In my last post, I noted that progressives need to turn their attention toward the medium- and long-term fiscal crisis the country faces. How massive is the challenge we face? The following chart, from Keith Hennessey, an ex-Bush policy advisor, says it all:
Obviously the first thing to jump out is the escalating divergence between federal spending and revenues in the decades ahead. And the spending projection in the chart is from 2007, so it doesn’t include the stimulus or spending on the financial crisis (or the projected cost of health care reform). That’s scary enough. But the scariest part may not be evident at first glance.
The red line shows federal taxes as a percent of GDP going back to 1945 and projected outward to 2080 by Hennessey based on its historic growth. The yellow line shows federal spending as a percent of GDP. The chart makes clear that the level of federal taxation has actually varied little since World War II (which says nothing about how marginal tax rates faced by different groups have changed). You can see the last build-up of deficits that occurred from the 1970s through the mid-1990s. You can also see the build-up of the Bush years.
Historic Shortfalls
The kind of budget shortfalls we are looking at in the future dwarfs anything we’ve ever seen. There are two ways to close the fiscal gap – cut spending or increase revenues. What Hennessey’s chart makes clear is that the level of taxation it would require to meet projected spending needs is far higher than anything the country has ever seen-slash-tolerated. Indeed, even closing half the gap through higher taxes would necessitate historically unprecedented taxation levels.
Progressives, in short, are going to be caught between a rock and a hard place: we will either have to find a way to convince the electorate to go along with massive tax hikes, with all of the electoral risk that entails, or we will have to come up with a plan to make equally massive cuts to entitlements that are likely to also be unpopular and that may do significant harm if not thought through carefully.
It’s true that the right will also be caught in this dilemma, but its situation is not quite as severe for two reasons. First, as the chart implies, their preferred path to fiscal sanity (spending cuts) starts off a much easier sell than tax hikes, given historical patterns. And second, the right has little programmatic interest in permanent spending hikes. The Reagan and Bush years showed that there is a constituency on the right for greater defense spending, but unless we really end up permanently at war with radical Islam, it can be expected that the Pentagon’s budget will rise and fall as global circumstances dictate. Progressive goals, on the other hand, such as greater federal education spending, expansion of child care assistance, more generous safety nets, and broader social insurance constitute costly and (ideally) permanent spending increases that will exacerbate the fiscal gap in the above chart.
The Upshot for Progressives
What does this mean for the progressive agenda? First, it is vital that we prioritize our goals, a process that is going to require us to drop many of them, as difficult as that may be. Second, we need to come to terms with what “higher taxes” is going to mean in practice. U.S. taxation is actually as progressive as in Europe because we have taken so many families off of the income tax rolls. The added boost to raising taxes on “the rich” is much smaller than the revenue that could be raised by broadening the tax base so that we were not so reliant on upper-income families to pay for the benefits of government that everyone enjoys.
Third, we need to look for ways to achieve progressive aims that do not cost the federal government so much. That could include certain types of regulation, but it could also include a shift toward progressive cost-sharing in social insurance programs. Rather than trying to raise taxes to give people the benefits they say they want, we could move toward a paradigm where people gradually incur increasing costs of these benefits privately, forcing them to directly confront the trade-offs and efficiency concerns that social insurance tends to hide. Those with limited incomes could receive federal assistance but would still be incentivized to use benefits efficiently. (I will suggest what such programs might look like in future pieces here.)
Some progressives may object to the idea of progressive cost-sharing because it shifts costs and risk onto individuals. But they are going to incur the costs one way or another, whether through higher taxes or greater out-of-pocket spending. And given the impracticality of paying for future benefits solely out of taxes, risk is also likely to be privatized either way — whether by a thoughtful policy framework or through massive cuts in existing programs.
But let there be no doubt — the long-term prospects for significantly expanded progressive government are dim, and in fact, a retrenchment in coming decades is inevitable. President Clinton was wrong — the Era of Big Government is not over. But it will be soon. As progressives we must lead the process of winding it down in a responsible and fair way.
Tags: Budget, Deficits and debt, Taxes
I think this article has some good ideas in the “Upshot” section and raises good points for discussion in the “Shortfalls section.” I especially like the idea of the cost-sharing for social programs. It looks like a good mechanism to help people and yet still signal to recipients that there *is* a cost to their services. It reminds me of how insurance companies ask their customers to pay a small co-pay on their pharmaceuticals, so as to signal to people that generics are cheaper in cost than brand-name drugs. N.B.: Thanks to NPR’s Planet Money and Chicago Public Radio’s American Life Episode “Someone Else’s Money”, http://www.thisamericanlife.org/Radio_Episode.aspx?episode=392
On the other hand though, the mathematician side of me could not sleep at night if I didn’t point out that Hennessey’s chart is ridiculously flawed:
First of all, if he was trying to actually make a projection, he here assumed that Spending and Taxes are probabilistically independent of each other: meaning everyone in government just spends without ever looking at their budget constraints, and everyone in government just taxes without ever looking at what they want to spend on.
Secondly, Hennessey is doing a ridiculous extrapolation from a very short time. I’m rather surprised because in his own chart he shows that spending was often higher during Bush’s term than it is now during Obama’s term. If he used the same methodology on the Bush era spending, looking at the first two years of his second term in office, projected spending now would be projected to look something like 50% of current levels.
I think we tend to put faith in such reports because they confirm our biases. However, if we put these same statistical mistakes in to a non-political situation… well, consider this story:
Hennessey, fresh from projecting the ultimate demise of American due to Obamanomics, decides to buy a sandwich. He stays at the sandwich store for 15 minutes and watches another man buy a sandwich. He predicts the unwitting man will soon be broke, because if he keeps buying a sandwich every 15 minutes then surely his funds will run out in the next few months. Hoping to spare everyone in the store of this ultimate fate, he stands at the door and tells everyone trying to enter that they should not buy sandwiches for fear of falling into poverty and debt.
This article reminds me of where Roger Douglas got in his thinking in NZ in the late 1970s/early 1980s. Broaden the tax base and create incentives for people to spend carefully. Many people call both Roger Douglas and Ruth Richardson neo-liberals but from their biographies it seems clear to me that Roger Douglas belonged in Labour and Ruth Richardson in National, they were coming from very different directions.
Perhaps it is time for dems and progressives to really challenge military expenditures? Why are social entitlements the only thing up for cuts?
And don’t think that Republicans haven’t seen this, they essentially have decided that starve the beast would go faster if they made the beast larger. When catastrophic failures result as services shut down, they will be able to point and say “look at government fail! we told you so.” Dems will take the entire blame.
I see the spending trend line being derived from the Reagan administration spending trend, restarted from the present.
Of course, we had sort of a version of this graph in 2001 where the spending was projected down to zero and taxes projected upward to 100%, which Republicans addressed by pointing taxes down and spending up.
Let’s be clear, the graph from the present is pure Republican propaganda based on a politic message that has zero basis in fact.
Robert — the projected spending is almost entirely the result of Medicare and Social Security going bankrupt, and requiring ever-larger injections of tax money in order to remain solvent, which in turn requires even larger interest payments.
These entitlements (and possibly even more, if HCR passes) dwarf spending on ANY OTHER area, including the military. “Mandatory spending accounted for 53% of total federal outlays in FY2008, with net interest payments accounting for an additional 8.5%.” — Wikipedia
[...] 1. How much will U.S. taxes ever go up? [...]
This is a standard “scare chart” of the RW, and so are many of the talking points contained herein.
First of all, this chart is retarded. It uses short term spending, which was rung up in response to the worst financial crisis of our lifetimes and the worst macroeconomic downturn of our lifetimes, to project long term spending GROWTH. Dumb dumb dumb. Actually, disingenuous on the part of the chart’s creator, dumb on the part of this post’s author to accept this drivel.
Second, Adam, SS isn’t going bankrupt. We’re talking about a massive SS surplus (on paper at least) that is still growing because of the payroll tax, that according to worst case projections may not be sufficient to pay off all obligations in 2042. To repeat, the “bankruptcy” bogeyman is that the surplus (that thing that Gore wanted to lockbox) may evaporate by 2042 (or thereabouts). Whether or not SS, AS CURRENTLY FUNDED, goes net negative in 2042 or around then is a matter of debate. However, what is fairly obvious is that SS right now is more than self-funding. What we’re talking about to fix the long-term solvency of SS (which again is a matter of considerable controversy, given that it’s based on long run estimates of GDP growth, retirement rates, mortality rates, etc.) is maybe some minor tweaks at most. So put that conservative myth to rest.
Medicare is in trouble, but so is healthcare in general in the US. If you look at the long run cost growths of health care, you’ll see that Medicare costs have actually grown less than private sector health care costs (basically because as a block provider, Medicare has the institutional expertise to say “frak off” to rapacious HMOs and Big Pharma in a way that you and I and our employers typically don’t. Not sure whether this program can be cut.
Also, I take issue with the author’s contention that spending cuts are more salable than tax increases. Perhaps that’s true generically, but that’s because it’s based on decades of conservative propaganda that there are trillions of dollars of “wasteful” social spending out there. If you ask the average American where to cut spending to balance the budget, s/he will typically tell you to cut waste and maybe welfare type programs (depending on their ideology, either “wasteful” welfare or all welfare). Obviously, that won’t go anywhere towards balancing the budget.
What’s clear is that when it comes to making specific spending cuts, there is no appetite out there for it. The three main pillars of US federal spending (SS, Medicare, defense) all have vehement and broad-based support. Of those 3, clearly defense has the most “fat” to cut, but in a post 9/11 era, it seems unlikely that anyone will have the temerity to propose such cuts, even for the nonsensical Cold War era technology we’re spending hundreds of billions of dollars on (Star Wars anyone?).
So it seems clear that tax increases are the only answer to balancing the budget. What kind of tax increases? Again, this author seems to have a pretty strong conservative agenda here, or is a patsy, in arguing that the US is as progressive as Europe. He makes the argument that we’re “progressive” by focusing on income tax, which is of course progressive. Of course, he completely ignores the fact that for most Americans, their tax burden is largely borne outside of income tax. For LMI and middle class households, who pay FICA tax on their entire income and who tend to consume most of their paychecks, they typically pay something like 12-15% of their gross income for social security withholding and on sales/consumption taxes. Add that to the 15-25% federal income tax (+ any state income tax + any property tax) and we’re typically talking 40%+ tax rates. Yes, top tier income households pay 35% federal income tax + any state income tax, but their effective tax rate is typically much lower than that. First, any rich household that has an investment advisor will be making the vast bulk of actual income through capital gains rather than employment income in any given year, so we’re talking about a 15% tax rate. Second, because rich households typically don’t come close to spending their annual gross income in any given year (particularly in a high sales-tax US state), the effective sales tax they pay as a percentage of their gross income is close to 0. Third, because real estate is typically a fairly small percentage of their total wealth (the top 1% is typically invested in diverse securities, or else Goldman and Morgan aren’t doing a very good job of pitching their services), their effective property tax burden as a percentage of wealth is close to 0. There are a myriad of other reasons why the effective tax burden of the rich is much less than the effective tax burden of everyone else in the US, but it all goes to prove the point that Buffett made, when he noted that he paid far less in taxes than his secretary. To use income tax alone as an argument for claiming that the US tax code is progressive is either disingenuous to an extreme, or betrays a fundamental ignorance of tax policy (try even looking at your W-2 next time). The term “progressive expert” is fundamentally misleading here. At least strip off one of those two descriptors, because you’re either a conservative trying to mislead people, or you’re ignorant, but as it stands now, I would assume both.
adam, try looking up facts before you make factual claims.
http://www.cbpp.org/cms/index.cfm?fa=view&id=1258
Defense spending = 21%, Social Security = 21%, Medicare/CHIP = 20%, interest on debt = 8%
Social Security explicitly does not require any injection of taxpayer dollars, because it is funded by the FICA tax. In fact, Social Security has a rather sizeable surplus right now of about $2.2T. http://www.ssa.gov/OACT/STATS/table4a1.html
So when you claim that SS and Medicare contributed to larger debts, which led to higher interest payments, you are wrong. Higher debt is the result of reduced taxes + higher spending. The largest growth in non-SS spending since 1980 has been in defense spending. On the other hand, the largest decrease in federal revenues has been due to tax cuts passed under Reagan and Bush Jr. These tax cuts were supposed to increase overall federal tax revenues by improving GDP. In fact, GDP growth under Reagan and Bush were both less than under any Democratic President since WWII, except Jimmy Carter (for Reagan only; Bush enjoyed worse GDP growth than Carter). The federal debt exploded under Reagan and Bush Jr.
Please try looking up facts before you make factual assertions. Thanks.
Although the long term graph is startling lets look at just the next ten years. Excluding the health program the CBO’s predictions showed that over the next ten years our deficit/GDP will average 6% per year. For the past 50 years it has averaged 2% per year.
Deciding to raise taxes to accomodate the extra 4% in deficit spending would mean that the total revenue that the Federal government would have produce would be a 25% increase in taxes. That’s how out of whack the recent passed legislation is.
I have very serious doubts about your white line of spending more than doubling per GDP, and increasing many fold per person adjusted for inflation.
You can always take an unusually high growth rate, like in health care costs, and then say if this kept up for some great period like 70 years we’d be bankrupted. I suspect that’s the main thing driving your line.
It’s like saying in 2005 that I project only the richest 1% will not be homeless in 2080, because home prices will be so high projecting out recent price increases for 75 years.
Health care costs can’t, and won’t, increase as they have been recently for decades to come. They can’t, just as housing prices couldn’t, and the Obama program will be a big step forward.
Another key is high return government spending, like on education, alternative energy, basic scientific research, etc. This will make GDP growth far higher, and thus lower government spending as a percentage of GDP.
Also, take a look at the book, “The Future for Investors” by Wharton’s Jeremy Siegel. His projections show that just moderate increases in the retirement age over time can really diffuse baby boom retirement spending increases, and with increases in medical technology between now and 2080 it easily looks feasible and reasonable that most people can work beyond 67, especially with more and more jobs being non-physical. And, Siegel also discusses the positive effects of development of the much younger developing countries.
What a silly chart. The fact that it’s “created” by a former Bush advisor pretty much ensures it’s a joke. But in case you took it seriously:
1. the spending line doesn’t even start to increase until 2020-10 years from now.
2. That line actually decreases over the next 5 years
3. It gives absolutely no information about GDP assumptions, rolled out for 70 years! So, yeah, if spending skyrockets and GDP stays roughly the same, in about 70 yrs. we might possibly, maybe be f-d.
No offense, but I don’t think I’ll worry too much about this one.
Dave and Boo-urns both yuck it up because the chart under discussion comes from a Bush adviser and Boo-urn chortles on because that pot of gold known as the Social Security Trust Fund holds about $2 trillion. Well, the Summary of the 2009 trustees’ report on “Status of the Social Security and Medicare Programs” (www.ssa.gov/OACT/TRSUM/index.html), signed by those closet tea-partiers Tim Geithner, Hilda Solis, and Kathleen Sebelius, shows Social Security + Medicare outlays at about 17% of GDP in 2083. (See Chart B.) Medicaid is a big chunk, too, so the aggregate of the three budget-busters will be well above 20%. So it’s not obviously fanciful that total federal outlays in 2080 project to 40% of GDP in the chart here. For one thing, the national debt will likely be so large by then (under these current models) that annual interest payments on it will be another big chunk.
Then a look at the table titled “KEY DATES FOR THE TRUST FUNDS” shows that, e.g., Social Security starts drawing on general revenues in 2016. It doesn’t actually say this, but that’s what the title of the first line (“First year outgo exceeds income excluding interest”) means, since that pot of gold is actually filled with IOUs that can be redeemed only by drawing on general revenues. This inevitable trajectory was pointed out explicitly in the 1950 Brookings Institution monograph _The Cost and Financing Of Social Security_ by Meriam and Schlotterbeck, but it’s too soon for the Boo-urns of the world to have caught on to this. (It’ll probably **always** be too soon for that.)
Yea, this is almost entirely a chart showing the broken and unsustainable US health care system.
Progressives have an answer to it: change our health care system to be like the other couple dozen wealthy nations for whom these charts and their citizens lives are far less scary (though the charts are still a bit scary).
Conservatives also have an answer to it as well: change our health care system to be more like the many dozen poorer nations for whom these charts are far less scary and their citizens lives far more scary (though they see themselves as part of some group who will remain safe).
Sure it ought to keep us up at night. The reason is that the current health care reform, while it will cover more people better, does not seem likely to do much about overall costs (thanks in large part to conservative objections). We need to follow it up with further reforms that will.
“Some progressives may object to the idea of progressive cost-sharing because it shifts costs and risk onto individuals. But they are going to incur the costs one way or another, whether through higher taxes or greater out-of-pocket spending.”
Notice how risk is present in the first sentence, but absent from the second. Risk is important to individuals. Often more important than cost. You can tell because insurance exists and its purpose is to decrease risk and it has a cost.
[...] The site Progressive Fix recently featured a post called “A Chart that Should Keep Progressives up at Night” which the author uses to argue that progressives need to shift their agenda to the right. [...]
See this chart:
http://baselinescenario.com/2010/01/20/one-more-thing/#
It will be important to you if you actually are a progressive.
My opinion is that the debt is in relation to health care. It is such a major expense. But what can be done?