Challenge: Stabilize the Debt

[M Paquette]

Here's an interesting simulator, that provides a pretty fair smorgasbord of budget cutting and taxation options, and asks you to simply shave a projected US debt in 2018 from 66% of GDP to 60%. That sounds like a pretty small change. It's harder than it looks, particularly if you think of yourself as a politician up for re-election and not wanting to upset your constituents or campaign contributors too much. The 66% baseline assumes current law applies, such as the tax cuts expiring this year.

Budget Simulator | Committee for a Responsible Federal Budget

It's not perfect, but it will give you a good feel for the sorts of options that can be implemented, and what their impact is.

I thought I'd bring this up after a dinner-table conversation last night where someone insisted that correcting welfare fraud would bring the budget into balance. (It wouldn't. The entire set of federal welfare programs is around 15% of total federal spending, or 36% of the annual deficit for 2010. Assume a fairly absurd 20% fraud rate is removed, and you've closed 7% of the deficit.)

It's interesting to play with this and see what various campaign promises and political drums being beaten actually do. It's pretty hard to come up with reasonable results without touching our Social Security and Medicare entitlements.

 

[LOL!]

Paul Krugman states unequivocally that now is not the time to stabilize the debt:
http://www.nytimes.com/2010/09/06/opinion/06krugman.html Take that to the dinner table.

Although one comment to his opinion is that if 500,000 young men die (as in WWII), that would reduce unemployment.

 

[M Paquette]

Paul Krugman states unequivocally that now is not the time to stabilize the debt:
http://www.nytimes.com/2010/09/06/opinion/06krugman.html Take that to the dinner table.

I tend to agree. I was thinking the other day that some folks seem bent on replaying 1937-1938, right down to making some pretty interesting economic missteps. Mr. Krugman seems to have the same thoughts regarding the Austrian Austerians as I've had.

I happened to run across that budget simulator, though, and thought it might be mildly enlightening. It's easy to just balance the budget with it, particularly if you're willing to hurt one faction or another, but it's insanely difficult to come up with a set of options that the House and 60 Senators would approve, no matter what party happens to be 'in control.'

 

[samclem]

Thanks for the link. It's an interesting calculator. Observations:
- I'm fairly sure there's no dynamic modeling going on here (e.g. cutting tax rates doesn't increase economic activity and possibly produce higher net govt revenue, etc).
- If one selects "repeal the new health care legislation" the deficit goes UP by $160B. (because the Medicare cuts and Medicaid cuts made possible by "higher efficiency" never occur, and the increased taxes don't happen). I'm sure the numbers also look worse because all those CLASS premiums won't be artificially bumping up the short-term revenue (at the expense of a very large bill to come due later). I guess, being an official gummint calculator, they have to stick with the fantastic assumptions in the legislation and use the crazy "accounting" rules of Congress, but it does reduce the credibility of the whole exercise.
- So, what's the meta-message of this calculator? Is this the Committee's attempt to pave the way for the bad news they'll be spreading soon? I wouldn't be surprised if the committee generates more than one "final report." If the conservatives in the group sign up for the tax hikes that will be proposed, they'll prove themselves to be very gullible. Previous recent good-faith efforts to engage in a mature discussion on cuts and taxes have been used as political cudgels. I think that bridge has been burned, and that, unfortunately, real work will have to wait until after the elections. . . in 2012.

 

[dex]

Here's an interesting simulator, that provides a pretty fair smorgasbord of budget cutting and taxation options, and asks you to simply shave a projected US debt in 2018 from 66% of GDP to 60%.

The method is not the way it is done in an on going business. Some of the tools you would use would be:
- across the board cost cutting goals
- review inflation assumptions
- postpone implementation of some programs
- eliminate outdated programs (as mentioned)
- hiring freezes
- employee benefit reviews
- increase revenues
- cash flow (to reduce interest expense)

In other words - a lot of detailed work.

++++
Do all the possible choices add up to the total budget?

 

[ziggy29]

The method is not the way it is done in an on going business. Some of the tools you would use would be:
- across the board cost cutting goals
- review inflation assumptions
- postpone implementation of some programs
- eliminate outdated programs (as mentioned)
- hiring freezes
- employee benefit reviews
- increase revenues
- cash flow (to reduce interest expense)

Add to that "offshoring manufacturing to China and IT work to India".

 

[M Paquette]

The method is not the way it is done in an on going business.

Well, yeah. This is the Federal budget, though, and the various options represent the typical horse-swapping that one would expect of Congress, and include a number of options that resemble some of the campaign promises I hear. I thought it was an interesting opportunity to try some of these options out and see what would actually happen to the budget projections.

 

[Texas Proud]

Thanks for the link. It's an interesting calculator. Observations:
- I'm fairly sure there's no dynamic modeling going on here (e.g. cutting tax rates doesn't increase economic activity and possibly produce higher net govt revenue, etc).
- If one selects "repeal the new health care legislation" the deficit goes UP by $160B. (because the Medicare cuts and Medicaid cuts made possible by "higher efficiency" never occur, and the increased taxes don't happen). I'm sure the numbers also look worse because all those CLASS premiums won't be artificially bumping up the short-term revenue (at the expense of a very large bill to come due later). I guess, being an official gummint calculator, they have to stick with the fantastic assumptions in the legislation and use the crazy "accounting" rules of Congress, but it does reduce the credibility of the whole exercise.
- So, what's the meta-message of this calculator? Is this the Committee's attempt to pave the way for the bad news they'll be spreading soon? I wouldn't be surprised if the committee generates more than one "final report." If the conservatives in the group sign up for the tax hikes that will be proposed, they'll prove themselves to be very gullible. Previous recent good-faith efforts to engage in a mature discussion on cuts and taxes have been used as political cudgels. I think that bridge has been burned, and that, unfortunately, real work will have to wait until after the elections. . . in 2012.

Not to try and get in a he said he said match.... but I really doubt that the savings they voted on will actually come about... so IMO, we could get rid of the whole program and it will not cost us..

OR, keep the cuts, but don't do any of the spending...

OR, keep all the tax increases, but don't do any of the spending...


One of the problems with Krugman is that he seems to not mention the huge amount of tax and spending that will come with Obama care.. This will cripple the economy more than us not having another stimulus spending bill...

 

[Independent]

I thought I'd bring this up after a dinner-table conversation last night where someone insisted that correcting welfare fraud would bring the budget into balance. (It wouldn't. The entire set of federal welfare programs is around 15% of total federal spending, or 36% of the annual deficit for 2010. Assume a fairly absurd 20% fraud rate is removed, and you've closed 7% of the deficit.)

It's interesting to play with this and see what various campaign promises and political drums being beaten actually do. It's pretty hard to come up with reasonable results without touching our Social Security and Medicare entitlements.

Right. IMO, most voters don't have a clue about what's really big in terms of the federal budget (in spite of the pie chart at the back of the 1040). I'd like to provide each taxpayer an annual report that includes all the taxes they pay, including hidden taxes, and shows how that money is spent on a $ scale that's relevant.

Balancing the budget is impossible as long as voters believe that the gov't can provide them something for nothing. Politicians get re-elected by playing to that fantasy.

The frustrating thing to me is that when people are given real choices "Do you want to increase this tax to pay for this benefit?" they are capable of making rationale choices. It's just that we get lost in the smoke and mirrors of politics.

Looking at the calculator, I'd prefer that it give the full cost of every spending program, and ask what percent you'd cut, rather then have pre-packaged choices that often lack perspective.

My personal strategy for balancing the budget is to have dedicated taxes for the biggest programs, then have annual referendums on the tax rates. I think we'd get better results than with our current disfunctional system.

 

[M Paquette]

One of the problems with Krugman is that he seems to not mention the huge amount of tax and spending that will come with Obama care.. This will cripple the economy more than us not having another stimulus spending bill...

Overheard in the grocery store a couple weeks ago:

I don't see why I need to pay for health insurance. I get to see the doctor for free at the ER.

 

[Martha]

One of the problems with Krugman is that he seems to not mention the huge amount of tax and spending that will come with Obama care.. This will cripple the economy more than us not having another stimulus spending bill...

Or help the economy as small businesses will be able to attract talent as they don't have to worry about not being able to buy health care. Or help the economy as more people are able to start businesses of their own.

I think too many people are in a mind set that the whole thing was terrible when in fact it does a number of things most people agree are good. It doesn't solve everything and has lots of faults but I think it is far better than the status quo. Costs have been rising exponentially without reform.

I am not ready to assume failure before we try it out. And no one said we can't tweak things over time to make it work better.

 

[ERD50]

Or help the economy as small businesses will be able to attract talent as they don't have to worry about not being able to buy health care. Or help the economy as more people are able to start businesses of their own.

I think too many people are in a mind set that the whole thing was terrible when in fact it does a number of things most people agree are good. It doesn't solve everything and has lots of faults but I think it is far better than the status quo. Costs have been rising exponentially without reform.

I am not ready to assume failure before we try it out. And no one said we can't tweak things over time to make it work better.

That's fine, but regarding this line:

Costs have been rising exponentially without reform.

What is it about the bill that keeps costs from rising 'exponentially' (if we assume inflation averages 3% a year, then inflation is also rising 'exponentially' with an exponent of 1.03)? And I mean really keeps costs from rising, not just statements in the bill to that effect.

-ERD50

 

[samclem]

I wonder if the site tracks and tabulates the choices made by those who play with the calculator. It wouldn't be much of a "survey" since it's a self-selected sample of policy wonks who go there, but maybe there's some value in knowing the relative interest in various approaches among such people.

In the real world, we've all experienced the pain of the arbitrary (and mindless) "salami-slice" budget cutting approach. It is always a symptom of abdication of responsibility by management ("We won't make a decision on priorities, cut everything a little"). But, sadly, unless/until the government (and the electorate) is willing to identify which lines of business they want to cut out, it might be the best we can do. At least every department and agency would have to do some belt tightening. And, when the cuts start to really hurt, there will be some motivation to look in other departments for the "bill payers." My guess is there's a lot of fat out there--it's been a long time since things got incredibly tight at the federal level (any USG employees remember running out of paperclips and paper in the early 80's?).

I don't know if our system is set up to make a rational decision on these types of long-range issues. As many have observed before, nearly any system of leadership/management/government will function at a passable level if authority and responsibility are aligned at each level. I don't think we have that today. So, we'll probably lurch from crisis to crisis and get things done in a very expensive and painful way.

 

[HFWR]

So, we'll probably lurch from crisis to crisis and get things done in a very expensive and painful way.

Understatement of the day...

There are many problems, even with programs "we" "like". Government IT systems are woefully inadequate, don't [-]play[/-] talk well with other pertinent systems, and would be costly upfront to update, even if more efficient in the long run. Hard to know where the waste is if you don't know where the money went...

 

[MuirWannabe]

My guess is there's a lot of fat out there.

I thought this was the understatement of the day. I'm gonna go with a yea, that's a safe guess.

 

[Texas Proud]

Or help the economy as small businesses will be able to attract talent as they don't have to worry about not being able to buy health care. Or help the economy as more people are able to start businesses of their own.

I think too many people are in a mind set that the whole thing was terrible when in fact it does a number of things most people agree are good. It doesn't solve everything and has lots of faults but I think it is far better than the status quo. Costs have been rising exponentially without reform.

I am not ready to assume failure before we try it out. And no one said we can't tweak things over time to make it work better.

As someone else pointed out.... the bill does not change the rate of increase by much (if at all)...

I work at a small company that pays 100% of the employee cost.. but we have to pay for the rest of the family which is a lot. We went up over 10% last year. We will probably go up 9% next year. I will do a cost analysis of dropping health care coverage completly and just pay the people a bit more money. Let them swim on their own. I think the cost of the penalty will be cheaper for the company than us buying it on our own. And a small business with a lot of low cost workers will change how they do business. My boss said he knows of a pizza place that is planning on hiring ALL part time workers so they do not have to buy insurance... another 'unintended consiquence' (sp?) of the bill.


As for the OP, it is easy to balance the budget IF you could just pick and choose.. but there are enough special interests for each item that it is hard to get rid of something that should not be there anymore... the free mining of gold etc. that still happens based on an 1800s law is a perfect example... and the milk laws... and the sugar laws... heck, all farm subsidies...

 

[M Paquette]

As for the OP, it is easy to balance the budget IF you could just pick and choose.. but there are enough special interests for each item that it is hard to get rid of something that should not be there anymore... the free mining of gold etc. that still happens based on an 1800s law is a perfect example... and the milk laws... and the sugar laws... heck, all farm subsidies...

Yup. That's the challenging bit. Come up with a set of cuts that can at least get the debt under control, which would also be approved by 218 people in the House and 60 Senators.

Note that *renew tax cuts* handwave *cut the pork* handwave *repeal Obamacare* handwave do not appear to improve the situation significantly. One can invoke all the magic realism one wants, pretend the US economy runs on the right side of the Laffer curve, and engage in a variety of other silly season wishful thinking, but there's a painful day of reckoning coming for that 'budget', and all the campaign promises from all the various usual suspects don't have enough actual content to come close to a fix.

 

[samclem]

As someone else pointed out.... the bill does not change the rate of increase by much (if at all)...

I work at a small company that pays 100% of the employee cost.. but we have to pay for the rest of the family which is a lot. We went up over 10% last year. We will probably go up 9% next year. I will do a cost analysis of dropping health care coverage completly and just pay the people a bit more money. Let them swim on their own. I think the cost of the penalty will be cheaper for the company than us buying it on our own.

From today's WSJ:

Health insurers say they plan to raise premiums on some Americans as a direct result of the health overhaul as soon as next month, complicating Democrats' efforts to trumpet their signature achievement before the midterm elections. Aetna Inc., some BlueCross BlueShield plans and other smaller carriers have asked for premium increases of between 1% and 9% to pay for extra benefits required under the law, according to filings with state regulators.
These and other insurers say Congress's landmark refashioning of U.S. health coverage, which passed in March after a brutal fight, is causing them to pass on more costs to consumers than Democrats predicted. The rate increases largely apply to policies for individuals and small businesses and don't include people covered by a big employer or Medicare. . . .
Many carriers also are seeking additional rate increases that they say they need to cover rising medical costs. As a result, some consumers could face total premium increases of more than 20%.
While the increases apply mostly to the new policies insurers write after Oct. 1, consumers could be subject to the higher rates if they modify their existing plans and cause them to lose grandfathered status.
The rate increases are a dose of troubling news for Democrats just weeks before an election in which they are at risk of losing their majority in the House and possibly the Senate.
In addition to pledging that the law would restrain increases in Americans' insurance premiums, Democrats front-loaded the legislation with some provisions they hoped would boost public support. Those include letting children stay on their parents' insurance policies until age 26, eliminating co-payments for preventive care and barring insurers from denying policies to children with pre-existing conditions, plus the elimination of the coverage caps.
Weeks before the election, insurance companies began telling state regulators it is those very provisions that are forcing them to increase their rates.

The timing is very inconvenient. Maybe the insurance industry isn't the reliable ally that some politicians thought they'd bought fair and square.

 

[M Paquette]

From today's WSJ:
The timing is very inconvenient. Maybe the insurance industry isn't the reliable ally that some politicians thought they'd bought fair and square.

The insurance companies are just really bad at handling politics. Early this year, with the health care debate raging and America's Health Insurance Plans lobbying the heck out of Congress and doing it's darndest to sweet talk the media, Anthem Blue Cross rolled out rate hikes, asking for a 39% hike in individual insurance in California.

Dat dere was less den politically astoot, yaknowwhatimean?

Then the geniuses had to refile, after someone found their math to be... deficient...

None of that makes the insurance firms look like someone to rely on.

 

[dex]

The insurance companies are just really bad at handling politics. Early this year, with the health care debate raging and America's Health Insurance Plans lobbying the heck out of Congress and doing it's darndest to sweet talk the media, Anthem Blue Cross rolled out rate hikes, asking for a 39% hike in individual insurance in California.

A large factor in that increase probably was due to fewer people paying into the plan due to layoffs and companies eliminating or reducing coverage.

 

[jIMOh]

I did it
I had to raise taxes
and cut spending even more
and we can still do a trip to Mars

 

[Emeritus]

Thanks for the link. It's an interesting calculator. Observations:
- I'm fairly sure there's no dynamic modeling going on here (e.g. cutting tax rates doesn't increase economic activity and possibly produce higher net govt revenue, etc).

This is not an issue of dynamic modeling. This would take magic fairy dust. Business tax rates in the USA are so low that you cant self finance a tax cut

"The countries with most potential for self-financing tax cuts are the welfare states in Northern and Western Europe. At the other end of the scale, with transfer-adjusted tax rates well below ten percent, we find the United States, Iceland, and Korea, where public transfers are modest fractions of private consumption."

On the analytics of the dynamic Laffer curve*1

ScienceDirect - Journal of Monetary Economics : On the analytics of the dynamic Laffer curve*1

 

[samclem]

This is not an issue of dynamic modeling. This would take magic fairy dust. Business tax rates in the USA are so low that you cant self finance a tax cut

"The countries with most potential for self-financing tax cuts are the welfare states in Northern and Western Europe. At the other end of the scale, with transfer-adjusted tax rates well below ten percent, we find the United States, Iceland, and Korea, where public transfers are modest fractions of private consumption."

On the analytics of the dynamic Laffer curve*1

ScienceDirect - Journal of Monetary Economics : On the analytics of the dynamic Laffer curve*1

Thanks, that's an interesting study and the authors are very clear that their work has limited application, that more work is needed, and that previously published work (Ireland, 1994) reached different conclusions (esp about the impact on govt revenues in the US from a decrease in taxes). Modesty is becoming in an academic, we should see more of it.

I am curious as to why you bring up business tax rates in particular. Surely you're not claiming that US corporate tax rates are low by OECD standards.

 

[HFWR]

Didn't care much for the options presented, or the assumptions/implications made...

I would support drastic spending cuts, and higher taxes, in the longer-term, but neither seems wise in the short-term, due slow economy/high unemployment...

 

[jIMOh]

Didn't care much for the options presented, or the assumptions/implications made...

LOL I thought the same thing, but still played the game

tax cuts should create jobs (which pay taxes) and that type of pull through only had a net cost, but not a net benefit in increased tax revenues.