StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



What Would You Do If You Were A Member Of Congress Facing This Situation?

08 Apr 2010
Posted by Stan Collender

Take a deep cleansing breath before looking at this just-released poll from the Economist/YouGov and ask yourself what you would do if you were a member of Congress facing this situation.

In question 23, almost two-thirds -- 62 pecent -- of those responding said that they wanted to cut spending to reduce the budget deficit rather than raise taxes.

But just three questions later, the only area of federal spending that a majority -- 71 percent -- was willing to cut was foreign aid.  More than 70 percent were against cutting every other of the areas mentioned and more than 80 percent were against cutting 9 of them.  Reductions in the 2 programs where cuts could have the largest impact on the federal government's bottom line -- Social Security and Medicare -- were only supported by 7 percent of those responding and, therefore, were opposed by 93 percent.

(Note: Before you send a nasty note, I'm not suggesting that Social Security and Medicare be cut, only that, mathematically, doing so would have the largest effect on the deficit).

Here's the question and responses:

26. If government spending is reduced in order to balance the budget, which of the following government programs should receive lower federal funding than they currently do? (Please check all that apply.)

Social Security ..............................................................7%

National Defense ........................................................ 22%

Medicare ....................................................................... 7%

Aid to the Poor .............................................................17%

Medicaid ..................................................................... 11%

Veterans’ Benefits ........................................................6%

Health research ...........................................................13%

Education ................................................................... 12%

Highways ....................................................................12%

MassTransit ................................................................27%

Foreign Aid .................................................................71%

Unemployment benefits ............................................19%

Science and Technology ............................................22%

Agriculture ..................................................................27%

Housing ......................................................................27%

The Environment ........................................................29%

None of the above ......................................................12%

There's nothing new about this situation, of course,  Bruce reported remarkably similar results last December and it's long been the case that the typical voter wants the deficit reduced without cutting spending or increasing taxes.  This latest poll shows that even the higher deficits of the past few years, which almost 60 percent of those responding said would be of great or some importance to them when they voted, hasn't changed the situation at all.

I know that I am stepping

I know that I am stepping onto some shaky ground here, but when Reagan was proclaiming the "magic" of supply-side economics and I was working on the Hill, I used to tell audiences about this formula: Work Out = Work In - Friction.
(That could be a variant of the Second Law of Thermodynamics and the theories of entropy.) In other words, if you want to get something, you have to contribute something while minimizing the friction (or overhead or waste or corruption, etc.)

Thinking about the prospects of dealing with our challenges, I am drawn not to some illusory alchemy but to the work of two scholars who I think appropriately diagnosed what we face: first, the late Mancur Olson, the economist who did some wonderful work on distributional coalitions and special interests, and Joseph Tainter, the anthropologist, whose book The Collapse of Complex Societies, unfortunately, seems an appropriate harbinger of where we may be heading.


Mancur Olson was right ...

... Bruce, good for you in citing Mancur Olson. I wonder how many members of Congress are familiar with his work? Fingers of one hand? Fewer?

As for the original question "what is a politician to do?", my personal reaction would likely be to retire :( But then I would never have run in the first place. We need some politicians who are willing to educate the public a little. Always painful. Gov. Christie in New Jersey seems to be attempting this, so it will be interesting to see what comes of his efforts.


Social Security is (fully)

Social Security is (fully) paid for by Social Security taxes (and then some). It has a $2.5 trillion balance. Are you suggesting keeping Social Security taxes while cutting Social Security? Otherwise, cutting Social Security wouldn't do anything for the deficit. Then it wouldn't be a Social Security tax, would it, just higher income taxes? Otherwise, I don't get your contention that reducing Social Security is going to reduce deficit spending.


Social Security's underfunding.

Social Security is (fully) paid for by Social Security taxes (and then some).

Social Security is underfunded by $7.7 trillion at present value, as per the Financial Report of the U.S. Government. (BTW, it's not even "fully paid for" this year, expenditures exceed payroll taxes now, adding to the deficit, about a decade before that was projected to happen.)

It has a $2.5 trillion balance.

It has no "balance" whatsoever.

The idea that the SS Trust Fund was created to be a funding mechanism for future benefits, holding a savings "balance" to pay them, is the great Urban Legend of US entitlement politics.

There was never any intention by the Greenspan Commission or the authors or the 1983 SS Reform Act, when legislating the Commission's recommendations, to create any such thing.

As Robert Myers, the Executive Director of the Commission and former Chief Actuary of SS, explained in the SSA.gov history section...
~~~~

Q. As we look at it today, some people rationalize the [trust fund] financing by saying that it's a way of partially having the baby boomers pay for their own retirement in advance. You're telling me now this was not the rationale. Nobody made that argument or adopted that rationale?

Myers: That's correct. The statement you made is widely quoted, it is widely used, but it just isn't true.

It didn't happen that way, it was mostly happenstance that the Commission adopted this approach to financing Social Security ... The main thing that was talked about was how do we fix up the short-range problem. Are you sure we aren't going to have another crisis in 2 or 4 years? ...
~~ end quote~~

The 1983 Commission never even thought of using the Trust Fund to finance future benefits, the idea never entered their heads. It was never discussed at all.

The Trust Fund as we know it was created then by "happenstance", accident.

Until then, from 1940 to 1983, SS was run straight "paygo" and the TF was part of the paygo mechanism. SS tax revenue bounced around up and down (on a small scale) and rather than constantly change benefits/tax rates to keep them in exact paygo balance, if taxes exceeded benefits the TF would get a credit and if benefits exceeded taxes the TF would get a debit -- and as long as the TF balance was modestly above zero it showed taxes and benefits were netting out equal overall, as intended.

If the TF balance ran below zero, then benefits exceeded taxes -- and the law required benefits to be reduced or taxes to be increased accordingly to preserve paygo. That was the function of the TF -- as part of the paygo mechanism, an accounting tool to maintain the paygo balance.

In making the 1983 law changes Congress intended to keep SS paygo, its main concern was to get the payroll tax rate high enough so the existing Congress wouldn't have the politically painful experience of having to raise taxes/cut benefits again on its own watch. It never considered the TF at all -- so it left things operating as before.

After the law was enacted the economy strengthened (Reagan boom years) and payroll taxes came in much greater than expected. THEN Congress realized it had created a "surplus", and had to decide what to do about it.

Myers tells an amusing story about Pat Moynihan who both a member of the Greenspan Commission and Senate Finance Committee chair. When he realized the unexpected payroll tax surplus was coming in Moynihan first went, "this is great! we can pay down the national debt with it." Then he blanched and went "Oh, no! We're just going to spend it all!"

For the rest of his life he lobbied to cut the SS payroll tax to eliminate the "surplus" and return SS to straight paygo, as it had been since 1940 and as had been the intention of the '83 changes. But Congress enjoyed spending the money so it never did.

Bottom line, the TF holds no balance to fund future benefits and was never meant to.

Come 2030 SS benefits are expected to exceed payroll taxes by $300 billion a year. If the TF never existed, Congress would have to increase general taxes by $300 billion to close that gap to pay promised benefits. With the TF, Congress will have to increase general taxes by $300 billion close that gap to pay promised benefits (paying down that much in TF bonds in the process).

The difference between those two numbers -- $300 B and $300 B -- is the value of the funding "balance" in the TF, the difference the existence of the TF makes ... $0.

And beyond that, even the full nominal $2.5 tillion "in the TF" is dwarfed by SS's total unfunded liability, $7.7 trillion over 75-years, $16 trillion open-ended.


SS "funding"

Not only are the SS "trust fund" balances meaningless (substantively, that is), the whole conceptual view of the degree to which SS is "solvent" or how much of a "funding gap" it has is nonsensical. We have projections for:
1. Spending on SS
2. The portion of overall tax revenues from FICA SS
3. The SS "trust fund" balances.
4. Overall spending (on SS and on everything else)
5. Overall revenues (from FICA SS and from all other taxes)
6. Overall deficits, debt/GDP, and debt interest expenses.

Only #4 and #5 mean anything in terms of rational analysis of our policy choices: total funds we project to have available (under current policies) and how much we can spend in total at projected deficit levels. Within those parameters we can spend as much or as little as we want on Social Security. In deciding rationally how much we can and should spend on SS, it doesn't matter one whit how much of our projected revenues happen to come from FICA SS under current tax policy, nor the size of those revenues, with or without "repayment" of the "trust fund" "balances", relative to projected SS spending. If we want to spend more, we can supplement it from the general fund, or (if for some reason we insist on raising only payroll taxes for that purpose even though it operates as a pay-as-you-go transfer payment program) we could shift out taxation more toward FICA SS (raising FICA SS taxation and offsetting that revenue increase by cutting other taxes). If SS were projected to be completely "solvent" forever, we could still spend less on it if we wanted to do so as part of our measures to reduce projected overall deficits: we could reduce benefits and/or eligibility (retirement age; means testing), reduce FICA SS taxation by the amount of savings, and offset that FICA reduction with increases in other taxes, resulting in no change in projected overall revenues, lower overall spending, and thus lower overall deficits. So again, all this focus over all these years and still today on the "funding balance" of SS as if that should guide our policy choices in some way is just absurd despite being the norm in discussion of this issue.

It's like if someone doesn't expect to have enough total money to purchase the particular size beverage and particular size hamburger he plans to buy at lunchtime, and he is focusing on the "balance" between how much money he expects to have in my right pocket (his "beverage funds pocket") to pay for that particular size beverage vs. the price of that particular size beverage, and he is basing his decision on whether or not he should plan to buy a smaller beverage instead based largely/solely on that balance, even though he expects to have a particular amount of money in my left pocket for paying for the particular size hamburger he plans to get. How much money he expects to have in one pocket vs. another, and the "beverage funding balance" of his right pocket money vs. that beverage size price, have no place in rational decision-making over whether he should go down in size on the beverage vs. on the hamburger, nor for that matter whether or not he should get more total money to avoid downsizing either.


correction: meant to say

correction: meant to say "Only #4, #5 and #6 mean anything in terms of rational analysis of our policy choices".


I also meant to refer

I also meant to refer consistently to "his" pockets in last paragraph. Sorry for any confusion.


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What I Would Do If I Were a Member of Congress

I would point out this discrepancy and say that there comes a time when we've got to fish or cut bait, and this is it. And I would say it over and over again: cut the programs you like, or raise taxes. Period. No more fantasies.

Defense is a particularly good target for budget-cutting, but it is heavily defended by the defense lobby.

But Congress has to man up and do their job.

Silly me!


There is no discrepancy,

There is no discrepancy, unless someone who said they wanted the deficit reduced by cutting spending did not select anything they would be willing to spend less on.

Just because everyone wants spending cut, does not mean there is a majority for cutting any particular program.

Congress should work on a grand compromise, cutting spending on many different things and raising taxes as well. I expect they will keep raising taxes in small amounts, shifting spending around, and running deficits until the next crisis.


The Power of Information

I wonder how people would respond to this question if, in asking which line items' budget be trimmed, the poll also indicated how much of the federal budget is currently spent on each item. Foreign aid is a miniscule portion of the federal budget. Cutting it to zero would still not have as a big an impact as cutting 10% each from the biggest programs (Defense, Social Security, Medicare, Medicaid).

Would their intransigence over cutting these programs dominate the simple arithmetic--that they're focused on the wrong programs? I am not so sure.


Yes, We Know You're Not Pete

"(Note: Before you send a nasty note, I'm not suggesting that Social Security and Medicare be cut, only that, mathematically, doing so would have the largest effect on the deficit)."

Still, the multipliers on SSDisability and Medicaid are, by definition, around 1, and the general SocSecTF and Medicare are near that--that is, they are transfers from a GDP perspective, not costs.

Contrast with defense, which Redlick and Barro claim costs 30-40 cents on the dollar.

The problem remains that, so long as health-care costs outpace growth, the deficit won't improve. But that would mean paying doctors--and probably especially specialists--less in the long term.

(No economist thinks twice about tell a company to outsource basic system maintenance to $20/hour Indian workers instead of paying $60/hour domestically. Strangely, though, there are qualms of fear in moving physician earnings from the US average of $200K closer to the rest of the developed world's ca. $100K.)


Pete?

Pete?


Reconciling Desires with Reality

Suppose voters got the chance to vote on whether or not to allow the ceiling on public debt to be increased (excluding the intragovernmental debt in the Social Security and Medicare trust funds).

Congress votes as they do today to raise the debt ceiling, but it must be approved in a referendum before taking effect.

Why is this a good idea? For precisely the reason illustrated by the polling results. It's like asking someone, Do you want to lose weight? They'll say, Yes. But when you ask them, Are you in favor of reducing consumption of steaks, hamburgers, beer, ice cream, etc., they'll say, "NO."

If the voters refuse to raise the debt ceiling, then Congress will have no alternative but to cut specific programs and increase taxes to meet the over-riding budgetary imperative of not increasing the debt. Congress will be in the role of the personal trainer and nutritionist who whips the fat boy into shape.

Until voters are forced to reconcile their desire for more government programs with the consequences upon the public debt, then Congress will never have the backbone to do it on their own.

That's why we need a Debt Limit Referendum. See www.thepeoplesdebt.com for more information.


Plurality vs. Majority

There is no conundrum, just false logic. The first question provides only two answers: raise taxes or cut spending. Hence, a majority will necessarily answer one or the other. The second question, however, provides 17 answers, one of which is "none of the above". It is almost impossible to imagine a scenario in which a majority of taxpayers would agree on a single budget category to cut.

The obvious solution is to take the top five categories and start there: defense, mass transit, housing, agriculture, the environment and housing. Propose a 10% cut across the board in those three areas and see what happens.


I keep doing what I was doing before

What would you do if you were a member of congress facing this situation?

I'd continue to do what I'd always done before -- exploit the voters' ignorance for my own benefit.

Do the voters know that CBO has projected that just to keep revenue even with promised spending only to 2030, income taxes on everyone across-the-board, both individuals and businesses, must increase by 50%? Else the credit rating of the US falls to "junk"?

Nope. Hardly. But am I going to make an effort to inform the voters of these facts? No way!

Instead, during my next campaign, if I am a Republican I am going to get votes for myself for promising big new tax cuts. If I am a Democrat I am going to get votes by enacting a whole new entitlement -- voters are always happy to become entitled to more.

If any so-called budget "hawk" nay-sayers spout worries about such things and ...

* I am a Republican I'll say don't worry, tax cuts spur the economy so they pay for themselves -- the more the better!

* I am a Democrat I'll say don't worry, look how we've written into the legislation that we'll find cost savings later, and enact a new tax that we've already rejected later, and by counting those cost savings and that tax revenue now, see, the whole bill is "paid for in full" already. Even without actually raising any tax or cutting any spending at all yet, as if by magik!

Then when 2030 arrives, and the fiscal situation is even worse than CBO projected thanks to these subsequent fiscal innovations, so taxes really have to be increased and benefits really cut ... I'll be gone. It won't be on my watch.

My political career will have been successful and I'll have traded it in for private sector wealth and influence, and a comfortable retirement. Not at all unlike the bankers who crashed Wall Street and walked away comfortably with the money from their lucrative employment contracts, signed pre-crash, on the basis of all the profits they were generating while setting up the crash.

If I were a politician, I'm pretty sure I'd be doing this, because this is what they've all been doing together for 70 years -- which is why there are $50 trillion in unfunded govt liabilities driving a 50% income tax increase (or credit rating collapse) by 2030.

Perhaps the survey results and original question are meant to suggest that members of Congress are somehow victims of ignorant voters -- what else can poor helpless members of Congress do, when the ignorant voters who elect them have such irrational preferences? It's the voters' fault. But that's not entirely persuasive.

The Founders via the Constitution established a Republic rather than a Democracy pretty clearly because they didn't trust the ignorant emotional masses. The informed leaders of the Republic would lead responsibly, they presumed and hoped (while being constrained against engaging in too much exploitative self-interest by the vote given upon them to the masses).

It conceivably could have been so, even in the entitlement age.

Remember how Social Security got started. FDR designed it to be actuarially sound, and "out of the Treasury forever" -- insisting (vociferously!) that each generation finance its own benefits, with each generation getting the federal bond rate as a return, and *no* cost of one generation being pushed onto any generation of the future.

But then in 1940 Congress started turning SS "paygo" and unfunded, slashing its tax funding and upping immediate benefits so earlier retirees got far more than they put in -- and FDR vetoed the changes.

FDR's head of Social Security, Arthur Altmeyer, went to Congress's leaders to defend the veto. He told them that by making SS actuarially unsound, by arithemetic they would make SS unfair inter-generationally (the young would get less than the old), drive future tax increases, and ultimately make SS go broke (as indeed happened in the 1980s).

Altmeyer reported that the leaders of Congress replied to him: Yes, but we'll be gone by then. It won't happen on our watch. Then they over-rode FDR's veto -- the only FDR veto ever to be over-ridden, IIRC. And our modern fiscal model of building $50 trillion in unfunded liabilities was launched.

All of which shows the incentive for members of Congress to profit personally up front by dropping costs on the future, which will land "not on our watch", is really, really powerful. Be it through unfunded tax cuts or unfunded spending increases.

And it is made so easy by exploiting the ignorance of the voters.

So that's what politicians do. I'm sure if I were a politician I'd be doing the same thing.


And you just pointed out the

And you just pointed out the flaw with representative democracy that also has monetary control.


Social Security

I have an idea. Social Security was designed to provide financial support for those that needed it, such as retirees that did not have pensions or other retirement income, yet currently, many of those that are receiving Social Security do not actually need it, as they are well supported by other retirement income. Why don't we consider some sort of restriction on receipt of benefits, such as increasing the eligibility requirements, or limiting total benefits? Also, one drawback of Social Security is that individuals who earn more than $100,000 only pay Social Security taxes on the first $97,500 of their earnings, but they receive full benefits when they become eligible. These kind of loopholes should be closed. I'm sure there are all sorts of other inequities in the program which could be adjusted to help reduce the cost of the program.


First, people lack

First, people lack information with which to choose what spending to cut. I just heard a guest on a conservative radio station talk about eliminating the DOE, since they had done nothing to reduce the quantity of oil we import, which was their original purpose. The DOE owns and maintains the nuclear portions of our nuclear weapons and their nuclear activities (including cleaning up nuclear waste from old activities) is the majority of their budget! When guests on progams with audiences of millions are so badly misinformed, how can anyone even talk intelligently with their neighbors and communities about resolving problems?

We can't get to the point of solving problems or proposing solutions until the knowledge level of citizens is increased. I would undertake that as a 5 year project. At the end, ask this question again, but ask it in a way that allows individuals to make tradeoffs of A vs. B, then aggregate an individuals A vs. B choices to determine their highest priority for cutting. This type of selection matrix is already used elsewhere for determining preferences.

Personally, I would implement some of the SS fixes such as increased retirement age, higher cap to SS contributions, cut the DOD in half, end the two ward, eliminate ag subsidies, tax all income at the same rate, phase out the mortgage interest deduction over 20 years (this would mostly impact raw land prices and would cause new houses to shrink slightly), and simplify the tax code so 100 million Americans just signed a form the IRS sent them affirming the IRS had filled out the form correctly.


Of course we want both taste and slimness

In a nation where a company can add water to its beer and then market the result, with great success as "Great taste...less filling," why should we be surprised that most voters want sustained services together with lower taxes.

Most voters, if asked, will request a pony, too.

Unfortunately, the "man up and do what legislators need to do" solution treats this as a problem of individual will and virtue on the part of legislators, when the real problems are systemic. How to redesign institutions to make 'manning up' (or, given the reality of which sex is confronted with real difficult decisions more often, 'womanning up'), a default rather than a fool's errand, is a difficult problem.


I recall, when the income tax

I recall, when the income tax was on the cutting block here in MA, the govt sent out a brochure to everyone with a simple pie chart explaining what state taxes pay for.

I think the federal government should do the same thing. They can send it with the tax forms, but it should be prominent. Because I'm wonkish I prefer more details to less, but I think even the simplest explanation would make a big difference.




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