It’s a non-starter. Have you seen how hard it is to raise the retirement age by two measly years? Entitlements grow. They do not shrink. That is a rule. The only way to shrink them is to do so without the public knowing; i.e. by inflating the currency so the purchasing power if their transfer payments falls. That is what is going to happen, as the government prints money and lends it to itself to continue to subsidize the freeloading class. It’s going to happen whether the government intends it or not. The dollar will grow weaker and weaker until that point at which we either lose our credit rating or lose our status as the global reserve currency, at which point we will experience hyperinflation and we will start to notice people in America refusing to deal in dollars. At that point our government will be completely powerless to print money in any meaningful quantity (perhaps they’ll lop a few zeros off of the dollar like Iran has just proposed to do) and will be, for all intents and purposes, bankrupt.

      1. Thanks Jason.

        Aussie, you’re right. Everybody is freeloading in one way or another. The government has played us perfectly, pitting every group of people against some other group that has wealth they could be looting. The rich guy is bring looted by the small guy, who is being looted by the corporations, who are being looted by CEOs who are the rich guys. It’s a never ending cycle of social guilt.

  4. What we are witnessing in America today is the end game of Socialism. A situation that was described in Ayn Rand’s epic novel Atlas Shrugged. Towards the end of that novel the parasite classes were running around trying to loot anybody and everybody,whether they produced anything or not. In America,today, everyone is trying to get their “share” before the country goes bankrupt. And go bankrupt it will. And then what? Here comes the economic police state and the gulags. And then? The New World Odor.

    1. We’re still a while away from that. At this point the greatest danger is the collapse of our currency. The profit motive still exists to keep the productive class running the hamster wheel. Our government realizes the economy can’t function without the profit motive. They realize that producers have a breaking point, and they’re doing their best not to cross it. But once people begin to awaken to the fact that we’ve been printing 14t of treasury notes as worthless as cash, they’ll notice the profits they’re being taxed on is just their last year’s capital newly inflated. Woe unto equity markets when that day comes.

  5. Good point Abraham. I think the currency will collapse sooner then later. Perhaps in the next year or two. When that happens the Welfare checks, the Social Security checks,the government payroll checks,the food stamps and all the subsidy checks won’t buy anything. Then there will be chaos. Food riots.Looting.Violence and Marshall Law. The parasite class,that outvotes the productive class will demand “law and order.” At which time the elites will dismantle whats left of the American Constitution,end American sovereignty and then fold the USA into a new world socialist odor run out of the United Nations. This is the megalomaniac elitist plan that they have been working on for decades. Make room for the gulags.

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