TCS Daily


Spending Cuts Even Democrats Can Support

By Jeffrey Alan Miron - June 13, 2006 12:00 AM

Most economists agree that large and persistent budget deficits are bad for the economy. Deficits mean government borrowing, which implies higher interest rates, lower investment, reduced capital accumulation, and slower growth. A few economists endorse an alternate view -- Ricardian equivalence -- which holds that private saving offsets government dissaving, making government deficits irrelevant. But this offset seems to be only partial, so the U.S. fiscal outlook is indeed bleak. This especially reflects the looming imbalances in Social Security and Medicare.

When it comes to reducing the deficit, however, economists divide into two camps. Those on the Republican side endorse tax cuts, even while decrying deficits. These economists argue that taxes are an independent evil because they distort economic behavior. And these economists suggest current deficits can help restrain future spending.

Economists in the Democratic camp regard tax cuts as folly. These economists downplay the distortions caused by taxes, and they claim that starving the beast does not work. Many also paint scary scenarios of financial market meltdown from ever-increasing U.S. borrowing.

In addition, Democratic economists suggest there is no expenditure to cut because most of the budget is national defense, entitlements, and interest payments on the debt.

Reasonable economists can disagree about the magnitude of distortions caused by taxes, as well as on whether continued borrowing will cause a financial crisis. And reasonable economists are understandably skeptical about starving the beast, since the substantial increase in expenditure following the Bush tax cut is at odds with this hypothesis.

But the claim that government expenditure cannot be cut is dead wrong. I offer here a list that Democratic economists should embrace. The numbers after each item are the approximate annual savings in 2006 dollars.

  • Agricultural Subsidies: Everyone's favorite whipping boy, and for good reason. These subsidies are a handout to rich farmers, and they raise food prices for everyone. $20 billion.

  • Social Security for the Well-Off: Social Security is not means-tested; people with substantial retirement income get full benefits. This is insanity; recipients did not "save" the benefits they receive; these benefits come from taxes paid by current working generations. Cut Social Security expenditure, say, 20% by introducing a modest degree of means-testing. $100 billion.

  • Medicare for the Well-Off: Same deal as with Social Security. Raise premiums, deductibles, and co-pays in a means-tested manner to save 20% of current expenditure. $60 billion.

  • Higher Education for the Well-Off: State governments currently operate colleges and universities in a manner that makes no distributional sense. Children of millionaires pay the same highly subsidized tuition as children in poverty. State governments should emulate the private sector by setting a high tuition rate and then offering discounts on a means-tested basis. $50 billion.

  • Pork: Although many "bridges to nowhere" are small potatoes, the number of potatoes is large. A recent accounting by Taxpayers for Common Sense estimated 2005 earmarks at $24 billion; most of this is pure pork. Adding big ticket items like manned space flight, Amtrak subsidies, mass transit boondoggles like the Big Dig, senseless flood control projects undertaken by the Army Corps of Engineers, and subsidized disaster insurance, not to mention state and local pork, would easily yield substantial savings. $70 billion.

The grand total from this list is $300 billion annually, roughly the deficit projected for 2006. Normal economic growth would therefore mean surpluses in the near future, should these cuts occur. To deal fully with the impending imbalances in Social Security and Medicare requires one more policy change, but it is again one Democratic economists should endorse: an increase in the normal eligibility year to 70 and then indexing of the retirement age to life expectancy.

Note that my list of cuts is consistent with Democratic views on redistribution; it does not cut a penny from programs for the poor. And my list does not address substantial but controversial programs that I personally would eliminate (drug prohibition and the Iraq war, for starters).

Instead, my cuts are ones every economist should endorse, regardless of party affiliation. This expenditure is either welfare for the well-off or pure waste. So it ought to be cut even if taxation is non-distorting and even if the budget is in surplus.

Democratic economists will no doubt claim these cuts are politically unlikely. That is correct. But that is precisely why Democratic economists, and all other economists, should use their blogs, and their op-eds to highlight the enormous scope for welfare-enhancing cuts in government expenditure.

Jeffrey Alan Miron is an economist at Harvard University. He blogs here and recently wrote for TCS about the Enron fraud.

Categories:

209 Comments

How about tax increases even Republicans can support?
It's a two-way street. This is the side of the street that Republicans since Bush's election have refused to walk on.

Brad Delong and Social Security
Well, you should be able to get Brad Delong onside with the Social Security idea: raise the age and index it to lifespans. He actually suggested exactly this about 18 months ago.

Social Security
Social Security is to a degree already means tested. A portion is taxed based on the amount of income reported on the federal tax return.

SS tax also limited
After a cutoff around 87K per year.

Relevant Cato Institute Study
the text in the story really doesn't do justice to the position stated.

What's said is:

"Economists in the Democratic camp regard tax cuts as folly. These economists downplay the distortions caused by taxes, and they claim that starving the beast does not work."

Problem is, the economists aren't just in the Democratic camp, and in fact, it's a little mre than a "claim." Los Angeles Times columnist Jonathan Chait's recent column highlights the issue -- and some Cato Institute research:

"While Republicans tax-cut and spend, research shows increases lead to reduced government.

IF YOU REMEMBER the 2000 election, you probably remember President Bush's warning about why we needed to cut taxes: If we did not return the surplus to the taxpayers, Washington would spend it. Well, we all know what happened next. Bush returned the surplus to taxpayers — and Washington spent the money anyway.

Conservatives have a number of analogies to explain why tax cuts will lead to spending restraint: Cut your child's allowance. Starve the beast. But the analogies are all wrong. The child has a credit card. The beast has a private meat locker. Washington can spend whatever it wants, regardless of how much it taxes.

The right has been congenitally unable or unwilling to grasp this lesson. Last week, though, there was a faint glimmer of recognition. William Niskanen, chairman of the fervently anti-government Cato Institute, did a calculation showing that, since 1981, every $1 in tax cuts tends to produce 15 cents of extra spending. Likewise, every $1 of tax hikes tends to reduce spending by 15 cents. The notion that tax cuts cause spending to dry up, or that tax hikes encourage more spending, is not just wrong, it's completely backward.

Now, Niskanen is not the first policy wonk to discover this correlation....

http://www.latimes.com/news/columnists/la-oe-chait14may14,1,318662.column?coll=la-news-columns

Spending Cuts
Oh sure, I've paid into Social Security for almost 40 years now, so let's just take it away. I saved my entire working life to provide for my retirement. Lets take money from me and give it to the guy up the street - you know, the one with the big SUV in his driveway, the guy who blew every cent he made. Because I'm "rich" and he's not.

SS benefits are already taxed above certain income levels.

Enough.

40 years
Let's say you're one of the many who paid in those 40 years, and you're also one of those who did well in life and now have a net worth of say, 5 million dollars. Should such people, and I believe there are many of them, STILL make a claim on SS?

What nonsense
Anyone who has been forced pay into SS (as most of us have)should, at the very least, get their money back with interest. Or they should be allowed to opt out from the beginning.

As for Medicare, College tuition and SS, I thought the Federal gov was Constitutionally not allowed to discriminate under any circumstance. Even against the wealthy!

This, and many other reasons, is why none of these these programs should even exist on the federal level.

Lifetime Earnings
Total Lifetime Earnings (TLE) needs to be factored in when deciding how much if any someone is going to get. Someone who made very little their whole life should get a little help. However, someone who made a lot of money and spent it all on should not recieve the same amount. Just because I saved instead of spent shouldn't mean that I get less. Since we can't get rid of these programs they should at least look at TLE instead of your current net worth.

SS Benefits
The statement that those with retirement get full SS benefits is erroneous. I worked 20 years in the private sector, paid into SS but when I retired from the government after working 20 years, my SS benefits were cut dramatically. They called it windfall profit. However, since I had had a 13 year break in service to rear my children, my government retirement was less. In other words, I was screwed by the government.

Send the government all our money
Then lets all jump on the communist bandwagon and send all our money to the government, since it knows best.

The real solution is for Congress to stop spending. And for Congress to stop spending voters need to vote out the spenders and vote in Congressmen that will cut programs. And for a president that will veto spending bills and select judges that will declare government programs unconstitutional.

And we need a population that does not think the world owes them a living.

Equity
Those just retiring (including me) have paid into SS and Medicare for their entire working lives. We had no choice. We paid into Medicare on our entire salaries, so Medicare is already means tested - you make more, you pay more. Social Security pays relatively higher benefits to low earners than to high earners; relatively higher benefits to those who met the minimum requirement for participation, as opposed to those who paid into the system for their entire careers. Those who saved as well, and have other income in retirement, pay income taxes on 85% of the SS benefit.

Most corporate defined benefit programs provide a benefit which includes SS as part of the calculated monthly benefit. Take away the SS portion and many retirees situation changes, in some cases dramatically.

My review of the Constitution does not reveal any text authorizing the federal government to redistribute income, certainly not among the enumerated powers.

It certainly would have been nice if FDR had announced during the debate on SS that the federal government could "steal" the "promised" (though not guaranteed) benefits of SS recipients if it found them inconvenient; and, if LBJ had done the same for Medicare. The potential victims of this theft could then have resisted the programs more effectively; and, planned for their own retirements assuming the eventual theft.

Of course, it would also have been nice if FDR had informed blacks that SS was designed so that, on average, they would collect no benefits because, on average, they would die first. However, I don't recall reading about that.

If anyone has any doubts why the public at large does not trust politicians, (further) means-testing SS and Medicare benefits would end those doubts. It would also answer the questions regarding whether SS and Medicare are welfare programs - they would obviously be welfare.

If the private insurance industry ever suggested terminating or means-testing insurance benefits, they would be investigated and prosecuted and persecuted mercilessly. I suggest the same treatment for legislators.

Why am I not surprised that eric's first reaction is to tax rich guys.
....

so is SS payout
Since the payout is based on what you paid in, not what you made.

Eliminating the SS cutoff would only result in those evil rich guys getting even more money when they retire.

eric only wants other guys to send in their money.
...

According to the liberals, it's their money
so why shouldn't they get it back?

SS vs. Welfare
We might as well just scrap SS entirely, and beef up one of the gazillion welfare programs already in existence.

Of Course Democrats (aka socialists) could support Means Testing.. It's a Tax Increase
If somebody pays more because of their income its a tax, whether they send that check to the IRS or to their healthcare provider, the effect is the same-a disincentive to working, saving and self reliance.

We really need to start examining the substance of stuff like "means testing" so we can label it properly.

How about you writing a check to the Treasury...Or..
Label it "for relief of the public debt". They'll be happy to cash it..

Here's some taxes I'll go for..

Apply a 50% unearned income tax to multimillionaires from Hollyweird. They make windfalls largely from their physical appearance which clearly isn't "earned". How much does one person need? Better yet, apply the Sec 162 deductibility limits that apply to corporate executives to the hollyweird rich.

How about a Co2 tax, to be applied to Gulfstream liberals? We should tax every airplane not engaged in common carrier operations $1000.00 per flight hour. No need for high profile athletes and celebrities to be jetting about the world in these inefficient modes of transportation without compensating us for the exhaust from their personal aircraft.












How about you writing a check to the Treasury...Or..
Label it "for relief of the public debt". They'll be happy to cash it..

Here's some taxes I'll go for..

Apply a 50% unearned income tax to multimillionaires from Hollyweird. They make windfalls largely from their physical appearance which clearly isn't "earned". How much does one person need? Better yet, apply the Sec 162 deductibility limits that apply to corporate executives to the hollyweird rich.

How about a Co2 tax, to be applied to Gulfstream liberals? We should tax every airplane not engaged in common carrier operations $1000.00 per flight hour. No need for high profile athletes and celebrities to be jetting about the world in these inefficient modes of transportation without compensating us for the exhaust from their personal aircraft.












The Problem in Microcosm-PA Gov Race.
Here in Pennsylvania, we will very like re elect Ed Rendell governor again. He will have a couple loyal constituencies:

1.) Inner City Philadelphians/Pittsburgers/Harrisburgers/Allentowners, with their high propensity for being on public assistance. When the state's Dept. of Public Welfare designs programs-Philly and Allegheny Counties are always segregated data wise because 90 plus percent of the welfare recipients are located there and because they have to pay more to service providers to put up living there.

2.) Philadephia businesses and other corporate welfare recipients who want the rest of the state to foot the bill for their choice to remain in a high crime congested area or pursue some business.

3.) Northeast Fools. As the Scranton Wilkes Barre area continues to crumble-aging "seniors" who haven't noticed the unions they used to be part of are long gone-as are the businesses they bankrupted-but they still stap on their walkers to pull the lever with the little jackass symbol next to it.

4.) Northwest Fools- Hard core bituminous miners who haven't quite figured out their jobs are harder, pay less and are fewer when the environmentalist controlled dems go about demonizing coal.

We could have sane government in a if we would just tell Philadelphia it needs to start standing on its own. Philadelphia created its own problems and it should pay for them.

How many times does this have to be repeated?!
From the article: "Those on the Republican side endorse tax cuts, even while decrying deficits". Is this implying that cutting taxes increases the deficit??? How many times do we have to go through a rounds of tax cuts before we finally admit that tax cuts RAISE GOVERNMENT REVENUES?!?! Every time they're tried. Every time. EVERY TIME THEY'RE TRIED. Do I need to say it again?

:::UNDENIABLE TRUTH:::
Tax cuts increase government revenue EVERY TIME THEY ARE TRIED.
:::UNDENIABLE TRUTH:::

For the love of Pete, get it straight!!!

Means-testing SS & Medicare
Sounds good to me, just as long as you also means-test the payments as well. If I'm not going to get anything out of it, why should I have to put into it? Make SS & Medicare PAYMENTS means-tested so the more you make, the less you pay.

Next up: Make all federal taxes regressive! Make the poor finally pay their fair share! Heh. :)

Well, duh...
Of course.
tax cuts = increased spending,
tax hikes = reduced spending.

Why is that? Because:
tax cuts = increased govt. revenue = more money to spend
tax hikes = decreased govt. revenue = less money to spend

Is this supposed to be some kind of revelation?

Wrong Solutions
The solution(s) to government expenditure and deficit problems do not lie in means testing and tweaking programs.

Two simple solutions:

First - Cap total government spending. Get a president and congress that will cap spending. My personal goal would be to cap spending increases at 0% for 2-4 years, and then index it at or just under inflation. Force politicians to deal with the prioritization of needs like the rest of us.

Second - Provide for choice. Allow people to opt out of SS and medicare/caid, or at the very least provide for private accounts.

Why shouldn't the option be on the table?
Even the Cato Institute says that simply cutting taxes leads directly to deficit. Please read the report.

You seem to have some personal issues about success
Why do you hate the rich? Particularly people who have made it through personal talent, as opposed to either theft or inheriting money. Is this a class envy thing?

Why not read the article?
It's really pretty clear. It quotes a Cato Institute economist. Maybe you think the Cato Institute is communist.

Do you really not have anything at all to contribute on topic
Except for this kind of spiteful, personal namecalling?

Laffer curveball
I think you've been looking at the Laffer Napkin a little too long.

Tax increases don't lead to decreased tax revenues. If you have a historical example in the last half century, please supply it. They do lead to increased concern about spending and deficit reduction, per the economic study cited.

Um, sure
And that's why those evil rich guys are lining up and begging to be allowed to pay more SS tax, isn't it?

Hands off my money
Implicit in Dietmar's communist ideology is that wealth creation is a matter of luck, not hard work and/or great ideas.

Since your base assumption is false, Dietmar, the answer is YES!! IT'S THEIR MONEY!! NOT YOURS!!

If they pay into SS, they deserve to get it back. I repeat, It's NOT your money. Just because someone has more than you because they work harder, are smarter, or have more luck, it doesn't give you the right to take it away, not matter how greedy, lazy, or stupid you are.

Funny How
You guys on the left get all bent out of shape about namecalling, unless the name is something like "rightwing extremist" or "Christian Fundamentalist (extremist) or "rich Republican" or the new boogeyman "Neocon".

Well, since SS was sold to the public as an 'insurance investment'...
...and not welfare, uh...yes. All people -- even rich people -- are thus entitled to getting their money back (at least). Otherwise, it would be just another welfare program. FDR structured it the way it is to avoid that because he knew it wouldn't survive politically over the long haul otherwise.

In my personal view it IS a welfare program anyway. But it is structured as much as possible to technically not qualify as such by standard economics and polisci terminology.

Better Yet
If you collect welfare- you don't vote.

What else to be expected from a "Harvard economist"...
except thinly disguised soak the rich crap. If the rich--the "well-off" the author calls them (and who determines what qualifies one as "well off"?)--are to be automatically excluded from Social Security and a host of other government "programs" why should they be required to pay the income taxes associated with those things? This is nothing more than shifting subsidies further onto the backs of those who pay the most to start with; the goal should be to end all subsidies for rich, poor and everyone between and shrink governments from fed to local.
Just more uninteresting drivel from a Krugman in disguise.

SS is not an "investment"
And has never been "sold" as one. It is a program in which working adults pay to support older, retired adults, with the promise that when they grow older, younger workers will do the same for them. Not welfare: pay and get paid. That's what it is, and that's what it's always been bileed as.

Why not trying making an argument instead of namecalling?
You know, bring forward facts, or arguments, instead of just froth and shake your fists and complain about communists and so forth.

sorry to burst your bubble
but I am afraid that it is perfectly constitutional for the feds (and thus the states) to discriminate based upon wealth -- as well as marital status, gender (except with regards to voting) and sexual orientation and others.

That is why the feminists pushed the Equal Rights Amendment (and failed).
http://en.wikipedia.org/wiki/Equal_Rights_Amendment

Laffer curveball 2
But let's try this then. Since tax cuts always increase revenue, let's reduce taxes to a flat 1 percent of earnings, and just sit back and watch the money roll in.

Sorry to burst YOUR Bubble
But I was adressing the public policy implications of an action that is mislabelled. Try reading and addressing whats written. If you do so, you will not see the issue of constitutionality addressed in my post.

The very fact that you don't address the issue at hand, and then attempt to purport that the ERA would have by design remedied the long standing practice of punitive taxation-shows deficiencies in cognitive processes that quite frankly, appear to require medication or therapy.

Another example of liberalism being a mental disorder.Of course your opening line "but I am afraid" would be perfectly valid if the object of your fears was your own convoluted and disordered thought processes.


Sorry to burst YOUR Bubble
But I was adressing the public policy implications of an action that is mislabelled. Try reading and addressing whats written. If you do so, you will not see the issue of constitutionality addressed in my post.

The very fact that you don't address the issue at hand, and then attempt to purport that the ERA would have by design remedied the long standing practice of punitive taxation-shows deficiencies in cognitive processes that quite frankly, appear to require medication or therapy.

Another example of liberalism being a mental disorder.Of course your opening line "but I am afraid" would be perfectly valid if the object of your fears was your own convoluted and disordered thought processes.


Where did Eric mention rich guys?
He just said to increase taxes. He is a typical sociocrat. Tax, tax, tax.

Click your heels together and say......
only a dolt would parrot this nonsense since Bush's tax cuts have resulted in an increase in revenue not a decrease; just as happened before.

Now click your heels together and say this isn't the politboro, this isn't the politboro.

I did
The fact that you are incapable of discerning the point doesn't change that.

Specific constiuencies, created to maintain the political class have given us a raid on the public treasury that constitutes a war of all on all.

How about a tax on lawyers?
90% on all income from class action and tort cases exceeding 200,000. This would stop some of these vultures.

Because taxes are already way too high.
Why don't you read the report. They say that cutting taxes doesn't result in spending cuts. They don't say that they lead directly to deficits.

Are you honestly trying to claim that SS payouts are not based on total contributions?
Please tell me you are not that stupid.

compared to eric, almost everybody is rich.
...

That's rich, Eric saying someone else has class envy
Eric never met a tax he didn't love. And everyone knows Eric never advocates class warfare, heavens no.

TCS Daily Archives