More Entitlement News

We were discussing entitlements recently and said many conservatives and progressives want to ignore the problem.  Jim Geraghty’s Jolt that we missed originally was all over that.  Read it all and it won’t copy but Jim concludes that the folks with the evidence always lose and so politicians are rational to conclude that they are enacting the wishes of the electorate by continuing to drive over the fiscal cliff that almost all of them can see.

Sidebar: Jim also discusses Sex and the City and cites some opinion. We only watched it a few times but we have a theory why it was popular with women.  Our explanation is that the series was populated with beautiful women who were foolish and unhappy. The beautiful characters unhappiness makes ordinary mortals happier by reducing their envy. End Sidebar.

Jim’s take on entitlements might be right and it is seriously depressing.  We need to buy the Washington Post.  Kevin Williamson’s screed is brilliant but it suggests even more pessimism.  Some days it is hard to post because we share Jim and Kevin’s level of depression about politics.

 

 

Advertisements

A Little News On Entitlements

Charles Blahous, a former public trustee for Social Security and Medicare, has a WSJ update on the financial position of these entitlements.  The title is The Social Security Trust Fund Goes Bust.  He says:

The downward spirals have accelerated. The combined Social Security trust funds—one for disability, one for retirement—as well as Medicare’s hospital-insurance trust fund, will begin eating into their reserves this year, according to reports released this week by the programs’ trustees.

It seems to us like an attempt to use the most recent data to galvanize the people to spur the Congress and the President into action.  It really should not be necessary and if the data was slightly more favorable it should not change the situation.  Charles gives us the important message near the end:

The annual press focus on the projected insolvency dates has always been somewhat misplaced. What’s really important is the magnitude of the shortfalls and the difficulty of correcting them, which grows every year.

We agree.  What is amazing is when you Google “Social Security Trustee Report 2018” is how little news it generated.  It mostly shows up on opinion sites.  The one in a news publication, US News And World Report is by Mark Miller and entitled, Repeat After Me: Social Security And Medicare Are Not Insolvent.  And why is an insolvent program not insolvent?

In other words, retirees – and future retirees – would lose nearly a quarter of their benefits. But that is not insolvency, and solutions are readily available to avoid that unacceptable outcome.

Here is an experiment.  Try paying 77% of your bills.  Are you insolvent?  Affirmative.  The outcome of insolvency depends on your creditors.  And if you have no chance, as with entitlements, of ever paying more than 77% then you are absolutely insolvent.  The only question is whether it will be solved before or after bankruptcy court.  Then Mark gives us a summary of the options:

Conservatives favor benefit cuts via higher retirement ages, more means-testing and a less generous annual cost-of-living adjustment. Progressives advocate gradually increasing payroll taxes and lifting the cap on taxable benefits. Considering that middle-class households depend mainly on Social Security for support in retirement, it would be wiser to follow the progressive agenda.

The first and second sentences need a close reading to reveal the bias.  We might convert Mark’s first two sentences into:

Conservatives favor solutions like means testing, more accurate cost-of-living adjustments, higher payments to lower classes, and higher retirement ages.  Progressive advocate higher taxes through increasing tax rates and the amounts subject to Social Security taxation.  Many conservatives and progressives seem to support ignoring the problem.

The last sentence in our quote of Mark is very curious.  Does it mean that the lower class doesn’t depend on Social Security (SS) for retirement?  We would like to see that data.  Our priors are that lower classes rely most heavily on SS of any class.  We, along with many conservatives, would support an increase in SS payments to them.  Middle class depends  on SS between the upper and lower, and the upper class depends the least on SS.  As we see it, the wiser course is the conservative agenda of means testing because it will reduce the payments to the upper class that is less likely to need it.

Fixing Social Security today is relatively easy because there are many politically viable solutions.  None of these solutions have happened because of the political opportunity in opposing any changes.  Fixing Medicare is going to be much harder because of the difficulty in creating a market for medical services.  We know we are not going to start today but let’s start soon for the kids and grandkids because, as Charles says, it gets harder to fix every day.  Start with SS.

 

 

Expected News

When folks as us about The Donald as president we have taken to saying that we hope the next seven years go as well as 2017.  If asked we are quick to say that it is unlikely that The Donald will have a year as good as 2017 between now and 2024.

This week brought more of what we expected from The Donald.  The NYT tells us he has continued to be an avid deregulator:

The Trump administration has adopted new limits on the use of “guidance documents” that federal agencies have issued on almost every conceivable subject, an action that could have sweeping implications for the government’s ability to sue companies accused of violations.

Powerline might be a little enthusiasic when it describes it as fantastic news but The Donald continues to be a great improvement over his immediate predecessor (HIP) or the alternative in 2016.

We knew when we elected him that he was not interested in reforming entitlements or reducing the deficit.  The Donald shared that with HIP and the alternative so voters didn’t have a choice in that area.  The did have a choice on regulation and taxation.  Kevin Williamson at NRO takes many politicians to task:

Like so much else in Washington, [debt] is speeding out of control with no working brakes and no one apparently at the wheel. As Herb Stein famously put it, “If something cannot go on forever, it will stop.”

James Freeman at the WSJ is worried about the Trump Spending Binge too and focuses on the government’s interest payments:

The Trump spending blowout is particularly dangerous because, as stock investors have noticed lately, interest rates are headed north. Washington will spend about $300 billion this year in net interest payments on the federal debt. Last summer the Congressional Budget Office estimated that this annual burden will grow to more than $800 billion by 2027, when it is expected to be more expensive than the entire Medicaid program by some $163 billion per year. This depressing scenario assumes the average annual interest rate paid by Washington rises to just 3.5% by then, still relatively modest by historical standards.

We agree with Kevin and James that we should be working on the deficit.  We support entitlement reform and a tax on carbon to reduce the deficit.  We wish it was now Mitt’s second term but it is not.  It terms of the deficit, HIP was an awful choice and The Donald was better than either the 2016 alternative or HIP because he prioritized economic growth but none of them were good for the deficit.

It is going to be harder to fix the entitlements and the deficit later but there is so little interest in it.  The politicians are not interested and only a few of the voters are.  Lots of writers are but we must not be writing well enough. We would like to get more than we expected from The Donald but we can’t be displeased at actually getting what we expect.

 

Budget Math

We oppose a balance budget amendment (BBA) because of the accounting problems, the big impact, and the bad decisions that will flow from trying to balance the budget in the short term.  We recognize that we have an enormous problem but we don’t see BBA as a solution.

After we wrote that there would be a budget shortfall of a trillion dollars or so in fiscal 2019 we remembered the problem of budget math.  Our state has a biennial or two-year budget. It was always took some work to understand what the annual impact was.  Switching to the federal budget somebody might reply that we could fix the trillion dollar shortfall by eliminating the $1.51 trillion cost of tax reform.  The problem is that the tax reform score is over a ten-year period.  Eliminating tax reform would get you somewhere between a sixth and an eighth of the way there.

We need to work on entitlements. Other areas could help but that is where the money is.  The changes need to be gradual.  For example, we can start means testing on Social Security now but full implementation might come in 20 years. It also gives us time to fine-tune means testing because means testing is very tricky.

Say no to the BBA and always ask about the time frame on budget proposals.

Balanced Budget Amendment

George Will has come out again in support of a balanced budget amendment (BBA).  In fact, George thinks it should be job one for 2018:

We will discover that point [when debt influences growth]  the hard way, unless Congress promptly sends to the states for prompt ratification a constitutional amendment requiring balanced budgets. [Emphasis added]

He also has a explicit suggestion from Glenn Hubbard and Tim Kane on what it should be.  Hubbard and Kane’s proposal

would limit each year’s total spending to the median annual revenue of the previous seven years, allowing temporary deficits to be authorized in emergencies by congressional supermajorities.

We have lived under balanced budgets at the state level and found them particularly vexing because most spending is committed when the budget shortfall shows up and then you must cut where available.  It is not a system that leads to good decisions.  In addition, or perhaps related to the first problem, there are accounting problems.  In the states an obvious problem is pensions.  The WSJ highlights New Jersey recently.  New Jersey has a new governor, Democrat Phil Murphy.

As he takes office later this month, Mr. Murphy must confront the state’s biggest problem—a pension system that is about $90 billion short of what it needs to pay future benefits.

The federal government’s obvious accounting problem is entitlements.

We like the idea of a BBA but the problem of writing the amendment, bad budgeting decisions, and the accounting problem lead us to oppose a BBA.  The federal budget is such a disaster, however, we are willing to consider that the current circumstances are worse than a BBA.

Let’s assume that the BBA George suggests has passed by June 2018 and there are no supermajorities to substantially raise taxes.  We are already in fiscal 2018 so fiscal 2019 would be the first year it applies to.  FY 2019 has expected spending of $3.93 trillion.  The spending limit is trickier because it would seem reasonable to limit to actual data.  If so the limit would be $2.775 trillion.  If we include estimated years then the limit would be $3.021 trillion.  So there would be a need for cuts and tax increases from somewhere between just under a trillion dollars to $1.2 trillion.

Sidebar: We don’t see a solution in writing the amendment by making it effective in say, 2030.  Each party is aware of the problem.  There is little interest in fixing the problem as the last two presidential elections have shown.  End sidebar.

Neither party would want to pass such rule.  Spending GOP capital on a failure is a bad idea when they might do something useful in 2018.  We know that politicians always wimp out when the “out” years come.  That is they promise to make cuts later and never do.  Reforming entitlements gets harder every year.  We expect a disaster but see the BBA as an even bigger disaster.  Sorry George.

 

 

 

Best Tax Policy

The Editorial Board at WSJ is worried that we might not end up the best tax policy proposal coming out of the current negotiations.  They really don’t need to worry.  We won’t.  At some point we will come to a Nay or Yea vote and we will need to decide.  We do need to remind them that they have forgotten about incentives when they say (sorry for the long quote):

The simplest system is also the fairest and the most efficient. Politicians who want to promote social policies can do so via spending or regulation, but when they lace the tax code with special favors they force tax rates higher and reduce economic growth. To benefit from these tax favors, Americans must also behave in ways that politicians require—like buying a Tesla—but are not the best for the economy. The point of reform is to return to the first tax principles of raising money with the least amount of political meddling.

The child tax credit is a form of income redistribution—a special favor for some taxpayers that costs the Treasury a bundle in foregone revenue. In 2012 the credit cost more than $56 billion, according to the Joint Committee on Taxation. The $2,500 credit Messrs. Rubio and Lee have favored would cost more than $170 billion annually, according to the Tax Foundation, with no revenue feedback from higher growth.

We agree that tax reform should be simple.  We don’t see that changing one of the parameters is any less simple and it surely relates to critical incentives.  Unless they are arguing for no deductions or credits for kids then there is no simplicity argument.  The incentive the Editorial Board have forgotten is having children.  Of course, as open borders folk they don’t care about kids because they would import them.  Everyone else recognizes that one way to reduce the entitlement crisis would be to increase the birth rate.  Increasing the child tax credit provides a financial incentive to increase the birth rate.  Will it work?  We don’t know.  It does seem fair.

Again, the crucial part of tax reform is to reduce business rates without increasing complexity.  We are absolutely opposed to Edward Lazear’s proposal (also in the WSJ without a peep from the Editorial Board) to make special categories for immediate expensing.  We would eliminate immediate expensing to get lower rates but we might vote for a proposal that included it.

Tax Reform: Serious And Not

The editors at the WSJ and Kevin Williamson at NRO show the two sides of conservative discussion of tax reform.  The latter is serious while the former is not.

The editors are all about rates.  It seems, but is not clear, that they are talking about personal rates and they certainly don’t care much about the deficit:

In an ideal world, the Senate deal would create room for tax cuts of $2.5 trillion or more. That’s at least how much more revenue the government would get if the economy returned to its historic growth rate of 3% a year from the Obama era’s 2%.

Kevin, on the other hand, recognizes the challenges that the Congress faces.  We have a significant deficit.  We have escalating entitlement costs.  We need to have dynamic scoring but tax cuts are not self-financing.  He reports (with comments) that:

President Trump’s preferred policy would reduce the top rate to 35 percent, while congressional Republicans have aimed at 33 percent, along with modest reductions in other brackets and, possibly, a large reduction in the corporate tax rate. Our corporate tax rate is one of the world’s highest on paper, but the effective rate — what corporations actually pay — is on average unexceptional, though it varies significantly from industry to industry and firm to firm.

We favor reductions in the corporate tax rate because of the variation that Kevin notes.  Corporations do things because of tax rates.  Those industries that face higher rates take actions like tax inversions to avoid them.  Rather than try to outlaw such inversions we should make the USA a tax haven so corporations and their profits come here.  It is also a reason why we favor lower corporate rates rather than immediate expensing.  We hope that the Congress takes a serious look at tax reform and make it into law.