Tuesday, April 19, 2011

Fight and flight in response to the budget conundrum

It strikes me that there are two core emotional reactions to the U.S.'s structural budget deficit -- or at least, two writerly tropes that one encounters over and over.  The first is "we are facing societal collapse" -- call it Mitch Daniels hysteria (our debt is "the new Red Menace") -- and the second is, "all we have to do is x," where x is the author's personal brew of preferred spending cuts, tax hikes and program redesign.

For the latest in the hysterical school, here is Jim Manzi:
The long-term forecasts, however, illustrate the crucial point that we are sitting on the mother of all bubbles. Many, probably most, Americans anticipate a stream of consumption that will be provided for them into old age by the government (i.e., other taxpayers). Unfortunately, most American taxpayers do not anticipate the kind of enormous increase in taxes that would be required to pay for this stream of benefits. One or both of these expectations will not be met. Americans as a whole are simply less wealthy, in the most useful sense of rationally anticipatable future material consumption, than they think they are. And the size of this disconnect is vastly greater than, for example, the size of the housing price bubble that just popped.
To get revenues to more or less match spending, those "enormous" tax increases might equal raising revenues to something like 23% of GDP over the next 20-25 years, as opposed to the historical norm of about 19%. That would leave U.S. taxes  well below European levels.  Doing so would not shake our economic universe. It would mean that our political universe had been shaken, to the extent that Republicans would have to give up their supply-side nostrums.

It's true that if we find no humane and efficient mechanisms for reducing health care inflation, a gradual hike to that level might not be enough.  But it's also true that over the 70-year horizon that has Manzi spooked, humans might be cyborgs, or the world may lie in radioactive ruins, or our coastal cities may be drowned under seas swelled by global warming. Or health care may be too cheap to meter and war a distant memory. Who knows?  We can't control future legislatures dealing with unimaginable contingencies, as Manzi first acknowledges and then effectively denies, proposing means of doing just that.  Some of those means may help for a while, as "pay-go" rules in Congress worked before Republicans spiked them.  But the real question is how long our budget battles will continue to be distorted by supply-side fabulism.

On the "all we have to do" pole, Andrew Sullivan offered this yesterday:
Is it really so tough to come up with the obvious compromise:

end all tax deductions (including the cirporate and middle class ones, but excluding charity), let the Bush tax cuts expire in their entirety (including those earning under $250,000), cut defense, raise the retirement age (with exceptions for manual labor), intensify and speed up the cost-control experiments in the ACA, and offer the elderly a Ryan style cut off - but more generously subsidized than he currently intends - and taking place in five years' time so we do not let the boomers off scott-free? (In my dreams, I'd add a gas tax. But that's far too win-win a proposal to get through the American political system.)
Yes, it is "so tough." Reducing tax expenditures (targeted tax breaks) is a matter of degree and is likely to be a huge battleground -- there are a zillion such tax breaks, each with so many reasons why.  The degree to which defense might prudently be cut is hardly obvious; nor is crafting a foreign policy over decades that would gradually offload our defense burden onto current beneficiaries and reduce the need for it by strengthening multilateral organizations.  Intensify and speed up ACA cost controls -- yes, yes, but as Sullivan often notes we don't know how effective those controls will prove (or worse, whether Republicans will gut them).  A "Ryan-style cutoff" I gather means a Medicare opt-out -- the costs of which are likely to redound to the state if people bankrupt themselves underestimating their future health care needs.

In a sense I fall into the "all we have to do" school myself, as does anyone (including Manzi) who doesn't see our budgetary problems as insoluble. Like Sullivan, I think we need to raise taxes, reduce our overseas commitments and cut defense, fund the ACA, and, I would add, increase government pricing power over healthcare procedures and products. None of this is simple, not on the level of ideal policy, and far less when filtered through our sclerotic political system with its "triple veto"  (two chambers of Congress, one requiring a 60% supermajority, plus presidential assent) and its delusional major party (the no-new-taxes-ever GOP).   It will be a multi-stage slog, with our hand doubtless forced by crisis at some stages.

But the underlying reality is that this country does have ample resources to fund the risk-sharing and investments in human capital and infrastructure befitting a wealthy democracy.

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