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Friday, March 21, 2003

Krugman 3.21

Krugman is back on his favorite subject, the phony Bush budget numbers. However, fans of the paranormal will not be disappointed by this latest column, so stay with me.

Krugman opens with a funny bit from The Onion. Since the Professor gave us such good laughs with Krug 3.11, in which he seemed to forecast both deflation and hyperinflation, it is encouraging to see his ongoing use of humor as a rhetorical device. Works for me! (Or will, someday).

However (paranormal fans, perk up), the fun begins in earnest with this:

The latest official projections acknowledge (if you read them carefully) that the long-term finances of the U.S. government are in much worse shape than the administration admitted a year ago. But many commentators are reluctant to blame George W. Bush for that grim outlook, preferring instead to say something like this: "Sure, you can criticize those tax cuts, but the real problem is the long-run deficits of Social Security and Medicare, and the unwillingness of either party to reform those programs."

"Many commentators"? And who might they be? What a great opportunity for a quote, or a link, or a footnote, or any reference at all to buttress this point. Who are we arguing with here, anyway? Krug 3.14 regaled us with the following:

...more people than you would think — including a fair number of people in the Treasury Department, the State Department and, yes, the Pentagon — don't just question the competence of Mr. Bush and his inner circle; they believe that America's leadership has lost touch with reality.

Does the NY Times have any rules at all on sourcing? More people than you would think believe that Krugman is simply hearing voices.

Bother. Well, despite the flashing from my "Strawman Detector", I will soldier on, mindful of the possibility that Krugman is rebutting an argument that no one has made.

The Bush tax cuts, not the retirement programs, are the main reason why our fiscal future suddenly looks so bleak.

I base that statement on a new study that compares the size of the Bush tax cuts with that of the prospective deficits of Social Security and Medicare. The results are startling.

...Accountants estimate the "actuarial balance" of Social Security and Medicare the same way a private insurance company would: they calculate the present value of projected revenues and outlays, and find the difference. ...both programs face shortfalls: the estimated actuarial deficit of Social Security over the next 75 years is $3.5 trillion, and that of Medicare is $6.2 trillion.

But how do these shortfalls compare with the fiscal effects of recent and probable future tax cuts?

The new study, carried out by the Center on Budget and Policy Priorities, estimates the present value of the revenue that will be lost because of the Bush tax cuts — those that have already taken place, together with those that have been proposed — using the same economic assumptions that underlie those Medicare and Social Security projections.

OK, here is the Center, and here is the study in question. The first author mentioned, Peter Orzsag, is a former Clinton official who may carry some partisan baggage. Imagine my surprise. But hey, Democrats are allowed to speak too, even in the NY Times. It's still America!

The [tax cut] total comes to $12 trillion to $14 trillion — more than the Social Security and Medicare shortfalls combined. What this means is that the revenue that will be sacrificed because of those tax cuts is not a minor concern. On the contrary, that revenue would have been more than enough to "top up" Social Security and Medicare, allowing them to operate without benefit cuts for the next 75 years.

Excellent, we have arrived at a point! Economists are trained to think at the margin, which may explain why some marginal thinkers are allowed in. The baseline for these tax calculations seems to be the 2000 Tax Code. Perhaps I should put my JK Lasser 2000 Tax Guide in a time vault? Or perhaps that millenial tax code was a third tablet carried down by Moses from Mt. Sinai, and only recently discovered.

Or perhaps the tax code was going to be revised after the 2000 election regardless of who won. Gore, in his bid for the mantle of "tax-cutter", had offered up a tax package which I vaguely recollect as being around $800 billion [mini-update: oops, let's try $500 billion, and scale back accordingly], versus a Bush package of $1.3 trillion. (Yes, maybe $1.6 trillion under some other calulation, I am typing quickly here and the point is, Gore would have cut taxes too.) Also, the Center is including a fix to the AMT that "everyone knows" must occur. Well, presumably Al Gore would have known that too, since he knew everything else. And, although I suppose the prospective AMT fix would be smaller because the standard Federal tax would have been higher under a Gore Administration, I suspect that most of the AMT adjustment would have occurred anyway.

So how much of this $14 trillion, at the margin, should we attribute to Bush? Unknown. The report shows a range for the original Bush tax cut of $7.9 to $10 trillion. If Al's tax cut would have been half of that, then we are talking, roughly, $4.5 trillion.

Bush's new proposals have not been enacted. They total $4.3 trillion. Will we get half of that? Who knows? Since the point of the exercise is to oppose the proposal, let's accept them at face value.

So, the adjusted comparison shows the Bush Program reducing Federal revenue by $7.6 to $9.7 trillion. We are still not sure why we are comparing this tax revenue to Social Security and Medicare, but the Center report tells us that some Administration report mentions this. Could the Bush Administration be the mysterious "many commentators?" We may come back to that, but meanwhile let's ponder this bit of wisdom from the Prof:

"that revenue would have been more than enough to "top up" Social Security and Medicare"...

Well, sure, taxes can do that. Is the Democratic Party proposing that Social Security be funded from general revenues? They do not speak with one voice, so perhaps I missed it, but just what is going in to that lockbox, anyway?

On to his Big Finish, and mine:

"Without those tax cuts, the problems of an aging population might well have been manageable; with them, nothing short of an economic miracle can save us from a fiscal crisis."

Ahh, can I take a page from Arlen Specter's playbook and vote "not proven"? The US GDP is roughly $10 trillion, so if we finance the entire "marginal" Bush tax cut, we are incurring new debts of less than 100% of GDP. Is this a big number relative to US history, or other economies? I think some research will show it to be big, but not unmanageable. And anyway, this number does not necessarily represent new debt - it means that the Federal government must plan to reduce spending or increase borrowing to make up the difference.

Secondly, the Federal Government typically spends about 20% of US GDP, if I remember the many WSJ tirades on this point. How did the Federal share of GDP behave over the 75 year horizon? Were taxes growing as a percentage of GDP, or falling? Perhaps a professional economist could take a moment to sort this out - maybe even a NY Times columnist could do so. If these projections showed the Federal Government growing steadily as a share of GDP, well, maybe that is not appropriate.

Thirdly, what should we make of this: "nothing short of an economic miracle can save us from a fiscal crisis." Over in Europe, the demographics are less favorable then in the US, immigration is less, unemployment is higher, social programs are more generous, current taxes are higher, and, I recollect, budget deficits in at least a few of those countries (e.g., France and Germany) are higher as a percent of GDP, as is current national indebtedness. What sort of a miracle are they hoping for?

The conclusion of the Center report is frank:

The nation faces significant long-term fiscal problems, which will increasingly manifest themselves after the baby boomers retire in large numbers. The nation also is likely to face needs in the decades ahead that will require resources in other areas, including areas relating to children, the environment, the large number of Americans without health insurance, the lack of a Medicare prescription drug benefit, and the uncertain costs of homeland security, as well as other problems that inevitably will arise in the future but that we cannot foresee today. A balanced long-term fiscal policy is likely to entail some changes in Social Security and Medicare to reduce their future claims on the budget. The Administration's tax proposals, however, make the long-term budget problem substantially worse and consume resources that could play a constructive role in Social Security and Medicare reform.

So many unmet needs, and more tax revenues would be lovely to pay for them, under the guise of "Save Social Security First". Oh, and tsk, tsk - in the last sentence, tax proposals "consume resources"? Please, they redirect resources, gents. And maybe some of these new programs just aren't going to hapen at the scale envisioned by optimistic Dems.

UPDATE: Peter Orszag has been studying Social Security for years, and sems to be a Krugman favorite. Here is just a tip of the iceberg from an Orszag paper that Krugman plugged in his Times column back in July 2002.

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