Arnold Kling  

The Alternate Universe Problem

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At the moment, I am very pessimistic about the prospects for the United States solving its fiscal problems without a crisis. Given that we have divided government, a reasonable long-term budget will require a compromise. But the two sides seem to live in alternate universes.

The Republicans' alternate universe is based on the belief that government spending ought not to exceed its historical average of about 20 percent of GDP. You can't get future spending down to that level, however, without really major cuts in future spending on Social Security and Medicare. Much as I would like to see those programs phased out completely, neither I or nor anybody else can claim to have won an election on that platform.

The Democrats' alternate universe is based on (a) the belief that the rich are not paying their share of taxes and (b) with Obamacare passed, the rise in health care spending as a share of GDP is as good as arrested. So they see no need to change the status quo on entitlements.

I think that a sensible compromise would be Simpson-Bowles. This would make some needed changes to entitlements, which drives the Democrats beserk. It contemplates leaving spending at somewhere between 21 and 22 percent of GDP, which drives Republicans beserk.

I go back and forth as to which side is being more self-defeating. Republicans, who won't agree to a 21.6 percent of GDP, with the result being that we stay on a path that takes spending much higher. Or Democrats, who won't agree to reductions in future entitlements, with the result being that we will be forced to cut entitlements in the future, during the inevitable fiscal crisis.


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CATEGORIES: Fiscal Policy



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The author at Samizdata.net in a related article titled The debt dilemma writes:
    "At the moment, I am very pessimistic about the prospects for the United States solving its fiscal problems without a crisis. Given that we have divided government, a reasonable long-term budget will require a compromise. But the two sides seem to live... [Tracked on May 6, 2011 5:26 AM]
COMMENTS (22 to date)
David E writes:

Arnold,

Since the US has never had revenues more than 19% of GDP for two years in a row, it seems to me that the Republicans are not conservative enough. A reasonable target for tax receipts is 18.5% based on the historical record.

Jon writes:

Given that David in his next post suggests that the Canadian feds spend only eleven percent of GDP, even twenty percent seems quite high.

Elsewhere Scott Summers has suggested that the US brings in about as much revenue per capita as the most voracious welfare states of Europe.

Elsewhere we were shown that the federal government already spends as much per capita on health care as the major single payer countries despite providing no benefits to three-quarters of the population. Health spending is high in the states because private spending is on top of that. The idea that we cannot contain spending growth in this area is ludicrous.

Effem writes:

As much as Americans want entitlements + low taxes I think they also strongly desire a system that feels fair.

The issue is less that taxes are too low but that there are too many wealthy/connected/too-big-too-fail that are able to take advantage of the system in ways that ordinary citizens cannot (e.g., private equity managers paying 15% on billions of income).

There is far too little talk of tax reform (as opposed to raising/lowering the overall tax bill). Seems to me that simplifying the tax code is low-hanging fruit. Yet it is largely ignored. To me, that's the sign of a system that is broken.

david (not henderson) writes:

Absent the inclination of Democrats to recognize reality, why shouldn't the libertarian preference be that the US proceeds to a fiscal/monetary crisis as quickly as possible? Is any other possibility sustainable in any case?

Lord writes:

The Democrats would love to do a deal but insist that they will not do it alone. The Republicans insist on not doing one since that would be compromise. The result is much closer to what the public actually wants, no deal. While their might be a crisis, I doubt the probability is more than 10-20%. Mostly it will be extended budget struggles and a continuing shift in the terms of trade that makes a solution easier.

Randy writes:

Seeing that the taxes are being taken from "us" and given to "them", and that there is therefore no common ground, I am absolutely in favor of spending cuts, and absolutely opposed to higher taxes. So, crisis then? Absolutely. Bring it on.

Tom Ault writes:

There are two keys to a budget compromise: how the burden of deficit reduction will be spread among the constituencies of the Republicans and the Democrats and how to keep either side from reneging once the compromise is in place. The first key is not a simple case of dividing the cost of deficit reduction half-and-half between spending cuts and tax increases. Any compromise will have to affect the agendas of the Republicans and Democrats roughly equally. Defense cuts are spending cuts, but affect the Republican agenda disproportionately more than the Democratic agenda. In order for defense cuts to be part of any compromise package (as they must be), Democrats will need to either agree to deeper spending cuts on their agenda items or to changes to the tax code that affects their base predominantly.

The second key will be harder to achieve, since it requires trust among the two parties that, should they obtain a significant majority in a future congress, the majority party will not throw out the compromise and make the minority party bear the complete burden of reducing the deficit. I believe that the current animosity between the two parties makes such trust, and therefore a meaningful compromise, very difficult.

Yancey Ward writes:

It will take a crisis to move either party, but the Republicans are probably closer to where it will be settled- most people are greatly underestimating the size of the hole, and that hole cannot be filled with equal amounts of tax increases and spending cuts- the spending cuts will have to carry more of the load. I am guessing the Federal government will spend about 20-21% of GDP in 2025, one way or another.

Les writes:

I disagree with the view: "I go back and forth as to which side is being more self-defeating. Republicans, who won't agree to a 21.6 percent of GDP, with the result being that we stay on a path that takes spending much higher. Or Democrats, who won't agree to reductions in future entitlements, with the result being that we will be forced to cut entitlements in the future, during the inevitable fiscal crisis."

If Republicans hold firm, their position would be veto-proof. That would call the Democrat bluff, and force the 2012 election to resolve the crisis. My money would be on the Republicans to win hands down - but only if the Republicans hold firm. If Republicans compromise they will lose, and will deserve to lose.

In support of my position, I quote Rabbi Hillel:
If I am not for myself, who will be for me?
If I am only for myself, who am I?
If not now, when?

Greg Colvin writes:

Randy, who is "us" and who is "them"? Aren't most all us of both?

And Arnold, how do you propose that people like me, currently dependent on SSDI and Medicare (not for too long, I hope) stay alive after your wish is granted?

Randy writes:

Greg,

Re; "Aren't most all of us both?"

It is a primary method of the political class to try to make us believe that "they" are also "us", but it isn't true. If it were true there would be no point to political organization.

8 writes:

Seniors are the group that will fight hardest to defend entitlements. Seniors are a big part of the Tea Party movement.

Democrats are relying on an argument that is not marginally productive. Seniors (albeit in small numbers right now) are defecting to the reform camp. The question is whether the Republican reformers pull enough to make a difference at election time, but after almost 20 years of failed attempts to reign in Medicare and privatize (fully or partially) Social Security, they finally have a positive trend in their favor.

Republicans are slightly unreasonable if you assume their position truly leaves no room for compromise, but when have Republicans not eventually compromised? Especially in this case, since tax increases will be a small part of the solution, spending cuts will need to be massive. GOP wins outright if they come out with big defense cuts before Democrats.

Democrats are slightly irrational; if they win today, they lose everything tomorrow. However, I think tomorrow is much farther away than we think, probably 10 to 15 years or so. They don't have much to gain except electoral victory, since reform unfavorable to Democrats is inevitable. So Democrats are also doing what's in their interest.

Greg Colvin writes:

Randy, I don't follow. Most everybody (us) pays SS and Medicare taxes, and most everybody who lives long enough (them) draws benefits. Where does the "political class" figure in?

Randy writes:

The certain beneficiaries of programs like social security and medicare are the polital class functionaries who run them. It is very uncertain that the people who are forced to contribute their hard earned wages to these programs actually benefit. A true determination would be to compare the payback from these programs with the payback from alternatives - and the elimination by force of all such alternatives is a very strong indicator that the programs are not intended to benefit those who are forced to contribute.

Randy writes:

P.S. The costs to operate Social Securtiy have risen approximately 8% per year since its inception. Why? Certainly the nominal amount of dollars handled has increased over the years, but have these people never heard of computers? never heard of automatic deposits? I think its clear that the costs of running the program continue to rise because the people who run the program have the power to steadily improve their benefits. They can, so they do.

Greg Colvin writes:

I'm already benefiting while I try to recover. The government employees also benefit by having a job. What I would call the "political class" benefit by using the taxes to cover over some of the deficit, but they aren't really fooling anyone. The only big uncertainty I see is plans to "privatize" the system, which means Wall Street will steal it. The current overhead for SS is 1%, much better than any private plan. I'm not sure how to reconcile that with 8% growth, Anyway, my check is deposited directly.

I don't know what you mean by elimination of alternatives. People remain free to save and invest for retirement. They are also "free" to buy private health insurance, although as an elderly man with preexisting conditions nobody will sell it to me.

So if Congress does try to damage the system I'll be joining the millions of geezers clogging up D.C. demanding what we have been promised our entire working lives. Maybe we can pay for it by not fighting so many wars, and taxing the billionaires who outsourced our careers to India.

Randy writes:

So-called “government” employees are members of the political class. The objective of political organization is to exploit a population. Political employees “benefit” by operating politically enforced monopolies.

Wall Street is not the only alternative in town. I think that the most common alternative would be for people to pay for their homes in half the time. This would open up a very wide variety of other alternatives for investment, leisure, and ways of living.

Yes, under the current regime people can use “other” money to invest, but they can't use the money that was taken from them. All alternative uses for that money have been forcefully eliminated.

If you are a current receiver of Social Security (i.e., “rent”) payments then there is still some small possibility that you are truly "benefiting" from the program, but you are a member of the last generation for whom that will be true.

While I empathize with your concern at the thought that you might lose what you believe you have earned, I am also aware that we are being manipulated by a political organization. They keep us worried, and in doing so they keep us dependent, and exploitable.

I'm not in favor of politicians stealing from me to fight wars either.

I see no point in taxing producers no matter how much money they make. I am, however, in favor of taxing politicians at a rate of 200 percent, no matter how much or how little they have stolen.

Greg Colvin writes:

Thanks Randy.

I tend to think of the "political class" as the politicians themselves, and the people and organizations with enough money to "influence" (i.e. buy) the politicians. Most government employees other than political appointees I consider to be working class like most everyone else: somebody has to do the work they do, however it's paid for.

And yes, I am currently living on SSDI, so I think I'm clearly benefitting: otherwise I'd be homeless and starving. Hypothetically, had I not been taxed in the past, I could have saved enough money to ride this time out. That is, if my ex-wife hadn't stolen that money along with the rest of our savings. And the rents I am extracting pale compared to those being taken by our plutocracy.

So I'll just respectfully disagree with you: I think a moderate level of taxation in return for a moderate level of social insurance is an acceptable tradeoff.

Randy writes:

Thanks Greg,

I think the "alternate universe" title of this column has been demonstrated.

For example, I don't believe that "somebody has to do the work they do" - your reference to "government" employees. I think these people have simply organized politically to forcibly eliminate alternatives to the so-called "services" they force us to pay for.

Also, I don't buy the idea of "moderate" as used in your reference to "a moderate level of taxation in return for a moderate level of social insurance". We are dealing with a political organization that does not respect the idea of limits to its power and has no interest in having its ability to exploit us "moderated" in any way. Just look at the history.

Greg Colvin writes:

Thanks Randy.

We do seem to live in alternative universes. I live way up in the mountains, where most everyone I know is uninsured, even the business owners, and businesses complain that it's hard to hire staff who have all their teeth.

I'm currently waiting for my Medicare kick in come August. You have to wait 2 years 5 months after becoming disabled to qualify, but being disabled you can't buy insurance. I'm not sure why, but suspect the SSA hopes I will die before drawing those benefits. So half of my of meager disability goes to medical care, and I'm not sure how I'm going to survive until August. Without adequate care my condition is not improving, and my career as a world-class computer scientist is being destroyed. This is not my idea of liberty.

So I'm opposed to anything that risks making things worse for me, and don't see why we can't have government-provided health care like every other civilized country on the planet, so my minimum-wage friends can get care too. I've worked with a lot of Europeans over the years, and they think America is just plain crazy on this issue.

If I was making lots of money I might (though probably not) have more sympathy with your anger at being taxed, but having already been taxed, I want the services that were promised. Libertarian friends have tried to convince me that somehow things would work out with no government, but I found their arguments too utopian to accept. So I don't want no government, I want good government, and don't mind the taxes needed to pay for it.

Randy writes:

This has moved off the page so I'm going to let it drop. Just one last thought. I find it interesting that you use the term "civilized" but live up in the mountains. The word civilized is derived from civitas, the city. That is, civilization is the way of the city. That is, one doesn't live in the mountains to find the way of the city, but rather, to escape it.

Thanks again.

Greg Colvin writes:

Interesting thought. Yes, civilization did mean the way of the city. But it's relative. I think there are about 16,000 people here in Chaffee County, which would have counted as decent city long ago. And with modern transportation I can get to Denver in a couple hours, and with the internet I can get to Japan in a few seconds. And most everything in the local stores was made in Asia. So our civilization is world-wide, and there is really no escaping it.

As for being in the mountains, I find I can't take the stress of large cities, and rafting and mountaineering are my favorite recreation. And if you have some outdoor skills, being destitute in the country is far better than in the city. And we do have banks up here, and my SSDI check gets deposited like clockwork.

And yes, it's time to let this drop. Thanks for the conversation.

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