Conversations / Live Q&A

I may not have been clear enough about SS.   My point was that the program is running a long-term deficit, despite the current trust fund surplus,  so I fall into the "the trust fund is not the be all and end all" camp.   But it is not a fiction either, it has legal significance -- because the government can only pay out benefits from the trust fund so if the TF is exhausted benefits literally have to stop or be restricted by what comes in that month in payroll taxes -- and therefore it has political significance as well.  The main point is that SS revenues and benefits have to be aligned in the long run. 

I hope that the debt ceiling is not used as the mechanism to address the fiscal issue because any such decision will have to be made in a hurry and will be pretty ugly.  Shutting down the government, of course, is also a pretty ugly solution and it backfired on those who fomented it in the 1990s.

I don't know the answers to these questions, which are more security- , defense- and foreign-policy related than economic-related.   These are certainly very legitimate public policy issues, and it would be great if we could resolve them, but it'd be a mistake to think that this type of thing will get us out of the fiscal situation we face.   (likewise, going after waste, fraud, abuse, earmarks, salaries of government workers, etc. are not going to solve the fiscal problem.)

Both good questions.  Very briefly, yes we should make an effort to make these changes now -- not to cut spending and raise taxes now because we are in a very weak recovery and that would hurt -- but rather to make NOW the plans and commitments to cut spending and raise taxes IN THE FUTURE.

With respect to the structure of government, there's no doubt that any institution as large as the federal government needs ongoing reform.  The question you ask here is really part of a larger debate -- do we solve the deficit problem by having government do a little less of everything it does?  or do we solve it by fundamentally restructuring the role of government in society?  Basically, everyone who wants to fundamentally restructure some aspect of government in society (whether it is tax policy, the governent's role in world military issues, privatization of SS or medicare, etc.) wants to do the latter, at least for their policy, but our government is not well-designed to make a series of huge changes all at once.  We may need to settle for now with having the same old government doing less of what it has done in the past (and raising more revenues). In other words, we shouldn't let the "perfect" of structural reform be the enemy of the "good" that is deficit reduction.  If we do, we may end up with neither and that would be very bad.  And of course, we should continue our efforts for structural reform, just not let it be hostage to deficit reduction. 

You're right that the deficit is not defined well, according to economic concepts.  I've written alot on this with Alan Auerbach at Berkeley (and he and Larry Kotlikoff and Jagadeesh Gokhale have truly emphasized this point over the years with generataional accounting).   BUT... in this particular current situation, both the reported deficit and the true fiscal status of the government are bad.  In contrast, in 2001, for example, people like Auerbach and me were reporting problems with the true fiscal status despite the big "apparent" surpluses that existed back then. 

One other aspect of this -- because the Trust Funds basically represent transfers between parts of government, but add to the gross debt, one should always focus on net debt figures not gross debt.

Yeah, I hear you.  It is easy to get frustrated.  It is perhaps worth noting that our founding fathers designed the government to be slow-moving but that may be a bit of a Panglossian interpretation (I saw Candide this weekend).

I go back and forth on the issue of how optimistic one should be about what policy makers will do.  Right now, I feel like it will take a crisis for them to get moving and unless we foment a crisis ourselves (via shutting down the government), it might be awhile before financial markets create a crisis for US debt.  (Please, be clear, I am not advocating that, just saying it seems like it will be a long way off.) 

It would be better/best/great if they came together and reached a conclusion that at least solved the problem for the next decade.  

Well, the problem is that cutting taxes doesn't cut spending either!  Over 80 percent of people who signed the no new taxes pledge and who voted on Medicare Part D in 2003 (the largest new entitlement in almost 40 years) voted IN FAVOR OF the new spending.  Likewise, about 80 percent of those same people voted for a large highway bill the same year. 

As I said in the Post article, fiscal discipline only seems to work when it is imposed on both sides of the budget.  Starving the beast has not worked and indeed that philospophy, espoused, in 1981 and 2001, led to very large deficits, when it failed. 

I could accept (though not agree with necessarily) the whole "no new taxes" approach to the world if it were accompanied with spending cuts that solved the problem, but you rarely hear that, you mainly hear people rant about taxes (which have been at generational lows the last few years) without suggesting a solution. As I mentioned in the article, that kind of thing is not particularly productive.

The way to solve the problem is to address it on both the spending and tax sides -- shared sacrifice is going to be necessary for this.   And we expect high-income households to bear some of the added fiscal burden that comes from solving the crisis, the only way to do that is to raise taxes, since high-income households dont benefit much directly from government spending.

It's a very good question and one I am not the best person to answer.  However, it is completely fair to say that just as we need to revisit the social contract (SS Medicare taxes) at home, we should revisit the implicit contract or understandings we have with the rest of the world with respect to security and defense issues.  That could well result in a strategic realignment for the US. 

This is a great comment, both because it's right and because it gets lost in the current discussion.  The issue isn't (just) the deficit, it is what the government does with the money. 

Another great question.  It seems like there are three separate issues floating around.  First, is cleaning up the ongoing day to day business of the past year -- there are just a bunch of things related to tax rules that have been left hanging -- AMT, estate tax, etc. 

Second, is short-term economic stimulus.   Somehow that has gotten reduced to the question of how much of the Bush tax cuts should be extended and for how long.  That is a very unfortunate shrinking of the topic, though.  The Bush tax cuts are by now means the best way to stimulate the economy right now -- they were never designed as stimulus and CBO listed them 11th out of 11 options in terms of their bang for the buck

The third issue is the long-term situation, which they won't do anything about right now, of course, but which hangs over their heads and at the very least encourages them not to do anything that raises the long-term deficit (like making the tax cuts permanent).

I think we could find better ways to stimulate the economy in short run than the Bush tax cuts in general and the Bush tax cuts that aid only high-income households in particular.  Such options include a payroll tax holiday, a new hiring tax credit, infrastructure investment, aid to the states, etc.  CBO has written extensively on this .

This quesion highlights one of the interesting things to come out of the recent stimulus efforts, namely that state governments -- because their balanced budget rules, which require them to cut back when revenues fall -- have not helped much in the recent recovery efforts.  This (a) reduces the impact of federal stimulus (b) makes federal aid to the states particularly powerful stimulus, since every dollar given to them reduces the amount they need to lay off people or cut spending.  Interestingly, this phenomenon is neither new (it happened in the 1930s as well, where the states provided no net stimulus over the decade) nor limited to the US (in Japan in the Lost Decade, subnational governments often moved in ways that subverted the aims of federal stimulus).

It all points to how hard it is to manage an economy as large as ours. 

I do believe, based on the evidence I've seen, that the stimulus package has indeed helped stimulate the economy. I won't speculate on whether the unemployment rate would be 13% had we not had the package, but it is worth noting that there was major, major concern in the winter of 2009 that the economy was in or approaching "free fall" and I think the stimulus had not only a direct effect in spurring spending but also an indirect effect, in essence letting people know the government was not going to stand idly by, preaching the wonders of the market miracle, while the economy drove off the cliff.  So, count me as a fan of the stimulus package.

We certainly have to address defense issues as part of the budget package and Sec Gates has already made some moves on that front.  In the short run, as Harvard professor Martin Feldstein has proposed,  doing needed maintenance on military machines and equipment would be a good way to get spending going now -- and we know we need to do that anyway.  

I think it is clear that the military should be subject to budget constraints and forced to set priorities and make choices just like the rest of us, but not being a military expert I would not want to make those particular calls myself.

This is a good question, fun to think about and important.   Having thought about it now (very breifly), I am guessing that there is more variation within each major group in cutting benefits or raising taxes than there is across groups.  That is, I would guess that in any big group (SS recipients, farmers, high income taxpayers, Medicare recipients) there are some who are willing to say that the benefits are excessive and or the taxes are too low and some (many) who wouldn't.  That's just a first impression, though. It'd be interesting to know if people have thought about this more systematically.

This relates a bit to the question about how we measure the deficit.  One reason analysts like to focus on the long-term outlook rather than the short-term outlook is that all of the different measures of the deficit give the same answer (bad!) in the long run.

So, as to why people lend us money, the US government is still an extraordarily safe and secure lender. I fervently hope we do not mess that up with politicians playing "chicken" around the extension of the debt ceiling in April.    Yes, we can repay current debt. Current debt levels are not particularly high -- it'd be better if they were lower but they aren't the real problem. The real problem is that we are on an unsustainable path. 

I have been struck by how much of the burden would be  borne by government workes (or lack thereof) in the Commissions draft report.  The Commission (technically, the DRAFT report of the COCHAIRS of the commission)  had to come up with cuts that would get the deficit down by 2015.  They focused those cuts on discretionary spending more than one might have expected.  Cutting the workforce is not going to deal with the long-term deficit though simply because it is not a big enough spending ite,

I disagree that it is "just" a spending problem.  The thing t notice is that it is the current services budget that goes off of the deep end in the long run.  it is not a big expansion in government services or programs, it is the continual running of current programs as the population changes.  One can argue coherently that maintaining current services is "part of the deal" and that taxes should rise to pay for them. One can also argue coherently that keeping taxes at a relatively fixed share of GDP over time is "part of the deal" and so spending per capita should be cut sharply.  I personally end up in the middle -- we have two "deals" that are becoming mutually inconsistent --  and I think we are going to need to compromise between the two extremes.  I don't see this, though, as "just" a spending problem.

There are a few things the President could do, but remember that the vast majority of government spending is on a few items -- defense, SS, Medicare, Medicaid, net interest -- and those can't be affected unilaterally.

Well, here's the problem. No one actually knows what "the" level of (un) sustainable debt is.  Historically, it has varied across countries and of course it depends on a wide variety of other factors, like economic strength.  But we do know that the US is headed down a path that is not sustainable.

Yes, health care is a big problem for the budget.    Yes, there are high end of life costs.   A few thoughts on all of this

--it is not clear to me how one knows whether one is in an "end of life" episode or not.  Clearly, if one is not or has the chance to avoid that, the case for spending money is different than if one is.

--second, the social problem isn't so much that people spend alot on health care,  it is that they spend a lot of public money on health care.   So, we either need to find a way to move health spending on to private budgets or a way to better prioritize public spending.  The only way to do that is .... rationing of some sort, a dirty word, I know (so call it something else) but that is the issue.   My colleague Henry Aaron has been making this point for almost 30 years now and he's right.

Oh, it's mentioned, it just never goes very far.  I think among urban policy wonks, getting rid of farm subsidies is a very favored idea on grounds of budget, economy, equity, environment, on and on.   The problem is the Senate, where every state has two votes! 

So, we can't seem to get past the Bush tax cuts!! Let me close with responding to this statement, which is heartfelt but is ideological and not evidence based.   The evidence and analysis indicates, over and over again, that there are better ways to get a weak economy going (remember the need here is for aggregate demand) than extending tax cuts to the wealthy.