Arnold Kling  

The Deficit Argument, V

Public Transit and Public Choi... Employees as Owners...

David Warsh gives one of the more sober overviews of the debate over tax cuts, the deficit, and Social Security.

There are two basic issues in US tax policy — the question of the size of government and the health insurance/pension problem.
...During the 1990s, the federal share of GDP climbed steadily from its thirty-year average of around 17.5 percent of gross domestic product until it reached 19.2 percent in fiscal year 2000
...It is this higher percent governmental claim on the nation’s resources that George W. Bush’s 2001 tax cuts were designed to roll back — from around 19.2 percent to the 17.5 percent level, where revenues were when Bill Clinton took office.

As I see it Warsh is making two major points. First, there is a debate about the best size of government, with Republicans wanting to shave it by about 1 or 2 percentage points as a share of GDP. Second, there is a long-run "train wreck" coming in the form of entitlement spending on the Baby Boomers. In my view Democratic economists keep using the second issue to try to score points on the first issue. Economists for both parties are not particularly forthcoming to the public about the train wreck.

For Discussion. Warsh concludes that, "There’s absolutely nothing flaky about George Bush’s economics. Like his war in Iraq, he is deliberately taking a risk." Can this risk be evaluated objectively? At historical measures of growth, what is likely to happen without major changes in entitlements, tax rates or rules of eligibility?

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CATEGORIES: Social Security

COMMENTS (3 to date)
Keith T. writes:

The Social Security entitlement program must be changed to allow individuals to manage their own funds. If not, phase the program out.

Let me tell you why I think this. I got hit with a $500 per month tax increase in January because I met the Soc. Sec. earnings limit last fall. When that limit is reached, taxpayers don't pay that tax for the rest of the year. Taxpayers start over at the beginning of the year.

My family makes an okay living, but we pay NYC's high taxes, and we are not "wealthy". We need the money. Paying into this program is such a gamble because its existence and returns depends on factors completely out of my control. This is my own money, being "saved" for me by people who do not have my interest at heart!!!

Scott writes:

There isn’t going to be a train wreck. We’re just going to slowly get mired down in the mud. The Social Security surplus is spent every year just like general tax revenues. As it decreases we’ll have less to spend on other things. When the surplus is gone, we’ll have to supplement it with other tax revenues.

It will be a slow but inevitable process unless we significantly change things now. But, there won’t be any train wreck.

(Note that the Social Security trust fund is irrelevant at best and an outright fraud at worst.)

Patrick R. Sullivan writes:

We of course, have had this discussion before. Remember Brad DeLong's cat-out-of-bag-moment:

" Steve Cecchetti's ideas for a Framework for Fiscal Policy. I think his particular framework is a bad idea: the existence of the baby-boom generation, rising medical costs, and the belief that everyone ought to be able to see a doctor together more-or-less force federal government spending up from its current twenty percent or so of GDP to somewhere between twenty-five and thirty percent over the next generation."

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