Arnold Kling  

Deficit Commission Co-Chairs' Draft

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Public Choice for Children... My Big Fat Consumer Surplus...

The powerpoint is here. Thanks to Greg Mankiw for the pointer.

Lots of tax reform (get rid of the mortgage interest deduction, the health care deduction), and no VAT. Cuts in Social Security benefits, but trying to maintain benefits for the elderly poor. On Medicare, more or less the kitchen sink. I think they endorse everyone's ideas for cost control--left (threatening the public option), right (saying something positive about consumers sharing costs), and center.

On the whole, the proposals probably add up to something center-right. The left may complain loudly (Tyler Cowen has found some complainers already), but the only way that the complainers will get their way is by electing a new people.

This looks like President Obama's golden opportunity to triangulate. My guess is that he will seize it. I hope he does. We could do worse.


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CATEGORIES: Fiscal Policy



COMMENTS (11 to date)
Steve Sailer writes:

"but the only way that the complainers will get their way is by electing a new people."

That could never happen!

mlb writes:

I find this policy attempt rather amusing. First, you create an economic system* that allows most wealth to be accumulated by the top 10%. Then, the other 90% become over-indebted and need govt help to pay for retirement, healthcare, & food. Finally, when those transfer payments become too large you call it a crisis and promise to cut such transfer payments at a a time when there is little economic growth because corporations and the top 10% prefer to put their capital to work outside the US, in gold, etc.

What about this makes any sense at all?

*In summary: "allow unlimited credit creation provided a fudged-CPI stays below 2% helped in part by offshoring most manufacturing."

John Thacker writes:

mlb:

The transfer payments being talked about have had this impending crisis for years. It has nothing to do with wage growth for the middle class- due to the structure of Social Security, any extra real wage growth would also have meant extra payouts, so it wouldn't have helped.

The fundamental problem is that Social Security has always promised more benefits than it took in. It could get away with that by taking advantage of the shape of the population distribution, but no longer. One way around it is the "default" solution, where we do nothing and simply cut benefits by 21% in 2035 or so. According to what they've said publicly, that is the preferred solution of the Democratic Party compared to doing anything now.

David N writes:

If you thought Obamacare cost some Democrats their seats, just wait until they eliminate the MID.

After the MID is eliminated, the only remaining personal interest deduction will be margin interest. I hope I won't have to wait until the next stock market crash to start reading here about how the margin interest deduction represents an unfair subsidy and fueled the bubble and is unfair to net spenders.

Pandaemoni writes:

"but the only way that the complainers will get their way is by electing a new people."

I am pretty sure the way complainers win is by saying things along the line of "They *say* they will protect those in need, but under their plan, this elderly grandma/cherubic child/picturesque traditional nuclear family will slowly starve to death living on a single can of non-premium cat food per week."

Repeat until your anecdotes and imaginings look like data.

R Richard Schweitzer writes:

@Mlb et simili:

Every social system, right down to the tribes, clans and families will develop a "top" 10%, and what makes up the members is the accumulation of whatever constitutes wealth therein (cattle, cowerie, human heads, etc.).

As that social order evolves and accumulates aggregate wealth, the "top," because that's what is being measured, increases more than the rest -
how else could it be the "top."

The alternative is equal poverty.

mlb writes:

@ Richard:

I don't disagree in general but I think there are limits. The US (and probably the world) are at levels of inequality not seen since prior to the Great Depression. It feels as though we have crossed a threshhold as evidenced by how many people feel like "have-nots." Ultimately 51% of people in this country can do anything they want including total wealth redistribution. The key is to ever keep 51% of people from feeling like they have no other choice - my fear is we are approaching that.

I believe that inequality is also partially behind our health care crisis. Families have gone from one wage earner to two wage earners meaning less time to shop/cook and more reliance on fast food. It also means less time spent with kids on activities and teaching about proper nutrition. Another factor is the rise in quality food costs (fresh foods) which has increased reliance on foods that deliver a low-cost calorie (fats & starches basically). Of course the CPI is designed to substitute unhealthy foods for healthy foods as healthy food costs rise so this trend goes unchecked.

Once you start experiencing trends like the above I would argue you have put your tribe/country on an usustainable path. And I dont think any solution will work unless it reverses wealth inequality (which is much wider than income inequality). We need a wealth tax - either legislative or market-driven (higher interest rates and financial asset defaults would act as a wealth tax).

Don Levit writes:

Mlb:
How do you get this 10% analogy, and the alternative being equal poverty.
There is quite a gap betwwen those 2 extremes?
What about the 80/20 rule?
Even that would be too much disparity in income for a democratic republic to operate.
My understanding is that the wealth gap is higher now than it was in the Great Depression.
I understand that households who make $100,000 and up constitute the top 20%.
The IRS states that we don't even meet the 80/20 rule of AGI.
Go to:
Page 90
http://www.gao.gov/new.items/d11142.pdf.
It's not at the 90/10 level, but even at this level, do you think our economy is sustainable?
Eventually, even the top 10-20% will feel the heat.
In regards to what benefits to cut and taxes to raise, that is a separate issue.
But the tweaking of Social Security and Medicare does not get to the root of the problem.
Social Security was intended to be a self-supporting retirement/insurance nprogram with no utilization of general revenues.
And, Medicare, as most agree, is off the charts and needs serious reform. The first thing I would do is try to actually design it as an insurance program, and limit the amount of general rebevues used to support its rich benefits.
On a side note, the retirement plan for federal employees is run similarly to Social Security.
The government even states that the federal pension plan does not operate like a pension plan.
I have links to support all this information, good objective, governmental excerpts to those who are interested.
Don Levit

mlb writes:

Don,

I have no hard-and-fast rules or threshholds. I think this is an art, not a science. I rely on my perception of what people are thinking/feeling to get a sense for when something has become unsustainable.

I am also a believer that the truth ultimately comes out. And the bottom 80 or 90% of this country have been completely conned. I think they will eventually figure that out.

We have a system whereby:
- CPI is artifically low
- We allow unlimited credit creation as long as CPI is low
- We are willing to offshore our entire labor force as long as it helps keep CPI low
- We outsource credit creation to lightly regulated private entities
- We allow oligopoly structures with rampant price signaling to exist ensuring record margins among the credit-creation industry (and other industries)
- We bail out such entities when they take princiapl losses
- Our two polical parties are in agreement on the above policies for the most part but fight like hell on other issues to keep the illusion alive that they represent different agendas

This is a recipe for concentrating an entire country's wealth among those in the financial industry and asset owners despite the fact that such activities add little value to the overall quality of life.

This is unsustainable.

Daublin writes:

Mlb, it's worth noting that these people you say are bing conned are fabulously rich by both world and historic standards.

Our ability to whine in the face of good fortune will never cease to amaze me. Everyone has a pony now, but we are supposed to feel conned and oppressed because some people have ten ponies. Boo hoo.

mlb writes:

Daublin,

You are correct, that is the good news. The bad news is that relative status matters a lot to people. Especially when they feel that wealth has been ill-gained. I work in finance...right in the middle of Manhattan no less. I can tell you that while there are some extremely sharp people in finance, most have gotten wealthy just being along for the ride and on the right side of hidden government subsidies & bailouts. People of similar intelligence and work ethic in other industries probably have 1/10 the wealth. If you think that is what America stands for, I disagree.

The other piece of bad news is that our apparent wealth could disappear very quickly. Right now, the bottom 20% have it OK. But we are one USD crash or deep recession away from the bottom 20% being in abject poverty even by third world standards. And of course the elite would continue not to question the system even in the face of abject poverty. How could they, their wealth is "deserved" as they are completly blind to the massive subsidies they receive.

We are playing with fire.

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