We have heard all this before, but Ben Bernanke does a particularly nice job of laying out the long-term fiscal challenge in his testimony yesterday:
Federal government outlays in fiscal 2006 were 20.3 percent of nominal gross domestic product (GDP), receipts were 18.4 percent of GDP, and the deficit (equal to the difference of the two) was 1.9 percent of GDP. These percentages are close to their averages since 1960....Unfortunately, we are experiencing what seems likely to be the calm before the storm. In particular, spending on entitlement programs will begin to climb quickly during the next decade. In fiscal 2006, federal spending for Social Security, Medicare, and Medicaid together totaled about 40 percent of federal expenditures, or roughly 8-1/2 percent of GDP. In the most recent long-term projections prepared by the Congressional Budget Office (CBO), these outlays are projected to increase to 10-1/2 percent of GDP by 2015, an increase of about 2 percentage points of GDP in less than a decade. By 2030, according to the CBO, they will reach about 15 percent of GDP. As I will discuss, these rising entitlement obligations will put enormous pressure on the federal budget in coming years.
We all know that benefits will be cut. We don't know when and how they will be cut, but more importantly we don't know at what cost in terms of output loss because of the conflict on how to distribute the limited fiscal resources between programs and within each program. The tax burden will hardly increase, although many politicians will attempt to increase it. You should take a look at the many fiscal reforms implemented in Latin America and elsewhere in the past 30 years (in my view the most successful one was the one implemented in Chile starting on April 1975). Anyway, from my reading of those experiences and the dynamics of US politics, I think it will take at least 10 years before US politicians start to discuss seriously how to cut benefits.
ron cronovich said...
If you want to learn more about this problem, read The Coming Generational Storm by Laurence Kotlikoff and Scott Burns (only $12 or 13 at Amazon). It's well-written, well-documented (sometimes excessively so), and gripping. Kotlikoff is a highly-regarded mainstream economist and his book is very credible (unlike, say, any of Ravi Batra's The Coming Great Depression of [current year + 3] books).
Kotlikoff lays out the options for dealing with the looming fiscal crisis, and calls them "the menu of pain." He notes, as have Greg and many others elsewhere, that the longer we wait to address this problem, the worse the pain will get.
The options, basically, are: raising taxes, cutting government spending, cutting benefits, and raising the retirement age (which is basically a benefits cut).
I will add another option to the menu: rescind all restrictions on smoking. Allow smoking on airplanes, in restaurants, in churches, hell, even in public schools. Teach kids that it's "cool" to smoke, that they are wusses and have no self-worth if they don't. Drop the cigarette tax - this is one tax cut that really will pay for itself, though not because of any Laffer curve type effect.
Getting back to reality (for the moment):
The spring 2005 issue of the Journal of Economic Perspectives has three excellent articles on Social Security. The first, by James Hines and Timothy Taylor, lays out the problem. The second, by Peter Diamond and Peter Orszag, argues that we can "save" Social Security with relatively minor tweaks, and that a more drastic overhaul such as implementing private accounts is a bad idea. The third, by Martin Feldstein, takes the opposite view. All three articles are very much worth your time, as is the longer but somewhat easier to read book by Kotlikoff.
Is Big Ben willing to criticise the don't-tax-but-spend-wildly Bush administration?
The day I retire I will have paid SS taxes for 52 years. I imagine about 2 days before that the feds will announce that there isn't enough money. Swell.
Unrelated to the fiscal gap,
It seems you have changed your RSS feed so that it only allows excerpts to be read in aggregators, without functional links.
Its made it less enjoyable and more tedious to stay caught up on your blog, even though it is my favorite.
The only reason bloggers do this is so that they get more impressions on their website for their ad revenue. Please don't let that be your motivation...lv
Rusty: there's exactly nothing that can be done about it now. Raising taxes today won't do diddly-squat other than give Congress more money to spend today, unless the "overage" is saved outside the government in something like a Singapore-style provident fund, or into personal accounts which would be coupled with a pay-as-you-go component.
If it's "saved" into government bonds, as is done now, it just internalizes the public debt, but relies on future tax income to actually service that debt.
This is why the "trust fund" as currently put together is a mythological beast.
these rising entitlement obligations will put enormous pressure on the federal budget in coming years
It's about time. Long overdue in fact. Medicare is the problem and it will require solving healthcare. We need to start now since it will take a while to find out what works.
Kotlikoff's failing is trying to apply the finance of an individual to that of a society. There is little a society can do to "save" for retirement. See "What if Boomer's Can't Save for Retirement" for the rejoinder.
Roland Patrick said...
'Is Big Ben willing to criticise the don't-tax-but-spend-wildly Bush administration?'
As Bernanke noted both tax revenues and spending are at their averages since 1960.
David Walker, who heads GAO has been trying to trumpet these inconvenient fiscal truths for some time now. But when the Fed Chief says it, it does not go unnoticed. American's unwillingness to realize that government is needed and their increasing unwillingness to pitch in is a sad commentary on where we are as a nation. We have probably already passed the financial tipping point. Great empires of the past were rarely lost from the outside. They rot from within - usually with fiscal sypmtoms showing first.
Where, exactly, would you "pitch in"? Raising taxes today does diddly-squat for tomorrow's obligations. It only internalizes the budget deficit by allowing the government to print bonds and stuff them in a file cabinet.
Without an external savings pool that is beyond the reach of Congress, there is precisely nothing that raising taxes will do today.
Remember that the "SS trust fund" is just a bunch of bonds. It has no market value other than being a claim on future revenue, so by raising taxes today - and allowing Congress to increase spending - all you're doing is raising taxes in the future. The "trust fund" can't ever be "solvent" as long as it is stored this way.
SS will _always_ be a pay-as-you-go system unless it's backstopped by either private accounts (my preference) or some sort of Singapore-style provident fund that's invested in the market. (I don't like this, since it would have $trillions in it, so I wouldn't want Congress or bureaucrats anywhere near it.) If we did something like this, the pay-as-you-go component could be dealt with, but it will always be there.
Social Security vs. health care.
What to cut and how to cut?
Across the board or more of one than the other?
Does the nation really need to encourage longer lives?
Does Medicare extend lives and thus raise the cost of Social Security?
Should we then cut health care and let a static or decreasing life span take care of reducing Social Security costs?
Us non-economists want to hear.
All this talk about money. How mysterious.
Dr. Bernanke knows perfectly well that money is just money. Increasing taxes today, or setting aside money today, isn't an answer of any kind for providing entitlements in the future.
Even if the federal government did take actual pictures of dead presidents printed on special paper and put them in Al Gore's "lock box," that wouldn't change the federal government's ability to provide entitlements in the future.
In the end, it's about production of real goods and services, not money. As Dr. Bernanke and all other good economists know, the money can be and will be provided to finance federal government spending in the future as it's needed. The result will be inflation, just as it always has been from ancient times.
If the federal government is able to provide entitlements to real people in the real future, it will be able to do so only because real production of goods and services is sufficient in the future to cover consumption demand.
Never mind how much money the feds say is lying around somewhere, now or in the future.
If real health care and other real goods and services are available as entitlements in the future, it will be because some part of our population is willing and able to produce real goods and services in the future. The money people will use to buy those real goods and services will come from taxes paid in the future or money creation that occurs in the future.
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An excerpt from the Fed Chairman’s recent testimony via Greg Mankiw’s blog. For reference, US GDP is around $13322600000000. Federal government outlays in fiscal 2006 were 20.3 percent of nominal gross domestic product (GDP), ...
posted by Administrator @ 8:46 AM
Bernanke on the Fiscal Gap