The Editors Are Worried About the Debt (Updated)

The editors of the Washington Post are worried about the public debt:

The nation has reached a hazardous moment where what it owes, as a percentage of the total size of the economy, is the highest since World War II. If nothing changes, the United States will soon be in an uncharted scenario that weakens its national security, imperils its ability to invest in the future, unfairly burdens generations to come, and will require cuts to critical programs such as Social Security and Medicare. It is not a future anyone wants.

Stabilizing the debt should be a top priority for Mr. Biden and Congress. That starts with setting a clear goal. A reasonable target would be aiming not to have the debt exceed the size of the economy (a 100 percent debt-to-gross-domestic-product ratio). Currently, the debt is 98 percent the size of the economy and on track to hit 118 percent in a decade, largely because of soaring costs from baby boomers retiring and heftier interest payments, according to the nonpartisan Congressional Budget Office. It doesn’t take a PhD in accounting to see the warning sign here: As debt gets bigger than the economy, the interest costs become so onerous that there is little money left for anything else. By 2033, the nation will be spending more on paying creditors than on the entire defense budget.

Their explanation for why the debt has grown so high so fast is to blame it on the Baby Boomers. That those born between 1946 and 1963 would eventually become old has been known for, yes, more than 70 years.

I think a better direction in which to point a finger is at bad assumptions. For quite a while it was assumed that real median wages would always grow. That hasn’t been the case or has only intermittently been the case for 40 years. For decades it has been assumed that spending more invariably produced more economic growth. There is substantial empirical evidence that the larger the overhang of the public debt, the slow is economic growth. It has been assumed that a college education would provide a comfortable living. What is true is that a medical degree, a law degree from a top law school, or engineering degrees in certain specialties do that. Unfortunately, the number of those school slots doesn’t increase as fast as the population does. There are blue collar positions that provide a comfortable living, too, but those have been de-emphasized in favor of college educations. Now we’re boosting the public debt to reduce the private debt incurred by young people in educational debt and will never be able to pay it back. More bad assumptions.

Something else should be considered. Throughout American history it has proven very difficult to raise the effective tax rate much above where it is right now. There is a name for that and I’ve posted on it but it doesn’t come to mind right now. If you don’t want to borrow more (“print money”) and you can’t increase the effective tax rate and you don’t want to reduce benefits paid, you’ve got to look for other areas of the budget to cut. There aren’t many left.

Update

The editors of the Wall Street Journal are unimpressed by President Biden’s plans as well:

The press is reporting that President Biden’s 2024 budget proposal released Thursday would cut the deficit by $3 trillion over 10 years. Way to bury the lead. The plan raises taxes by nearly $4.7 trillion and would increase revenue and spending to unprecedented plateaus as a share of the economy.

The President’s $6.89 trillion proposal is a political document that sets up his re-election campaign. Its spending and tax proposals were rejected in the last Congress under Democratic majorities and have no chance of passing with a GOP House. But the budget shows where Mr. Biden wants to take the country if he wins a second term. Bernie Sanders would be pleased.

concluding:

Even with all the taxes, deficits over the next decade would total $17 trillion, and debt held by the public as a share of GDP would rise to 109.8% in 2033 from 97% last year. Mr. Biden’s budget is a recipe for an economically and militarily (see nearby) weaker America, but at least he’s warning voters of his intentions—unlike in 2020.

With the exception of the corporate income tax, I thought that President Trump’s tax cuts were foolish and whatever growth they produced would not be enough to generate enough taxes to make up for the revenue lost. That has proven correct. I think that when you have an economy that’s growing robustly, you can afford to spend some of the income you’re receiving on things you’d like as well as on what you must. As the economy slows, you don’t.

At this point I think we need to stabilize Medicare and Social Security and start getting more bang for our terabucks in other areas of government. Anything that doesn’t do either of those are wastes of breath.

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Why Are Progressives Sad?

Perhaps not coincidentally David Brooks’s New York Times column is closely related to the subject of Jon Haidt’s post about which I just posted:

One well-established finding of social science research is that conservatives report being happier than liberals. Over the years, researchers have come up with a bunch of theories to explain this phenomenon.

The first explanation is that conservatives are more likely to take part in the activities that are linked to personal happiness — like being married and actively participating in a religious community. The second explanation is that of course conservatives are happier; they are by definition more satisfied with the established order of things.

The third explanation, related to the second, is that on personality tests liberals tend to score higher on openness to experience but also higher on neuroticism. People who score high on neuroticism are vigilant against potential harms, but they also have to live with a lot of negative emotions — like sadness and anxiety.

He goes on to describe the “maladaptive sadness” from which progressives are suffering:

First, a catastrophizing mentality. For many, America’s problems came to seem endemic: The American dream is a sham, climate change is so unstoppable, systemic racism is eternal. Making catastrophic pronouncements became a way to display that you were woke to the brutalities of American life. The problem, Matthew Yglesias recently wrote on his Substack, is that catastrophizing doesn’t usually help you solve problems. People who provide therapy to depressive people try to break the cycle of catastrophic thinking so they can more calmly locate and deal with the problems they actually have control over.

Second, extreme sensitivity to harm. This was the sense many people had that they were constantly being assaulted by offensive and unsafe speech, the concerns that led to safe spaces, trigger warnings, cancellations, etc. But, as Jill Filipovic argued recently on her own Substack: “I am increasingly convinced that there are tremendously negative long-term consequences, especially to young people, coming from this reliance on the language of harm and accusations that things one finds offensive are ‘deeply problematic’ or even violent. Just about everything researchers understand about resilience and mental well-being suggests that people who feel like they are the chief architects of their own life” are “vastly better off than people whose default position is victimization, hurt and a sense that life simply happens to them.”

Third, a culture of denunciation. When people feel emotionally unsafe, they’re going to lash out — often in over the top, vitriolic terms. That contributes to the fierce volleys of cancellation and denunciation we’ve seen over the past few years. For example, Damon Linker recently wrote a piece for Times Opinion arguing that Ron DeSantis is bad, but not as terrible as Trump. The furies descended on him online. The gist was that it is shameful to merely say DeSantis is bad — you need to say he is a fascist, pure evil! If you aren’t speaking in the language of maximalist exorcism, you’re betraying the cause.

This rhetorical style is also self-destructive. When maximalist denunciation is the go-to device, then nobody knows who’s going to be denounced next. Everybody finds himself living in a climate of fear, and every emotionally healthy person is writing and talking from a defensive crouch.

I think there’s more going on, something inherent. Progressives are dissatisfied with the status quo by definition. Now couple that with radicalization which, as noted in my prior post, encourages a feeling of helplessness. How can such helpless dissatisfaction be anything but unhappy?

Note that “radicalization” doesn’t apply only to progressives. Our present politics is dominated by left wing radicals on one side and right wing radicals on the other with most ordinary people who are just trying to live their lives as best they can stuck in befuddlement.

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Misery Loves Company

The topic of Jon Haidt’s post is summarized here:

All of Gen Z got more anxious and depressed after 2012. But Lukianoff’s reverse CBT hypothesis is the best explanation I have found for Why the mental health of liberal girls sank first and fastest.

This graph illustrates the point:

What happened in 2012?

After examining the evidence, including the fact that the same trends happened at the same time in Britain, Canada, and Australia, Goldberg concluded that “Technology, not politics, was what changed in all these countries around 2012. That was the year that Facebook bought Instagram and the word “selfie” entered the popular lexicon.”

This passage explains the “reverse CBT hypothesis”:

Greg is prone to depression, and after hospitalization for a serious episode in 2007, Greg learned CBT (Cognitive Behavioral Therapy). In CBT you learn to recognize when your ruminations and automatic thinking patterns exemplify one or more of about a dozen “cognitive distortions,” such as catastrophizing, black-and-white thinking, fortune telling, or emotional reasoning. Thinking in these ways causes depression, as well as being a symptom of depression. Breaking out of these painful distortions is a cure for depression.

What Greg saw in 2013 were students justifying the suppression of speech and the punishment of dissent using the exact distortions that Greg had learned to free himself from. Students were saying that an unorthodox speaker on campus would cause severe harm to vulnerable students (catastrophizing); they were using their emotions as proof that a text should be removed from a syllabus (emotional reasoning). Greg hypothesized that if colleges supported the use of these cognitive distortions, rather than teaching students skills of critical thinking (which is basically what CBT is), then this could cause students to become depressed. Greg feared that colleges were performing reverse CBT.

I wanted to remark on this passage, describing the notion of “locus of control”:

As first laid out by Julian Rotter in the 1950s, this is a malleable personality trait referring to the fact that some people have an internal locus of control—they feel as if they have the power to choose a course of action and make it happen, while other people have an external locus of control—they have little sense of agency and they believe that strong forces or agents outside of themselves will determine what happens to them. Sixty years of research show that people with an internal locus of control are happier and achieve more. People with an external locus of control are more passive and more likely to become depressed.

Radicalization—any sort of radicalization—promotes the development of an external locus of control. The radicalized tend to attribute every setback to whatever it is they’re radicalized with respect to. If you’re radicalized with respect to race, you are predisposed to attribute every setback to race; if you’re radicalized with respect to gender, you’re predisposed to attribute every setback to gender; if you’re radicalized with respect to sexual preference, you’re predisposed to attribute every setback to sexual preference; and so on.

One will always encounter hardships and setbacks in life. When there are lots of miserable radicalized people around and they are driven to make other people as miserable as they are themselves, you get, well, where we are right now.

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The Conundrum

I’ve seen a number of opinion pieces in various different forms about education and healthcare and there’s one point they miss. When you increase the willingness to pay without increasing the supply, the price will go up. That’s not just axiomatic it’s tautological—saying the same thing in a different way.

The effect of reducing out-of-pocket in healthcare is to increase willingness to pay. The same is true of subsidized (or free) loans for education.

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The Story of Medicare Spending


The graph above shows the steady rise in Medicare spending per beneficiary since the program started in 1966. But that doesn’t reflect constant dollars! (I hear someone say) Here:

Not quite up to the present but it gives you the general idea. I think it tells a story.

The cost per beneficiary has grown faster than inflation over the period of the last 55 years with only a few exceptions and those exceptions are significant. Note the period between 1997 and 2000. What happened?

Congress, alarmed at the growth of Medicare spending, imposed something called “Sustainable Growth Rate” (SGR). Here’s a description from Brookings:

Under the SGR formula, if overall physician costs exceed target expenditures, this triggers an across-the-board reduction in payments. The target is based on spending growth in the economy – that’s where the “sustainable” part of the name comes from – but is not tied to quality or access to care. This year, if Congress does not act by March 31, then payments to Medicare physicians would be reduced by 21.2 percent.

What happened to upset that?

However, since 2002, Congress has stepped in with short-term legislation (often referred to as the “doc fix”) to avert the payment reduction. These patches have kept increases in physician payments below inflation over time, and have also resulted in a huge divergence between the actual level of Medicare physician-related spending and the target in the SGR formula. Consequently, the budgetary cost of permanently fixing the SGR now runs over a hundred billion dollars. For years it has been clear that both the SGR and physician payment system urgently need attention.

In other words what reduced Medicare spending was reduce the compensation rates and what increased it again was allowing the compensation rates to increase.

One last point. The annual increase in spending per beneficiary is just under 6% and has been for some time. Private insurance is about the same. When Medicare was first put in place in 1965, healthcare represented about 5% of U. S. GDP. Now it’s 18%. That means that healthcare contributes a full percentage point to inflation every year.

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How Many Wars Can We Fight At the Same Time? (Updated)

After the incident in which four Americans were kidnapped in Mexico (two killed; two rescued/escaped), some are calling for our military to be used against “the cartels” in Mexico. Apparently, they’re emboldened by our many successes against irregulars elsewhere in the world.

Let’s leave aside the folly of seeking health care in other countries (apparently, one of the four was seeking an elective procedure). Leave aside that Mexico is in fact another, sovereign nation and that using our military within its borders would be an act of war. Folks, this is what borders and limitations on travel are for.

Take our southern border seriously and do whatever is necessary to close it.

Update

Relevant from NPR:

Nearly 780,000 people were projected to leave the U.S. for health care in 2022, according to Healthcare.com, citing data from the medical travel website Medical Departures.

That outburst of activity got a big boost in late 2021, when the U.S. relaxed key border restrictions with Mexico.

Costa Rica is the second-most popular destination for U.S. visitors seeking medical care elsewhere, Woodman said. It’s a particular draw, he added, for people in the Northeast and Southeast.

Cosmetic surgeries are just one of the procedures that are far cheaper in Mexico — for years, people have been visiting from the U.S. to get elaborate dental work or cosmetic treatments done, or to pick up antibiotics and other medicines at favorable prices.

Many people also travel to get orthopedic work done, replacing knees or hips for less than half the cost of such procedures in the U.S.

“North American patients travel to Mexico for care primarily to save 50-70% over what they would pay in the United States for an elective treatment,” according to Woodman.

There is no such thing as a robust system of international civil law.

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The Europe We Defend

At Foreign Affairs Max Bergmann and Sophia Besch underscore a point I’ve been making:

Instead of galvanizing efforts to address deep structural problems in European defense, the war has only reinforced them. European forces are in worse shape than previously thought, and weapons stockpiles have necessarily been depleted to support Ukraine. As Europe seeks to rearm, it is finding that its defense industries aren’t fit for purpose. Efforts to coordinate European procurements are not working, with countries all going their own separate ways, adding to the general dysfunction. The United States has demonstrated its indispensability to European security and confirmed Europe’s dependence on Washington. European leaders have seemingly accepted this as the natural state of affairs, with many declaring the pursuit of European “strategic autonomy” dead and turning their backs on cooperation with other EU countries. The momentum in favor of reform and change that had built up over the last decade appears to have vanished.

Although proposals exist for addressing these problems, none offer the kind of sweeping initiative that would be necessary to fix them. In short, a broken status quo prevails.

The major European economies have not fulfilled their commitments. Their advocates here say, “Well, it takes time”. The authors continue:

The war has revealed the appalling state of European defense. Europe has underinvested in its armed forces for the past 20 years, and what little funding it did commit was focused on building forces for humanitarian, counterinsurgency, and counterterrorism missions far from the continent, such as in Afghanistan. European militaries thus lack the basics needed for conventional warfare in their own backyards. Most countries lack basic ammunition stockpiles. The German armed forces, for instance, only have stocks of ammunition for a few hours or days of combat. Tank fleets across Europe have atrophied both in numbers and readiness. Germany has 300 Leopard 2 tanks on paper, but only 130 are operational. And it is not just Germany: Spain also has more than 300 Leopard tanks, but one-third of them are no longer active and are largely in disrepair. Europeans lack sufficient quantities of artillery and are therefore heavily depleting their forces to support Ukraine. France, for instance, has sent more than one-third of its howitzers to Ukraine, while Denmark has sent practically all of its artillery. Although European states, to great acclaim, committed themselves earlier this year to sending Leopard tanks to Ukraine, it is unclear how long it will take to make them combat-ready.

What they don’t mention is that part of the reason that Europe is as defenseless as it is is that both we and the Europeans like it that way. We don’t have to worry about being threated by German armies and the Germans can spend the money they could spend on their military on other things—the Germans are much stricter on fiscal matters than we are.

source: tradingeconomics.com
I have long thought that was a feckless strategy on our part but that’s what we’ve been doing. I would think that we would give the Europeans a choice: defend themselves or pay us to defend them. For some reason or other we don’t do that.

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Questions (Updated)

Given a choice between supporting Ukraine against Russia and supporting Taiwan against China, which should the U. S. choose?

If your answer is both, you need to explain how we’ll do that with our present industrial base and fiscal situation. What do you plan to cut from the budget? If you don’t plan to cut anything, how will you realize enough revenue—just raising marginal tax rates is not enough. The federal government is already at WWII levels and there are limits to how much can be extracted from the private economy.

Update

Possibly a pretty timely first question given this report by Jeremy Herb and Zachary Cohen at CNN:

US Director of National Intelligence Avril Haines told Congress Wednesday that Chinese President Xi Jinping is likely to press Taiwan and try to undercut US influence in the coming years as he begins a third term as president.

While Beijing has stepped up its public criticism of the US, Haines told the Senate Intelligence Committee that the intelligence community assesses that China still believes it “benefits most by preventing a spiraling of tensions and by preserving stability in its relationship with the United States.”

I have no idea what “press” means in this context or what President Xi is likely to do. Russian President Putin had Russia’s military invade Ukraine shortly after his 71st birthday. How old is Xi Jinping? 69? These milestones have a way of focusing the mind.

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The WSJ and Biden’s Medicare Plan

I expected a response from the editors of the Wall Street Journal to President Biden’s plan for Medicare and I wasn’t disappointed:

President Biden on Tuesday rolled out a plan he says will shore up Medicare for decades, and we’re all supposed to believe the spin: looming insolvency averted. But this proposal is really a huge tax increase paired with prescription-drug rationing that does nothing to reform the health entitlement, and the tax ratchet is only beginning.

The White House in a fact sheet previewed a proposal for “extending Medicare solvency” in its budget outline for fiscal 2024, set for release Thursday. Mr. Biden says he’ll extend “the life of the Medicare Trust Fund by at least 25 years,” without “benefit cuts” while “lowering costs for Medicare beneficiaries.” The program’s hospital insurance trust fund is set to start coming up short in 2028.

This Medicare miracle will come mainly from raising taxes and diverting the money into what was supposed to be a self-financing trust fund. The Administration would extend the Affordable Care Act’s 3.8% surtax on investment income to business income. Pair that with jacking up the rate to 5%, but putatively only for those earning north of $400,000. The current net investment tax kicks in at $250,000 for married couples, so call the new bracket a surtax on the surtax.

They raise a good point, allied to an observation I made in my own post, linked above. It’s hard to tax the highest earners. They have devices for avoiding taxes unavailable to the rest of us and they have the wherewithal to hire lawyers to ensure their interests are protected. That’s why taxes tend to fall on us ordinary wage slaves. We’re easy to tax and we’re unlikely to fight back.

As I noted in my post I’m not opposed to either of the measures President Biden mentioned in his op-ed but they don’t do anything to solve fundamental structural problems in Medicare. So, for example, if healthcare costs rise 6%, that means that the general rate of inflation is at least 1% and it’s all healthcare. Translation: cost of living increases are different now that healthcare is a sixth (or more) of the economy.

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Answer This One Question

Regardless of what some of the things I’ve written may sound like I’m actually very sympathetic to free trade. I’m probably the only person you’ve encountered who’s actually read (and understood) David Ricardo’s “On the Principles of Political Economy and Taxation” (in which the theory of trade that later came to be called “comparative advantage” was laid out). Ricardo himself also pointed out that it only applied when capital was immobile which is not the case today.

I’m seeing lots and lots of criticisms of our increasingly protectionist trade policies. Some of that is purely partisan but some is ideological.

I have a question for the free trade absolutists. How does the United States remain secure while being dependent on other countries both for manufactured goods and materials? Security is the bottom line even if it means that goods become more expensive.

My own preference is for us to be buying more from Canada and Mexico (in particular) and I find it perverse that the “Buy American” push falls disproportionately on imports from those two countries. But that’s another subject.

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