Arnold Kling  

Outside-the-Beltway Mentality

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Wisdom of Crowds?... Net Neutrality, Again...

Jeff Miron proposes spending cuts,


The grand total from this list is $300 billion annually, roughly the deficit projected for 2006. Normal economic growth would therefore mean surpluses in the near future, should these cuts occur. To deal fully with the impending imbalances in Social Security and Medicare requires one more policy change, but it is again one Democratic economists should endorse: an increase in the normal eligibility year to 70 and then indexing of the retirement age to life expectancy.

Note that my list of cuts is consistent with Democratic views on redistribution; it does not cut a penny from programs for the poor.


Miron writes as if the main issue is between Democrats and Republicans. Instead, the issue is Inside vs. Outside the Beltway. It is inside the beltway that these spending cuts are "unthinkable" and "politically unpalatable."

One quibble I have is that Miron's proposals for cutting state spending on state universities should not be counted against the Federal deficit. A second quibble, as long as we are on the topic of state spending on higher education, is why not advocate vouchers for individuals instead of funding of institutions?


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CATEGORIES: Fiscal Policy



COMMENTS (20 to date)
JohnDewey writes:

I cannot support any proposal to add further burden to the "well off". Isn't it enough that the most productive members of society have been supporting everyone else's government obligations throughout their working lives? Apparently not. We're ready to screw those folks again in retirement.

Miron is not talking about removing just the Gate's and the Buffet's from the social security rolls. In order to achieve the 20% social security reduction he advocates, the earned benefits of the at least the top 12% will need to be stolen. To achieve the 20% medicare benefit reduction will probably require screwing the top 25%, who are likely healthier than the underclass.

Social security and medicare are not welfare. These programs are a pact made with all citizens. Rich and poor alike pay into the program all their lives. Then all get like benefits.

Why would any economist support increasing the burden of the "well off"? Wasn't "From each according to ablity" a total failure?

Nathan Smith writes:

Economic inequality has several uses, and one of them is as an incentive. That's one reason for property rights. But there are no property rights in Social Security. That makes it dependent on the vagaries of politics, highly uncertain, and unlikely to serve as an incentive for anyone. There's a humanitarian case for Social Security payments to the elderly poor but not to the better-off (i.e., the rich by world and/or historical standards if not by those of the contemporary US). I'm not generally a soak-the-rich kind of guy, but there is no justification for large government handouts to the well-off.

Nathan Smith writes:

re: second quibble.

No doubt Jeff Miron supports vouchers but thinks that that's a topic for another essay.

But I have a third quibble: shouldn't the children of the well-off be seen as individuals and not extensions of their parents. Even if their parents could afford to pay high tuitions at state universities, they might not choose to do so, and if "rich kids" can't go to state universities cheaply and their parents don't want to shell out $30,000 a year, they might not be able to go to college at all, while "poor kids" would be able to, even if their parents were stingy, because their parents would be unable to pay for their college, as well as unwilling.

This is only one example of the problems with a blanket advocacy of means-testing.

JohnDewey writes:

"I'm not generally a soak-the-rich kind of guy"

That's exactly what you seem to me.

"but there is no justification for large government handouts to the well-off."

That's bull. Social security is not a handout. It's an intergenerational pact. The agreement, as approved by representatives of all citizens, was that the government will take a significant part of our savings in return for a future retirement benefit.

I'll agree that the "well-off" have no legal property rights with respect to social security and medicare. But to use that to justify taking what was rightfully earned is just crap.

If we're going to suddenly change the rules after 60 years, then everyone should suffer equally. If social security can only pay 73% of its obligations, then all recipients should get a 27% cut.

I do understand that the problem is much greater than the trustees projection of 27% social security underfunding.

Nathan Smith writes:

A "pact" implies consent. There is no consent in Social Security, just taking by force, the same as theft except on a larger scale. I don't much blame John Dewey for misunderstanding this though. He's repeating the lies about a "pact" that were deliberately propagated by Social Security's founders and have seeped into popular mythology ever since.

Doug writes:

My impression is that most Democratic economists would agree with Miron that adding means testing to large entitlement programs is economically sensible. Their real objection - and that of many other supporters of those programs - is that Social Security and Medicare will become politically unviable if they don't offer 100% coverage.

On the face of it, JohnDewey's talk of the "intergenerational pact" of Social Security is nonsense. I have no legal rights to my payout from this supposed "pact", and in fact I am almost 100% confident that my promised benefits will be deferred or reduced or eliminated long before I reach retirement age. I am also nearly certain that I will continue to pay FICA taxes all of my working days. Some pact! I want to renegotiate!

My gut reaction is exactly what talk of the imaginary "pact" is trying to suppress. If many people see see clearly that they will receive minimal or no benefits, will they continue to politically support a program that claims a significant portion of their taxes each year? People like JohnDewey plainly believe the answer is "NO". I'm not so sure - personally I think that supporting the retirement of the elderly poor is a worthwhile use of my tax dollars - but I can't claim any special insight into how the politics would play out.

Nathan Smith writes:

re: "the retirement of the elderly poor is a worthwhile use of my tax dollars."

I feel that way too. But. Beware of perverse incentives. If you let the elderly poor get help from the government, they'll foresee that and have less incentive to save. Better-off people, who either don't expect government handouts at retirement at all, or for whom they'll be comparatively low, will save in order to consumption smooth. The result is to increase the wealth gap, as it becomes worthwhile for the rich to save, but not the poor.

A second effect of Social Security is anti-family: in traditional societies, parents rely on their children in retirement; but by making seniors financially independent, Social Security reduces their dependence on their children. Foreseeing no dependence on their children, parents have less reason to invest in their children's earning power. This helps to drive the explosion of student debt with which the younger generation is now burdened. It may be that (despite the sentimental feelings traditionally associated with family), family ties are, on net, inefficient. Still, that family interdependency has been displaced, not by individuals' free unbiased choice, but by a government social program, should worry us. My own view is that part of America's "cult of youth," and the general disdain for the elderly that has taken hold in popular culture (remember, there was a time when the young wore grey-haired wigs to look dignified; now older people dye their hair) is a result of the reduction of seniors to "useless eaters" by the government. Corrupted by government handouts, they are no longer looked to for their wisdom and experience, but are discarded and irrelevant. Exceptional figures-- seniors like Rupert Murdoch, Alan Greenspan, John McCain, etc.-- only go to show what the elderly population could achieve if they weren't ruined by welfare-dependency.

JohnDewey writes:

"Better-off people ... will save in order to consumption smooth."

I'm not so sure. If social security benefits are means-tested, many of the "better-off" people will lose their incentive to save.

"Foreseeing no dependence on their children, parents have less reason to invest in their children's earning power."

Do you honestly believe this? Almost every parent I know is saving or spending money for his or her child's college education. Those who deferred parenthood until their late 30's are now being forced to defer their retirement.

"Corrupted by government handouts, they are no longer looked to for their wisdom and experience, but are discarded and irrelevant."

Oh, please! Boomers will never be irrelevant. We have too much money and too much political clout to be ignored. Contrary to your assertion, we'll continue achieving for many more years than any generation before us.

Nathan Smith writes:

re: "If social security benefits are means-tested, many of the 'better-off' people will lose their incentive to save."

Assuming that Social Security taxes do not qualify as savings (they don't), this is self-evidently false. Means-testing Social Security means lower future incomes for Baby Boomers. If they want to smooth consumption, they'll have to save more now.

re: parents investing in children's human capital.

It's a glass-half-full/glass-half-empty thing. Yes, a lot of Boomers do spend a lot of money on their children's education. But many kids still go into a huge amount of debt just to get what have become the basic tools for a middle-class life, which previous generations didn't have to do. We don't really know what these outcomes would look like if pure market forces, undistorted by Social Security subsidies, were at work. It may be that Boomers today are using the increased lifetime incomes implied by future Social Security payments to engage in altruism towards their children, or perhaps in the class-prestige effects of having their children in good colleges, rather than investing in their children's earning power as they might do if they didn't expect Social Security benefits later and expected a sort of personal inter-generational pact with their children to constitute a significant share of their wealth in their old age. An altruistic and/or prestige-seeking parent might be more likely to pay $30,000 for his kid to major in philosophy at Harvard, whereas a parent who wanted to make sure his kid could help him out in his old age might push his kid to go to state school and get a degree in engineering or business. And the latter outcome might be better for both the kid and the parent. As it is, a lot of kids get out of college feeling guilty because so much has been invested in them, and yet having little idea what they're supposed to do with their lives. Post-college life can be a hard landing.

re: "Boomers will never be irrelevant. We have too much money and too much political clout to be ignored. Contrary to your assertion, we'll continue achieving for many more years than any generation before us."

Well, maybe. That wouldn't disprove my point, which is about the current generation of retirees, once the "Greatest Generation" in their youth. They're proportionally more welfare-dependent than the Boomers will be. If the Boomers break the mold, more power to them!

If John Dewey really objects to the possibility that Social Security reform will burden the Boomers, I have a lot of sympathy. I'm happy to have the pain distributed across the generations. I'm not a "soak the Boomers" kind of guy any more than I'm a "soak the rich" kind of guy. Indeed, even if my generation--I'm 28-- suffers ALL the pain, that's a price worth paying. I would rather retire in poverty than live a middle-class lifestyle by robbing my children through the payroll tax. The bottom line is that the government should get out of the inter-generational transfer business. How is another matter.

quadrupole writes:

Please don't further screw up peoples lives by means testing for college tuition. I know literally dozens of kids who have trouble getting their parents to even fill out the financial aid forms, much less contribute. I know a large number of folks who also had great difficulty getting their 'wealthy' buy absentee and divorced parent to conttibute a single cent to their college education.

It comes down to this, either compel parents to contribute or stop holding their adult children responsible for parental behavior. I advocate one of two policies:

1) Align the criminal penalty for parents not filing financial aid forms upon request with the criminal penalty for not filing tax forms and then make parental contributions mandatory (as in we can garnish your wages, put leins on your property, etc).

or

2) Stop looking at parents at all for financial aid.

Either of these is fair and just to the student, the half way measures we have today are not.

JohnDewey writes:

"The bottom line is that the government should get out of the inter-generational transfer business. How is another matter."

How is the whole problem. Twenty years ago, Boomers said exactly what you're saying: that they weren't counting on Social Security and that this system needs to be changed. But they were forced to pay into this system a significant part of their income for the past two decades. And so Boomers rightfully feel entitled to the benefits of that system they've been funding.

You may feel your generation will be different - that today's 20-somethings and 30-somethings will give up social security. And perhaps the more enlightened of you may vote to do so. But as long as the masses continue to believe that social security will be there, they're going to consciously or unconsciously adjust their life-long savings patterns. When your generation becomes 50-year-olds, they'll start arguing that they're entitled. And they'll vote that way.

How can social security be changed? In every decade, the main beneficiaries are the age groups that vote in highest numbers. What politician is going to ignore them?

I've been arguing with the "greatest generation" for 20 years that this system must be changed. Those arguments fall on deaf ears, just as your arguments are now falling on my near-deaf ears.

My main disagreement with you, Nathan, is this statement you made:

"there is no justification for large government handouts to the well-off."

You may be different, but I predict the "well off" from your generation - those who worked a little bit harder and took a few more risks and paid higher social security taxes - will feel just as outraged in 30 years when some young person tells them they aren't entitled to the same benefits as everyone else.

Deweyjon writes:
How credible such a theory is depends on your time scale.

Caplan in another article made the above comment.

Why is Social Security and Savings not evaluated from the same perspective? The birth to death aspect of the problem certainly places them in a time sensitive category.

And so we have the need to put away in our youth sufficient production to be consumed during our later non-productive years.

Enter "store of value" - numerical money!

I entered the workforce 67 years ago. My first job was as a longshoreman - a job which still exists today.

At that time I was paid $0.95 per hour. Today that same job pays $27 per hour.

How could I have saved anything remotely useful for today- 67 years later?

There is another aspect of "The Economy" which is necessary. That which is produced today must be traded tomorrow. The Money which is used as "a store of value" to efficiently execute our daily economy is seriously different from the money intended for use in the future economy which the money system guarantees to be (27 times)larger.

Politics is rarely lucky but in the case of Social Security we stumbled on an answer.

Don't go away.

If we could "save" a percentage of the current economy to be returned for consumption as a percentage of the future economy we would have a functiomal answer.

Stripped of emotion and political interference over the years, that is what Social Security is today.

Economic balance is sustained by the production of current labor being consumed by those no longer producing.

The Excess SS tax % being used for other reasons opens the emotional door. The SS tax percentage should be current and be only that which is necessary to pay the current SS bill.

Enough except to ask how to economically justify promoting saving current money while anxiously watching Walmart sales.

JohnDewey writes:

"The SS tax percentage should be current and be only that which is necessary to pay the current SS bill."

Absolutely!

The only acceptable alternative I've read was Greenspan's recommendation that excess FICA revenues be used to pay down federal debt.

Politically it must be impossible to lock the box on excess FICA revenues. The temptation to spend the excess is just too great.

If Washington could somehow lock the box, the hundreds of billions in funds would likely distort our financial markets.

The smartest thing to do with excess funds is give them to the group who will make the smartest allocation decisions: the very people who paid the taxes.

morganja writes:

John Dewey,
You make a huge logical leap in your first post. Are the better-off truly the most productive members of our society? What is the relationship between wealth, income and productivity?

JohnDewey writes:

morganja: "Are the better-off truly the most productive members of our society?"

I certainly believe the most productive members of society will have higher incomes. I don't think that's a huge logical leap.

morganja: "What is the relationship between wealth, income and productivity?"

That's a different question. Economists have written books on the subject. I'll be happy to provide my answer. But I hope the more knowledgeable sponsors of this blog will have time to respond, or at least critique my response.

Productivity in our economy is driven by capital investment. It is wealthy and upper income people who have surplus funds to invest. They may not themselves decide what equipment to purchase and what plants to build. But their desire for investment returns ensures funds will be invested efficiently. Efficient investment results in more purchases of plants and equipment, the result being higher productivity overall.

Transferring surplus income or wealth to lower income people eliminates funds for capital investment. Reduced capital investment leads to lower productivity and thus a lower standard of living for society as a whole.

Providing unearned funds to anyone reduces the incentive to work harder, acquire skills, and become more productive. Transfers of wealth thus strike a double blow to the nation's productivity and its standard of living.

I don't see any huge logical leap in my answer to your second question. Do you?

morganja writes:

John Dewey,
Thanks for the response. Of course I see huge logical leaps. Economic models are fun to play with, but they are mostly useless except as a forum to discuss concepts. When I first took economics in College I was easily confused by my lack of real world experince and the claims of the professors into believing that economics DESCRIBED the way the world works instead of the way it perhaps SHOULD work. Now that I am wiser from years of working in some of the largest corporations in the world, I realize that after learning the huge advantages of a free market system, 90% of the rest of the major should have been devoted to the assumptions made in the models. The way business is done has very little to do with free markets. Careful observation of what is actually going on in any given situation is the basis of science and economics. However it is a widely, if not universally, neglected skill in most economic thought. Like the god-awful marxist literature we had to read at college, economists are way too quick to make assumptions, leaps and force random facts into ill-fitting patterns to fit pre-conceived notions. The failure of our society to strive towards a free market system as much as technologically possible results in huge inefficiencies and distortions. Not small. Huge.

So, to respond, I do find some very important logical leaps that you, and many, many others make. Some of the most productive people will have high incomes. Some will not. In the absence of a free market its impossible to say that income equals productivity. The implication is that there is a heirarchial triangle with the most productive individuals at the top making the most income and the less productive below them and so on cascading down in an even ordering reflective of constributions to economic society. However, careful observation reveals little evidence to support that under-contemplated assumption. In coprporations, for example, , the highest incomes accrue to those not with any discernable productive skills, but to those who posess, sometimes scary, political skills. In this context, political skills are not productive in that they do not increase efficiency, profits or any other useful output, most oftentimes, the opposite.
Secondly, the connection between wealth and income is not nearly as clear or straightforward as many seem to assume. This is a very murky topic and almost all economists simplify their models by assuming that they are the same.
Third;
"Productivity in our economy is driven by capital investment. It is wealthy and upper income people who have surplus funds to invest. They may not themselves decide what equipment to purchase and what plants to build. But their desire for investment returns ensures funds will be invested efficiently. Efficient investment results in more purchases of plants and equipment, the result being higher productivity overall."

Five statements, each of which is shaky by itself, leaping on weak assumptions to the next. For the sake of brevity I'll skip over the false engine motif, glance only half-mockingly at the 'not deciding themselves', and get right to the desire-assuring claim. Awfully New-Agey of you. All you have to do is want and it will happen. Come to think of it, sounds a lot like a certain government we have too. Their desire is for higher returns on their investments. An undistorted, free market capital market would assure that of happening. But we don't, and it doesn't.

Fourth, you leap into the next statement;
"Transferring surplus income or wealth to lower income people eliminates funds for capital investment. Reduced capital investment leads to lower productivity and thus a lower standard of living for society as a whole."
While we are on this subjuct, does it not necesarily logically follow from your argument that we should, as a nation, be transferring wealth from the poor to the wealthy in order to increase Capital Investment, Productivity and the Standard of Living for society as a whole? Perhaps a confiscatory tax on the first $20,000 of a persons yearly income? Yet this never seems to work. I wonder if perhaps the model of large surplus of wealth=capital investment = increased productivity actually works in a highly distorted, inefficient breakdown of a market system?
Fifth, the most highly productive people in your model admittedly don't do anything except have large mounts of money that they have invested for them and due to their desire, turns into Capital Investment, Productivity, and a Higher Standard of Living. Yet, looking at it from Henry Ford's perspective, they don't actually do anything. They just have money to invest. Assuming for a second that this mouse sitting in the cage here has ten million dollars to invest, he, or perhaps she, its hard to tell, is actually one of the most productive members of our economic society. Incredible. Just by sitting there and shitting in the corner.

Finally;
"Providing unearned funds to anyone reduces the incentive to work harder, acquire skills, and become more productive. Transfers of wealth thus strike a double blow to the nation's productivity and its standard of living."
I have never seen a more succinct, powerful argument for the inheritance tax. Or indeed against the whole problem of the wealthy and the burden they place on the rest of society.

Walker writes:

morganja, your lack of understanding of economics is breathtaking.

The wealthy are a "burden" on the rest of society? Somebody should tell the IRS that, since according to the IRS statistics, the top 50% of income earners pay ~95% of taxes, with the top 20% paying over 80% of taxes. That sounds more like a subsidy than a burden.

Income residtribution though punitive tax rates and schemes like the inheritance tax are simply ways for politicians to legally purchase votes. If you have 80% of the population paying little to no tax, you can gain favor with that large number of votes buy redistributing more income away from the other 20% and into the 80%'s pockets. After all, if you can get the 80% to vote for you, you don't *need* the 20%'s votes. Why worry that you are seizing private property from one person and giving it to another?

Lowering marginal tax rates in general, and particularly on the top income earners, has had dramatic positive improvements in our economy *every* time it has been done. The reasons are obvious...

If I am a potential investor, I am much more likely to put money back into the economy if it is going to be rewarded, or at least left alone by government. If large portions of anything invested are seized by government for its own purposes, then any incentive to invest at all is removed.

The fairest tax system is one that does not tax income at all. The fairtax, which taxes consumption, is a much better system, and treats everyone (and every industry) the same. There are no tax breaks for any special interests, and people near the poverty line pay zero tax, and it scales up based on consumption.

[Note from the Econlib Editor: Please keep personal vitriol and ad hominem attacks off EconLog. We prefer not to have to ban people for being uncivil or for rules violations.]

JohnDewey writes:

morganja,

I really don't know where to start in responding to your post. I fear any effort to help you understand economics will be fruitless. I don't have the time, quite frankly.

One point you raise I will respond to:

I said: "their desire for investment returns ensures funds will be invested efficiently."

You responded: "Awfully New-Agey of you. All you have to do is want and it will happen."

This shouldn't be a difficult concept to understand. If an entrepreneur desires funds from investors, he must provide some evidence the investors will receive a return on their investment. Investors evaluate the risks and the potential return from that investment, comparing those with other investments they might make. It is investors' desire for maximum returns with minimum risk that weeds out most inefficient uses of capital.

Is there anything at all complicated about this?

morganja writes:

Well thanks for demonstrating your ignorance and pretentiousness in responding to my arguments. How I love pretentious ignorance. Your comprehension of economics can best be described as faith-based.


Once again I will attempt to get through. What is it about markets that make them efficient? The fact that they exist? You have to examine the assumptions, see if those assumptions are being met in REALITY. Let me say that again. REALITY.

My point, which you both completely missed, is that FREE MARKETS assure efficiency. If you believe, like I do, that free markets are not only moral, but also by far the most effective, productive and efficient economic model, than you must conclude that the lack of a free market is less effective, less productive and less efficient. Follow me here, because I'm using logic. If our economic system is significantly short of a free market than we are being less productive and efficient then we otherwise would be. In my experience, and through careful observation of what exactly transpires in our system, I note that our system is eaten up with anti-free market forces, distortions and breakdowns. Therefore, we are this very second, hold your breathe here because this is a shocker. Ready? We are currently experiencing misallocation of resources, inefficient production, waste and inefficient distribution of profits.

Now, if you believe in free markets, actually look at our economic system, and realize it is greatly inefficient, distorted and corrupt, who do you think is benefiting the most?

You would have me believe that the people living in the ghetto and the trailer park are the prime beneficiaries of our economic system and the poor guy sitting in the BMW on his way to his condo at the ocean he bought with the trust fund he inherited from his great-great grandfather is the victim.

In fact I have seen this argument over and over again. There is an unfounded belief that we live in a free market system despite evidence and theory to the contrary. Therefore, they claim, the rich are by definition the most productive members of society. Therefore, and this is what they really care about, taxing the wealthy is bad. In fact, if totalitarian communist party rule eliminated taxes on the wealthy they would be all for communist party rule.

I am against the income tax. I am for the Fairtax. But not because of this bs theory that the rich are being screwed in our society. I am so tired of listening to their pathetic weak, reality-free arguments, but most of all I am tired of their pretentious ignorance.

Sorry for the bit of a rant. But if you have a disagreement with something I said, bring up a counter-argument or evidence. Don't rely on pretentiousness as a foundation of an argument.

Finally,

"The wealthy are a "burden" on the rest of society? Somebody should tell the IRS that, since according to the IRS statistics, the top 50% of income earners pay ~95% of taxes, with the top 20% paying over 80% of taxes. That sounds more like a subsidy than a burden."

Once again we are mixing up wealth and income. But let us not neglect the incidence of a tax. Also, tell me. If someone is given $500,000 in unearned income due to a distorted market, and is asked to pay $1750,000 of that in taxes, is he truly bearing the burden of the distorted system?

"This shouldn't be a difficult concept to understand. If an entrepreneur desires funds from investors, he must provide some evidence the investors will receive a return on their investment. Investors evaluate the risks and the potential return from that investment, comparing those with other investments they might make. It is investors' desire for maximum returns with minimum risk that weeds out most inefficient uses of capital."

In a free market, yes. But what if some investors have information, power over government regulation, connections, etc, that others do not. What if the government itself decides to distort the capital markets? What if the money supply is manipulated? From certain perspectives the capital markets approximate a free market. From most others they do not.

"If I am a potential investor, I am much more likely to put money back into the economy if it is going to be rewarded, or at least left alone by government. If large portions of anything invested are seized by government for its own purposes, then any incentive to invest at all is removed."

Right. And then what are you going to do with your money dis-incentive boy? You are going to invest your excess money no matter what kind of tantrum you get in. In fact, the less you will earn from investment percentage-wise is a motivation to invest more money to assure your lifestyle and income.

"Lowering marginal tax rates in general, and particularly on the top income earners, has had dramatic positive improvements in our economy *every* time it has been done. The reasons are obvious..."

I'm sorry. Do you believe that the marginal rates for the wealthy have gone up the past 5 years? Or do you think the economy is roaring along? Please be specific and try to exclude deficit spending on Haliburton from your analysis.

[Note from the Econlib Editor: Please keep personal vitriol and ad hominem attacks off EconLog. We prefer not to have to ban people for being uncivil or for rules violations.]

morganja writes:

Damn. We got yellow-carded.

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