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Social Security, by Jagadeesh Gokhale. He gave me a copy when we had lunch today, so I'm just getting started. I'll write more when I've read more. Meanwhile, we can deem it self-recommending for someone who wants to be conversant with the future financial problems in that program. Sad to say, it is not likely to be a best-seller.

In person, Jagadeesh sees the only solution for entitlements as some sort of "grand bargain" of higher taxes and lower benefits. I thought about why such a bargain is unlikely, and I think it comes down to the way we do Congressional elections. If it were a Parliamentary system, with proportional representation, there might be some incentives for bipartisan cooperation. However, with out individual-district system, with gerrymandering used to carve out safe districts, the incentive to compromise with the opposing party is blunted by the threat of being challenged in the primary by someone of the other party.

Incidentally, I think that is why we did not have bipartisan health care reform. If the Democrats had compromised, they would have been crucified by their supporters. Same with the Republicans.

If you want bipartisanship in Congress, you probably need to change the electoral process.



COMMENTS (13 to date)
staticvars writes:

"If the Democrats had compromised, they would have been crucified by their supporters. "

What exactly could they have compromised on that would have brought a Republican to their side?

guthrie writes:

staticvars,

You might have to ask the Republican congress-folk... and you might have to ask them in private (I haven't seen any interviews on the subject, myself).

Dan Weber writes:

I've been thinking for a while that the House of Representatives should be made a nationwide parliament. (And return the Senate to being elected by the states, while we're at it.)

No way would the current House approve of it, but I'm not sure we would lose anything by doing that.

Doc Merlin writes:

"the incentive to compromise with the opposing party is blunted by the threat of being challenged in the primary by someone of the other party"

You mean the threat of being challenged within your own party. I.e. why the republicans are afraid of the tea partiers like Rand and Ron Paul

Jesse writes:

The Democrats did draw the ire of the left plank of the party for compromising too much (no public option), while the Republicans wanted to "kill the bill" and voted entirely in lockstep. They offered no engagement with the actual terms of the bill, except to the attack the Democrats for gutting Medicare (a highly principled stance to be sure); instead they mainly focused on portraying Obama and the Democrats as ramming radical change down the throats of ordinary Americans who didn't want it.

Meanwhile the stock market is up, which is consistent with the expectations of those who think of the bill as corporate welfare, but not consistent with those who think of the bill as the victory of radical totalitarian fascist socialist communism and the end of good ol' American freedom.

I don't think lack of bipartisanship is the problem with our politics, and even if it was I really don't think Obama and the Democrats are to blame for the fact that not a single Republican supported the health-care bill. It was in Obama's interests to have passed "bipartisan" legislation with very broad Congressional support; on the other hand, the Republicans had an explicit strategy of no compromise and making the defeat of the bill Obamma's "Waterloo."

(It should also be noted that criticizing politicians for handing out bribes for marginal votes is somewhat inconsistent with criticizing them for being ideologically rigid and refusing to "compromise.")

Doc Merlin writes:

Jessie:

Ok this has been said and refuted so many times, I am going to stop assuming people are mistaken and just assume they are lying.

"They offered no engagement with the actual terms of the bill, except to the attack the Democrats for gutting Medicare."

Really now, watch Paul Ryan's speech to obama at the beginning of the healthcare summit. He lays out what the republicans want in the bill.

Jim Glass writes:

Jagadeesh sees the only solution for entitlements as some sort of "grand bargain" of higher taxes and lower benefits. I thought about why such a bargain is unlikely...

Re-examine the incentives. If you do you will see the future "benefit cuts for tax hikes" grand bargain is not only possible but the nearest thing to a certainty:

(1) It has already happened for Social Security -- in 1983, SS was "saved" by a political bargain that was near exactly 50% benefit cuts and 50% tax increases. Both were major.

The same political forces that operated in 1983 will be operating in 2030. What has already happened must be considered possible.

(2) It is a naive mistake to look at the politics of today to say such a compromise will be impossible in the future when in 2030 the self-interests of the voters will be so different than today.

Today uncompromising partisanship on SS is for both parties a "free lunch" that has the main effect of motivating more campaign contributions from the base, because nothing really has to be done about SS today. So both parties are free to engage in posing as much as they want.

But in 2030 income tax rates will need to be 50% higher than today just to stay even with the rising cost of Medicare and SS (and now even higher to cover Obamacare too) ... and about 30% of that increase will be for the cost of operating the SS trust fund. Voters aren't going to like that!

Then posing about SS won't be any free lunch any more!

Consider the self-interest even of retirees. How many of them are going to be happy about paying a 50% income tax increase on their pensions, IRAs, life savings, and yes their Social Security benefits(!) -- in exhange for nothing more than they have today, zip, nada?

The political incentives then to avoid that tax increase by, say, means-testing the richest out of SS will be immense.

BTW, don't think rich seniors will object. They sure aren't going to want to pay a major tax increase on all their income to preserve their piddling-to-them SS benefits.

So in 2030 we'll have a world in which the masses of middle-class seniors and the powerful richest seniors both have a major tax-avoiding incentive to start means-testing benefits downward.

If the seniors all want that, will anyone else who isn't getting benefits, but just paying the tax increases, object? Who???

We'll be right back to 1983, which produced the deal of: (1) tax increases to maintain benefits for most current retirees, coupled with offsetting benefit cuts consisting of (2) means-testing for the current rich -- carefully disguised in 1983 in the form of the 'income tax' newly imposed on SS benefits, except with the tax going back to the SSA instead of the Treasury -- today a very substantial benefit cut, as the tax threshold has not been indexed for inflation; and (3) increase of the retirement age.

I'll go to Long Bets right now and wager we'll see all three of those "reforms" again circa 2030, in a fully bipartisan compromise, just as in 1983.

IOW, contentious political partisanship is subject to the laws of economics just like everthing else.

When its cost is free to politicians, so they profit by engaging in it, we get a surfeit of it.

But when it becomes costly, fatally costly to politicians, there is a lot less of it.

In 2030 politicians who aren't seen to be striving to contain that 50%-and-rising-forever tax increases are going to get killed.

We'll be seeing "bipartisan" deals then, motivated by the politically bipartisan desire to survive.

Matthew C. writes:

The stock market is up because it is being juiced by the Fed ZIRP (and PPT buying of futures).

Don't worry, the crash is coming soon enough. . .

Elvin writes:

It will take a "Nixon goes to China" move by a President to reach out to the other party controlling Congress for a grand bargain.

The best example is Bill Clinton, who was willing to accept several Republican ideas in the 1990s. Reagan's deal with the Democrats in 1986 on tax reform was another. It can be done.

However, if the Republicans win Congress this year, I think Obama is too ideological to compromise in 2011. Despite all the complaining about Republicans not offering any ideas, Obama has never, ever shown the ability to forge a compromise.

So it will take a clever Democrat like Bill Clinton to make a deal with Republicans. (Bill Clinton, in my opinion, actually understands economics, business, and wealth creation. I question whether Obama does. Did Obama ever take an econ class in college? Or is his transcript filled with "studies" courses?)

Oddly enough, I think McCain might have been able to achieve a grand bargain. Bush was probably too rigid in taxes, but he did work with the other side of the aisle pretty well (i.e Kennedy and education, TARP) when he wanted to.


Jesse writes:

Doc Merlin: Not a single Republican voted for the healthcare bill.

One theory is that every Republican is a principled politician who believes that the healthcare will add to the deficit and therefore refused to vote for it.

Sure, Paul Ryan is consistent with that theory. But what about the Republicans (Gingrich, Steele) complaining about Obama's Medicare cuts? What about the Republicans who twisted arms to expand Medicare sometime back (during that long-forgotten time when the R's had control of Congress and the Presidency...)

I'm not saying that no Republicans have principled opposition to budget deficits and entitlement programs. But it's quite obvious that not ALL of them do. Ryan's proposal certainly would not have passed Congress, even if the Republicans had the same majorities the Democrats currently have.

Matthew C: of course, if all the stock market movements during Obama's Presidency had been in the opposite direction, then that would have simply proved all of your prior beliefs correct. Heads you win, tails I lose, the hallmark of logical debate and rigorous science.

Doc Merlin writes:

"I'm not saying that no Republicans have principled opposition to budget deficits and entitlement programs. But it's quite obvious that not ALL of them do."


My answer to that is:

'You mean the threat of being challenged within your own party. I.e. why the republicans are afraid of the tea partiers like Rand and Ron Paul.'
The republicans got beaten pretty black and blue in 2006, and they blame it on their own voters abandoning them. They also are very much looking forwards to taking control of the house in 2010.

In general however, the opposition party is usually better at sticking together than the party in power. Also, newly elected parties are much less likely to be bipartisan unless they have to be.

mulp writes:

"Really now, watch Paul Ryan's speech to obama at the beginning of the healthcare summit. He lays out what the republicans want in the bill."

Listen carefully to what Ryan has said about the reform bill, and logically about his proposal.

The reform bill just passed delays some of the pain, just like Ryan's plan, and as Ryan notes, the Republican Medicare cost controls involve delayed pain, and the Republicans when they controlled Congress were unwilling to allow the delayed pain to go into effect. Therefore, he argues the reform bill's delayed pain will not go into effect, and of course, neither will his plan's delayed pain.

Of course, Democrats have demonstrated their willingness to impose pain immediately, even when it costs them. Consider 1990 and 1993, when Democrats worked with Bush to hike taxes, and then Clinton's budget director drove another round of tax hikes; tax hikes that were retroactive. Bush was punished for dealing with the future, and then Clinton and the Democrats were punished for doing likewise. But Bush hiking taxes in the middle of a recession, and Clinton piling on, resulted in a very good economy by 1996 so he was reelected, and by 1999, the budget was in surplus, and the 2000 budget surpluses were projected to repay the external debt by about 2010.

And by the way, Ryan's budget plan assumes tax revenue of 19% on average, something that happened for more than a year while Truman and Clinton were president.

Liberal Republicans hiked taxes to pay for their spending, but conservative Republicans cut taxes and increase spending. Ryan seems no different. I will believe Ryan is serious about the budget when he proposes front loaded pain instead of starting off with tax cuts and delayed spending cuts that won't go into effect.

And to Elvin, Clinton did compromise with Republicans, but not to balance the budget. He agreed to their quest for more deregulation and for lax oversight of Wall Street, yielding to Greenspan's view that corporate managers would ever take undue risks with their own wealth. Consumer protection was quashed, regulation of futures was rolled back even more, the SEC only made sure legal documents were filed and ignored warnings of fraud, because Greenspan argued fraud couldn't exist in business. The result: ENRON, Worldcom, Madoff, widespread mortgage origination abuse if not fraud, the financial meltdown, and more. The complaints and warnings were filed with the SEC for many of these situations, but the SEC dismissed the complaints.

But hey, Republicans promised a free lunch, high returns with no risk if the government just let Wall Street take big risks.

Clinton compromising with Republicans ended very badly.

Jeremy, Alabama writes:

There is no bipartisanship in congress because, as Hayek reminds us, we have long since exceeded the proper bounds of a limited government of what can be reasonably agree upon.

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