Wednesday, August 10, 2011

My Attempt at a Debt Reduction Plan

Yoram Bauman: “We don't have a budget deficit because the left believes in mandates, or because the right believes in markets. We have a deficit because the middle believes in magic.”
For more economic and political humor, see the Stand-Up Economist.
    I’ll start by saying that I think that the debt plan was a disaster, worse than I expected.  I was hoping that the truly bipartisan Bowles-Simpson plan would be passed, as it was at least a start in the right direction.  However, even that fell apart.  I have little faith that the new "Supercomittee" will come up with anything better.  I think that Republicans deserve most of the blame for their utter refusal to raise even one penny in revenue.  Democrats were to an extent willing to start at Social Security reform, but the Republicans would not agree to eliminating tax breaks on the “job creators.”  Supply-side economics has proven a disaster under Reagan and George W Bush, falling significantly short in improving growth and turning out a disaster in raising revenue.  To be fair, the Democrats, including Obama, have gotten sidetracked by pushing for eliminating tax breaks for oil companies and private jets.  Although these tax breaks may be unnecessary, they make practically no impact on the debt.  Obama should have spent his time aggressively pushing Congress to draft Bowles-Simpson.  Fortunately, we avoided default, but only just barely.  The battle will rage on over the next few years, adding a painful layer to an already difficult time of economic uncertainty.

Every politician agrees that we should cut wasteful spending.  Now what does this mean?
“Conservative” Plan:
  • Eliminate practically all non-defense discretionary spending
  • -$714.3 billion in 2010
  • =still over $700 billion deficit for 2010
We can eliminate Medicare and Social Security, but then we have to eliminate their respective taxes as well.  
Disclaimer: I am no economic expert nor claim to be one.  The following is almost entirely devoid of numbers and specifics.  However, I stand by the economics of the basic outline.
Here is my basic plan if I were dictator of the US:
  • Social Security
    • Note: In 2010, Social Security generated net $150 billion in revenue.  Although it will need restructuring to stay solvent in the future given the growing, aging population, it is not at all to blame for the current deficits.
    • raise the retirement age
    • raise the cap-make the payment system more progressive.  Alternatively, the Social Security tax could simply be eliminated, as it has not been used to fund just Social Security anyway.  Social Security would have had net profits since its inception until about 2050 if the money had not been funneled to fund other government operations.
    • Alternatively (or additionally), the benefit system could be made more progressive.  Social Security could be reduced or even eliminated for the wealthy to reduce costs.  I am not sure that this would significantly reduce costs though since the vast majority of Americans are not wealthy enough to afford this.
  • Health Care
    • Europe-style (either single payer or public, private non-profit mix)
    • Okay, I am punting this one.  Basically, our system is wasteful, inefficient, and ineffective.  We need to streamline records, encourage preventative medicine, have tort reform, eat healthier, exercise more.  It still may be prohibitively expensive.  The real problem is uneccessary visits/operations.  Expanding coverage may help with ER visits somewhat, but it is really tough to reduce costs with an aging population.
  • Discretionary
    • Independently review funding: spending should have economic analysis attached and continuing funding should be reviewed for cost/benefit analysis
      • Eliminate wasteful, uneconomical infrastructure spending (not much money here)
    • CUT DEFENSE (more than half of discretionary spending)
    • less jailing, more education
    • ELIMINATE MOST TAX CREDITS AND SUBSIDIES.  This should really be seen as a spending issue, not a tax issue.  Tax breaks=spending
  • Taxes: Restructure Revenues
    • Eliminate/reduce most taxes and replace with Pigovian taxes, starting with a large carbon tax.  See for a primer on the economics of taxing negative externalities.  Such a tax system is favored by a majority of economists across the political spectrum, although it has been scorned by nearly every active Republican politician. 
      • Significantly increase welfare, as consumption taxes are highly regressive.  This is a more efficient solution than a progressive income tax.  Although it will have practically the same effect in aiding the poor and middle class, it will discourage excessive energy use.  Taxing energy will not only be good for the environment in a much more economical manner than mass subsidies and regulation.  It will encourage urbanization and alternative transportation.  One problem with a consumption tax is that the rich are still going to use large amounts of energy unless their wealth is eliminated.  However, there is a huge incentive here for companies to become more efficient, so even if wealthy Americans have high rates of consumption, their footprint will be significantly reduced.
      • Hopefully, the tax will be ineffective at raising revenue, instead serving to greatly reduce pollution.  From an environmental standpoint, I would still favor a highly progressive consumption tax to an income tax, because consumption in itself wreaks havoc on the environment and depletes natural resources.   
  • Good Government Spending to Keep/Increase
    • Infrastructure (increase in bust periods, decrease when economy is booming)
    • Education (always good; includes schooling and worker training)
    • Research (see Internet, GPS, airplanes, etc)
      • Keep in mind, though, that private investors will help in most promising startups (like Google).  Government investment must be in something that is too risky for private investors to get into, although just because something is “cool” (cough, cough, nuclear fusion) doesn’t mean it is a worthwhile investment.  Government should focus more on research and less on subsidizing already-available technology.
    • Foreign Aid
      • This is a tricky one.  Our foreign aid structure needs to be significantly revamped.  Just as should happen domestically, education needs to be put at a higher priority than welfare.  Sure, we need to make sure that African children don’t starve.  But we need to show them how to efficiently grow crops rather than dumping our excess corn.  Investing in education in developing countries is both the right thing and the economical thing to do.  Increasing their standard of living will decrease population growth and increase international trade.  We need to make sure that we teach them to live in an environmentally sustainable, but prosperous manner.  
  • Subsidies
    • Good subsidies: encourage greater education, sustainable growth
    • Urbanization (such as city planning, public transit)
    • Funding of long-term, but economical projects (ex: nuclear power plants, solar farms, infrastructure)
    • Ways to help the poor
      • EDUCATION (including worker training)
      • Good, nutritious food (no food stamps for booze, cigarettes, alcohol, and junk food/drinks); if possible, teach to grow food and cook
      • Health Care (including rehab, dental care, psychiatric care)
      • Birth Control (largely a function of education)
      • EDUCATION (I can't emphasize this enough)
  • Regulation
    • While regulation is economically seen as an inefficient way to reduce supply, it has arisen out of necessity to correct for systematic market failure.  Although it is more desirable for both the government and the economy to use the tax code to manipulate business decisions, sometimes large fines are simply not enough.  A poorly regulated industry can cause great harm to the economy and to the implicated companies, evidenced in the past decade by the Enron scandal, the Deepwater Horizon blowout, and the real estate collapse and the resulting bank failures.  
  • Things to keep in mind
    • Keynesian fiscal policy can work, and it does not always involve more spending.  In an overly ambitious economy, taxes should be raised, government spending should be decreased, and transfer payments should automatically decrease.  Unfortunately, it is a tough sell to the American people that their taxes should go up, benefits down, and unemployment should be higher.
    • In a down economy, spend money, lower taxes, increase welfare (should be automatic).  This has not been much of a problem until recently.
    • SUPPLY SIDE ECONOMICS DOESN’T WORK.  While there can be debate over the effect of lowering taxes on business incentive to produce and hire, there is absolutely no evidence that under current conditions, the increased economic activity would be enough actually decrease the debt created through lowering rates.
    • Not all expenditures and revenues should be treated equally
    • Short term cost does not tell the whole picture
    • Wealth is good, but income inequality is bad/inefficient
    • It is not a bad thing to reduce the number of necessary workers (more efficient).  In fact, if could eliminate the need for low-skilled workers, that would be a good thing.  Hopefully in the long term, people are educated enough to be able to fill some sort of a skilled position.

Addendum on Monetary policy:
    While elected officials have been bickering over seemingly irreconcilable differences, another entity in the government has been at work.  The Tea Party, championed by Ron Paul, has tried to paint the Fed as a bloated government bureaucracy wreaking havoc on the economy, but the Federal Reserve has done its job well.  It has provided hundreds of billions in monetary stimulus though its purchase of bonds in two rounds of “Quantitative Easing.”  It recently announced the the Federal Funds rate will be kept at 0%, an effort to boost borrowing by keeping interest rates near zero.  Unemployment has come down, albeit slowly, while inflation has been kept under control.  Some economists, most notably Harvard professor Kenneth Rogoff, argue that significant inflation in the short term should be encouraged to boost the economy.  However, there is no clear consensus on what more, if anything, should be done.