A Fiscal Scenario By Any Other Name

Paul Krugman: "I wrote Monday about the strange phenomenon of Republicans lining up to propose cuts to Social Security, a deeply unpopular policy that is, however, also a really bad idea. How unpopular? Lee Drutman has the data: only 6 percent of American voters support Social Security cuts, while a majority want it increased. I argued that this apparent act of political self-destructiveness probably reflected an attempt to curry favor with wealthy donors, who are very much at odds with the general public on this issue:..."

Regardless of whether the Republican cuts are ill-designed or voters overwhelmingly support increasing benefits, earned benefits have to be on the table for the U.S. to be able to meet its future obligations. The National Debt is over $18tn, but Laurence Kotlikoff states the true fiscal gap as measured by the present value of expected future taxes less expenditures is over $200tn. He goes on:

"[There is] irresponsible behavior on the parts of politicians of both sides who are trying to get the elderly's vote. When President Bush introduced Medicare Part D, which is prescription drug insurance for the elderly, [he added] another $15 trillion to the fiscal gap. He didn't ask a single old person, including Warren Buffett, to pay a penny for this extra form of social insurance.

...So a lot of people like to portray this as the Right vs. the Left, the poor vs. the rich, but it's really adults vs. children."

Like Kotlikoff, I believe in social safety nets. but something that can't go on won't. The Congressional Budget Office is apparently more concerned than they let on. The CBO produces two fiscal scenarios:

 "they put out what's called the 'Baseline Extended Budget Forecast,' based on forecast which is a complete fabrication of what they really think; and they also have put out, but rather quietly, this 'Alternative Fiscal Scenario,' which shows the official debt, as it's currently measured, exploding through time."

The nation's fiscal situation is similar to Detroit, but it has the benefit of the Federal Reserve to buy more time. One has to address the elephants in the room -- Social Security, Medicare, defense, tax policy (and of course Planned Parenthood).

One important item not often addressed is the Homeowner Tax Credit. Not only is it an expensive program (in foregone revenues), but it distorts the housing market. Yet it is a program with such momentum that pulling the plug will lead to foreclosures because those benefits are now priced into the market. Further, the Tax Credit subsidizes interest payments instead of down payments, and therefore households are incentivized to take on more debt.

The Homeowner Tax Credit was a political, not an economic, policy. This helps to create a vested interest with a broad base (both Republicans and Democrats own houses). 

The same is true for earned benefits. Now this doesn't mean that these policies don't attempt to achieve desirable ends or their principles should be abandoned. But we do need to recognize when one generation expects to get out far more than they put in. We need to recognize that what is prudence in the conduct of every private family can scarce be folly in that of a nation. No parent would leverage their children's future earnings to increase their own income with the understanding that it will be impossible for the child to recover by doing the same to the next generation.