Posts Tagged ‘public debt’

For some time, the Institute for Truth in Accounting has been beating the drum of “accounting truth” in government finances. Recently USA Today picked up on their claim that true federal deficits and debt are several times larger than the official numbers. They ran the numbers and found that “the government ran red ink last year equal to $42,054 per household — nearly four times the official number reported under unique rules set by Congress.” In addition, “Federal debt and retiree commitments equal $561,254 per household. By contrast, an average household owes a combined $116,057 for mortgages, car loans and other debts.”

The reason for the difference between these numbers and the official ones is that the official numbers exclude the cost of promised retirement benefits: Social Security and Medicare. From the story: “Jim Horney, a former Senate budget staff expert now at the liberal Center on Budget and Policy Priorities, says retirement programs should not count as part of the deficit because, unlike a business, Congress can change what it owes by cutting benefits or lifting taxes.”

Yes, but will they? It seems to me that the “real” set of numbers is some weighted average of the official and full numbers, where the weight is the probability that Congress will act to reform retirement entitlements before they drag the official deficit even further into the red. Medicare is already losing money.

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President Obama has just announced his nominee to be the next Secretary of the Commerce Department. In the WSJ‘s words: “President Barack Obama will nominate John Bryson, a senior adviser to the private-equity firm Kohlberg Kravis Roberts & Co., to be his next commerce secretary.” The Journal continues:

Mr. Bryson, one of 20 senior advisers to KKR, is the former chairman and chief executive of Edison International, a publicly traded power company and the parent of Southern California Edison and Edison Mission Group. He also co-founded the Natural Resources Defense Council, an environmental-advocacy group, and has been a member of the U.N. Secretary-General’s Advisory Group on Energy and Climate Change.

I had not heard of Mr. Bryson before this nomination. People who found “environmental-advocacy group[s]” make me a bit nervous—since such people are sometimes rather longer on the advocacy side than on the scientific side of policy—but I am sure he is an able and capable person.

My question instead is why he is needed at all. Why, in the twenty-first century, when we have a globally connected world with billions of trading partners making trillions (or more) non-centrally-coordinated decisions every day, do we have need for a person to oversee all of this? Does he believe that he will be able to make better decisions from atop his perch in Washington, DC about where people should allocate their scarce resources, which of the options they face are those of which they should avail themselves, which people, businesses, groups, companies, institutes, funds, and organizations should trade or associate with which, what they should trade, and on what terms they should associate, and so on, than the individuals and groups themselves would make?

According to the Journal, a White House official said: “The president is confident in Mr. Bryson’s ability to lead the department and promote job creation, economic growth, sustainable development and improved standards of living for all Americans by working in partnership with businesses, universities, communities and our nation’s workers.”

I confess I am rather skeptical that Mr. Bryson, however able he is, will contribute positively to any of those objectives. This is not an indictment of him personally; it is instead an indictment of the rather voluminously inflated estimation some seem to have of human beings’ ability to consciously design and coordinate large-scale human social institutions. Even if Mr. Bryson were literally the smartest person on the planet, his ability to “promote job creation, economic growth, sustainable development and improved standards of living for all Americans by working in partnership with businesses, universities, communities and our nation’s workers” would be orders of magnitude inferior to the ability to do those things of uncoordinated individuals and private parties acting in competitive markets.  

The Great Mind Fallacy, it would seem, strikes again.

I say cut not only this Secretary’s job, but the entire Commerce Department and its $8.8 billion budget. When we are more than $14 trillion in debt, it would have to have a rather astonishing rate of return on its investment to justify its continued existence. Given the systemic liabilities it faces, I am skeptical it meets that threshold.

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I had a recent post on the unfunded liabilities burden in the states. Related to that post–and the $3 trillion in unfunded liabilities–Steven Greenhouse has an interesting piece in today’s New York Times that explores what might be an emerging trend: “Faced with growing budget deficits and restive taxpayers, elected officials from Maine to Alabama, Ohio to Arizona, are pushing new legislation to limit the power of labor unions, particularly those representing government workers, in collective bargaining and politics.”

While the article focuses on Republican governors (e.g., Scott Walker and John Kasich, respectively, the newly inaugurated governors of Wisconsin and Ohio), it also examines the efforts of Andrew Cuomo (New York) and Jerry Brown (California).

Obviously, this has the labor unions up in arms.

But labor leaders view these efforts as political retaliation by Republicans upset that unions recently spent more than $200 million to defeat Republican candidates.

“I see this as payback for the role we played in the 2010 elections,” said Gerald W. McEntee, president of the American Federation of State, County and Municipal Employees, the main union of state employees. Mr. McEntee said in October that his union was spending more than $90 million on the campaign, largely to help Democrats.

“Now there’s a bull’s-eye on our back, and they’re out to inflict pain,” he said.

Undoubtedly, politics has a lot to do with this. But the fact that Democratic and Republican governors appear to be following a similar strategy suggests that there is something else going on.

Unlike the federal government, the states are in an interesting position as a result of their economic constitutions. While there is great variety, all states (other than Vermont…go figure…and arguably North Dakota and Wyoming) have balanced budget requirements on the books. Of course, these requirements vary along a number of dimensions (e.g., what constitutes a balanced budget? What enforcement provisions exist?). The National Conference of State Legislators has an interesting report on the variety of balanced budget requirements in the states for those of you who may be interested (download here).

As the report concludes, despite the variety of provisions at the state level, there is broad adherence to the norm of balanced budgets:

Considering the lack of specific constitutional mandates and enforcement structures, state compliance with the principle of a balanced budget is notable. Restrictions on debt play a part, but are an insufficient explanation for the fact that even states that can legally carry a deficit from one year to the next try to avoid doing so. It appears that the political convention that state budgets are supposed to be balanced is its own enforcement mechanism.

As the new Congress assumes power in Washington, one can predict that there will be some symbolic efforts to control expenditures (waste, fraud and abuse…be afraid, very afraid. Non-defense related discretionary spending…something wicked this way comes). But one wonders whether there can be sufficient movement toward achieving fiscal sustainability without the imposition of a new economic constitution for the federal government. Unfortunately, it is difficult to imagine that elected officials who benefit greatly from the ongoing expansion of federal spending would follow the lead of Ulysses and bind themselves via a constitutional amendment.

As Jon Elster notes (in Ulysses Unbound, p. 143):

“Because of the privilege of the present over all future dates, Congress will, like St. Augustine, tell itself that balancing the budget is a good idea—in the future. But when the future arrives, it always does so in the form of a new present, to which the same reasoning then applies.”

A balanced budget amendment could overcome this problem, Elster suggests, but adoption would likely require that it only take effect in a future Congress—a current Congress safeguarding their benefits while binding future Congresses. This strategy is complicated in the United States “because of the variable and uncertain duration of the amendment process.” But without such provisions, can one expect that members of Congress—regardless of their partisan stripe—will confront the problem of fiscal unsustainability with the same courage that will (hopefully) be exhibited by the states?

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Former OMB Director Peter Orszag has written a well-reasoned piece on the co-chair’s proposal on Social Security (see today’s NYT). Money Quote:

If Congress were to take all four of these recommended steps, it could not only eliminate the long-term deficit in Social Security but also make the system much more progressive. Even compared with the benefits promised by the current system, the recommended benefits for the poorest 20 percent of recipients would increase by about 5 percent, while those for the wealthiest retirees would fall by almost 20 percent.

One may disagree with his conclusions, but at least he has read the report and decided to report on what he read.

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Professor Krugman has an opinion piece in the NYT today chastising the “Hijacked Commission.” No one who has read Dr. Krugman’s columns before will be at all surprised with his take on the National Commission on Fiscal Responsibility and Reform. It may be “bipartisan,” he notes, but this simply means that the commission will be a compromise between “the center-right an the hard-right.”

Krugman opens his indictment with the following observation:

Start with the declaration of “Our Guiding Principles and Values.” Among them is, “Cap revenue at or below 21% of G.D.P.” This is a guiding principle? And why is a commission charged with finding every possible route to a balanced budget setting an upper (but not lower) limit on revenue?

This is a rather selective reading. The earlier pages discuss the need to reduce the debt (or soon face $1 trillion a year in interest payments) and move toward a balanced budget, lest we push the costs of our decisions on to future generations. Before discussing revenues, the report then proposes: “Bring spending down to 22% and eventually 21% of GDP.”  It is within this context that the co-chairs propose that revenues be capped at or below 21% GDP.

Professor Krugman’s question, to repeat, is: “why is a commission charged with finding every possible route to a balanced budget setting an upper (but not lower) limit on revenue?” The answer: because the limit it sets on revenue matches the limit it sets on expenditures (hence the goal of balancing a buget).

Any exercise of this type must begin with an assumption of how large the government should be relative to GDP and then explore means of reaching this goal. This would be true even if the commission had assumed 30, 40 or 50 percent of GDP. Of course, one can only speculate that there would be fewer complaints from Professor Krugman had the commission assumed that government should spend 50 percent of GDP and then proposed to cap revenues at this level.

On the issue of revenues, as noted in an earlier post, the co-chairs’ report presents three broad options for revenue reform. Within one of the options, it provides four different combinations of  marginal rates and eliminated tax expenditures/exemptions. One of these three involves eliminating all expenditures (another, for  example, maintains most of the major expenditures).  Dr. Krugman’s take:

They suggest eliminating tax breaks that, whatever you think of them, matter a lot to middle-class Americans — the deductibility of health benefits and mortgage interest — and using much of the revenue gained thereby, not to reduce the deficit, but to allow sharp reductions in both the top marginal tax rate and in the corporate tax rate.

Once again, of the three broad options discussed, one variant of one option does what Krugman suggests. By the way, this is also combined with a chart that shows who enjoys these expenditures and, contra Professor Krugman’s assertion, most of the current benefits are claimed by the top quintile not the middle class. This is nothing new, by the way. There is ample empirical support for this claim that our system of tax expenditures and exemptions strips much of the progressivity out of the tax system.

On the Social Security proposals, Dr. Krugman like others who likely wrote their critiques before reading the report (or wrote their critiques assuming, quite rationally, that no one else would read the report) focuses on the gradual increases in the retirement age without saying a word on what would be the greatest change: progressive indexing. Once again, this would retain the benefits for lower wage workers while significantly reducing benefits for upper income workers.

Why does this feature of the reform proposal go unaddressed? The simple answer: the closer you come to transforming Social Security into a means-tested policy, the more you subject it to the political dynamics that have limited the expansion of other welfare programs (or, in the case of AFDC, led to its elimination). Retain its universal benefits, and you retain the broad base of support that will lead to its ongoing expansion (until it collapses under its own weight, of course).

I strongly suggest that readers of Pileus go and examine the report (available here). It is 50 pages of PowerPoint slides. Don’t rely on editorial writers or bloggers of any ideological stripe to do the work for you.

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Alan Simpson and Erskine Bowles foreshadowed some of the ideas currently being circulated within President Obama’s National Commission on Fiscal Responsibility and Reform with their co-chairs’ proposal (download here).

The work of the Commission is critical. The deficit is heading toward the 10.6 percent of GDP (the highest in the postwar period) and the debt is currently 94 percent of GDP, projected to break the 100% mark in the next few years. The major unfunded entitlement obligations are going to lead to collapse unless reforms are initiated soon.

To provide a quite and simplified overview of the co-chairs’ proposal (it is only 50 pages long, worth a read) let me say a few words about the spending and revenue sides.

On the spending side:

The goal is to reduce spending to 22 percent of GDP (and ultimately reduce it to 21 percent of GDP). This is to be achieved in a number of ways, including caps on discretionary spending (including $200 billion in cuts by 2015, split evenly between defense and domestic). There are also recommended reforms in medical entitlements (basically the list of incremental reforms that have been discussed widely in recent decades). For Social Security, the recommendations include progressive indexing (i.e., maintaining the current formula for low income workers but switching to the chained CPI for those above the 50 percent breakpoint) and increases in the earning cap combined with gradual increases in the retirement age (to 68 by 2050 and 69 by 2050).

On the revenue side:

The goal is to raise revenues to 21 percent of GDP. This is to be achieved by reducing marginal rates and, most importantly, eliminating some tax expenditures and exemptions (at the extreme, this could be worth $1.1 trillion).  The report provides a series of options. At the extreme, marginal rates drop dramatically (8%, 14%, 23%, and 26%) when combined with the elimination of all tax expenditures and exemptions. If one wanted to retain child tax credits, the EITC, and current mortgage interest, health and retirement benefits, the marginal rates would have to be higher. This is combined with a modest increase in the gasoline tax.

On the expenditure side, the Democrats have already declared the proposal DOA.

Speaker Nancy Pelosi  characterized the proposals as “simply unacceptable.” “Any final proposal from the commission should do what is right for our children and grandchildren’s economic security as well as for our nation’s fiscal security, and it must do what is right for our seniors, who are counting on the bedrock promises of Social Security and Medicare.”

Not to be outdone, AFL-CIO President Richard Trumka clained that the proposal told “working Americans to ‘Drop Dead.’”

Unsurprisingly, the GOP is displeased with the tax reforms.

A few initial comments are in order:

First, the goal of reducing government to 22 percent of GDP seems overly modest.  This was largely the level of spending exhibited during the 1980s and the end of the George W. Bush presidency. Reductions to 2000 level (18 percent of GDP) would seem to be within reach.

Second, the howling from Pelosi and Trumka is painful. The proposed changes in Social Security would have positive impacts on low-income elderly (they would retain the same COLA formula and the program would be there for them in the long run). The greatest negative effects would be felt by high-income earners (via progressive indexing and increases in the cap). The tax reforms—particularly if we eliminate all exemptions and expenditures—would shift a greater burden to upper income earners (the primary beneficiaries of the “hidden welfare state”).

If I could simply impose changes in Social Security, I would likely means test the entire program (and do the same with Medicare). I would eliminate the exemptions and expenditures from the tax code but retain slightly higher marginal rates to accelerate the movement toward a balanced budget. But given that we have to work within the world of the politically possible, this seems like a credible—if modest—first step.

Prediction: The political capital to be gained from opposing reform will prove far too attractive for anyone to pass up and the final report of the National Commission on Fiscal Responsibility will be stored safely in the Library of Congress only to be discovered by future historians hoping to document the decline of the Republic.


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Like many other people, I was underwhelmed by the recently released Republican “Pledge to America.” Longwinded, wishy-washy, and mostly tinkering on the edges.

I am not a member of the Republican Party (or any other party), and I am indeed one of those who fails to much difference of substance between the two major parties—at least on fiscal issues. There are differences on social issues, but, as I have argued before, those issues pale in importance to the fiscal reckoning that looms before us.

I am not alone in thinking this. In fact, I believe this cluster of fiscal concerns constitutes the core of what animates the Tea Party. It is what explains why they oppose some candidates, including some Republicans, and why they favor others, including some independents. Their surging influence gives me some hope that we might finally address this issue, and it is why I welcome their contribution.

But I am not here to defend the Tea Party qua party either. I want us to get our fiscal house in order—now. To that end, I humbly offer what I believe would be a winning, and indeed inspiring, agenda for an ambitious group of politicians.

Call it “The Principles of American Renewal”:

1. No new taxes of any kind.

2. No new spending of any kind.

3. An immediate, across-the-board 5% reduction in the budgets of every department, agency, bureau, institute, and program currently operated under the auspices of the federal government. That includes both “discretionary” spending and “mandatory” spending budget items.

4. Do the same next year, and then freeze all spending levels there unless a super-majority of both houses of Congress approves otherwise.

That’s it. It’s not much, but I think it has considerable virtues.

First, it does not require us to argue about which agencies, offices, etc. should be cut and which should not—cut them all, with proportionate equality.

Second, no one can claim, at least not credibly, that there is not at least 9.75% of fat (what two years of 5% cuts amount to) to cut in every single line of budget in the federal government.

The 2010 federal budget (October 2009–September 2010) entails spending $3.55 trillion dollars. So this policy would entail a 2011 budget of approximately $3.37 trillion, and a 2012 budget of approximately $3.20 trillion—a savings, after two years, of some $350 billion, bringing federal spending down to what it was all the way back in . . . 2008. Is anyone willing to claim that the federal government was just not spending enough in 2008?

Third, if Daniel Mitchell is correct (H/T Roger Ream), a policy like this would rapidly balance the annual budget, and it would be a good first step toward addressing our longer-term national debt.

Fourth, there are many, many households and business who have had to make similar adjustments. Many of them indeed have gone completely under and wish they only had to make a 9.75% adjustment over two years. So this pledge could enable its supporters to claim that they understand our economic difficulties and are willing to do their part.

There would be some obstacles, of course. This policy would require reform in some entitlement regulations, and special-interest groups would complain about their funding decreasing. But politicians could insulate themselves from the worst of the complaints by claiming, truthfully, that their hands are tied by the need for across-the-board reductions; no one is being singled out for special treatment.

A pledge to support a program like that, backed up with, perhaps, a promise to resign if a candidate voted otherwise, would, I preduct, be a winning one. If enough people got elected on it, it might also actually do some good in Washington, making it a win for the rest of us as well.

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