(Warning: this post is even more wonkish than my normal wonk-fests)
I return from my trip in Europe to find out that the Mayans were wrong. The world will end four months earlier than they predicted, on this very August 2nd.
I really have no idea how this standoff will play out. But I can put myself in the shoes of various political actors, and then imagine what I would do if I was actually trying to rationally further the goal of that actor. For the thought experiment, I’ll pretend I’m a temporary dictator, then Obama, then Speaker Boehner.
If I was Cincinnatus …
After many sleepless nights without any hope of compromise, Congress and the President summon this humble software programmer to Washington, and give him full plenary powers to permanently fix the budget problems. My mandate is to set the budget straight, but not to adjust any of the goals, values, or income redistribution policies of the government. Fixing the budget problem is not an excuse to soak the rich or to abandon the poor. Any necessary cuts must be as fair as possible to all. Here’s my plan.
First, I would fix in statute the percentage of the nation’s resources that are yearly transferred from the working young to the old. The current percentage is around 15% (social security + Medicare spending divided by Total National Income). My mandate is to not alter the overall income distribution, so I will keep that percentage for now. My only long term change will be to add an automatic adjustment based on the dependency ratio that could raise the tax to a maximum of 20% (1).
The total pool of money spent on social security and Medicare for a given year, would be a running average of what the tax takes in over a ten year period. If the the current year tax revenue is greater than the spending, then the excess money is destroyed. If the current year social security/Medicare tax revenue is less than the spending, the necessary money is printed. Thus the spending will be balanced in the long term (due to basing it on the ten year average tax intake), but in the short term the spending will be counter-cyclical.
The income each senior citizen receives would be a share of the total. The share for each senior is allocated based on how much income that senior citizen earned over his or her life plus the number of kids that senior citizen raised to adulthood. (2)
Note that the benefits would not be explicitly cost of living adjusted. But as tax revenues rise with inflation, payments will also increase. However, if some sort of supply shock triggers Consumer Price Index inflation (such as running out of oil), payments would not increase. This is natural. If there is a supply shock, there is nothing the government can do to ease the pain. It is fair that all groups suffer the pain together. The alternative (raising taxes on the working young) is much less fair (since the working young would then have to pay higher taxes and higher oil prices).
Under my plan, Medicare spending is capped to the amount that the Medicare tax brings in. The progressive might complain: what if medical costs rise faster than the tax revenue rises?
First off, I am skeptical of the notion that medical costs are some unmoved mover. Rather, I think medical costs have risen to meet the (lack of) constraints of the budget process. Put a hard cap on spending and limits on costs will follow.
That said, resources are always limited, and hard decisions will always have to be made about where Medicare should draw the line between cost and benefit. I’m not a medical expert so I don’t know where those lines should be drawn. Neither are voters or Congressmen. What I would do is setup Medicare as an independent agency, with a board of directors elected by the beneficiaries. The board of directors would hire an executive and management team. They would be in charge of figuring out how to control costs and improve care (replace fee-for-service with capitation? decide not to cover some services? create death panels? cut payments to doctors? The management team would be held accountable by the board for results (mortality rates, patient satisfaction surveys, etc). An even better solution would be to divide the Medicare administration into multiple independent management teams so that seniors could have more choice, and could exert the power of exit in addition to the power of voice.
Also as a final measure, the artificial supply constraints on medical care very much need to be lifted. It is crazy that the number of medical school graduates each year has not been allowed to increase in decades, despite the large increase in American population.
Retirement Age and Means Testing
What about the retirement age? Does it need adjustment? I don’t think there needs to be a set retirement age. Rather the benefit payments should be structured in such a way that the government doesn’t care at what age you retire. If you retire at 60 you get less money per year than if you retire at 65, which would earn you less than if you retire at 70.
Should social security and Medicare be means tested? Well, means testing is almost certainly not in my own personal self interest. So I’m against it on that ground. On universalist grounds, I’d note that the income tax structure of the U.S. is already extremely distorted. There are already large sections of the income curve where earning income makes you less well off because of lost benefits. Means testing social security and Medicare will make this problem even more acute.
Other Deficit Budget Problems
Great! We have fixed the long term social security and Medicare problem. But we still have a deficit in the rest of the budget to fix up.
Part of the deficit is caused by the recession. The “Modern Monetary Theorists”, aka neo-chartalists, have pointed out that the deficit is necessary to restore private balance sheets. While the deficit is one way of restoring the balance sheet of Joe Public, I’d prefer a faster, fairer, and more direct method. Issue a one time, balance-sheet-repair stimulus of $10 trillion. 30% of this stimulus is issued by printing money and mailing every U.S. citizen a $10k check. The other 70% of the stimulus is issued by printing money and renominating all FDIC backed accounts and all T-bills to be 20% higher than their existing face value. The effect of this is to issue a massive stimulus, without badly diluting currency holders. Dollar holders are rewarded for holding dollars, not punished.
As I previously stated, my mandate as dictator is to not alter the current distribution of government largess. The status quo is that government spends 45% of the total income. Any spending is automatically a tax. If the spending is not balanced by an income tax, then the spending is de facto a seinorage tax. The seinorage tax is an inefficient way of taxing, and so I would close the deficit by replacing the seinorage tax with a national property tax.
Finally, I’d like to consolidate a bunch of various factional government payments (EITC, farm subsidies, home mortgage interest deduction, pell grants, excess government pensions, etc.) into a national dividend issued to all citizens. The national dividend would be paid out each year as the delta between tax revenues and spending. Thus any spending increase not balanced by a tax increase would cause a direct hit to the dividend. Focusing on increasing this dividend would be a more healthy schelling point for politicians of both parties to focus on. This is different than the current system where spending increases end up causing “debt” which no one perceives as actually hurting or costing themselves. I think a national dividend would cause Washington to be more honest and straightforward about the costs of its spending. (3)
If I was Obama…
Now, if I was Obama, what would I do? Putting myself in his shoes, my goals are 1) get re-elected 2) move a progressive agenda forward and 3) look out for the general welfare of the American people.
My first best option as Obama would be to do the exact same thing I said I would do as dictator. Obama should say, “Congress has made itself an absurdity by passing a set of mutually contradictory laws. Legally Congress has allocated more money to spend than it has risen in taxes. Legally and constitutionally, the U.S. cannot default on its debt. And legally the debt limit cannot be raised. These three acts cannot be reconciled. My mandate is to work for the benefit of the American people. So until Congress can stop its foolishness, I am going to rule as the elected executive and elected representative of the American people. Here is the plan. I will execute it directly, via executive order…”
My second best option is to find a back door way to keep the economy running as normal. One possibility is to issue some new kind of note that is still backed by the “full faith and credit of the U.S.”, but technically isn’t debt. Matt Yglesias suggested the U.S. should issue trillion dollar platinum coins. Another possibility is to accept matured t-bills as payment for taxes, and declare them as legal tender for all transactions. Another more straightforward method is to simply let the U.S. Treasury’s bank account go negative. So when the account gets drawn down to zero, and the next person cashes their social security check or redeems their treasury bond, the money is subtracted from the U.S. treasury’s account and the balance goes negative. The U.S. financial system is a ridiculous Rube Goldberg machine already. There are infinite ways of sticking on some bubble gum, calling it currency, and keeping the machine running just as before. I don’t know which of these methods is technically legal, but frankly, it doesn’t matter, because no one else knows either. And as history shows, good politics always trumps legality.
My third best option as Obama, is to temporarily delay all Medicare reimbursements. Mail every hospital and doctor a letter (signed by some unknown head of the Medicare agency, not by Obama) and tell them: “I’m sorry the government does not have the funds to pay you, please call your Congressman and tell them to raise the damn debt ceiling.” The advantage of this proposal is that it a) cuts payment to people who can afford to miss a check or two (as opposed to cutting social security, which might actually kill some senior citizens) b) it forces the GOP to act. There is no way politically the GOP can withstand the ire of hundreds of thousands of doctors c) it does not do any permanent damage to the credit or economy of the U.S.
My second worst option is to cave to the GOP. This option should be avoided, because as a progressive (putting myself in the shoes of Obama) I don’t like the GOP proposals, and as a politician, cutting spending will slow the economy somewhat in the short term, thus hurting my chances of re-election. Also, politically, voters don’t respect compromisers or cowards – voters respect strength and victory.
My worst option is to default on the national debt. There is a very large chance that this significantly damages the U.S. economy, which will hurt both the people of America and my chances at re-election. There is only one possible silver lining to a partial default. The U.S. over the past few decades has succumbed to the “Spanish disease”. Instead of running an economy based on producing real goods, it has been abusing its status as reserve currency of the world. Like 16th century Seville, the U.S. thrives by by exporting its own currency, rather than by exporting well made goods. A partial default might end the U.S. currency’s reserve status and thus reinvigorate the manufacturing and export economy. That said, there are far better ways of curing the “Spanish disease” problem than a reckless default. The effects of defaulting are entirely unpredictable, and there are far more ways of it ending in complete disaster than there are of it actually proving a boon.
As I’ve written before, and as both Moldbug and the Moslerites have pointed out, the national “debt” should not be thought as “debt”. The national “debt” should already be thought of as part of the money supply. A persistent attempt to pay off the debt via running surpluses or a major and lasting default on the debt, would be tantamount to contracting the money supply, which would be extremely deflationary, and would be immensely harmful to the main street economy.
If I was Speaker Boehner
Now, if I was in the shoes of the Speaker Boehner, what would I do? My goals are to a) further my ideological goals of reining in government spending b) enhance my own power and prestige. Total government spending as a percentage of total national income has risen from a mere ~10% a hundred years ago, to over 45% today. In the last few years the rise has been particularly sharp. Previous generations of Republicans tried to control spending by reducing taxes (the old starve the beast argument), but that proved not to work, as the beast just issued t-bills instead. So now the GOP is trying to cut off that angle instead.
If I was Boehner, I would resign. Even better, I would give an epic speech calling the system rigged from the core, and calling on every member of the Republican House to resign, and every Republican to boycott all further elections. There is no way the GOP can win – politically or ideologically. Even if it wins the battle (unlikely), and gets Obama to agree to all its spending-cut demands, it will lose the war. The trend for one hundred years has been more government spending, that’s not going to change. Even if by some miracle, I win the debt ceiling battle, parlay it into a huge political victory, and capture control of the House, Senate and Presidency, I still lose in the long run. Even the House, Senate, and Presidency, staffed by the current crop of Republicans, simply do not have the power and ability to win the long war against the Universities, press, and civil service.
The GOP does not have the intellectual and institutional infrastructure to govern effectively. Even when there is some essential truth that the GOP seems to grasp, and that the left is set against, the GOP doesn’t have the intellectual fire power to turn that truth into actual effective, realistic policy. The idea that the national debt needs to be “repaid” for instance, would send the nation into a disastrous deflationary spiral if actually attempted (4). And as a Republic president, the entire university, media, and civil service establishment works against my aims. My efforts at governing will be re-routed toward an effort to preserve keep my name clear of eternal ignominy. There is no way to further my long term prestige and power through Republican politics.
And worse, even when the GOP is right in its goals, the left becomes more uncompromising. The left starts believing the opposite of the GOP purely for party spirit reasons. And when the left inevitably wins in the long term, the result is far worse than if the GOP had never existed.
The U.S. is a democracy. If you want to win politically, you must control what people think. Right now, the public education and university system control what people think. This system is entirely in the hands of the left wing. The only thing that matters for the right-wing is defeating this system. So if I was GOP leader I would resign, and use whatever fund raising connections I had to try and fund and create the antiversity.
(1) As the dependency ratio rises, I don’t think a 15% tax will be enough to keep promises to seniors. But a tax over 20% becomes increasingly burdensome to the young, and they shouldn’t have to pay the price just because the preceding generation was too decadent to reproduce.
(2) It’s a myth that social security is some sort of savings plan that pays back what you pay into it. Social security is a socialization of the old tradition of children supporting their parents in old age. Thus it makes sense that people who have more kids should get more social security in old age.
(3) The Keynesians and MMTers will complain that the national dividend is pro-cyclical, making recessions even worse. This is correct. One solution would be to make the dividend based on the weighted surplus over ten years. But overall, I think the budget should not be used for counter-cyclical purposes. I think a balanced budget with a dividend is necessary for honesty and discipline in taxes and spending. So I would prefer to create a special monetary stabilization agency to handle countering recessions. The one goal of this agency would be to keep NGDP/monetary inflation growing at a predictable 3% a year. It’s only mechanism of control would be to set a dividend that gets paid on all notes backed by the full-faith-and-credit of the U.S. government (T-Bills, dollar bills, FDIC insured deposits, etc.). The dividend would be paid automatically by creating money. The agency would increase the dividend in times of recession/deflation, and cut it during times of inflationary pressures. In normal times the dividend would be around 3%, to create 3% NGDP growth. But at the onset of a recession the agency might raise the dividend to 5%, 10% or even higher if needed.
(4) The tea partiers have no idea the consequences of what they are actually asking for. The problem is that the taxing-spending-debt-issuing-fiscal system of the federal government is two things in one. It’s a) a system of allocating resources between the government and private sectors and b) a system of regulating the money supply of the economy. In the process of laying on the tracks to change policies regarding (a), the tea partiers will create a catostrophe with regards to a deflationary spiral with regards to (b).