The discussion starts with Paul Ryan's proposal for 2012 and beyond, which was passed by the House. To the extent that the details are fleshed out in the proposal, this is quite radical. Ryan proposed a major downsizing in the federal government, and the policy plan would also implement a serious redistribution in wealth - from the current young to the current old, and from the poor to the rich. Also, it does away with some social insurance, in particular health care for unhealthy poor senior citizens, among other things. The United States differs from most other developed countries in that it provides much less in the way of social insurance. This proposal, if implemented, would make it differ a lot more. Maybe this is what most Americans want, but I don't think that Americans are fundamentally different human beings from the ones that inhabit Scandinavia, France, Germany, or Canada, for example, where most people seem happy with more social insurance than what we have here.
Given the radical nature of Ryan's proposal, one would think that an honest and detailed description of the proposal would be apropos. After all, we want to understand exactly what we are getting into. But that is not quite what is written up in the document I link to above, which is replete with somewhat devious language and scare tactics. For example, in the charts on page 8, I would love to know what assumptions imply that the federal government will spend 80% of GDP with a debt/GDP ratio of 900% in 2080. So much for that.
Now, on to President Obama's April 13 speech. Obama starts by getting us to buy into the idea that we made some decisions in the past about providing social insurance, through medicare, social security, and other programs, and that we all share a commitment to those programs. But there is a demographic problem, which we recognized long ago: the large baby boom cohort that we need to provide for. Adjustments were being made to recognize this, at least up to 2000:
As a result of these bipartisan efforts, America’s finances were in great shape by the year 2000. We went from deficit to surplus. America was actually on track to becoming completely debt free, and we were prepared for the retirement of the Baby Boomers.Then, what happened?
But after Democrats and Republicans committed to fiscal discipline during the 1990s, we lost our way in the decade that followed. We increased spending dramatically for two wars and an expensive prescription drug program -– but we didn’t pay for any of this new spending. Instead, we made the problem worse with trillions of dollars in unpaid-for tax cuts -– tax cuts that went to every millionaire and billionaire in the country; tax cuts that will force us to borrow an average of $500 billion every year over the next decade.Notice the use of "we" here. No mention of the words "Bush" or "Republican." If he had wanted to, he could have made this more partisan. Presumably he would rather make the enemy Ryan and friends rather than George W.
To give you an idea of how much damage this caused to our nation’s checkbook, consider this: In the last decade, if we had simply found a way to pay for the tax cuts and the prescription drug benefit, our deficit would currently be at low historical levels in the coming years.
So, we have now been through a major recession, which has further increased the size of the government deficit, and added to the government debt, but why do we care?
Now, ultimately, all this rising debt will cost us jobs and damage our economy. It will prevent us from making the investments we need to win the future. We won’t be able to afford good schools, new research, or the repair of roads -– all the things that create new jobs and businesses here in America. Businesses will be less likely to invest and open shop in a country that seems unwilling or unable to balance its books. And if our creditors start worrying that we may be unable to pay back our debts, that could drive up interest rates for everybody who borrows money -– making it harder for businesses to expand and hire, or families to take out a mortgage.Thus, the bad effects of having too much government debt are, well, essentially everything bad. We can certainly give him this, as I think you can construct a rigorous economic argument that will give you all of these effects. Basically he is describing the Argentinian debt experience, which is what you have to face if you are permanently fiscally irresponsible.
So, we have to do something, but what, and when?
A serious plan doesn’t require us to balance our budget overnight –- in fact, economists think that with the economy just starting to grow again, we need a phased-in approach –- but it does require tough decisions and support from our leaders in both parties now. Above all, it will require us to choose a vision of the America we want to see five years, 10 years, 20 years down the road.Actually, he might have worded this "some economists think..." Some other economists might think that, for example, whether we pay the taxes now or defer them does not make much difference.
Obama then goes on to criticize the Republican proposal that was passed in the House. Then, he gives us this:
I believe it [the Republican plan] paints a vision of our future that is deeply pessimistic. It’s a vision that says if our roads crumble and our bridges collapse, we can’t afford to fix them. If there are bright young Americans who have the drive and the will but not the money to go to college, we can’t afford to send them.There is some truth in this. Ryan's proposal certainly does have the: "We are beaten down by the crushing burden of this huge government, and we're just not up to supporting these poor people" tone to it. What I don't like about what Obama is saying is that we are supposed to be motivated by the desire to compete with those people-who-do-not-look-like-the-average-white-American. Obama could have said: "You wusses! Canadians have universal health care, insure their unfortunate generously, and they are fiscally responsible to boot! Do you hear them whining about it?"
Go to China and you’ll see businesses opening research labs and solar facilities. South Korean children are outpacing our kids in math and science. They’re scrambling to figure out how they put more money into education. Brazil is investing billions in new infrastructure and can run half their cars not on high-priced gasoline, but on biofuels. And yet, we are presented with a vision that says the American people, the United States of America -– the greatest nation on Earth -– can’t afford any of this.
So what do we plan to do? Here are some principles:
To meet our fiscal challenge, we will need to make reforms. We will all need to make sacrifices. But we do not have to sacrifice the America we believe in. And as long as I’m President, we won’t.Specifics? This involves, on the spending side: (i) continuing with the budget cuts passed last week; (ii) cuts in defense spending; (iii) reductions in health care costs, without affecting actual benefits; (iv) changes to social security. The defense department is certainly a good place to look for spending cuts. In the past, we know inefficient contracting practices have taken place, that we have built weapons systems that we do not need, and that we have engaged in wrongheaded military campaigns. Surely we can improve on that. On health care, we know that the fraction of GDP we spend on health is extremely high relative to any other developed country. Further, much of this simply represents inflated prices. Doctors' salaries in part reflect the monopoly rents from the restrictions on supply imposed by the American Medical Association. Drug prices are high in part because of the the monopoly rents generated by patent protection. Medicare and Medicaid could surely deliver equivalent health outcomes at much lower cost. Obama is vague about social security reforms, but what seems to be needed here is to use sound actuarial science to properly calibrate benefits, perhaps to an average retirement age of 70. Social security taxes have to give here too, but maybe we can mitigate this by allowing the immigration of some highly-skilled people who would be more than willing to pay those taxes.
Now, on the taxation side, it seems that all the talk about honesty and shared sacrifice go out the window. Obama wants to refer to a tax increase as a cut in tax expenditures, for example. Then, we get this:
In December, I agreed to extend the tax cuts for the wealthiest Americans because it was the only way I could prevent a tax hike on middle-class Americans. But we cannot afford $1 trillion worth of tax cuts for every millionaire and billionaire in our society. We can’t afford it. And I refuse to renew them again.
Beyond that, the tax code is also loaded up with spending on things like itemized deductions. And while I agree with the goals of many of these deductions, from homeownership to charitable giving, we can’t ignore the fact that they provide millionaires an average tax break of $75,000 but do nothing for the typical middle-class family that doesn’t itemize. So my budget calls for limiting itemized deductions for the wealthiest 2 percent of Americans -- a reform that would reduce the deficit by $320 billion over 10 years.
1. Earlier in his talk, Obama told us that in 2000, before the Bush tax cuts were put in place, everything was fine. If he wanted to follow through on that thought, the logical conclusion would be that we should let the whole package expire, after the two-year extension. In itself, that would give some redistribution from rich to poor, but why load all of the tax increases on the rich?
2. Why not go after the mortgage interest tax deduction? Obama says he agrees with the goal of that deduction, but I think he would be hard-pressed to articulate what the goal is. The mortgage interest tax deduction certainly contributed to the financial crisis by subsidizing debt and encouraging households to leverage their housing wealth, and there is no sound economic rationale for the existence of such a deduction.
1. The Paul Ryan plan is radical. If this is what the Republicans want, they should base the 2012 election campaign on it, and see how far they get. If the average American understands what it means, I don't think he or she will vote for it.
2. Why does Obama cling to the tax-the-rich plan? We know it won't fly given the current composition of Congress, and it's not consistent with the thrust of his other ideas.