Wednesday, December 29, 2004

New Year's predictions

I certainly don't claim to have special intuitions about the future (I almost used the cliche "crystal ball"), nor do I have the sort of inside information that I would need to put real money down on anything. But I do think that:
1) Iraq will go really badly - as much beyond what we now expect as 2004 was relative to expectations a year ago.
2) Social Security will be going badly for Bush, and he will extricate himself with an irresponsible giveaway that offers individual accounts as a free benefit on top of everything else.
3) Though perhaps not until 2006, tax reform will turn into a small package of changes, with no significant revenue-raiser apart from (possibly) repeal of the state and local tax deduction if they can push it through despite the leeriness of blue state Republicans.
4) The Yankees will win another world championship, with at least one major superstar being added after Randy Johnson and Carlos Beltran, and with a payroll that is 2X even the Red Sox and Angels (say, $220 million). By year's end they will be adding more superstars.
5) At least one other major foreign policy disaster for the US will strike. No predictions about terror attacks here as that, literally, hits too close to home for me. (Living near Ground Zero will do that.)
6) The US economy will be doing poorly, but the timing of fiscal meltdown will still be unpredictable.
7) Bush's approval rating will be in the 40-43% range, but the Democrats will still be floundering. (Perhaps I should be ashamed of myself for making such an obvious prediction as the latter.)
8) More Administration scandals even though it is hard to see who would report or investigate them.
Cheer up, all, and pop those champagne corks. I know that I will - as Jim Carrey would say as the Mask, because I gotta.

Friday, December 24, 2004

Depressing reading

Blue state reading for me these last few days. First, Tom Frank's What's the Matter With Kansas?, the false-consciousness account of the far right revolution in the red states. Since, in my legal academic circles, economics-based thinking and ideas such as free trade are widely accepted on the left and right alike, it is a bit peculiar to read something viewing them as so obviously false that (a) no arguments need be made against them, and (b) they can only be held by deliberate stooges or the nearly insane. Frank seems to think that if, for example, you see a US factory closing somewhere because the multinational owner opens a plant in Indonesia instead, it is blind free market ideology to think that the net long term effect on US jobs might be zero [wages admittedly are a more complex matter], yet that it is simple down-home common sense to assume that NO jobs are gained elsewhere in the US. In other words, Frank thinks he does not have or need a theoretical view about how the overall labor market operates, whereas in fact he both needs one and has one that is likely to be wrong in key respects.
The basic false consciousness theory is of greater interest, however. That is, his view that the people being harmed by Bush-style economic policies (which of course in many cases are not free market at all) are being duped by "social issues" red meat, designed to lead nowhere but to an endless cycle of grievance, into favoring their oppressors and deflecting all blame to a powerless bunch of fall guys who are basically the heirs to the centuries-old anti-Semitic Christian stereotype of Jews (updated to apply to the likes of John Kerry). What gives this argument some credibility is the fact that it has happened so many times before, centuries of European anti-Semitism being one example and red state Bush Republicanism's twin and covert ally (since the two are good for each other in home politics), Bin Ladenism in the Islamic world, being another.
I am now in the middle of Imperial Hubris, by Anonymous (aka Michael Scheuer), which is if anything even more disconcerting, especially if one lives in one of the places that might actually be attacked again by Al Qaeda. (The Bush argument in the 2004 election that only he could protect us from terrorism was pitched 100% to people in states who knew with utter certainty that the places where they live will never be attacked. These people are having fun endorsing what they think is general butt-kicking, including torture, because they know full well that they are playing with the house money, since only their hated blue state brethren will pay for their spree.)
The basic point of this book, written by a leading CIA official who I believe was recently purged, is that we have already lost in both Afghanistan and Iraq, and are mostly losing everywhere else as well, due to the grotesque ignorance of our policymakers about known facts on the public record concerning the places where we are enmeshing ourselves and the people we are fighting, relying on, bribing, trying to bully, etc. This goes back before the current President Bush, however; e.g., the Clinton Administration should have had a plan in place to decapitate Al Qaeda in Afghanistan on September 12. The book suggests, though not expressly arguing in what I have read so far, that neither instituionally nor politically and ideologically in the US is there any potential to do a better job of realistically advancing our undoubted long-term interests in peace and prosperity.

Thursday, December 23, 2004

Tax Reform, Bush-style

The New York Times reports today that the Bush Administration is unlikely to propose sweeping tax reform, but instead will seek incremental changes. No surprise there - they are already headed for big trouble, I think, in Iraq (obviously) but also on the Social Security reform front. Controversial fundamental tax reform would be a lot even for these guys to try. (It hasn't hit them yet, by the way, that just because they won almost every single political battle they fought in Washington in the first term doesn't mean that this will continue. I am reminded of Bertrand Russell's discussion of inductive reasoning, involving a chicken that reasons from past experience that every morning it will not be sent to the slaughterhouse. One morning, it is wrong.)
Anyway, here are the 5 main items that the Times article identifies as likely to feature in the incremental tax reform plan, with some quick reactions to them:
1) Eliminate the alternative minimum tax - Hard to quarrel with this one, since it doesn't even really have a better tax base, in many respects, than the regular tax. (For example, no personal exemptions adjusting for family size.) But of course this is immensely costly, said to be $660 billion over ten years. Repeal also would reduce progressivity, although less at the very top than at the lower six-figures range. In a different political environment, that would merely call for suitable adjustments to the rate brackets since whether we should have an AMT is a different question from how the distribution should work. By the way, a less costly alternative, although not one I advocate, is simply to raise the AMT exemption amounts and index them for inflation or perhaps even to the growth rate of the economy.
2) Expand tax-free savings accounts - I have come to favor a consumption tax, so in principle this might be fine, and again the progressivity effects could be offset elsewhere (although they won't be). But tax-free savings accounts without taxing dissaving (i.e., borrowing) could be a mistake. If I put $10,000 in a tax-free savings account, and finance the investment (although not traceably) by keeping my home mortgage $10,000 higher, I am not actually saving any more.
3) Eliminate state and local tax deductions - blue stater though I am, there is much to say for this, on the view that state and local taxes paid have some correlation, however weak, with the provision of untaxed consumption benefits provided by the state and local governments.
4) Increased income taxation of Social Security benefits - this is equivalent to means-testing for Social Security benefits, but by another name so people don't get hysterical. Fine with me, and note that it is one of the few politically conceivable ways of making better-off current seniors share in the pain of narrowing the fiscal gap.
5) Subject employer-provided health insurance benefits to income taxation - This really requires a blog all its own. I am sympathetic because it addresses the over-use of insurance to pay routine medical benefits. If car insurance were tax-free when employer-provided, we would probably see it paying for gasoline. The downside is that we may want to encourage more people to have health insurance, either out of paternalism (we think they are making a mistake if they don't have it) or because we figure we will have to pay for some of their treatment if they need it but are uncovered and out of cash. Some recent econometric research suggests that the bad effect, encouraging over-insurance for routine items, is bigger than the good effect, encouraging the purchase of some basic insurance for big items. So again I have a lot of sympathy although this is bound to be controversial. One last point - there might conceivably be hidden fiscal benefits, via Medicare and Medicaid, if healthcare consumers were forced to be more cost-conscious and this affected general treatment norms and product development in the healthcare industry. (I further discuss this point in my book on Medicare.)
Bottom line - the proposals certainly could be a lot worse, especially given what I have come to expect from the Bush Administration. But don't hold your breath that more than a couple of them (the revenue-losers?) will happen.

Tuesday, December 21, 2004

Already making a beast of himself (but that's okay because he is a beast)

This past weekend we adopted a new cat, our third, a 1-year-old brown-gray tabby boy named Buddy. Despite the name he came with, he has no discernible resemblance to Buddy Guy, Buddy Miles, Buddy Hackett, or the fictional Buddy Love, although perhaps a slight temperamental resemblance to Buddy Holly.
After seeing him a couple of times over a few weeks, itself a long story, we decided we couldn’t resist because he was simply too nice to pass up. Not every cat licks your face in the visiting room of an animal pound, not to mention the more common but still pleasing behaviors of purring loudly and rubbing vigorously against your hand. Plus, once you focus on a given individual whose life prospects are otherwise quite poor, it is hard to resist utilitarian principles, as extended to sentient beings generally. (The fact that those principles would tell you to just keep going is easier to ignore, albeit not, as most philosophers would perversely argue, evidence against the persuasiveness of utilitarianism.)
Heads up to anyone passing through downtown Vernon near Great Gorge: the Vernon Animal Pound, on Church Street near the main drag, is not a no-kill shelter. Not to criticize them - they don't have the resources - but this raises the stakes for the animals there.
Apart from being impossibly sweet-tempered and even calm for a 1 year old, Buddy appears to have comprehensively studied the cat handbook and memorized the list of cat behaviors that are expected of him. He is now being “fixed,” as the euphemism goes, but will soon be launched on the initially anxious (for cats, not people) project of finding his footing in a home with two other cats. The other two, 13-year-old boy Shadow and 3-year-old girl Ursula, are quite aware of what is going on and seemed unimpressed by my statement, made to them with fingers crossed, that “we have no idea how he got here, but as long as he’s here, we might as well be nice to him.”

Defending (?!) Bush's Social Security dodge at his press conference

Other bloggers, such as Timothy Noah, Chris Suellentrop, and Sam Rosenfeld, have been harsh on President Bush for flatly refusing to say anything meaningful about Social Security benefit cuts at his press conference. Certainly, as an aesthetic matter, it seems to have been the usual arrogant frat boy routine and contempt for democratic openness that make him unwatchable. Plus there were hints of triangulating, in the Clintonian sense of trying to make the Republican Congress take the blame for proposing benefit cuts.
But - Bush did appear to acknowledge, however obliquely, that benefit cuts are necessary, and that they are on the table other than for current and near-retirees. (I would put these folks' benefits on the chopping block too, presumably through means-testing to avoid impact on those who have too little else, but I recognize that this is politically beyond the pale.)
I interpret him as saying that it's too soon to be at all frank and open about benefit cuts, which to have a chance would have to be proposed further down the road. And if this is the best political strategy for moving a couple of steps back towards fiscal balance, then, however unedifying, there is something to be said for it.
Not to say that the Social Security changes will move us towards fiscal balance, or that individual accounts have anything to do with such a move, but still let's be fair at this point.
One of the big controversies on the blogosphere over the last few days has been whether there really is a Social Security crisis when the benefits are projected as lasting for a while. Alas, this debate uses an arbitrary measure, the Social Security Trust Fund, of when the money is officially deemed to run out, wholly aside from the actual financial markets question of when we can't raise the money to pay benefits without hyper-inflation. Alternatively, bloggers debate whether it is tactically wise for the Democrats to say that the Social Security funding crisis Bush keeps invoking for political cover is a sham. Should they instead be "proactive" by saying yes it's real, but let's do X, Y, and Z instead of individual accounts? This choice in turn is getting debated mainly based on whether there has been too much political rhetoric over the last 10+ years about the crisis for the Dems to change the message now. (See, for example, Andrew Samwick and the others he mentions.) So this is a debate about perception, not substance.
Granted, perceptions are important, as are political tactics, especially given how the Bush team plays ball. But I would like to see more recognition of the important substantive point, which is that we face a serious overall fiscal crisis to which rising Social Security benefits (i.e. growing faster than the economy due to increasing life expectancies) are a meaningful contributor. So we need to address the overall fiscal problem no matter what games we play with accounting fictions (or more charitably, precommitment tools) such as the "Social Security Trust Fund." True, Medicare, or more broadly unsustainably rising healthcare spending, is the biggest problem, and one that will have to be addressed no matter what. But, to quote my mother-in-law, "'Every little bit helps,' said the old lady as she spit in the ocean." It certainly would be worthwhile to address Social Security if addressing it meant significantly narrowing its $10 trillion fiscal gap. And the fact that we have other, bigger problems actually increases the importance of addressing this piece (since we have no slack), even if suggesting that this is not the most logical place to start.
All this being said, I do wonder if Bush's punt to the Congress, rather than merely being smart tactics, actually shows a lack of nerve (or clout as he heads towards lame duck status with mediocre approval ratings) that suggests nothing will happen after all.

Friday, December 17, 2004

Meanwhile, back at the "economic summit"

More breaking news from the Administration's "economic summit." President Bush's Ron Ziegleresque spokesman, Scott McClellan, is quoted as saying afterwards: "Markets will look favorably on a plan that addresses the long-term sustainability of Social Security."
Doesn't this depend on exactly how the Administration addresses sustainability? For starters, whether they make it better or worse? In their own special way, they have been tirelessly addressing overall fiscal sustainability for the last four years.
Plus, at the risk of tedious repetition, if they wipe out $10 trillion of Social Security fiscal gap but add $12 trillion via permanent tax cuts and AMT relief, just how much credit do they hope to get from the financial markets?

Increasing baseball's efficiency

I am sure all economics-minded baseball fans are as distressed as I am by the sheer wastefulness of the process whereby the Yankees have to buy all of the top players and then hope they perform in a limited number of key situations each October. Wouldn't it be much more efficient and streamlined if we changed baseball's rules so the Yankees could simply buy runs directly?
Imagine Game 4 of the ALCS last October under this rule. The Red Sox tie it up off Rivera in the bottom of the ninth - but then, before the tenth inning can begin, the Yankees simply buy a run and are declared the winners by 5 to 4! It's a sweep!
Yankee fans start celebrating. Announcers talk about how it's not just the money the Yankees have, it's how smart they are in using it. Joe Morgan gives the credit to Derek Jeter.

Thursday, December 16, 2004

President Bush on thinking long-term

Comedy or nerve? You make the call.
Here is what he said today at his "economic summit," about the approaching date when Social Security will start paying out annually more than it takes in:
"Now, some will say, well, that's 2018, I'm not going to be around. But I don't think that's what a good public servant thinks, should think."
Pretty big talk for a guy who figures to add more than $30 trillion to the fiscal gap before he is done, including, on the income tax side, $12 trillion that is still to come from extending the tax cuts and fixing the AMT. Even just this remaining amount exceeds the projected Social Security shortfall.

Musical interlude

Saw the Pixies in concert last night, part of their 8-night run at the Hammerstein Ballroom in NYC.
The warm-up act was Le Tigre, who left me wishing we had gone the night before and seen Broken Social Scene. Le Tigre has this dance punk feminist thing going, very earnest in a 20-year old way (even if they are older), and they definitely appeared to be nice people. But as they largely relied on pre-recorded backing tracks that were not especially compelling, and as their words and vocal performance didn't add much, all I could think of was Ashlee Simpson. I guess Ashlee is the other way around (live band, canned vocals), but the level of creativity is comparable. Le Tigre was to a degree fun, but I had the sense they should be trying to win their dorm's talent show before they hit the main stage.
If any Le Tigre fans read this, which may be a long shot, I imagine I will hear from them.
The Pixies were pretty much all business (bills to pay?). They muffed a couple of arrangements, but were fantastic anyway. Their playlist is just exceptionally strong; hardly anyone since the Beatles could match it. They played almost everything from Doolittle and Surfer Rosa, obviously knowing where their best work is, and well-chosen scatterings from the rest. I do wish they had played Bam Thwok. One of the best concerts I've seen because the material is just so outstanding and they were generally up to playing it well.
While we're at it, my 2004 album of the year pick is Brian Wilson's Smile. True, the performance, while highly professional and skilled, has at times that generic "Beatlemania" quality to it. But the material is too good for this to matter much.
And my two picks for overrated are Franz Ferdinand (catchy but limited; once through the 80s was enough for me) and Arcade Fire (maybe I will come around, but for now they just seem too histrionic). Among the new releases I liked better were Blonde Redhead, Fiery Furnaces, Elliott Smith, A.C. Newman, Wilco, and Modest Mouse.

Knocking on Kevin's Drum

Kevin Drum, who often does a pretty good job for a political commentator at understanding Social Security fundamentals, is missing an important point when he says:
"I'm not in favor of making any changes to Social Security at the moment. The 'funding shortfall' has a strong Chicken Little flavor to it, and even if it turns out to be real there's little reason to try fixing it four decades ahead of time."
Au contraire, mon brave. The shortfall is driven by rising life expectancies, which are unlikely to change (and we certainly hope they don't change). So it is a pretty solid projection even if the timing bounces around. And the drop-dead date could move forward as well as back. Plus, with benefits being pegged to wage growth, it is harder to out-grow the problem. Why wouldn't you plan in advance for a predictable problem down the road? Should people wait until age 60 to plan for their own retirements?
I realize Kevin is reacting to the Bush Administration's absurd insistence that a $10 trillion piece of the fiscal gap requires making changes that have nothing to do with sustaining our long-term finances, while they conveniently forget the estimated $16.6 trillion hit they laid on the fiscal gap in 2003 with the Medicare prescription drug benefit, not to mention the $12 trillion hit they are planning right now via fixing the alternative minimum tax and making the Bush tax cuts permanent. But, Kevin, don't let this draw you into denying that there is a Social Security problem (albeit a smaller one than the Medicare problem) that we ought to do something about. Responsible people on all sides will ultimately have to recognize this.
On the other hand, Kevin quotes something that is right on the money with regard to proposals to eliminate wage indexing of Social Security benefits so that we only have inflation indexing: "It's as if an official in 1935 had said: 'Why does every retiree deserve a flush toilet and a telephone? Half of Americans make do without complete plumbing and less than half have telephones.'""
This is indeed the problem with eliminating wage indexing. Another way to put it is that, over the infinite long run, it means that seniors' benefits are phased down to zero as a percentage of GDP.
But this doesn't mean, as Kevin too swiftly concludes, that moving to mere inflation indexing should be off the table. Don't we need to look at all the tradeoffs and at effects on all age cohorts? Personally, what I like about eliminating wage indexing is that it changes the inertia point. Congress must vote to raise seniors' benefits relative to inflation, rather than having it occur automatically, and thus what is defined as a "cut" versus a "new benefit' changes. In a political world where seniors and the AARP are so powerful, inflation indexing strikes me as a better place to set the pre-change baseline even if we recognize that it is problematic as an actual outcome.

If George W. Bush owned the Yankees ...

... he would give Kevin Brown and Javier Vasquez the Medal of Freedom for their contributions to battle against the Red Sox.

Tuesday, December 14, 2004

Why must politics be so stupid?

Okay, my title is a bit too harsh. What I really mean is, why can't political discussion, at least when we're not in the middle of a Presidential campaign, focus more on the actual issues rather than on rhetorical ploys?
The Social Security debate already has the following form. From the Administration: we have a terrible funding crisis so we must adopt individual accounts to solve it. From liberal opponents of the Administration: what funding crisis? The Administration is just doom-mongering and we don't have to do anything yet, and if there's any problem at all it's a General Fund problem, not a Social Security problem.
Let me try an analogy. A swimmer is bleeding in the water. A couple of hammerhead sharks, one big and one small, are heading towards him with gaping jaws. The Administration tells the swimmer: "Your wristwatch is water-logged! You've got to fix it at once so you can time the small shark as he circles in!" The other guys say: "Don't touch that watch! The sharks are still 20 yards away, and besides the small one isn't the problem!"
As I keep saying, individual accounts are a debatable idea with both virtues and vices, but have little to do with the funding crisis. Diverting taxes and benefits of equal present value would have no effect on the fiscal gap, so the only real argument for using them to fight the fiscal gap is that they create a distraction to give you political cover. (Oops, I don't know that I can extract this lesson from my shark story.) But I am skeptical both that this trick would work and that the Administration even plans to try it.
Anti-Administration forces respond by saying there really is no problem or at least it's not in Social Security. But there is a really bad overall problem, as shown by our estimated $73 trillion fiscal gap, and Social Security does contribute $10+ trillion to it. To paraphrase Everett Dirksen (with due adjustment for inflation), a trillion here and a trillion year, and eventually you're talking real money. True, the Medicare part of the problem is far worse, and indeed the underlying problem of unsustainable healthcare growth is broader still, since private health insurance is also on an unsustainable growth path. But the effect that increasing life expectancies have on the growth rate of Social Security benefits relative to the economy is indeed a part of the huge and serious overall problem.
Suppose we could, this year, bring Social Security into long-term balance through changes that, while painful, were reasonable under the circumstances. That would be a big down payment on addressing the fiscal gap, and it also might be a signal to the markets that we are starting to come to our senses.
So here's an idea: the Administration actually does something responsible for a change and tries to lower the fiscal gap that it has done so much to expand. Since that ain't gonna happen, the left says: we have a problem but you aren't actually doing anything about it.

Saturday, December 11, 2004

Bozo in Paradise

David Brooks has been an embarrassment since the day he started writing for the New York Times op-ed page. He seems to think his job is to echo White House talking points (with an occasional stab at friendly advice), not to think and write about issues in any authentic sense. This means that he is a puppy dog, not a journalist.
Worse still is his ignorance, which reached a laughable level in today's Brooks column about Social Security.
Brooks claims that the idea of having the government issue debt to buy stock is supported by faith in markets, and seems ill-advised only if you don't trust markets.
But issuing $X billion of debt and buying $X billion of stock does not mean trusting markets - it means holding a position that financial markets value at zero. You own assets that the markets value at $X billion, and you issue debt that the markets value at $X billion. Yet you think, apparently, if you are as woebegone as Brooks, that you have stumbled on a bonanza - something that will do so well that you can wave your magic wand and evaporate $11 trillion of unfunded liabilities.
Brooks notes that stocks have a historic real return over some period of 4.6 percent, while the government can issue debt at a real interest rate of 2 percent. Voila, a big money bonanza from the difference between what you pay and what you earn. But this could only happen if markets are badly awry in how they value the two sides.
If he were minimally economically literate, he would have heard of something called a "risk premium." Riskier returns generally must offer a higher interest rate, because people don't like the risk. If you are long the riskier asset but short the safer asset, you have a positive expected return, but one that the market sensibly (given people's risk aversion) values at zero because the down side is nasty.
There actually is a plausible argument, although I don't buy it myself, for having the government issue debt and buy stock. It is based on what economists call the "equity premium puzzle," or the idea that stocks shouldn't offer quite so much of an extra return given their historical track record of fluctuation. But this is an argument for individual accounts based on the idea that markets have screwed up and that the government can therefore cleverly take advantage - not an argument based on faith that markets work.
David Brooks should go back to writing about tall skim no-whip frappuccinos with Madagascar cinnamon.

Tall Tales in the Holiday Season

Anyone who believes Bernard Kerik withdrew for the Homeland Security position due to housekeeper issues, as claimed, should contact me immediately. I have a bridge in Brooklyn that I would like to sell you.

[UPDATE: Not to crow, but check this out. The degree of emphasis the spinmeisters put on the housekeeper/immigration issue, which didn't really seem so terrible, was the obvious tipoff that they were trying to distract us from stuff that was worse, plus of course several other unseemly stories had already started to surface.]

Friday, December 10, 2004

Krugman on Social Security again

Although my shock and awe about the Bush Administration's fecklessness has been pushing me ever further into Krugman's camp, I still can't join better-known bloggers such as Josh Marshalland Brad DeLong in reverently embracing everything he says about Social Security.
Case in point: Krugman's column today.
The big point he makes is that the Bush plan probably amounts to nothing more or less than "government borrowing to speculate on stocks." This is probably correct, although we haven't seen the plan yet.
So maybe I am just quarreling over the footnotes, but they are important.
I have been saying that an individual accounts plan actually could eliminate the Social Security portion of the fiscal gap IF - as I do not expect for a second - it cut guaranteed benefits by the amount of the diverted payroll taxes PLUS $10 trillion in present value terms.
For Krugman, even this would not be good enough. This difference of opinion reflects that, while I am a fan of long-term measures such as the fiscal gap and generational accounting, he seems to think that, since the good ol' deficit is the measure we have always used, it's jolly well good enough for him.
He makes the valid point that long-term measures rely on projections of future policy that may not be credible. For example, the bond markets might (rightly) not believe that a $1 trillion diversion of payroll tax revenues today was really, truly going to be offset by an $11 trillion, or even a $1 trillion, reduction of benefits in the future. Who knows what Congress will really end up doing down the road?
This type of problem has led me to the conclusion that, while the fiscal gap is analytically a coherent measure and the deficit is not, in the world of official budget measures you need both. Policymakers should be generally constrained (at least in the sense of an accepted policy norm) against increasing EITHER the deficit or the fiscal gap, lest they game the former through smoke & mirrors timing games, or game the latter through non-credible claims about policy in the distant future. (An example would be purporting to "pay" for individual accounts through a $1 million a person annual head tax, to take effect in the year 2050.)
With the Bush Social Security plan, of course, the measurement issue may boil down to whether they can ignore making the short-term deficit worse because the long-term picture ostensibly remains the same. Ignoring that it actually will have gotten worse if the future medicine is politically less credible than the current candy. And ignoring as well that the idea was supposed to be improving the long-term picture, rather than placing a bet on stocks while it ostensibly remained the same.

Thursday, December 09, 2004

Read his lips: no new Social Security taxes

Now that new taxes have been ruled out to help pay for individual accounts, the only remaining way to pay for them is through benefit cuts. We are told by proponents of the change that the Admnistration's plan will eliminate Social Security's estimated $10 trillion long-term revenue shortfall. We are also told that trillions of dollars in payroll taxes will be redirected to individual accounts over the next few decades. Sounds like an awful lot of benefit cuts would have to be proposed - far more than one can imagine the Administration proposing in a sensitive political environment.
Keep in mind that this is not being billed as a full switch to individual accounts even for younger workers. So the plan is not to eliminate their traditional benefits, and certainly not to admit (or let it be persuasively argued) that they are paying for the transition.
People on the left are convinced that the plan is to destroy Social Security and shred the safety net. Frankly, that might be better than what I suspect is the actual plan, which is to recapitulate the Medicare "reform" by promising more free lunches and further endangering the US government's fiscal position.

"Look, Mommy- I'm a soldier!"

Was I the only one to laugh at the childish G.I. Joe outfit our President wore the other day when he was photo-opping with US troops? Is he trying out belatedly for the album cover of Sgt Pepper?

UPDATE: Maureen Dowd laughed at it, too. [And a reader tells me Jon Stewart did as well.]

Reader challenge: free copy of one of my books if you can find any photograph of Dwight Eisenhower in a military-style outfit while he was President. Those who are don't have to pretend. [Oops - a reader sends proof that Eisenhower wore one while President-Elect, in the course of visiting the US troops in Korea. Since I am a lawyer I guess I could embrace the technicality - he hadn't been inaugurated yet - but instead I'll tip my hat.
Maybe Eisenhower was responding to those "Swift U-Boat" ads in which Stevenson alleged he was a German double-agent.]

Tuesday, December 07, 2004

Shameless plugs

My latest book, Corporate Tax Shelters in a Global Economy: Why They Are a Problem and What We Can Do About It, is now available. It is actually more of a short monograph (50 pages of text), but at least it is priced to move. As in, free download available.

While you're at it, if interested you could also check out my latest full-length, Who Should Pay for Medicare?

Krugman on Social Security

Paul Krugman's column in today's New York Times, Inventing a Crisis, continues Krugman's recent career as a lightning rod or bellwether (take your pick). Some reasonably well informed readers love him; others, even if skeptical or worse about the Bush Administration, find him way too partisan and biased. I ought to know, since I have been in both groups at different times. During the 2000 election, I thought he was too harsh on Bush (who I at that time misjudged) at least relative to his harshness on Gore, who was certainly being fiscally irresponsible as well, if on a smaller scale. Thus, if both candidates proposed to make Social Security's funding problems worse, he would point out that Bush's math could be expressed as "2 - 1 = 4," without, it seemed to me, applying the same standard to Gore.
In the last couple of years, I have come to feel that his view of the Bush Administration is largely correct, and that one need not share his politics or view of government economic policy to agree with him on this, since principled conservatives should be just as appalled by this Administration, and on the same grounds (apart from different views of progressivity) as liberals.
But I still find him too unthinkingly traditionalist on Social Security. He is eager to defend the system without sufficiently asking whether it is well designed - for example, in its so strongly favoring older generations and, to name another, less well-known redistributive quirk in the system, one-earner couples relative to two-earner couples and singles. Maybe there is a sound political judgment behind this, reflecting the view that, if you open things up, the political system will adopt more bad changes than good ones. But since he is not saying that, I discern an underlying lack of full candor with the reader, or else myopia on his part.
Today Krugman accuses the proponents of individual accounts of inconsistently, and therefore in his view dishonestly, saying both (1) that the current Social Security surplus is meaningless, and yet (2) that the approaching Social Security deficit is intolerable.
I think this is a bit unfair. The real problem is that the U.S. fiscal system as a whole is deeply in the red, as shown by its estimated $73 trillion fiscal gap (expected to become $85 trillion if the Bush tax cuts are made permanent and the alternative minimum tax scaled back). One significant contributor to this - although Medicare is the biggest problem - is rising Social Security benefits relative to the size of the economy, mainly due to increasing life expectancies. We're glad seniors are living longer, but it means they get the Social Security pension for more years, without any matching increase in funding.
There is a fiscal crisis, it is potentially very serious - think Weimar Germany for one possible playout - and the trend in Social Security benefits is a contributor. True, the questions of when Social Security goes into annual deficit, and when the Trust Fund is deemed to run out, are by themselves trivial. But the trend is the problem, and it does call for at least considering Social Security changes (although Krugman is right that making greater use of general revenues is one of the options to consider).
Final point on this: individual accounts are indeed irrelevant to the fiscal crisis, unless used as a benign political trick to facilitate greater financing (and they might be more likely to end up being used as a malignant political trick to shower more goodies on current voters).
What makes individual accounts irrelevant to the problem is that they really just shift funds around. Suppose you had to save more to send your kids to college. The individual accounts idea amounts to saying, "don't save more, just change how you are investing what you save." But in practice this might just mean that the same investments are reallocated a bit between people (or merely between bank accounts) in ways that don't really matter much at the end of the day. For example, even if stock market investment really offers a higher return than alternatives over the long run, adjusted properly for risk - and that is very much open to question (the last 100 years don't prove what we should expect over the next 100) - it's not clear that there would be more stock market investment in the society as a whole under individual accounts, rather than just a bunch of offsetting portfolio shifts in who directly holds which financial assets.
Final point: given what we know about the Bush Administration, one can't rule out the paranoid liberal idea (paranoids are sometimes right, after all) that this is a scheme to let the fund managers rip off investors. In different hands, it might be a plan to hand the fund managers a costly mandate, by pressuring them to accept lots of small accounts on which they weren't allowed to recover their administrative costs. But think Bush Administration + pharmaceutical industry + Medicare prescription drug benefit, and you will have to wonder what to expect. The proof will be in the lobbying - if the securities industry pushes for this, it will mean they expect a huge windfall. If they don't, the paranoid liberals can take a deep breath although the looting might still emerge later on. (In 1965, the American Medical Association feared Medicare as a camel's nose in the tent of government-run healthcare, but it ended up being a bonanza for doctors.)
One reason for expecting a rip-off, just as for expecting that individual accounts will end up increasing the fiscal gap, is that it might aid enactment. So even a relatively good or at least innocuous plan might change for the worse as it goes through Congress, leaving principled supporters with the question of whether at some point they should pull the plug on their support.

Yoda Steroid Controversy

Fans of the Star Wars series were stunned to learn this morning, from leaked Imperial Senate testimony, that the beloved Jedi warrior with the undersized body and the oversized heart has admitted to relying on something other than the Force to help him in light saber duels against much larger warriors.

Friday, December 03, 2004

Mister "Small Government"

While this is highly unlikely to be news to anyone in the know in Washington, it is certainly interesting to read that Grover Norquist, whose supposed anti-government creed is doing so much to drive U.S. tax policy these days, is a man who sells access to his friends in government for cold hard cash. See Lou DuBose's recent Texas Observer article, K Street Croupiers.
Grover, if you are out there, at what point do the means become the ends?
And this is even leaving aside the point that, as I have argued in a number of places, such as in Cato's Regulation Magazine, Grover's tax-cutting policy actually makes government bigger over time by increasing redistribution from younger to older generations and creating such instability that people must continually lobby over absolutely everything.

Baseball and steroids

As a person whose dislike for the New York Yankees (aka the Evil Empire) is on a par with what those Canadian demonstrators apparently think about the U.S. and/or President Bush, I must admit to getting a bit of schadenfreude over the Giambi/steroids affair, subject only to concern that it would end up helping the Yankees by allowing them to wiggle out of what has become an inconvenient contract. (For them, even $80 million probably can't be described as worse than "inconvenient").
But of course there are broader implications here, not to mention that I am disposed to admire Barry Bonds although the leak about his testimony is no more surprising than that about Giambi's.
A point about the steroid controversy that not everyone gets is that the issue here is really, in a sense, more about the players than the fans. The reason for banning steroids is to protect the players. You may want to do this for paternalistic reasons if you think lots of players who would be inclined to take steroids are making a serious mistake in terms of their own long-term interests. (Bonds and Giambi have certainly been well-compensated for any enhancement to their stats, but lots of others may not be, perhaps even at the college level or lower.) Or, less controversially if you don't like paternalism, there is a collective action problem here. Players are engaged in an arm's race, and all are worse off if they must do more just to stay in place. (Without the illegality, this is the story behind Jim Courier's rise and fall as the men's #1 tennis player - he raised the bar in terms of physical conditioning, and trounced the field until everyone else realized they had to join him.)
From a fan standpoint, steroids hurt the game only in the circular sense that, if people care about them then they care about them. I personally find Bonds' achievements amazing no matter what. And of course there may be systematic changes to the balance of forces in the game, e.g., more home runs, which might be good or bad for fans without regard to whether they come for steroids. It certainly isn't unreasonable for fans to hate steroid users because they are cheating in a manner that endangers their fellow players. But player welfare is the issue here.
Separate question: will we soon start hearing about amazing late-career power pitchers and steroids? After all, you need flexibility, not just strength, to hit like Bonds or Giambi, and maybe that implies power pitchers can benefit too.

Tuesday, November 30, 2004

Shoot the messenger?

According to an article in today's New York Times, U.S. officials in Iraq say that Iraqi forces supporting the Alawi government are foundering under rebel assaults, rather than growing stronger as per the visualized "Iraqification" of our side in the struggle there.
It's obvious what the Bush Administration must do - fire those U.S. officials who are talking off-message to the press, while declining to address the actual problem. At least, this would follow under their approach to CIA reform, which is to fire people who were 30% wrong so that the President can be advised exclusively by those who were and remain 100% wrong.
I am trying to keep this blog above the partisan fray, in the sense that I don't especially like either party and that I despise the approach to blogging (or scholarship or journalism) where one serves as an echo chamber for some political faction's message of the day. But staying above the fray would have been a lot easier under Reagan or Bush Sr., both of whom were grown-ups, interested in solving problems including through bipartisanship, than it is with the current crew.

Monday, November 29, 2004

Time for leading conservative thinkers to guard their reputations

We are at an interesting point in the Administration's push to create individual accounts in Social Security. With tax reform on the back burner at least for now and nothing changing in Iraq even as they keep announcing that they have broken the back of the insurgency, Social Security is where the Administration is going to want to make its second term mark.
Some basic contours of the proposal are already pretty clear. Over the next ten years, use hundreds of billions in present-law payroll tax revenues to create individual accounts for people below a given age such as 55, funded, if that is really the word for it, by borrowing hundreds of billions of dollars.
The politics are also getting predictable. With little if any Democratic support likely (although I suppose they will try for Joe Lieberman), it has to be rammed through on a straight-line Republican Party vote. But we can see already that the Administration has lost a bit of leverage with Republicans in Congress because there is no more need to reelect Bush, and the fellas in Congress are bound to get nervous about the midterm elections.
So the proposal will have to be candy-coated like mad to get it through, the key being to make it attack ad-proof. So no tax increases to help pay for it, and I suspect little in the way of real and credible benefit cuts down the road to reduce the implicit Social Security debt commensurately with the increase in explicit debt. E.g., they may guarantee that no one can do worse than under present law, leaving investors in a "heads we win, tails the government loses" posture. The consequences of this might be limited by restrictions on portfolio choice in the accounts, but the problem is still there, and if Congress down the road lets people use the accounts pre-retirement for all sorts of worthy needs, while keeping the guarantee of traditional-level Social Security benefits, then it could get ugly indeed.
Plus there will be manipulation of budgetary rules to avoid scoring the Bush proposal as increasing deficits or public debt. And here is where leading conservative thinkers had better think about their reputations. If they are serious about their principles, they should not endorse the proposed new budgetary rules, or the Administration's Social Security plan, even if bears some passing resemblance to what they have been advocating, if it ends up being a budgetary scam that pushes us closer to default due to the sugar-coating and absence of adequate offsets. In other words, they should cut loose if this turns out be Medicare prescription drugs all over again, where the new benefit was supposed to be paid for by cost-saving measures but those measures basically evaporated. Not to name names (well okay, let's), but I am hoping that the likes of Martin Feldstein, Glenn Hubbard, Kent Smetters, and Andrew Samwick will subject the Administration's proposal to the same standard of serious scrutiny that they would have insisted on if it had been proposed, say, by Clinton in 1999.
What is the main reason for individual accounts in Social Security? While there are some arguments for greater portfolio choice by participants, these arguments are not overwhelming given the paternalistic reasons for the program (trying to require minimal rationality in lifetime consumption smoothing and investment choice) along with the administrative costs of running millions of small accounts. You can argue this one either way, but I don't see it as a really big thing. To Feldstein et al, I think the real key behind privatization is to nudge voters and consumers, in large part through well-intended but tricky fiscal language games, towards greater national saving.
But will the plan that is advanced by the Administration really accomplish this? My guess is that it will be more on a par with the idea of "funding" individual retirement accounts by printing money. Few would view that as a sensible step towards increasing national saving, and I suspect we will wind up with something that is not much better.
The Administration's reasons for pushing individual accounts are unlikely to have anything do with this concern about national saving, or even with increasing portfolio choice (although they may want to reward their friends in the securities industry who would run the accounts, if the terms of running the accounts do not prove too thankless). Reason 1 for the Administration is that you have to do something in your second term, and nothing better comes to mind. Reason 2, the "philosophical" Rove-Norquist reason, is to change the payor's name on the Social Security checks that seniors get, so the checks will not seem to come from the government. From this standpoint, you could even do nothing and have everyone get the same checks as previously, so long as the checks seem to come from one's own individual account rather than from Uncle Sugar. This is supposed to make seniors less pro-government and more pro-Republican. In short, an "ownership society" via re-labeling of Social Security benefits even if nothing changes on the ground.
But to do this, they are actually going to have to change things on the ground, and potentially in a manner that pushes the Federal government closer to default. If this is what the Administration's plan does, principled conservative thinkers had better get off the partisan bandwagon and say so.

Sunday, November 28, 2004

Follow-up on cliched writing, and a Reader Contest!

Sorry to keep flogging poor Tom Perrotta, but we have a winner for cliched and stereotyped writing in "Little Children."
From page 190, describing a women's book group: "[T]he atmosphere inside Bridget's condo was warm and welcoming, full of laughter and intellectual curiosity. Over here an informed conversation about the films of Mike Leigh. Over there an impassioned discussion of third-world debt relief."
What, no Save the Marmosets fund drive in a third corner? And maybe they could be exchanging Vegan dog food recipes in the fourth?
But on to the contest: change the key words to make it more interesting.
Here is my entry, just to show the general idea:
"The atmosphere in Bertha's cell block was hateful and hideous, full of smirking and emotional emptiness. Over here, an informed conversation about the snuff films of John Wayne Gacy. Over there a gloating discussion of famous third world famines."
Use the comments feature if you want to try your own.

Friday, November 26, 2004

Reasons to waste time on-line if you're going to waste it anyway

Tom Perrotta is the author of "Election," among other novels that have given him an "American Nick Hornby" (Newsweek)-style reputation as an OK suburban satirist, steering below the heavyweights but above the Oprah genre of heartwarming fiction. But Perrotta's latest, "Little Children," is disappointingly cliched after a good opening chapter or two. Case in point, selected semi-randomly from p. 150: "That's who I was in high school, even in college - Superjock, Mr. Quarterback."
In the words of a character in the movie Clueless, "Could we be more generic, please?"

Tuesday, November 23, 2004

Making a bad measure even worse

Deficits are a bad measure of the government's fiscal position because they are short-term only. If you earned one dollar more than you spent this year but had to send quadruplets to Ivy League colleges next year, it would not make sense to think of yourself as having a "surplus" for the year, given that the enormous liability around the corner had crept closer.
This is why I urge use of the fiscal gap to measure how the government's finances are doing. The fiscal gap could be defined as the sum of currently outstanding national debt plus the present value of all expected future deficits under current policy. The fiscal gap has recently been estimated to stand at about $73 trillion, or seven times the value of annual production in our economy. Making President Bush's tax cuts permanent, plus fixing the alternative minimum tax, has been estimated to raise it to about $85 trillion.
Another measure I like is the "true budget deficit," as I call it (though it hasn't caught on with anyone else yet), or the increase of the fiscal gap during a given year. In 2003, mainly due to the Medicare prescription drug benefit as well as the tax cuts, President Bush and the Republican Congress ran up a true budget deficit in excess of $20 trillion, or more than twice total economic production for the year. Quite a spree by any measure.
Politicians usually prefer the official deficit measure to the fiscal gap or true budget deficit, because it enables them to play games and hide the long-term problems. But every now and then the myopia of a current year measure turns around and bites them on the bottom. The current Bush Administration push for individual accounts in Social Security is an example.
Suppose payroll taxes with a present value of $1 trillion were "diverted," over the next ten years, from the Social Security Trust Fund to individual accounts. But suppose this were fully paid for through a $1 trillion cut (in present value terms) in future Social Security benefits paid by the government. Under conventional government accounting, budget deficits over the next ten years would go up by more than $1 trillion, even though the fiscal gap would be unchanged.
The Administration and its supporters are understandably unhappy that deficits would be reported as higher even if things had not truly gotten worse. So, the Washington Post reports, they are thinking of "creative" (shudder) new strategies such as simply not reporting the effect on the deficits or on national debt. Glenn Hubbard and Kent Smetters rationalize this approach by noting that the higher explicit debt would be offset by lower implicit debt (i.e., unfunded Social Security commitments in the future).
Yes, but. What if the changes don't really reduce implicit Social Security debt? Or what if the offsets reduce it by only a tiny bit, relative to the expansion of explicit debt over the next ten years? For that matter, what if the Bush Administration shocks everyone by reducing future benefits by MORE than the reduction in current government revenues? In that case, shouldn't they get some credit for reducing the long-term fiscal problem?
The fiscal gap is a measure that takes care of these problems automatically without requiring a "creative" accounting solution. By the very rules of its computation, the fiscal gap would increase by the present value of the diverted payroll taxes and decrease by the reduction in implicit Social Security debt through the traditional Social Security system. It therefore would offer a correct measure of the overall net effect, which would show up as well in the true budget deficit for the year of the change.
By contrast, the approach suggested by Hubbard and Smetters (traditional deficit accounting plus a special rule to cover this case) is an invitation to disaster, or more precisely to deceit by Congress and the President. I might trust Glenn or Kent to design the special accounting rule - although frankly, I would have trusted Glenn a bit more four years ago, before he participated in the budget policies of the last four years - but Glenn and Kent would not in fact be the people deciding on the rule, either this time or when it is invoked as a precedent the next time. Letting Congress and the President decide to disregard new deficits and debt because of claimed offsets down the road would be akin to handing the old Enron management extra discretion over their financial reporting. So there is really no substitute for shifting to meaningful long-term measures. Ad hoc fixes, even when they can be rationalized, risk moving us in the direction of making our current bad measures even worse.

Friday, November 19, 2004

The state of the play

According to the Wall Street Journal, no tax reform from the Administration until 2006. That puts it just in time for the run-up to the midterm elections, always a good time for farsighted statesmanship.
Meanwhile, in Social Security, "advisers say Bush won't spell out how to cover transition costs for new private accounts." Meaning, I presume, that just as with Medicare prescription drugs the pitch will be new benefits for free.
A fine point here: while shifting payroll taxes to private accounts would make the short-term deficit look worse, it actually wouldn't increase the long-term fiscal gap if benefits from the traditional system were cut sufficiently to match the payroll tax shift in present value terms. But the notion that the Administration would be forthright enough to pay for the shift through genuine long-term traditional benefit cuts, thus inviting political attack from the Democrats, requires attributing it with a degree of honesty and responsibility that goes completely against its track record.

Thursday, November 18, 2004

Class war?

Brad DeLong ( and others view reports about the Bush Administration's tax reform deliberations as indicating "the next round of its class war for the rich and against the middle class." In particular, they note that the Administration is said to be planning to scrap state and local tax deductions along with business tax deductions for employer-provided health insurance. All this to help pay for flatter rates and cutting or eliminating the tax burden on saving and investment.
Plus, the Administration may eliminate the alternative minimum tax (AMT) rather than simply raising and indexing the exemption amounts so that it goes back to being a tax just on rich people.
Brad et al are right to see these changes as helping the rich at the expense of the middle class. And they are probably right about the Administration's distributional aims. But let's be fair about this.
The dominant view among tax academics is that allowing deductions for individuals' state and local taxes is probably a bad idea, because it is generally more reasonable to assume that taxes are a proxy for untaxed personal benefits than to assume that the two are totally unrelated (although admittedly the relationship is quite rough). So the deduction provides a tax incentive for public provision of services at the state and local levels even where private provision would otherwise be better.
The exclusion for employer-provided health insurance (which I take the Administration to be targeting indirectly if it denies business deductions) encourages over-insurance for routine expenditures, while also structuring the insurance market to worsen the difficulties for those who aren't insured through work. Recent empirical work by economists suggests that the exclusion has done more to promote over-insurance for the routine items than to increase the percentage of people who are insured, although admittedly it does some of each.
The third idea, eliminating the AMT rather than just restoring it to its 1986 levels, also makes sense, all else equal (an important caveat). Nuremberg-style confession of the day: I helped draft the AMT, and also wrote about it way back when [The New Alternative Minimum Tax: Perception, Reality, and Strategy, 66 Taxes 91 (1988) - see also Tax Simplification and the Alternative Minimum Tax, 91 Tax Notes 1455 (May 28, 2001)]. But I realized early on that no sane tax system would include it, all else equal. The only good case for having it is that clearly superior alternatives, such as trading it in for a somewhat better regular tax, might be politically unavailable.
Anyway, all these are to a degree good tax policy ideas. At least, they are good in efficiency terms. In principle, moreover - another important caveat - they wouldn't have to result in a bad package distributionally if there were proper adjustments elsewhere.
There will be plenty of time to snicker (or cry) later if the Administration's tax reform package lives up to the worst expectations of its critics. By the way, no knowledgeable person could reasonably prefer a national sales tax to a VAT unless she considers facilitating evasion a positive good. But let's keep straight about the details, if only in the surmise that sometime in the distant future, when the Republican Party has returned to its senses (a la Reagan, who repeatedly cooperated with the Democrats in tax and entitlements policy from 1982 through 1988) a reasonable bipartisan package will be feasible.

Wednesday, November 17, 2004

Interesting times

The Bush Administration's two main domestic policy initiatives for 2005 are ostensibly tax reform and Social Security. As these are among my main areas of professional interest, you can guess that I will be all over the action, as it develops, like a cheap suit. Perhaps I should say if it develops; tax reform may be headed straight for a blue ribbon commission, meeting somewhere underneath the Potomac River.
Since I consider markets and incentives to be important, although also favoring progressive redistribution, I would be a sure bet to have partial sympathy with intelligent and well-designed conservative proposals in these areas. But the Administration's track record does not inspire confidence, to say the least. These guys like to do things on the cheap in the Rumsfeld sense, if not in the budgetary sense.
Tax reform seems unlikely because, unless it loses revenue, it has to have losers as well as winners. Something like the flat tax would be a huge improvement on present law, the reduction in progressivity aside. ("Other than that, Mrs. Lincoln, how did you like the play?")
Better than that would be the X-tax, David Bradford's version of the flat tax that has more brackets. (A non-flat flat tax, although the flat tax is also a non-flat flat tax since it has a zero rate bracket.) Clintonian New Democrats should consider advocating progressive consumption taxes, a subject I and many others have written about, and that can come in several different forms.
The Administration has not studied tax reform and has essentially no expertise about it, the possibility of their consulting Glenn Hubbard aside. I suspect that they don't trust the Treasury staff any more than the CIA or State Department staffs.
[CORRECTION: Bruce Bartlett has drawn my attention to documents showing that the Treasury under Paul O'Neill did study tax reform. One more example of how O'Neill was great in many ways even if politically maladroit.]
On Social Security, the big problem is the system's $10 trillion fiscal gap. Or rather the overall fiscal gap, for all government programs, that stands at an estimated $73 trillion. What do "individual accounts" do for this? It depends on how they're done. One way of thinking about it is that you increase the fiscal gap by pulling payroll tax revenues out of the system to fund the accounts, and you reduce the fiscal gap by reducing promised Social Security benefits under the existing system. So the effect on the fiscal gap depends on which is greater. Any guesses about how the Administration is likely to handle this? ("You'll still get your cake, but now you can also save up for ice cream.")

Roth's The Plot Against America

Philip Roth's new novel is quite good until the last third or so. Its effectiveness as a commentary on today's politics is all the better because it really seems rooted in 1940 rather than attempting any crude one-to-one correspondence. For example, Lindbergh does not equal Bush; the analogy, rather, is in how fast the floor can fall away if elections take a particular turn and people start to think differently.
Unfortunately, just when things are getting really hair-raising, Roth opts for that favorite ploy of fourth grade fiction: "Then I woke up and it was all a dream." Not exactly, but close enough.