Thursday, March 15, 2007

The Center for a Responsible Federal Budget

On Tuesday, I had the opportunity to attend the annual conference of the Committee for a Responsible Federal Budget and participate in a roundtable with its Board of Directors and others. The president of CRFB is Maya MacGuineas, the "M" from the LMS plan. Here are the points I made:

1) Articulating a Budget Target

Some of the discussion referred to the possibility of a budget summit. (The CRFB's co-chairman have called for this publicly.) I think that the critical element of budget policy is setting the target. I think the target has (at least) two parts.

First, the government budget should be in balance over the course of business cycle, where budget here refers to the General Fund, excluding surpluses or deficits in entitlement programs. As an alternative, I would accept a weaker standard that there be no trend in the ratio of total federal debt to GDP. (This debt figure includes any debt held by government trust funds.)

Second, all entitlement programs like Social Security and Medicare should be sustainably solvent using enumerated and dedicated revenue sources. Sustainably solvent means that the program's trust fund is projected to have a positive and non-decreasing balance at the end of the relevant projection period. Enumerated and dedicated revenue sources means that the practice of relying on the General Fund to finance upwards of 75 percent of Medicare Part B and D should end--no open-ended commitments. Enumerate a revenue source to pay for it.

Personally, I won't work actively for the election of any political candidate or the in the administration of any politician who espouses a budget policy at odds with these targets.

2) All Dollars Matter

I still give the current Administration great credit for being willing to engage on Social Security's solvency. But I remain disappointed in the way that engagement was undermined by policies toward other entitlement programs and the General Fund (leaving aside design and marketing issues in the personal accounts). The public was supposed to be concerned about Social Security reform because the program is projected to shift from surpluses to deficits as the Boomers retire, life expectancy continues to increase, and fertility rates remain around 2. I acknowledge that's why I'm concerned. That's why the President said he was concerned, or at least one of the reasons.

If concern over tax burdens on future generations is what motivates you, then it is completely inconsistent with that motivation to pass a Medicare prescription drug bill that generates a projected unfunded obligation that is bigger than the projected unfunded obligation in Social Security. It is also completely inconsistent with that motivation to run General Fund deficits that are not balanced by later surpluses, raising the debt burden on future generations. This sort of inconsistency will doom any chance at prudent reform of any of the programs.

3) What If This Becomes a Class Conflict?

I've been working on Social Security and its reform for over a decade, closer to two. I have always framed the issue as a matter of conflict between generations over resources. The inconsistencies in #2 are starting to frame the debate in terms of class. For example, those who want to preserve entitlement programs as they are currently structured think that debt finance of entitlement programs is not so bad. Debt is serviced primarily through the income tax, and of all taxes (other than inheritance taxes), the income tax is the most progressive. So why accept any increase in payroll taxes or mandatory broad-based contributions to personal accounts now? The normal answer would be so that we can reduce the tax burden on future generations. But they don't see it that way. High future income taxes fall on the highest-income members of future generations. According to this view, those people are largely the children of the highest-income members of the current generation who, again according to this view, are not paying enough income taxes today. Sure, they would rather have the current highest-income people pay more today, but the second-best alternative for them is the highest-income people some other time. When this becomes an issue of class divide, I think we'll have an even tougher time bridging it.

I'd like to take this opportunity to thank people who have given me feedback through the blog about these issues. Anyone who's been reading for a while can see how my views have been shaped through these productive and polite exchanges of ideas.


TStockmann said...

And I'd like to return the thanks as a reader. Your willingness to actually consider the more thoughtful responses shows that people aren't (necessarily) doomed to talk past each other on this subject. Rhetoric and posturing may still win out over analysis in practice, but it's refrshing to have a choice.

Fritz said...

Medicare part D was inevitable. Be glad it is a private delivery system. Despite partisan efforts to derail the implementation, it is quite popular. Perhaps over time, the rest of Medicare will follow suit. I'm not as concerned about Medicare because I believe that a major innovation in healthcare will surface in the coming decade.

One thing never mentioned in the Social Security debate, K-12 education. If we were to reform that delivery system, double the amount of high school graduates capable of college education, the SS system would become solvent. The US has far too many low GDP producers. That is evident just by the shift in medical benefits for full time workers.

One danger of your SS plan, concentration of investment. Lifting the cap on high GDP producers would shift investment dynamics of that money. In fact, potential GDP could actually make the system worse.

Tom said...

Andrew, I think people have quite a nuanced view of all this, contrary to the belief of the pundit class. Most people know that a) we won't get as much as they're promising, and b) someone else is likely to pay the freight.

The issue with medical expenses is that there is no "substitute"...I can get health care or die. The best analogy is feudal much as you might resent them, you can't live without them and they can extract enormous amounts of money from you. You'll notice that this didn't stop until (over the past 100 years) we learned we could indeed live without them.

Right now, doctors have us in the same bind...and, as in feudal times, we turn to government to "protect" us...and you can expect a couple of centuries of conflict over it.

Now, over to Fritz on the subject of doubling the number of college-ready people...Hello? Take a 1950, what, 10% of people went to college? Now, 70% do some or all of college? What planet are you living on?

I put the burden of proof on you: the US has the best economy in a world where success depends upon education and innovation. Period. By the only rational criterion our system works better than everyone else's: fond memories of the old days when things were really tough (oh, puh-leeze) do not count.

Fritz said...

Entry to college is not the same as capable of college, half never finish. 12th grade testing is abysmal. Yes, we have the best secondary education in the world, but our K-12 is not serving our economy or democracy.

Healthcare also reflects this gap. Wealth drives healthcare just like auto safety, but like your feudal example there are fewer substitutes.

I don't understand what you are claiming, I'm a free-enterprise capitalist.

Lord said...

What If This Becomes a Class Conflict?

Isn't it that already, only with disguised motivations?

Edward Charles Ponzi Jr. said...

What are the growth assumptions that are used to generate the current view of the long-term fiscal gap?

What if we have a nice long recession starting around now?

Anonymous said...

I find some if the remarks you make here rather surprising and even disturbing.