Will the Deficit Panel Report Be DOA?

The New York Times is reporting that the bipartisan deficit reduction committee appointed by President Obama early this year has produced a draft report of its recommendations:

WASHINGTON — A draft proposal to be released Wednesday by the chairmen of President Obama’s bipartisan commission on reducing the federal debt calls for deep cuts in domestic and military spending starting in 2012, and an overhaul of the tax code to raise revenue. Those changes and others would erase nearly $4 trillion from projected deficits through 2020, the proposal says.

The plan would reduce Social Security benefits to most future retirees — low-income people would get a higher benefit — and it would subject higher levels of income to payroll taxes to ensure Social Security’s solvency for at least the next 75 years.

The article is quite terse. Among the elements of the proposal appear to be reducing marginal income tax rates, eliminating or curtailing some current deductions, some form of means-testing Social Security, raising the Social Security retirement age, military spending reductions, and a 3:1 ratio of spending cuts and revenue increases. I endorse all of those measures, at least in principle.

However, there are some things that fill me with foreboding. The NYT article doesn’t mention further cuts in Medicare spending. Without reductions in federal healthcare spending all other measures will be in vain. And then there’s this:

The Senate majority leader, Harry Reid of Nevada, and Representative Nancy Pelosi, who will remain the House speaker until January, have promised in writing that the Senate would vote first and, if it approves a plan, the House would vote as well.

Should the package of proposals fall short of the necessary 14 votes in the deficit commission, as many people expect, proponents of deficit reduction, including some administration officials, hope that at least some of its recommendations could be the basis of efforts to pare deficits once the economy fully recovers.

The emphasis is mine. “Fully recovers” to what? Some sectors of the economy will never recover to the heights they saw just a few years ago. The prices of tulip bulbs have never gone back to the levels they saw during the Tulip Mania of the 17th century and that was nearly 500 years ago. We were in the midst of a bubble a few years ago, for goodness sake.

What desperately needs to happen is for the Congress to act decisively and then to stop. The uncertainty will be as killing to the economy as the deficit and the current misallocation of resources that the last couple of years have seen the Congress dutifully bronzing for eternity.

Is the panel’s report dead on arrival? If that’s the case I’m afraid we’ll have a choice between deflation and hyperinflation. Our creditors won’t tolerate our current level of profligacy indefinitely.

42 comments… add one
  • PD Shaw

    According to Derek Thomson at Atlantic, the Medicade reimbursement formula would be modified and some other things.

    http://www.theatlantic.com/business/archive/2010/11/how-to-balance-the-budget-the-fiscal-commission-co-chairs-proposal/66381/

  • PD Shaw

    I meant Medicare . . .

  • Sam

    It’s probably not all that unexpected that there wouldn’t be a ton of detail about Medicare given the commission’s aim was deficit reduction by 2015 – at which point Medicare still isn’t weighing that heavily on the deficit. There’s some broad ideas including tort reform and exchanging payment expediency for lower payments.

  • Will the report be DOA? Here’s how I see deficit reduction playing out:

    In order of priority

    1.) DOA – do nothing at the moment and push the problem into the future.
    2.) At some future point there will be tinkering with the edges and the party responsible will pay the price at elections. The other party will demagogue the party responsible for cuts/taxes.
    3.) Like with many alcoholics or drug addicts who want to go straight, a miserable bottom has to be reached and only then can a reform be undertaken. With the deficit things have to get real miserable in society before all of the groups suckling at the government’s teat agree to accept reductions in their benefits because the reductions are a better outcome than the misery of the status quo.

  • PD Shaw

    Gas tax increase of 15 cents, beginning in 2013, with intent to fully fund transportation. Sounds like what Dave wanted . . .

  • Maxwell James

    Wow. I’ll have to read it more carefully, but at first glance I’m kind of impressed.

  • john personna

    It’s really surprising that they can cut tax rates by that much and still claim revenue increases.

    I can support the plan just because I figure I have to support all such moderate plans. There will be enough nay-sayers that getting any of them passed is a long shot.

    I think it’s not so much DOA (I hope) but just that anything reasonable faces an uphill battle.

  • As they say the devil is in the details. I suspect that revenue increases are due to the limitations (or elimination) of deductibility of home mortgage interest and employer-supplied health insurance.

  • john personna

    Gas tax increase of 15 cents, beginning in 2013, with intent to fully fund transportation. Sounds like what Dave wanted . . .

    What’s interesting is that the gas tax hasn’t even been covering transportation spending. It’s been a draw from general funds.

    Is 15 cents enough to fix that?

  • john personna

    As they say the devil is in the details. I suspect that revenue increases are due to the limitations (or elimination) of deductibility of home mortgage interest and employer-supplied health insurance.

    I’ve long favored a 10-year phase out of such things. That seems a long enough timeframe to make them politically palatable. I’m not sure if that works with the accounting.

  • PD Shaw

    The mortgage deduction is modest; it eliminate the deductability of the second home (didn’t know you could do that), for home equity loans, and mortgages over $500k. I would go lower, but this might be feasible.

  • PD Shaw

    The Derek Thomas article I linked to had a lengthy summary of the plan which said on the front not to release it, quote it or cite it. I quick-read it and now it appears to have disappeared.

  • PD Shaw
  • Sam

    The mortgage deduction is modest; it eliminate the deductability of the second home (didn’t know you could do that), for home equity loans, and mortgages over $500k. I would go lower, but this might be feasible.

    that’s just 1 of the proposals, the best one eliminates it entirely along with taxing company provided medical benefits – which should also reduce medical costs. I endorse it.

  • Icepick

    First, shaving $4 trillion off by 2020 doesn’t seem like nearly enough. Not even with the reductions in future liabilities to SS and Medicare. That’s $400 billion a year for ten years, which sounds like a lot of money until you look at the (overly optomistic) projected budget deficits for the next decade. If this plan works we may only add about a trillion a year to the national debt for the next decade! (I am not being overly optomistic in my personal projections.)

    So if this is what a politically sheilded commision comes up with, then I’m not terribly hopeful whether it passes or not.

  • Icepick

    The plan would reduce Social Security benefits to most future retirees — low-income people would get a higher benefit ….

    The devil is in the details, but this looks like an opportunity to game the system. Hide what would have been retirement “income” in earlier eras in ways so the wealth still exists but the income would disappear, leaving a “low-income” retiree to reap the benefit in SS income. Despite what they say, one can live pretty well on SS if one has no debts and decent supplemental medical coverage.

    This will be a business opportunity for someone with the resources to exploit it.

  • As I read more about the process the commission undertook my sense of disappointment grows because there are too many areas which were not even broached.

    The deficit, and for that matter, the fiscal operations of the federal government, are not divorced from the fundamental dynamics of society, yet the fiscal issues are treated as though they exist unconnected to the factors that influence them.

    For instance, the projections show that unemployment is going to be stubbornly high for quite a long time, yet we still maintain immigration quotas and are taking no efforts to expel illegal immigrants. We know that job losses are falling disproportionately on citizens rather than legal and illegal immigrants. Citizens have a wider safety net that they can rely on and this reliance on the safety net increases the deficit. Did the commission address this problem? If they have I haven’t yet come to the details. Why are we still importing people at a time when the nation has a labor surplus and when the dynamics of the labor market disfavor citizens over immigrants? Was there any calculation done on the prospect of reducing the presence of net-c0st immigrants and perhaps calculating a net present value bribe to entice them to leave the US, thus reducing our present and future liabilities to them?

    The deficit problem is the dependent variable where the independent variable, in a broad sense, is society. The solutions really should start with the factors that drive the spending.

  • Icepick

    Why are we still importing people at a time when the nation has a labor surplus and when the dynamics of the labor market disfavor citizens over immigrants?

    Here’s the cyncial answer: The people at the top are looking to replace the population with more easily manipulated peasants.

    The slightly less cynical answer is that Rs and Ds are doing this in an effort to buy current and future votes and contributions from various special interests.

    I’m sure there are non-cynical answers, but I wouldn’t want to ruin my reputation by posting them.

    NOTE: I’m speaking of the waves of illegal immigration. A lot of work visas are extended to very qualified people either because Americans don’t want to take on certain difficult topics, or employers are looking to cut costs.

  • Icepick

    The deficit problem is the dependent variable where the independent variable, in a broad sense, is society. The solutions really should start with the factors that drive the spending.

    The biggest factor drving future spending is the aging of our population. Thus the waves illegal immigrants are used to keep our population relatively young.

    That is either the most cynical or most -let me be uncharacteristicly kind- naive position, depending on whether or not the person staking out the position is sincere or not.

    (Sorry for mentioning sincerity. I’ve seen too much of “It’s the Great Pumpkin, Charlie Brown!” and “Bye, Bye, Birdie!” lately. My only defense is that Ann Margaret is yummy.)

  • Icepick

    And obviously I have no defense for the Charlie Brown stuff. No Ann Margaret, just rocks.

  • The biggest factor drving future spending is the aging of our population.

    I agree.

    Thus the waves illegal immigrants are used to keep our population relatively young.

    Policies should be developed so that they are based on a thorough understanding of the phenomenon they seek to address. Putting aside the role of immigrants for the moment, intergenerational transfer schemes depend either a stable ratio of workers to retirees where productivity and income remain constant or a diminishing ratio of workers to retirees where productivity and income are increasing.

    What we have is the worst of both worlds, a diminishing ratio of workers to retirees and the younger generation being less productive than the generation entering into retirement:

    Texas is changing. It is growing older and browner, with the elderly and Hispanic populations growing at an unprecedented rate. And as the populations increase, so will the challenges.

    If current trends continue, Texas’ work force will be less educated and less skilled. State services, already burdened, may be strained to a point never experienced before. The numbers provided by Murdock support the dire warnings:

    Hispanics may represent 53 percent of the population by 2030, compared to 30.3 percent for Anglos and 9.2 percent for blacks.

    More than half of Hispanics 25 and older had failed to finish high school in 2000; fewer than 20 percent had completed some college, and only about 10 percent had a college degree.

    Hispanics could occupy 38 percent to 52 percent of the Texas work force by 2030.

    By 2030, 16 percent to 20 percent of the population will be 65 or older, an increase of about 10 percent over 2000. Most will be Anglos. Of Texans older than 65 in 2000, 72.6 percent were Anglo, 16.7 percent Hispanic.

    The aging population — coupled with a segment that is less educated and, thus, earning less money — will strain social services, including those for the elderly.

    “An educated work force raises income levels, which generates businesses activity and increases the market for goods and services,” Murdock said. “It also increases investments for new businesses, which in turn increases tax revenues. Higher education equals higher incomes.”

    It does the nation little good to have a retiring physician’s productivity replaced by a young grocery store clerk.

  • Sam

    Why are we still importing people at a time when the nation has a labor surplus and when the dynamics of the labor market disfavor citizens over immigrants?

    Are you serious? We should be quintupling immigration. We should steal the top 10% from China and India. The only reason our past growth tops Europe’s is because of our higher immigration and the expectation it will continue.

  • Icepick

    Policies should be developed so that they are based on a thorough understanding of the phenomenon they seek to address.

    Whoa, I thought we were discussing government policy, not sensible planning.

    It does the nation little good to have a retiring physician’s productivity replaced by a young grocery store clerk.

    Yep. The question for me is whether our leaders realize this is what will happen. If they don’t they’re too stupid to be setting policy. If they do then perhaps I am not cynical enough.

  • Icepick

    Are you serious? We should be quintupling immigration. We should steal the top 10% from China and India.

    Are you serious? We are not poaching the top 10% of India and China. At best we’re cherry-picking people from everywhere, and allowing the middle 20% (at best) from Mexico, and Guatamala. Besides, why should the top 10% from China and India come here now? There are vast opportunities for such people in their own countries without uprooting their entire lives.

    The only reason our past growth tops Europe’s is because of our higher immigration and the expectation it will continue.

    Maybe that was true in the 19th and early 20th century, but not anymore. A lot of our recent economic “expansion” was fueled by a housing bubble in part attributible to cheap illegal immigrant labor. How’s that working out for us now?

    We here a lot of crap from our ‘leaders’ on this front. On that one hand they tell us that education drives innovation and productivity gains. On the other hand they tell us that illegal immigrant who are often illiterate in their native tongue are driving economic expansion. If both things are true then we should choose the ceaper option. That would be to completely open our borders to all the world’s poorest people. Hell, it might even be profitable to give them plane tickets to get here. Just bring ’em in and let the good times role!

    Less snarkily, there’s the immigration that IS – the primary focus of which as been to important the cheapest least-skilled labor possible – and what you’re advocating – which is largely the opposite of what we’ve been doing for decades now.

  • The only reason our past growth tops Europe’s is because of our higher immigration and the expectation it will continue.

    I’ll write off your hyperbole to your wanting to quash my point rather than wanting to address it thoroughly. The only reason? That’s funny.

    I find it quite funny to see leftists moaning about sustainability when it comes to things like environment but when it comes to other aspects of public policy they act like sustainability is an alien concept. Buying short term gain at the cost of long term devastation is no solution. Buying present day benefits by implementing an unsustainable ponzi scheme is no bargain.

  • I think it bears mentioning that nowadays France has about the same rate of immigration that we do. The French also have the same problem as we do: most of their immigrants are poor and unskilled.

    I think that more important than immigration rates in the American experience of immigration is that historically many of our immigrants have come here with skills and have assimilated relatively quickly, more so since failing to assimilate bore substantial social and economic sanction. Times have changed.

  • The federal government has plenty of actuaries and economists on staff. Get them to develop a model which calculate the expected lifetime taxes paid by immigrants against the expected lifetime benefits that flow to these immigrants. If the benefits owed to these immigrants exceed the taxes that they’ll pay, then devise a form of early buyout for them – pay them to go back to their home countries.

    By starting at the foundation level, the PEOPLE who comprise the US and then working upwards towards the fiscal policies, many structural problems which drive the deficit upwards can be addressed.

    I’m just using immigrants as an example. We also have cockamamie social forces which result in the more intelligent/better educated having fewer children than the less intelligent/less educated, so we see those parents who are best equipped to provide their children with exceptional human capital being less stressed and those parents who are least prepared to provide their children with human capital improvements being tasked with a job that is beyond them. The estates of the upper class flow from 8 great grandparents to 4 grandparents to 2 parents to 1 child while the estates of the lower class flow from 8 great grandparents to 24 grandparents to 72 parents to 216 children. The solution isn’t to tax the upper class and redistribute it to the lower class, rather the solution is to incentivize higher birth rates in the upper class and lower birth rates in the lower class. Stop the intergenerational concentration of human capital in the upper class and encourage dilution because there is lots of slack and dilution won’t harm the children. Meanwhile,stop the intergenerational dilution of human capital in the lower class and encourage concentration because the concentration will actually benefit the human capital accumulation in the children.

  • PD Shaw

    You’re right Sam; I didn’t catch that there were several tax proposals. I tend to think the Wyden-Gregg option has better political legs — not because I like the home mortgage deduction, but if you capt it like that it starts to become a relative non-issue since most of the benefits are for high-income earners anyway. And I wonder if tripling the standard deduction to $30k has more concrete appeal than lowering rates that appear quite abstract.

  • PD Shaw

    That said, the median and price of a new home is closer to $250k, so lower the mortgage deduction by half would seem to be politically doable.

  • PD Shaw

    . . . median and mean . . .

  • How is it that other countries have functioning real estate markets without employing mortgage deductions?

    In fact, Canada’s home-ownership rate is currently higher than the rate in the United States, despite a lack of government-subsidized housing finance.

    All we’re doing is misallocating capital by creating a tax deduction which favors one form of investment over another.

  • Sam

    Are you serious? We are not poaching the top 10% of India and China. At best we’re cherry-picking people from everywhere, and allowing the middle 20% (at best) from Mexico, and Guatamala. Besides, why should the top 10% from China and India come here now? There are vast opportunities for such people in their own countries without uprooting their entire lives.

    You misinterpret, I’m not saying what we are doing, rather what we should do – that is increase legal immigration of skilled workers – I didn’t specify a method – if attracting them comes down to amenable tax structure, fine – I am definitely not advocating the illegal kind. The last time I checked, the (legal) immigration quota from Mexico via green card was 0 anyway except for TN visas – which aren’t allowed to immigrate.

  • steve

    “The biggest factor drving future spending is the aging of our population.

    I agree.”

    Nope. It is the actual price inflation of medical costs, if you are talking about deficits. Pretty well studied.

    “The only reason our past growth tops Europe’s is because of our higher immigration and the expectation it will continue.”

    Mish addressed this a while back. We calculate our GDP differently than they do in Europe. Gives us better looking numbers. The difference is much smaller than most think.

    ” The solution isn’t to tax the upper class and redistribute it to the lower class, rather the solution is to incentivize higher birth rates in the upper class and lower birth rates in the lower class.”

    Umm, we kinda suck at social policy. How would you push lower birth rates past the evangelical/Catholic coalition?

    Steve

  • Umm, we kinda suck at social policy. How would you push lower birth rates past the evangelical/Catholic coalition?

    Off the top of my head? For tax purposes, family income is divided amongst all members of the family and then standard personal deductions apply and then the tax is calculated.

    $500,000 yearly income for a dual income, no kids couple is going to put both people into a higher tax bracket than a $500,000 yearly income for a couple with 3 children where the $500,000 gets treated as five incomes of $100,000.

    The point here is that incentives have to match opportunity costs. A standard baby bonus is going to be more attractive to a low income family than to a high income family. What has to be done is to increase the incentives for child rearing in high income families by lowering the opportunity cost. Conversely, increase the incentives of having fewer children for those in the lower class thus allowing them to concentrate more of their resources onto a smaller number of children and boosting the human capital of their children.

  • Sam

    I think that more important than immigration rates in the American experience of immigration is that historically many of our immigrants have come here with skills and have assimilated relatively quickly

    hence why I like China and especially India as targets of brain poaching. Indians and Chinese all learn English in school already – from my experience Indians are especially good English speakers. We should at least keep the ones that come here on student visas if they want to stay.

  • hence why I like China and especially India as targets of brain poaching.

    I don’t think that anyone has disagreed with you. I’m certainly not. Finding immigrants who will become net tax contributors is a goal that should be written in the bedrock of immigration policy. It’s not. The problem we have to solve first is how to curtail immigrants who will become net tax recipients.

    A nation is the sum of its people. The financial health of a nation results from the financial and productivity aspects of its people. I’m arguing that we can’t separate the two. If our intergenerational population replacement skews towards lower human capital benchmarks, then the effects will ripple out far and wide and will have significant impact on federal fiscal policies.

  • Icepick

    Sam, you can argue about what our immigration policy should be, but that doesn’t change what it is now. And there is very little will amongst the political elites to actually address immigration in any way other than to codify what’s already happening and to encourage more of it.

    steve, medical inflation may be outstripping the aging of the population, but old people use a lot more health care than the young. Pump up 8% inflation on my annual healthcare costs (age 42) and 8% on my mother’s (age 83) – my entire healthcare expense gets swallowed by her 8%. If she had died prior to age 79 her total healthcare expense wouldn’t have been much more than mine – but it’s all down hill from 80! We’ve got a lot more old people now, and they require a lot more healthcare. If everyone were young and healthy medical inflation* just wouldn’t matter than much. OTOH (I’m feeling like an economist tonight) if medical inflation were zero we would still see our medical expenses go up substantially because of changing demographics.

    * What counts as medical inflation anyway? Are we talking about the inflation on something that’s already done, or the addition of new treatments and services? They’re very separate issues and would need separate solutions.

  • john personna

    Kevin Drum doesn’t like it, for reasons similar to Dave’s:

    http://motherjones.com/kevin-drum/2010/11/deficit-commission-serious

  • john personna
  • This is what Drum wrote:

    Capping revenue at 21% of GDP, for example. The plain fact is that over the next few decades Social Security will need a little more money and healthcare will need a lot more. That will be true even if we implement the greatest healthcare cost containment plan in the world. Pretending that we can nonetheless cap revenues at 2000 levels isn’t serious.

    To me that comes across as someone who is thinking in a very static fashion. I infer his position to be one where there are no consequences to the nation from raising tax rates to cover the fiscal imbalance.

    To me, a dynamic response would likely entail significant depression in economic growth, job creation an increase in capital flight, a reevaluation on time allocation between personal industry and leisure, etc.

    There’s always a trade-off. Is the world a better place if seniors have fully funded and expansive Medicare but the working population suffers from significant unemployment, diminished standards of living, and slower economic growth than would otherwise be the case?

  • john personna

    I think he’s just trying to move eyes to Medicare, which is a costs management issue. At least, I don’t think anyone has figured a way to fund Medicare as now projected.

  • Sam

    FYI – from here:
    http://www.census.gov/ipc/www/idb/index.php

    France has a NET immigration rate of 1/1000 whereas the U.S. is 4/1000

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