super hanc petram

Wednesday, February 25

Screw the Boomers  

That's Alan Greenspan's message to Congress. The best way to deal with the looming financial issues in the Social Security system? Screw the retirees. Oh and boost the retirement age. This is, in Alan's opinion, far preferrable to raising taxes to cover the financial gap that will open in the system when the boomers begin to retire. I went on a tirade a while back over Greenspan's 25 January 2001 testimony in which he told the Congress that the financial future of the country was dependent on them slashing taxes.
I believe, as I have noted in the past, that the federal government should eschew private asset accumulation because it would be exceptionally difficult to insulate the government's investment decisions from political pressures. Thus, over time, having the federal government hold significant amounts of private assets would risk sub-optimal performance by our capital markets, diminished economic efficiency, and lower overall standards of living than would be achieved otherwise.
Having been given cover by the wise old man, Congress slashed taxes 3 years in a row. Now the budget picture is a mess. But now, 36 months later, the wise old man says that the tax rates from 2000 cannot be enacted again because it would destroy the economy. A brief aside. Greenspan floats this stink bomb in his testimony, "[i]n recent years, budget debates have turned to choices offered by those advocating tax cuts and those advocating increased spending." This is a lie. Perhaps in Greenspan's world these were the decisions, but the actual question in the debates of 1999-2001 was tax cuts vs. saving Social Security. Anyone with a rudimentary understanding, indeed anyone that read the newspaper even on a monthly basis during those years understands this. The current outlook is such that we have a total reversal of the budget picture from 2001 which is now also holding the nation's future hostage.
These scenarios suggest that, under a range of reasonably plausible assumptions about spending and taxes, we could be in a situation in the decades ahead in which rapid increases in the unified budget deficit set in motion a dynamic in which large deficits result in ever-growing interest payments that augment deficits in future years. The resulting rise in the federal debt could drain funds away from private capital formation and thus over time slow the growth of living standards.
As Kevin Drum discussed here and as the Economist discussed here there is a very wide range of budget outlooks. The Economist even provides this handy graphic: The CBO baseline estimates factor in a recovering economy from now until 2013. Indeed, they expect a sharp turnaround in the deficits to begin soon as a result of economic growth. However, after 2006, a yawning light blue section emerges under the baseline. This is the cost of allowing Bush's tax cuts to become permanent. Roughly $400b a year by 2013. The only other section of the graphic that is as large is the one that accounts for increases in discretionary spending (of which Social Security & Medicare are not a part) as a result of the growth of GDP. Greenspan's proposal to deal with this (and future assumingly larger) deficits in the budget picture is to slash spending on Medicare & Social Security as well as halt all increases in discretionary spending (yes that would include defense). But if we are to believe the CBO (and Alan certainly seems to) that would still leave us with a $200+b deficits (and no hope of closing it) solely as a result of the tax cuts. As I remember it, the country was doing pretty well under Clinton's tax rates. Indeed we only barely made it to a surplus then (with the help of a speculative bubble, no less). Rather than screwing old people out of their retirement benefits and health care (for which they have worked to make this country what it is today since the late 60's), shouldn't we first look to restore some sanity to the tax code? Why is it that the marginal income tax rates of people making over $200,000/year are untouchable until we have destroyed the retirement system of this country? Why is the chairman of the Fed's worldview so distorted?


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