Thursday, March 31, 2011

If only it was April 1st, the headline might read "Ryan tackles Social Security!"

Of the big three entitlement programs, it's interesting how Republicans will propose the most changes for Medicaid. The program most targeted for low-income Americans. Coincidence?


TJE said...

Unlike Harry Reid, that profile in courage on the issue of social security?

Patrick_L said...

Hey- I've called out Reid before.

I was just pointing out the factual basis for Ryan's budget "bravery"- ignore health care costs, try to cut health care for the poor, and push to increase tax cuts for the wealthiest Americans (have you read his "roadmap?" - the road he describes seems to be located in a special fire-and-brimstone place).

Oh, and don't forget the Welfare Reform Act of 2011. Talk about stepping up to the plate and taking a trying to beat low-income Americans bloody.

TJE said...

I don't read roadmap as you do.

Patrick_L said...

I assume you don't question the fact that it would dramatically cut revenues, largely by cutting taxes for the wealthiest Americans?

The highlight: "Top-bracket taxpayers would overwhelmingly benefit from Ryan’s tax cuts. By 2014 people making in excess of $1 million-a-year would enjoy an average tax cut of more than $600,000. To put it another way, their after-tax income would rise by nearly 30 percent."

Did you notice that the richest one-tenth of 1 percent of Americans — those whose incomes exceed $2.9 million a year — would receive an average tax cut of $1.7 million a year. These tax cuts would be on top of those that high-income households would get from making the Bush tax cuts permanent.

Ryan's roadmap shifts the tax burden so heavily that the very wealthy would face lower tax rates than the middle class. The Tax Policy Center reports that people with incomes over $1 million would pay an average of just 13 percent of their income in federal taxes, while households in every income group between $30,000 and $1 million would pay at higher rates than millionaires. Btw, these percentages cover all federal taxes, not just the income tax.

Maybe that's why Ryan's Roadmap would cause the debt-to-gdp ratio to soar for decades? The only way Ryan's Roadmap ever achieves fiscal solvency is buy heavily cutting Social Security benefits and converting every government health care plan into some form of a voucher-system. What does that do? It just removes the financial obligation of these programs from the federal government's books. It transfers nearly all of the risk of health costs to the tens of millions elderly, sick, disabled, and children who are beneficiaries of the government health programs. He does nothing to ensure health care costs come down, but he does ensure that within a matter of years tens of millions more Americans will lose access to quality health insurance because they won't be able to afford it- particularly in a system which creates devastating adverse selection problems.

TJE said...

"These estimates are subject to lots of uncertainty. For instance, we assumed Ryan’s 8.5 percent VAT—the new business tax—would generate about 4.3 percent of GDP in revenues. TPC’s Joe Rosenberg, who modeled the Ryan plan, believes that estimate is generous. But since no such tax currently exists, it is hard to know for sure.

One other caveat: TPC did not assume that taxpayers would change their behavior in response to this new tax structure. We know they would, of course, in some ways that would generate additional revenue and in others that would lose revenue. But because these changes are so uncertain, TPC did not include them in our revenue estimates."

TJE said...

Mr. L, do you give Mr. Ryan credit for proposing *something*, as opposed to others in Washington?

Patrick_L said...

About the VAT, America doesn't have a VAT so it makes it slightly more difficult to estimate. Of course, many other countries have VAT's and there have been many economists who have closely studied this issue. Also, TPC benefits from having the best private microsimulation model out there. So, I don't have a problem with the statement "For instance, we assumed Ryan’s 8.5 percent VAT—the new business tax—would generate about 4.3 percent of GDP in revenues. TPC’s Joe Rosenberg, who modeled the Ryan plan, believes that estimate is generous." So TPC is giving Ryan the benefit of the doubt just in case things would go a lot better than TPC models.

Also, the second caveat is a reference to dynamic scoring- which is an old and tired debate conservatives only like to bring up regarding tax cuts. Here are some useful links: (Even the conservative hack-of-the-moment, Douglas Holtz-Eakin, put cold water on this idea).

As the literature and estimations clearly show, even the most generous of dynamic scoring models actually increase the uncertainty around estimates and only sometimes ever show modest reductions in the cost of tax cuts. For instance, Bush Administration Treasury Analysis found under dynamic scoring that their tax cuts would only pay for about 10% of their “statically”-estimated cost. And even that generous conclusion is even less likely to apply to the Ryan tax cuts, which are cutting even further into the tax code and reducing how much additional simulative effect there might be. TPC could run countless dynamic models (taking months), come up with countless results, some of which would show Ryan’s roadmap in a better light and some which would show it being worse than the TPC’s current static analysis. Or it could stick to the very successful, less assumptions-biased and prone to variation version of estimation.

Even the most partisan of Republican economists in their academically-reviewed literature have only ever estimated very modest improvements to the cost of tax cuts by using dynamic scoring- and only for certain, high-yield tax cuts. The academic literature and empirical studies, which I don’t’ even begin to start citing here, throw heaps and heaps of cold-water on this idea that not including dynamic effects somehow explains why tax cuts appear to “cost” so much. The most generous estimations from the most generous experts find tiny effects which barely even begin offsetting the full cost of these ridiculous tax cuts. And that’s even assuming we had the technology, data, and computing capacity to run these analyses.

Third. No- I don’t give Ryan credit for proposing a ridiculous, non-starter proposal that is so irresponsible in that it proposes to balance the government’s budget 50 years from now by dramatically shifting the burden from the wealthy to low-income Americans. It makes the federal tax system regressive! Ryan deserves no credit, especially when you consider that he had the opportunity to vote for the Bowles-Simpson package. His vote would have brought the other two House Republicans along (who both also voted against), which would have brought Bowles-Simpson up for a vote in Congress. Ryan has PROVEN his actual level of commitment to restoring the country’s fiscal solvency with his voting record. As it turns out, it’s negligible.

Patrick_L said...

And from the crfb link you posted, one passage stood out:

"Though Ryan did not intend to do so, TPC and CBPP show that cutting taxes by about 2 percent of GDP (relative to current policy) would drive the debt to astronomical levels -- even assuming the extremely large (and extremely brave) spending cuts proposed by the Congressman."

(And brave is a codeword for impossible)

TJE said...

But you ignore Mr. Ryan's response:

"The tax reforms proposed and the rates specified were designed to maintain approximately our historic levels of revenue as a share of GDP, based on consultation with the Treasury Department and tax experts. If needed, adjustments can be easily made to the specified rates to hit the revenue targets and maximize economic growth."

And you ignore CRFB's praise for Ryan.

Mr. L, don't let Washington make you a dogmatist.

Patrick_L said...

a) So basically Ryan admits there's a good chance his tax cuts will massively deplete revenues beyond the levels Ryan instructed the CBO to assume. He is calling for a massive tax-cut, but then calls for any necessary tax increases to restore reveneus to historical levels? Is he going to be the one voting for those "tax increases?" But that would violate the pledge against tax increases?!?

Also, notice the phrasing in his response "If needed, adjustments can be easily made to the specified rates to hit the revenue targets AND maximize economic growth." (emphasis added) But isn't it conservative law that taxes reduce economic growth? Going from past statements, most conservatives and/or Republicans would consider those goals mutually exclusive.

b) I don't ignore CRFB's praise for Ryan- lots of people in Congress in have supported various deficit-reduction proposals over the years. Heck, some of them actually voted for the Bowles-Simpson recommendations! He may have deserved praise before the fiscal commission, but his service on the commission showed that he was unwilling to put his money where his mouth is on deficit reduction. When evaluating politicians, do you look to their words or their actions?

TJE said...

Patrick_L said...

Also, the historical average of revenues as a share of GDP is a poor baseline. It ignores the interest costs of the debt we’ve already accumulated, it ignores the aging of the population, it ignores the cost of our increased homeland security and defense commitments, and it ignores the rising costs of health care. The last factor is going to take decades to control- no matter how you do it (conservative, Obama-style, etc.)!

Here’s what Matt Miller had to say on this topic: “For starters, federal spending under Ronald Reagan averaged 22 percent of GDP. Under Bowles's view, therefore, the outer limits of the Democratic Party's 21st-century aspirations would be to run government at a size smaller than did a 20th-century conservative icon.

What's more, Reagan ran government at this size at a time when 76 million baby boomers weren't about to hit their rocking chairs. In 1988, 32 million retirees received Social Security and 33 million were on Medicare, our two biggest domestic programs. By 2020, about 48 million elderly Americans will receive Social Security, and 62 million Americans will be on Medicare (then the numbers really soar).

As a matter of math, if you run the government at a smaller level than did Ronald Reagan while accommodating this massive increase in the number of seniors on our health and pension programs, you have to decimate the rest of the budget.

That's especially the case when you consider that health costs in the Reagan era were around 10 percent of GDP, while they're now 17 percent, headed toward 20. Obviously we need a national crusade to make health-care delivery more efficient. But until there's progress on this front, the 21 percent goal would be tantamount to Democrats agreeing that Uncle Sam should handle health care, pensions, defense and little else.”

We shall see what happens the week after Congress returns from break and Ryan releases his budget. Hopefully the true deficit-reduction game in town, the "Gang of Six," will be able to release something by then.

TJE said...

Note the change in defense spending as a percent of gdp between Reagan and Obama.

TJE said...

How about using federal spending as % of GDP at the end of Clinton presidency as baseline?

Patrick_L said...

I was going to say yes to your last question, but I then I thought about it more and realized I’d have to decline. That goal MIGHT be achievable for many, many decades from now. I know this is a completely hypothetical scenario, but I wouldn’t want to say whether that level would be acceptable without having the faintest idea what economic conditions might be like fifty years from now.

As for the practicality in the next few decades- the first point we need to keep in mind is that Clinton spending-levels were only achieved during the strongest period of economic growth in recent decades, so those levels should not really apply when the government is in a recession or just exiting one. Maybe 18 months to 2 years for after a run-of-the-mill recession?

However, it's a political impossibility (and policy nightmare) to try to get to those levels in the next 20-or-so years.

Even Clinton's levels didn't account for the baby-boom generation, interest costs from the deficits of the Bush Jr. and Obama administrations (although a large portion of Obama's deficits can be attributed to the recession as opposed to policy decisions- not that it exonerates him from culpability). Or the continuously rising costs of American health care.

It's going to take decades to significantly reduce Social Security expenditures (since anyone over the age of 65, and probably 55, is frozen into the current structure). It's going to take a long-time to slow the growth of health care costs, whether you do it in a conservative way or a liberal way. It takes decades for even Ryan's proposal to seriously reduce the government's health care costs- and it only achieves that by that shifting significant financial risk from the government onto individuals (which doesn’t actually improve the health of our economy). Some risk-shifting is reasonable, but the Ryan proposal has no plan of safeguards in-place if health care costs system-wide continue to rise at historical averages- a level much higher than what his funding formula provides. This means that the vouchers would dramatically reduce over time the value of health care benefits many Americans could afford. Ryan’s proposal also runs the risk that successful insurance pools won’t form as you introduce tens of millions of elderly and sick Americans enter the individual insurance market- even though this shift creates enormous adverse selection problems.

At the same time, the federal government’s goal can’t just be controlling deficits. Many economists believe we need to actually reduce the debt as a size of GDP- whether measured at gross or public levels. Our current debt level puts us perilously close to a debt crisis if investors lose confidence in our ability and willingness to pay our obligations. In addition, that debt level is guaranteed to be exacerbated by any recession that might occur. We need to increase our fiscal “cushion” for when the next recession strikes.

Patrick_L said...

In addition, how much of a peace dividend can we expect in the near future? The Clinton levels would also have to be a baseline dependent on the complete absence of any significant U.S. military action or levels for years beforehand. Any U.S. intervention or military build-up would need to increase the spending-to-gdp goal (from my perspective). Also, I know conservatives aren’t the biggest fans of investment spending- but a lot economists of all stripes are concerned about the country’s lack of infrastructure spending for the past few decades (including the Clinton and Reagan years). Basically recent Presidents have been able to live off of infrastructure investments made back in the 1940’s, 50’s, and 60’s. But those systems and resources are quickly fading and are not equipped to support our modern economy. The Chamber of Commerce thinks we need a lot more infrastructure spending in order to maintain our economy’s competitiveness- and I agree with them. Any spending should be paid for and not-deficit financed, but I think it’s time once again for our nation to invest significant amounts into our roads, freight rail, ports, internet broadband, etc.

Taking these trends into account, it quickly becomes apparent the revenue AND spending levels will have to be maintained at historically-unusual levels for at least the first few decades as part of any serious long-term drive towards fiscal sustainability. In addition, the tax increases will have to be front-loaded because the major cost savings (extractable from entitlement programs), will take several decades to enact but we need strong fiscal action now to control deficits and begin reducing the debt. That’s why tax revenue levels will have to be pushed above and beyond their historical high in the near-term. Spending levels will decline as the recession fades, but the major cost growth in recent years has been defense/national security and entitlements. It will take a while to find substantial savings in these budget areas.