Tuesday, August 05, 2003
how to screw a country in one term
paul krugman--through his alternate site--links to this testimony to the congressional budget committe given by william g. gale, senior fellow at the NONPARTISAN brookings institute. he doesn't mince any words:
...The conventional wisdom is accurate: The United States faces substantial projected fiscal deficits in the coming decades.
and what, pray tell, are the causes of for these "substantial projected fiscal deficits?" well, mr. gale gives a number of reasons, one of which--surprise, surprise--is the bush administration's irresponsible tax cuts:
These facts imply that the aggressive tax-cutting agenda that the Administration has pursued the last few years deserves equal billing with Social Security and Medicare as "the real fiscal danger." They also imply that the decisions you [Congress] make about extending the tax cuts, about removing the sunsets, have long-term fiscal implications that are greater than those that arise from fixing the entire social security problem.
he also puts the smack down on one of the meme's that's been making the rounds lately: i.e. that the release in the next few years of baby-boomers' tax-deferred retirement accounts will more than offset any potential budgetary shortfalls.
Third, there is no hidden pot of gold waiting for us in future revenue from tax-deferred retirement accounts. Recent press reports have grossly overstated the impact of research undertaken by Stanford University Professor Michael Boskin. The press reports and some aspects of Boskin's paper suggest that future revenues from tax-deferred saving plans are (i) omitted in fiscal gap calculations, (ii) large enough to eliminate most or all of the fiscal gap, and (iii) likely to raise $12 trillion in revenues through 2040.
These suggestions are flawed. In fact, the underlying fiscal gap calculations already contain almost all of the projected revenues. As a result, adjusting the conventional estimates for the difference between Boskin's projections and the projections that are built in to the fiscal gap estimates has trivial effects on the estimated long-term fiscal gap and on estimated future budget deficits. Nor are we ever likely to see $12 trillion in net revenues from tax-deferred retirement accounts. After adjusting Boskin's estimates for reasonable parameter values, an error in the computer code, and proper treatment of interest payments, the revenue effect will be either close to zero or possibly negative.
in addition, he argues that the real danger of deficits is not their impact on interest rates (he calls that debate a "side show") but rather is their detrimental effect on national savings and income:
The real problem created by budget deficits is that they reduce national saving, which in turn reduces the assets owned by Americans and hence reduces future national income. These effects can be sizable, especially in the long-term. Conventional estimates, based on models developed by the CEA Chair Gregory Mankiw, indicate that the decline in the fiscal outlook since January 2001 has reduced GDP by at least 1 percent in 2012 and national income per household by $2,300 in 2012. These effects will persist over time. To put it differently, controlling the deficit is a pro-growth policy. [emphasis mine]
and finally, the coup de grace for all those youngish republicans of my generation who so strongly supported tax cuts because they so naively thought they would benefit:
Fifth, the fiscal problems the country faces are unlike any other the country has faced in their origin and nature. We will likely have to find a new way of dealing with them. The notion that federal spending can be held to its post-WW II norm of about 18 or 19 percent of GDP seems virtually impossible to maintain without severely cutting the major entitlement programs or eliminating the rest of government. In future years, spending on Social Security, Medicare, and Medicaid alone is anticipated to exceed 19 percent of GDP. The unpleasant implication is that a long-term resolution of these issues that does not destroy the role of the federal government in American society will have to include significant increases in tax revenues as a share of the economy. [emphasis mine]
so let's recap: the incipient retirement of the baby boom generation when combined with the bush administration's tax cut will result in huge budgetary shortfalls in the coming decades. these deficits will occur despite the expected future release of revenue from boomers' tax-deferred retirement accounts. the eventual impact of deficits will be a marked decrease in GDP and national income. and finally, my generation will be the ones footing the bill for the boomer generation's irresponsibility.
yup, i think that pretty much sums it up...
paul krugman--through his alternate site--links to this testimony to the congressional budget committe given by william g. gale, senior fellow at the NONPARTISAN brookings institute. he doesn't mince any words:
...The conventional wisdom is accurate: The United States faces substantial projected fiscal deficits in the coming decades.
and what, pray tell, are the causes of for these "substantial projected fiscal deficits?" well, mr. gale gives a number of reasons, one of which--surprise, surprise--is the bush administration's irresponsible tax cuts:
These facts imply that the aggressive tax-cutting agenda that the Administration has pursued the last few years deserves equal billing with Social Security and Medicare as "the real fiscal danger." They also imply that the decisions you [Congress] make about extending the tax cuts, about removing the sunsets, have long-term fiscal implications that are greater than those that arise from fixing the entire social security problem.
he also puts the smack down on one of the meme's that's been making the rounds lately: i.e. that the release in the next few years of baby-boomers' tax-deferred retirement accounts will more than offset any potential budgetary shortfalls.
Third, there is no hidden pot of gold waiting for us in future revenue from tax-deferred retirement accounts. Recent press reports have grossly overstated the impact of research undertaken by Stanford University Professor Michael Boskin. The press reports and some aspects of Boskin's paper suggest that future revenues from tax-deferred saving plans are (i) omitted in fiscal gap calculations, (ii) large enough to eliminate most or all of the fiscal gap, and (iii) likely to raise $12 trillion in revenues through 2040.
These suggestions are flawed. In fact, the underlying fiscal gap calculations already contain almost all of the projected revenues. As a result, adjusting the conventional estimates for the difference between Boskin's projections and the projections that are built in to the fiscal gap estimates has trivial effects on the estimated long-term fiscal gap and on estimated future budget deficits. Nor are we ever likely to see $12 trillion in net revenues from tax-deferred retirement accounts. After adjusting Boskin's estimates for reasonable parameter values, an error in the computer code, and proper treatment of interest payments, the revenue effect will be either close to zero or possibly negative.
in addition, he argues that the real danger of deficits is not their impact on interest rates (he calls that debate a "side show") but rather is their detrimental effect on national savings and income:
The real problem created by budget deficits is that they reduce national saving, which in turn reduces the assets owned by Americans and hence reduces future national income. These effects can be sizable, especially in the long-term. Conventional estimates, based on models developed by the CEA Chair Gregory Mankiw, indicate that the decline in the fiscal outlook since January 2001 has reduced GDP by at least 1 percent in 2012 and national income per household by $2,300 in 2012. These effects will persist over time. To put it differently, controlling the deficit is a pro-growth policy. [emphasis mine]
and finally, the coup de grace for all those youngish republicans of my generation who so strongly supported tax cuts because they so naively thought they would benefit:
Fifth, the fiscal problems the country faces are unlike any other the country has faced in their origin and nature. We will likely have to find a new way of dealing with them. The notion that federal spending can be held to its post-WW II norm of about 18 or 19 percent of GDP seems virtually impossible to maintain without severely cutting the major entitlement programs or eliminating the rest of government. In future years, spending on Social Security, Medicare, and Medicaid alone is anticipated to exceed 19 percent of GDP. The unpleasant implication is that a long-term resolution of these issues that does not destroy the role of the federal government in American society will have to include significant increases in tax revenues as a share of the economy. [emphasis mine]
so let's recap: the incipient retirement of the baby boom generation when combined with the bush administration's tax cut will result in huge budgetary shortfalls in the coming decades. these deficits will occur despite the expected future release of revenue from boomers' tax-deferred retirement accounts. the eventual impact of deficits will be a marked decrease in GDP and national income. and finally, my generation will be the ones footing the bill for the boomer generation's irresponsibility.
yup, i think that pretty much sums it up...
