Friday, September 18, 2009

Can the budget deficit be closed by spending cuts -- and "spending cut nitwits"? 

Or: Looking at the "long game" true deficit hawks must play.

Bruce Bartlett, long time conservative, supply-side economist and member of the Reagan and Bush I administrations (although disillusioned and embittered by Republican policy since Bush II) looks at the surging budget deficit and the prospects for spending cuts, and despairs. He writes in Forbes, "We Can't Cut Spending. Why? Because the Votes Aren't There". is impossible to get control of spending without cutting entitlement programs. Many Republicans agree, but they never make any serious effort to do so. On the contrary, they defend entitlements when Democrats suggest cutting them.

The Republican National Committee has run television ads opposing cuts in Medicare because Obama proposed using such cuts to fund health reform. Many demonstrators at right-wing tea parties were seen carrying signs demanding that the government keep its hands off Medicare....

How likely is it that the people protesting Obama's Medicare cuts will stand with Republicans if they propose cutting that program even more to balance the budget? They will switch sides in an instant. The elderly will fight anyone who tries to cut their benefits even as they hypocritically demand fiscal responsibility and rant about the national debt. The elderly are the reason why we have a national debt.

Unfortunately, the ranks of the elderly are rising. In 1980, those over age 65 constituted 11.3% of the population. Today they represent 13%, a figure that will rise to 16% in 2020 with the aging of the baby boomers and increasing longevity, 19.3% in 2030 ...

Furthermore, the elderly are a rising portion of the electorate. Back when Medicare was established, those over 65 constituted 15.8% of voters. Last year, they made up 19.5%...

In short, there is no evidence that it is politically possible to cut spending enough to make more than a trivial difference in our nation's fiscal problems. The votes aren't there and never will be. Those who continue to insist otherwise are living in a dream world and deserve no attention from serious people.

[My emphasis in that last paragraph, back to that in a bit.]

He's even more candid on his new blog...

Why Spending Won't Be Cut

Every time I try to explain why our fiscal problems are so deep that higher revenues must be considered, some nitwit always says to me, ďWhy donít we just cut spending?Ē

Itís as if the choice between raising taxes and cutting spending is no more difficult than the choice to buy melon or cantaloupe for breakfast.

What these nitwits implicitly assume is that we live in some kind of dictatorship where Ron Paul has Stalin-like power and spending can be cut with the wave of a hand, where no one has to worry about getting the votes in Congress for politically painful legislation, where the budget largely consists entirely of foreign aid, where there are no entitlement programs or interest on the debt to pay, and where the primary beneficiaries of spending (the elderly) arenít the largest and fastest growing voting bloc in America...

Is he right? "Yes" about today -- but largely "no" about tomorrow, in this observer's opinion.

It's certainly true that the budget deficits to come won't be eliminated by spending cuts exclusively, but that's a bit of a sham argument -- it's at least as true that they can't possibly be eliminated by tax increases at alone. Just look at them (especially the last chart). No possible tax increases can cover all that.

That leaves just two possibilities: (1) National bankruptcy and social collapse, or (2) a combination of tax increases and spending cuts in a political bargain.

Yes, spending will be cut, because there is no other option. The challenge for deficit hawks is how to best prepare for and manage those cuts from here.

There are ample precedents of option #2 working on a major scale in the US. When Social Security went broke in 1983 its funding gap was closed near exactly 50%-50% with benefit cuts and tax increases. And the unsustainable Reagan deficits produced Bush I's deal with the Democrats of a ("please forget reading my lips") tax increase in exchange for spending cuts plus meaningful "paygo" rules that restricted future spending growth. (Which created a good part of the following fiscal improvement for which the Clintonistas later claimed 120% of the credit.)

Bartlett is right that "counting the votes" is essential, and that no votes today exist for cutting spending on anything, least of all entitlements. Not on either side of the aisle -- and that each side will viciously (and hypocritically) attack the other for proposing any cuts.

When Republicans proposed a modest, progressive, Pozen-style Social Security benefit cut for the rich, Democrats stormed town halls to demagogue it as "destroying Social Security to make grandma eat cat food". The Democrats today are proposing cuts in Medicare, and Republicans are returning the favor.

But that's just today, while keeping the status quo is a "free lunch" for both parties.

Today's political calculus is easy: "spending cuts = political pain" for Congress, "status quo = no pain". Ergo "status quo" wins, each and every time. (The future be damned.) Simple.

Instead, let's consider political incentives in the future when big tax increases will faced. Now "national bankruptcy = more pain than we can endure", and "status quo = national bankruptcy". To avoid that the political calculus becomes rather more interesting: "spending cuts = political pain", "tax increases = political pain" ... leading to ... "If I'm going to feel pain, so are you ... you aren't seeing me take a tax increase until I see you take a spending cut ... now let's look for the combination that's least painful for both of us."

For instance, take the Social Security Trust Fund. Today it's easy for the left to say: "It's simply unimaginable that benefits secured by the Trust Fund won't be paid. Those are US bonds in the Trust Fund!" -- especially with retirees becoming a larger part of the voting electorate all the time!

But it's easy only because it's free. Today nobody on the left has to do anything at all about it to say the benefits will be paid. They don't have to incur the serious political pain of saying "let's raise taxes a lot now."

Moreover, the argument that the "senior vote" will block all spending cuts isn't nearly as persuasive as it may first look -- as evidenced by Social Security's "tax increase for benefit cuts" reform bargain of 1983.

The key here is that at the time of the deal you cut only the benefits of the few richest seniors through a means test. Beyond that you keep the benefits of current seniors intact, and cut only the benefits of the young who aren't seniors yet.

The 1983 Social Security reform did this in two ways:

[This is getting long. If you are still interested, read on. Otherwise, on to the next post.]