The NYT’s attempt to fix the budget

By Felix Salmon
November 14, 2010
rent-vs-buy calculator, David Leonhardt has helped create another interactive tool, this one called "You Fix the Budget". He writes:

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In the wake of his excellent rent-vs-buy calculator, David Leonhardt has helped create another interactive tool, this one called “You Fix the Budget“. He writes:

The New York Times has conducted its own analysis of the federal budget, but with a different final product. Rather than making recommendations, we are laying out a menu of major options, so that readers can come up with their own plan. We have received help along the way from the deficit panel, from Congressional and White House aides and from liberal, conservative and centrist budget analysts.

It’s a good idea in theory, and I even played the game myself, solving the deficit with a mixture of 69% tax increases and 31% spending cuts. Still, I’m not a huge fan of the way it’s been executed in practice of the way that the NYT makes it both too easy and too difficult to “win” the game.

The too-easy part comes on the spending-cut side. The goal is to reduce the 2030 shortfall by $1.355 trillion, and the NYT includes an option under “health care” which simply says “cap Medicare growth starting in 2013″. By clicking on this box, which “would cap the Medicare growth at GDP growth plus 1 percentage point, starting in 2013″, you at a stroke get $562 billion of savings.

You can win the game without clicking on that box — I managed to do it — but of course the game becomes much harder if you deny yourself that easy and fanciful trick. But it is fanciful: there’s simply no credible way to enact that kind of hard cap on Medicare expenditures, in a world where the over-65 population is growing fast as the Baby Boomers retire, where that generation is also living longer than ever, and where end-of-life healthcare is becoming increasingly expensive across the board.

The too-hard part comes on the tax-hike side, where the options are far too limited. For instance, you have two choices when it comes to taxes on capital gains and dividends, both of which cap that tax at 20%. Can’t I opt to raise that tax to the same level as the income tax? Even the deficit commission does that.

Similarly, for the payroll tax, the most you can do is raise the ceiling so that it covers the same 90% of all income that it covered at inception; you can’t raise it any further than that, or abolish the ceiling entirely.

And on the mortgage-interest deduction, there’s no option for abolishing it, as I would love to do; instead all you can do is swap it out for some lower-cost credit.

Most importantly, the options for new taxes are extremely constrained. The carbon tax is relatively modest, raising $40 billion in 2015; I’d like to see something significantly larger — ideally a cap-and-trade system with credits which were fungible with Europe’s system — which would raise more money and include significant rebates for people in the bottom half of the income distribution.

The bank tax is also a good idea, but again it doesn’t go far enough, since it hits only the largest banks: why not add the option of a Tobin tax, too, which would raise revenue from financial transactions no matter who was engaging in them.

I’d also love to see the option of a wealth tax, which could raise a lot of money from those most able to afford it.

Finally, although I’m a fan of a consumption tax, I don’t like the NYT’s sole option on that front — a 5% national sales tax which applies to everybody equally. I’d much rather see something much more progressive: look at each taxpayer’s annual income, subtract their annual savings, and the difference is their annual consumption. Allow everybody say $50,000 of consumption per year tax-free, and then start taxing consumption over that point, with the tax rate rising as consumption grows. If you spend over $250,000 a year, your marginal consumption could be taxed quite highly.

In general, the NYT options on both the spending-cut and the tax-hike side tend to hit the poor and the middle classes more drastically than the rich; what’s missing here is the option to implement something much more progressive, in both senses of the word. It’s a missed opportunity, and a shame.

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Comments
27 comments so far

Felix writes “…there’s simply no credible way to enact that kind of hard cap on Medicare expenditures, in a world where the over-65 population is growing fast as the Baby Boomers retire, where that generation is also living longer than ever, and where end-of-life health care is becoming increasingly expensive across the board” but he forgot the most important observation about “the over-65 population”, that they VOTE more consistently and reliably in their own self-interest than any other demographic and thus wield considerable political power.

Perhaps if we raised the retirement age BEFORE most baby boomers retire, so that they can concentrate their minds on accumulating the savings that they didn’t while they were younger instead of demanding more government-subsidized health care (a la Medicare Prescription drug benefit), we can address this, but if we wait, we’ve lost the game before we’ve even gotten into the second half.

Posted by Strych09 | Report as abusive

It’s far more egregious that there’s no phased in, gradual FICA tax increase on the table with regard to SS.

My guess as to why eliminating the cap on SS is not included is that such a plan is just sloganeering. It would fundamentally transform SS into a huge welfare program, whereas now it is insurance with some progressive elements. Lifting the cap is not an actual, coherent way of fixing Social Security as it was conceived or as it presently exists.

And, channeling Greenspan, shouldn’t we be worried about paying down the debt too quickly at some point? Why are we closing the gap completely?

Posted by Some-Guy | Report as abusive

We =did= raise the retirement age for the Baby Boomers. We also raised their taxes specifically to cover the SocSec shortfall, and their Medicare taxes, both absolutely (rate raise) and progressively (removing the cap on income being taxed).

Posted by klhoughton | Report as abusive

And, Felix, you left out the most obvious complaint about the Leonhardt Matrix: it claims you created “tax increases” by =following current law=.

Posted by klhoughton | Report as abusive

As I understand it, under most scenarios Social Security needs a fix at some point to remain solvent for the long term. However, the only way that affects the budget as a whole is that its surplus has been funding a part of the deficit of general government spending. By raising the SS retirement age, doing SS means testing, or raising the cap on SS income, that by itself doesn’t impact that deficit, unless a part of the plan is to continue funding general spending deficits in this way. Is that what is going on here?

Medicare, of course, is a very different story.

Posted by Curmudgeon | Report as abusive

I found this “game” incredibly useful. I sense that my perspective is different from the prior commenters, so I thought it worth sharing.

I’ve felt overwhelmed and therefore largely uninterested in the finer points of the budget debate, but the game in today’s NYT got me asking questions and online to seek out more information – not a small thing. Our right to participate in our government is only as good as our incentive to stay engaged and informed.

I would not have spent Sunday afternoon reading about the finer points of the national budget if it weren’t for this game.

From that perspective, I think its a very useful learning tool.

Thanks also for all your comments. When I get smarter about this stuff, I will be back to engage the debate!

Posted by bklyngirl | Report as abusive

Curmudgeon, the accounting for Social Security may be nominally separate from the remainder of the budget, but it remains an obligation of the federal government and thus part of the budget as a whole.

Social Security definitely needs a fix, and a fix enacted today will help resolve a lot of uncertainty going forward. You don’t want to wait 20 years and then change the rules a month before somebody is ready to retire. Putting the fix in place today allows the changes to be dated far enough in the future that people can plan.

Personally, I haven’t been counting on receiving ANYTHING from Social Security. Until they come up with a plan for closing that ~25% shortfall, I will continue to assume that I will personally receive nothing. Thus I would view a fix as a *positive* for my personal financial situation, even if it meant a lower number on my annual Social Security statement.

Posted by TFF | Report as abusive

There is no “missed opportunity.” It’s the plan. And there is no shame; the elite has no shame.

http://www.correntewire.com/tool_time_wo rlds_greatest_newspaper_not

Posted by lambertstrether | Report as abusive

The NYT budget game ignores the elephant in the discretionary budget room. The choices for defense cutbacks are mere pimples on the elephant’s behind.

What would a “fixed budget” look like if the game allowed cutting defense spending to NATO or OECD averages ex-US?

Defense spending in the US is well over $1 trillion if you include the supplementals, intelligence, homeland, veterans, military pensions and the military components of DoE, State and interest on the national debt.

The “game” is just that — a game. It assumes business-as-usual for defense, with just a few nips-and-tucks, while allowing slash and burn elsewhere. Disingenuous of the NYT.

Lastly, the SS trust fund is fuly funded for almost 40 years and only minimal changes are needed to extend its life well past then. What Bowles-Simpson is trying to tell us is that the money is GONE and won’t be repaid.

End the empire and the budget will balance.

Posted by upstater | Report as abusive

@TFF: Why would you assume that you’d get nothing if you know the shortfall is 25%? If you’re going to be pessimistic, wouldn’t the more logical assumption be 75% of scheduled benefits? (Which, incidentally, would still be a higher real benefit than is paid to current beneficiaries.)

Posted by Some-Guy | Report as abusive

Some-Guy, you are assuming that the shortfall will be closed by reducing all benefits proportionately. See the Bowles-Simpson plan for a more likely scenario — sustain the benefits at the lower end while reducing benefits for those who can afford a reduction.

The simplest way to close a 25% gap is to cancel all benefits for the top 10% and phase in an average 50% reduction of benefits for the next 30%. Under that scenario, I would lose most or all of my benefits (depending on whether means-testing is done based on lifetime income or on lifetime savings).

But ultimately, who really knows? Until the system is fixed, I can’t count on anything. Only a fool would base their retirement on a system that has made more promises than it can keep.

And, of course, that is entirely separate from the question of whether the US government will remain solvent for more than another decade or so. Once the defaults start, all bets are off.

Posted by TFF | Report as abusive

I’ve got a better idea upstater… balance the budget and keep the empire.

One way or the other the “cap medicare box” will get checked by reality. The demand for life extending health care is unlimited. Resources are not unlimited.

The recently held elections demonstrated to those paying attention that the economies producers and providers of goods and services have reached their limit on how much they are willing to have redistributed to non-producers.

Best hope for people to invest enough in themselves, their families, and their communities to provide for themselves in retirement. The goverment can provide a low baseline of economic security but anything more than that creates powerful disincentives to work and savings which badly hurt society as a whole.

Posted by y2kurtus | Report as abusive

Question for TFF… what defaults are you predicting exactly? As we issue debt in our own currency I don’t know how or why the Treasury could default on it’s obligations.

I could see state and local goverments default… that would probably have an impact on the feds ability to borrow.

I could see the guarentee to Fannie and Freddie go away overnight (since it arrived in much the same way.) That would spook people.

I always read you comments because you’re extreemly inciteful… just wondering which shoes you are expecting to drop.

Posted by y2kurtus | Report as abusive

y2kurtus, I don’t think you can realistically monetize $15 trillion of debt (a figure we could easily reach in a decade the way things are going). Can you? Even if we tried, the massive inflation generated would have much the same effect as a formal default — perhaps even less controlled. As soon as inflationary expectations pick up, the cost of borrowing will shoot through the roof. At that point there will be very strong pressure to balance the budget.

But honestly, I don’t know what to expect. I see a trade imbalance, a steady job drain, massive deficit spending (that would normally stimulate the economy), and a demographic challenge on the near horizon as the baby boomers approach retirement. I am simultaneously trying to defend my portfolio against spiraling inflation and a deflationary/stagnant “lost decade”. Selling bond investments, yet also paying down debt.

I’m feeling much the same about the market that I did in early 2007. The difference is that it was an easy choice then to pull money from equities and invest it in CDs (5% yields), Treasury notes, and TIPS.

Today? Could again sell a quarter of my holdings and put it in cash, EXCEPT that appears to be what everybody else is doing. And as a rule of thumb, following the herd is a great way to lose money. So I’m slowly deleveraging while I wait for something to move. Inflationary rally or deflationary crash? Wish I had a clue…

Posted by TFF | Report as abusive

@TFF, in starting this distraction on social security, all I really meant was that I rather objected to using social security surpluses to continue to hide the true extent of the general account deficits. I suppose we can “fix” SS so that there are perpetual surpluses with which to buy government debt (and to magically make that debt disappear from the popular understanding of the deficit), but I think that’s not helpful to the debate.

Posted by Curmudgeon | Report as abusive

go back to England, you liberal ponce.

Posted by TinyOne | Report as abusive

Curmudgeon, have we been using Social Security surpluses to hide the general account deficits? I know we’ve been using them to reduce the amount of debt held by the public, but hasn’t the annual budget deficit been reported honestly? (Real question — I’m not sure.)

In any case, those surpluses are finished. Social Security’s cash flow is presently negative, and is projected (after a slight brief rebound) to get steadily worse over the next 20 years. The “proposed fix” didn’t do anything that would change the immediate cash flow, as far as I can tell, instead phasing in the changes gradually over many years. Unless I’m wrong, it really WAS targeted at the true problem?

And I very much agree that subsidizing the general account through extension of a flat/regressive tax is a bad idea.

Posted by TFF | Report as abusive

TFF, the number popularly reported as the deficit does not include debt held by the social security. The reasoning is that it’s all government funds, which is true, but disingenuous.

I have always been of the notion that the general account deficit and the SS actuarial issues should be two separate discussions, because it’s so easy to be unclear on what you are trying to solve. Perhaps I’m wrong. But from what I’ve read in the general press on Bowles-Simpson, no one is making it clear that one is to fix SS for the long term, and the other is to address general deficit reduction.

Posted by Curmudgeon | Report as abusive

Trying to figure out the answer to that question… According to documents here:
http://www.gpoaccess.gov/usbudget/fy09/h ist.html

For 2010 there is $264B of “Social Insurance and Retirement Receipts” that are “on-budget” and $740B that are “off budget”. The former, apparently, is primarily Medicare and Unemployment. The latter is Social Security and Disability. (I believe they were placed off-budget as part of the 1986 reform?)

In any case, the Social Security surpluses were relatively small from 1985 through 1996, totaling just $523B compared to a cumulative deficit of $2.9T over those 12 years. The surpluses did reduce the amount borrowed by 18%, but it is a stretch to suggest that they created the deficit spending. The politicians would have been perfectly willing to borrow more money if they had needed to do so.

After that, the surplus picked up rapidly. It more than doubled from $67B in 1996 to $150B in 2000. Moreover, the federal coffers were flush from the dot.com profits with the “on-budget” numbers showing just a $77B deficit from 1997 through 2001.

Perhaps that played a role in the Bush tax cuts? The large Social Security surpluses were projected to continue for many years (the recession changed that), so President Bush may have seen this as a way to return the funds to the economy (instead of doing something “stupid” like restraining the growth of the national debt?). But prior to Bush, either the surplus was comparatively insignificant or the budget was already roughly balanced.

Ironically, the page I’m looking at (from the 2009 budget report) shows the deficit declining to just $200B by 2012 (where it would once again be balanced by a Social Security surplus). Keep that in mind any time you hear a CBO projection… I wouldn’t be at all shocked if the actual combined deficit were still over $1T in 2012.

Posted by TFF | Report as abusive

Curmudgeon, if I recall correctly the *deficit* is generally quoted honestly while the *debt* is generally cited as “debt held by the public”. Perhaps a fine point? Of course most people who read are aware of both figures, but I agree that the lower debt total gets more press.

I would agree with you on separating the general account deficit from Social Security (the latter ought to be actuarially self-funding), however the problems with Social Security have been evident for a decade and nobody has mustered the political will to act on them. Making it a piece of a larger tax reform could make it easier to get something done? I’m happy with any fix, as long as I have time to plan ahead BEFORE I retire in the not-so-distant future. Right now I can’t count on anything.

Posted by TFF | Report as abusive

All of these fixes assume the need for revenue raising when the driving force of the Republicans and their corporate sponsors is to continue to drive the Federal Govt. into near oblivion. And they are winning big time and with Democrat wimp acquiescence. The big agribusinesses, manufacturers and banking/insurance industries are all multinationals which have no inherent interest in what happens to the US economy still less regarding “fairness” to the American people. The agenda is to drive gradually towards a state where there is no regulation and companies are free to do anything (or nothing in the case of infrastructure and public services). Think of a more sophisticated version of a banana republic but nevertheless one that has all the quality of life of about 1880. Oh and they are counting on the American public to remain anesthetized on 21st century bread and circuses and to just surrender to their impoverished fate. Will we let this be America’s future?

Posted by Jimbo316 | Report as abusive

An increase in payroll taxes could work well if we could 1) maintain consistent wage growth, especially for those in the bottom quintile and 2) phase in FICA tax increases so that they would take a tiny bite out of that wage growth.

For some reason, debates about SS begin with the premise that people shouldn’t pay more to get a higher benefit. Since initial benefits are indexed to average wage growth and people live longer, the value of what they get from SS will be higher. There’s nothing unreasonable about paying more now to get more later.

Social Security’s shortfalls have been exacerbated by bad fundamentals of the US economy over the last 20-30 years. With real wage growth mainly concentrated to the rich (and with SS indexed to /average/ wage growth), the tax base for FICA taxes have not grown as quickly as initial benefits for new retirees.

Posted by Some-Guy | Report as abusive

Some-Guy, our wages are already uncompetitive on the global market. I expect real wages to fall significantly over the next decade (likely flat wages and escalating inflation?).

Thus I don’t think increased payroll taxes are an answer. Marginal tax rates are already high, distorting behavior. We need to broaden the tax base, not raise the rates further.

Posted by TFF | Report as abusive

“I expect real wages to fall significantly over the next decade (likely flat wages and escalating inflation?)”

“Marginal tax rates are already high, distorting behavior.”

Two of the most accurate sentences I’ve read this week.

On our wages being uncompetitive… I could not agree more I’m shocked whenever I read about a local manufacturing business opening, expanding, or even highering.

How do you operate in a globally competitive marketplace paying twice the average wage of South Korea, for a 40 hour week compared to their 50 hour week… and their average highschool graduate has the same math skills as our average college graduate?

Best hopes for our entitelment culture to moderate their expectations

Posted by y2kurtus | Report as abusive

Reading Felix’s tax wish list, I shudder to think what the final government share of GDP would be if we made him emperor for a day.

Posted by Alvarez | Report as abusive

Alvarez, new taxes don’t need to be used to increase revenue. They can be used to offset old taxes, simply restructuring the incentives.

Posted by TFF | Report as abusive

@TFF – Absolutely, and I would certainly support doing something along those lines myself. I don’t see any evidence, though, that Felix is proposing those types of trade-offs in order to, say, raise 20% of GDP in what he believes is the best possible manner. Instead, it almost feels like he is trying to maximize government revenue, an effort that I wouldn’t support.

Posted by Alvarez | Report as abusive
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