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 cut" 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:

(1) Making benefits subject to progressive income tax, with the tax remitted not to the Treasury along with other income taxes, but instead to the Social Security Administration (making it a disguised means test). Initially, very few retirees were subject to this tax on benefits. But because the tax-exempt amount of benefits is not indexed for inflation, more and more retirees have paid more and more tax on benefits every year since.

(2) Visibly reducing benefits for the then young, by increasing the retirement age for younger workers at which they could receive benefits (with the younger they were, the greater the age increase) .

By the late 2020s approximately a 15% across-the-board income tax increase will be needed to the Social Security Trust Fund's operations. At the same time, an alternative option of avoiding the tax increase via a spending cut that would means test approximately the richest 15% of seniors out of benefits will be proposed, you can be sure. (Such ideas have already been proposed.) Who will vote for what then?

Let's count the voters and look at their self-interest then:

[] Will average retirees want to have taxes on all their retirement income (pensions, investments, IRAs, Social Security benefits!) go up, and their retirement incomes thus go down, to keep millionaires' benefits whole?

[] Will "the rich" want to pay more tax on all their income to protect their relatively piddling Social Security benefits?

[] Will younger workers raising families want to pay tax increases for ... nothing?

[] Will the Defense Dept., and Agricultural Dept., and all the other big government departments, lobby to use scarce general revenue to make payments to "the rich", defunding themselves?

If plausible answers are "no", "no", "no", and "no", then the day is coming when the political incentives favoring spending cuts will be very different than today. Thus my emphasis in Bartlett's...

The votes aren't there and never will be. Those who continue to insist otherwise are living in a dream world...
... he's right that there are no votes there now -- but a heck of a lot more votes will be there in the future, and that's what serious spending-cutters should prepare and wait for.

In the meantime, what would happen if we fought the budget deficit with a serious tax increase today? (Bartlett has argued for adopting a new Value Added Tax, a type of national sales tax, to contain the deficits.)

Say "Social Security surplus" -- the biggest single revenue increase we've had for the last generation. Did it reduce the national debt? Did the politicians just spend it? Worse!

"We find that there is no empirical evidence supporting the claim that trust fund assets have reduced the level of debt held by the public. In fact, the evidence suggests just the opposite: trust fund assets have probably increased the level of debt held by the public.

"... each dollar of Social Security surplus appears to have actually increased the debt held by the public in the past by $1.76..." [Kent Smetters, pdf].

OK, if the Democrats had a couple hundred billion dollars a year more in revenue today, does anyone really believe they would save it to close future deficits, rather spend it immediately on a bigger health care program and the rest of their agenda, to win the next election?

Say: "Cap-and-trade permits give away", with near $100 billion a year of potential deficit-closing revenue given away vrooooom by the Democratic congressional committee chairs to big corporate interests, quick as one can blink.

That was even after CBO said the corporations would be fully compensated with just 15% of the revenue, and Obama's budget director Peter Orszag had said giving away the revenue that way would be, quote, "the largest corporate welfare program that has ever been enacted in the history of the United States."

Yup, a lot of concern about the national debt there!

Yes, big spending cuts enacted today are a mere dream, but big tax increases today are a danger because they are a real possibility, and would be spent away just as wastefully and quickly as the cap-and-trade permit revenue -- and then, in the nearing future when we will really need new revenue, all the easy, lowest-pain, least-damaging revenue raisers will be gone.

So for true budget hawks, the least-bad course from here -- by counting the votes and, by political precedent -- is zero tolerance for any tax increase proposal until comparable-sized spending cuts are on the table as part of the deal.

The combination is the only possible long-term budget resolution, so that's what people who are serious about the debt situation should be working to set up now. In this observer's opinion.

As to the "nitwits" who want major spending cuts now, a couple more thoughts...

[] There is vast waste in government spending today: From Warren Buffett's employees at Dairy Queen paying for his entitlement benefits (what's either progressive or efficient about that?) ... to massive Medicaid fraud ... Obama's proclaimed 30% waste in Medicare (why is "insurance reform" needed to cut that?) ... crop subsidies for Big Agriculture... hundred dollar hammers and thousand dollar toilets showing the efficiency of billion dollar programs at the Pentagon, etc. etc. ... the list goes on and on and on.

On the merits, the nitwits who say this waste should be cut as the first thing are absolutely right.

The only thing that's actually maybe "nitwit" about them is thinking there's any chance it will be cut -- that the politicians will do the right thing. (How naive can they be, eh?)

But the more they protest, the more their accurate-and-valid complaints will be heard and be appreciated by "tax increase" day -- and the more they will be felt in the final spending-cut side of the bargain. Which is good. So bless them. Let them nitwit on!

[] As to even the extreme paleo-libertarian nitwits of the right ... without them, who would counter the extreme nitwits of the left? They who want to run up the debt for social spending far beyond even the $60 trillion of today, via "feed the beauty", figuring people who'd vote "no" on a program if they had to pay for it can be given it "free", and so be forced to pay for it later? (Not to mention wanting to nationalize banks and oil companies and pharma companies and any other capitalists who commit the sin of making a profit.)

If only the left could have nitwits and extreme nitwits, where would the center be?

So I say that until the day comes when mutual nitwit disarmament is agreed to -- which will be the day of the tax increase-for-spending cut deal -- let the nitwittery on the right continue.

God bless the right's nitwits. They may save the nation's finances of 2030.