Category: Uncategorized

Troy posted a link to the video of the CRFB dinner's panel discussion on "Are Fiscally Responsible Elections Possible?" From the lineup, you might have expected this to get interesting. Mark Halperin was the moderator. There were two former OMB directors in Leon Panetta (Clinton) and James Miller (Reagan). There were economic advisors from the three remaining Presidential candidates in Gene Sperling (Clinton), Jeff Liebman (Obama), and Doug Holtz-Eakin (McCain).

Things did get interesting around the 33 minute mark, when Miller started peddling supply-side gibberish. <!--break-->Panetta and Sperling gave him grief, but the panel blessedly moved on. I started thinking about the right way to put the supply siders on the spot. Here are the two questions they should answer if they believe that the 2001 and 2003 tax cuts raised revenues:

1. How much wider would the deficit be now if those tax cuts had not been enacted?
2. How much lower would tax rates have to go in order for you to stop insisting that further tax cuts would raise more revenue?

I wonder what we would get.

Elsewhere in the blogosphere, Jeff Frankel spends some time documenting extreme supply-side statements by Republican officials, wondering whether McCain is going to join them, and poking fun at those who simultaneously believe that tax cuts raise revenue but also "starve the beast."

I enjoyed Stan's account of the CRFB annual dinner and the opportunity to assemble as the full CG&G team. I'll have one thing to add on the dinner in a later post. Since I was making the trip from the frozen tundra of New Hampshire, I made a day of it and attended the roundtable on the economy, financial markets, and the budget that preceded the dinner. For my part, I contributed the following to the discussion:

First, I asked the question, "Who are the Bear Stearns creditors and why is it so important [that it requires Central Bank intervention] that they be paid?" They invested and it turns out that they lost. They might have a case in court, but why do they have a special claim on the federal government? I don't believe they do, and nothing I heard convinced me otherwise.

Second, there was some discussion that picked up on Stan's frequent theme that the Bear Stearns bailout opens the door to rescue operations for Main Street as well. I pointed out that a good chunk of the January economic stimulus deficit spending package was such a financial bailout. Considering that a large percentage of those who will receive their Wii-bate checks have credit card balances as large as what they'll get from the IRS, they would be wise to pay down their balances. If they do that, then the federal government has issued debt to replace the debt of other, less creditworthy borrowers. Voila, a bailout.

Third, I reiterated my disagreement with the CRFB's position this winter that favored a quick compromise on the deficit spending package over a constraint that it be paid for in the near future through higher taxes or lower spending elsewhere in the budget.

For my remarks at last year's roundtable, see this earlier post.

I agree with my partners in crime--Congress and the President should be able to conduct responsible budget policies even without putting any of it on autopilot. But they don't conduct responsible budget policies, and, more importantly, we don't hold them accountable for this at election time, and so I think some type of automatic trigger could work.

Pete notes that the triggers are likely to come at the tough points in the business cycle, leading Congress and the President to undo them anyway. If I didn't believe that in December, I certainly believe it after a winter orgy of stimulus packages and bailouts. Stan points out that for entitlement programs, the time horizon is so long that any forecast isn't good for anything but grins. One is complaining about short term concerns, the other about long term concerns.

What would a happy medium look like? Here are some ideas:

The Social Security Trustees extend the projections (the actuaries get cranky when you call it a forecast) out to 75 years, but most of the projection is on autopilot after just a couple of decades, if that long. (Take a look at this table, for example.) We could apply the "sustainable solvency" definition much earlier in the projection period if we were building in a trigger.

We can also be creative on what event is a trigger and what gets triggered. The advent of oral contraception in the 1960s and the legalization of abortion in the 1970s should have triggered a frank discussion of permanently lower fertility rates that found its way into policy. It doesn't matter what your view on Social Security is--you have to acknowledge that lower fertility rates make the pay-as-you-go financing more difficult to sustain. It would have been nice to recognize at that time that as generations were investing less in their children, they should have been paying more for their own retirement or expecting less per capita.

We used to do this with the Advisory Councils. But the 1994-6 Advisory Council was the last one, and the Social Security Advisory Board is far less prominent as an ongoing entity.

I think what we need is some good old-fashioned Congressional hearings, triggered by projections of long-term budget imbalance, with the expectation--imposed by the voting public--that there will be legislation produced to resolve the projected imbalance.

Stan wonders what sustainable means in the context of long-term entitlement reforms. We could start (and probably end) with the definition of "sustainable solvency" in the 2008 Social Security Trustees Report:

When a program has positive trust fund ratios throughout the 75-year projec­tion period and these ratios are stable or rising at the end of the period, the program financing is said to achieve sustainable solvency.

It means that for as far as can be projected, the entitlement program does not make a net claim on the rest of the government's resources. I don't think most people would care about a small net claim, but the projections for Social Security currently indicate a net claim of 1.7% of taxable payroll over the next 75 years and 3.2% of taxable payroll over the infinite horizon.

If we were the sort of country whose political system could be counted on to make sensible decisions when faced with an immediate crisis and prudent decisions along the way to avoid those crises, then I wouldn't worry about a net claim even that large.

But we are not that sort of country, at least not without a whole lot of effort applied to the policy process. I wouldn't call the Brookings-Heritage paper "innovative," any more than I would call the LMS plan "innovative." They are compromises agreed to now with the hope of avoiding policy changes done in immediate crisis, which seldom work out well.

Via the Real Time Economics blog, here is a link to a paper by the Brookings-Heritage Fiscal Seminar that recommends that:

• Congress and the president enact explicit long-term budgets for Medicare, Medicaid, and Social Security that are sustainable, set limits on automatic spending growth, and reduce the relatively favorable budgetary treatment of these programs compared with other types of expenditures.
• The programs be reviewed on a regular schedule by the Social Security and Medicare Trustees or the Congressional Budget Office to determine whether they will remain within budgeted amounts.
• Significant long-term deviations from budgeted amounts trigger automatic adjustments in benefits, premiums, provider payments, or other revenues. These adjustments could only be over-ridden by an explicit vote of Congress and acceptance by the president.

<!--break-->

It seems like the second one is already done, but the first and third would be improvements to the way these programs are handled.

Read the whole thing.

... is apparently Louisiana, as Governor Jindal receives high praise from the Times Picayune's editorial board.

The Legislature begins Monday a three-month regular session that provides a chance to continue pushing for reforms, this time on issues ranging from fiscal policy to workforce training.

Lawmakers need to make the most of the opportunity.

The session's centerpiece is Gov. Bobby Jindal's $30 billion inaugural budget. The details are still being worked out, as individual departments take their funding requests through the legislative hearing process. But the broad policies in the governor's first spending plan are encouraging.

Taking a different course from the previous administration, Gov. Jindal proposes to cut in half, from $800 million to $420 million, the state's dependence on the surplus to pay for recurrent expenses. His blueprint also would shrink the bloated state bureaucracy by eliminating more than 1,300 vacant jobs.

These are significant steps to move Louisiana in a responsible fiscal direction. They would begin preparing the state for the likelihood that revenues may level off or even fall once the post-hurricane economy cools down.

These policies complement the recent decision from the administration and legislators to spend most of the leftover surplus from the last fiscal year in long-term investments such as roads, flood protection and coastal restoration.

In its budget proposals, the Jindal administration also is promising to post on-line specific information on recipients and the uses of line-item appropriations, shedding light on a vehicle some lawmakers have used in the past to benefit pet groups with nebulous purposes. Giving the public easy access to that data is important.

Read the whole thing, and watch the new governor closely. His star is still rising.

I thought that Eduardo Porter's editorial in The New York Times today was relevant to our discussion of education finance. His thesis:

[R]acial and ethnic diversity undermine support for public investment in social welfare. For all the appeal of America’s melting pot, the country’s diverse ethnic mix is one main reason for entrenched opposition to public spending on the public good.

He cites a number of studies to support this thesis. His conclusion is of the form that we should overcome the challenge:

Globalization presents the United States with an enormous challenge. Rising to the test will require big investments in the public good — from infrastructure to education to a safety net protecting those most vulnerable to change. Americans must once again show their ability to transcend group interests for a common national cause.

What if we could work smarter rather than harder? Why do all differences (here, group interests) need to be transcended? Why can't the easiest ones be acknowledged and accommodated, saving this rather difficult process of "transcending" for the few places where it is most critical?

Question for you: what are those issues where you support more individual choice, and what are those issues where you think we need to do this sort of "transcending?"

Stan asks, "Why shouldn't there be a market for public education?" and motivates his question with an interesting article from The Washington Post. I would rephrase the question as I have done in the title and try to answer it as follows.

<!--break-->

The source of funding, at least to a level of an adequate education for all students, should be public. Education cannot be the way to break the intergenerational transmission of poverty and low income if those from disadvantaged backgrounds get trapped in substandard schools. The cost of properly educating students from disadvantaged backgrounds is higher than for other students. There should be some redistribution inherent in the funding of public education, even if market-based elements are introduced.

The use of the funds, when deciding among a set of accredited providers, should not be publicly controlled. Families should have the opportunity to spend the money that would be allocated to their childrens' education at any school, whether public or private, that is certified and willing to do so. The example in the Post story is an example of how a family with the means to do so is simply foregoing its claim on D.C. funds and paying all of it out of pocket. This makes it too difficult--there should be some amount (even if not the whole amount) of the expenditures that would have been made on the family's daughter that is now available to help pay the tuition at the school in Maryland. If that were the policy, then more students and those from less advantaged backgrounds would have the same sorts of opportunities.

Money should follow the student rather than be paid directly to the provider. Once you have that, good things about a market can follow, without abandoning a core commitment to funding an adequate education for every student.

For more of my views on education reform, see this earlier post.

Paul Krugman correctly points out the flaws with an argument of the form, "there is no trust fund, so the system will be in crisis in 2017." But his response is not a good argument against reforming the system now.

I acknowledge that we should be careful about demonizing the word "crisis." The use of the word "crisis" should be construed as an attempt to focus people's attention on how economic and fiscal relationships will change as we transition to a society with so many more retirees relative to workers. For example, in 1994, the World Bank published a very influential research report, "Averting the Old Age Crisis: Policies to Protect the Old and Promote Growth" that has been cited extensively. The report's conclusions for how countries should manage the transition resemble a lot of what people like me pushing for reform now: an unfunded public system to keep retirees out of poverty; a mandatory and funded system on top of that public system to promote savings and growth; and voluntary savings opportunities if individuals want to save beyond what has been mandated.

Ten to fifteen years ago, this was not viewed as particularly controversial. In the interim, we missed our chance to make progress during the Clinton administration, as the momentum that was building (e.g., "Save Social Security First") for phasing in reform gave way to impeachment proceedings. I supported this approach and was looking for ways to make it happen. As the Clinton Administration gave way to the Bush Administration, we got a Social Security Commission that had a very tough task before it. It was supposed to "strengthen" Social Security but was not supposed to collect more revenue to do it. I would take the Commission's recommendation (Model 2) over the status quo, but that's mainly because I have a small-government view of the world. Others who don't share that view are going to push back, and they did, with sufficient force to block the whole thing.

But none of this means that reform is not a pressing issue today. For example, Krugman states, "As Kevin Drum, Brad DeLong, and others have pointed out, the SSA estimates are very conservative, and quite moderate projections of economic growth push the exhaustion date into the indefinite future." As I pointed out at the time, this gives a very odd definition to "quite moderate projections of economic growth."

You can look at the sensitivity analysis for the growth in real wages in Table VI.D4 and see that increasing the projected rate of growth in real wages by 0.5 percentage points (around the baseline growth rate of 1.1% per year) shrinks the 75-year actuarial deficit from 1.70% to 1.12% of taxable payroll. That gets us about a third of the way toward a zero balance over 75 years and is a necessary but not sufficient condition to support Krugman's claim. If continued linear extrapolation is valid, then we would need to add about 1.5 percentage points to the real wage growth rate--over 75 years--to get the balance to zero. That's sustained real wage growth of 2.6% per year for 75 years. Krugman should come out and say that such a number is "quite moderate" if that's what he means. Seems pretty optimistic to me.

So I return for now to the same place we started: The population is aging. The aging population will place larger fiscal demands on workers in future generations. We can see this demographic challenge now. We should work to face up to it now.

Agreed, it is a very small set of people who will feel sorry for Jimmy Cayne getting "cayned." I did feel a little sorry for Michael Fay in 1994, but I didn't support his Presidential bailout either!