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Tuesday, March 15, 2005


For anyone who's interested, here is the link to Greenspan's testimony before the House Committee on the Budget on March 2nd. He makes a few basic points.
The budget deficit can't improve unless major action is taken.
But, as the latest projections from the Administration and the Congressional Budget Office suggest, our budget position is unlikely to improve substantially in the coming years unless major deficit-reducing actions are taken.
Congress doesn't have enough self-control to do it, so legislation to force a balanced budget is necessary:
In my judgment, the necessary choices will be especially difficult to implement without the restoration of a set of procedural restraints on the budget-making process. For about a decade, the rules laid out in the Budget Enforcement Act of 1990 and in the later modifications and extensions of the act provided a framework that helped the Congress establish a better fiscal balance.
But that's not enough either:
I do not mean to suggest that the nation's budget problems will be solved simply by adopting a new set of rules. The fundamental fiscal issue is the need to make difficult choices among budget priorities, and this need is becoming ever more pressing in light of the unprecedented number of individuals approaching retirement age. For example, future Congresses and Presidents will, over time, have to weigh the benefits of continued access, on current terms, to advances in medical technology against other spending priorities as well as against tax initiatives that foster increases in economic growth and the revenue base.
We will have to cut Medicare:
Currently, 3-1/4 workers contribute to the Social Security system for each beneficiary. Under the intermediate assumptions of the program's trustees, the number of beneficiaries will have roughly doubled by 2030, and the ratio of covered workers to beneficiaries will be down to about 2. The pressures on the budget from this dramatic demographic change will be exacerbated by those stemming from the anticipated steep upward trend in spending per Medicare beneficiary.
Productivity will not save us:
To be sure, favorable productivity developments would help to alleviate the impending budgetary strains. But unless productivity growth far outstrips that embodied in current budget forecasts, it is unlikely to represent more than part of the answer. Higher productivity does, of course, buoy revenues. But because initial Social Security benefits are influenced heavily by economywide wages, faster productivity growth, with a lag, also raises benefits under current law. Moreover, because the long-range budget assumptions already make reasonable allowance for future productivity growth, one cannot rule out the possibility that productivity growth will fall short of projected future averages.
Everyone's going to be very poor in about 25 years if nothing is done:
The long-run projections from the Office of Management and Budget suggest that the share will rise to 9-1/2 percent by 2015 and will be in the neighborhood of 13 percent by 2030. So long as health-care costs continue to grow faster than the economy as a whole, the additional resources needed for such programs will exert pressure on the federal budget that seems increasingly likely to make current fiscal policy unsustainable. The likelihood of escalating unified budget deficits is of especially great concern because they would drain an inexorably growing volume of real resources away from private capital formation over time and cast an ever-larger shadow over the growth of living standards.
Congress can't seem to ever cut programs, so for heaven's sake don't pass any new ones ( The Teddy Kennedy clause):
The critical reason to proceed cautiously is that new programs quickly develop constituencies willing to fiercely resist any curtailment of spending or tax benefits. As a consequence, our ability to rein in deficit-expanding initiatives, should they later prove to have been excessive or misguided, is quite limited. Thus, policymakers need to err on the side of prudence when considering new budget initiatives.
Unsustainable, unsustainable, get real would ya?
I fear that we may have already committed more physical resources to the baby-boom generation in its retirement years than our economy has the capacity to deliver.
Spending must be cut significantly to prevent massive cuts in Medicare and Social Security later:
Addressing the government's own imbalances will require scrutiny of both spending and taxes. However, tax increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base. The exact magnitude of such risks is very difficult to estimate, but, in my judgment, they are sufficiently worrisome to warrant aiming, if at all possible, to close the fiscal gap primarily, if not wholly, from the outlay side. In the end, I suspect that, unless we attain unprecedented increases in productivity, we will have to make significant structural adjustments in the nation's major retirement and health programs.
We must save for the future or the kids will be flat broke and unable to pay the taxes needed to feed you old geezers instead of just extremely pinched:
But solving that problem will do little in itself to meet the imperative to boost our national saving. Raising national saving is an essential step if we are to build a capital stock that by, say, 2030 will be sufficiently large to produce goods and services adequate to meet the needs of retirees without unduly curbing the standard of living of our working-age population.
But we are not saving for the future at all in any way. The money is gone:
Indeed, although the trust funds have been running annual surpluses since the mid-1980s, one can credibly argue that they have served primarily to facilitate larger deficits in the rest of the budget and therefore have added little or nothing to national saving. In my view, a retirement system with a significant personal accounts component would provide a more credible means of ensuring that the program actually adds to overall saving and, in turn, boosts the nation's capital stock.
Cut spending now:
Crafting a budget strategy that meets the nation's longer-run needs will become ever more difficult the more we delay. The one certainty is that the resolution of the nation's unprecedented demographic challenge will require hard choices and that the future performance of the economy will depend on those choices. No changes will be easy, as they all will involve setting priorities and, in the main, lowering claims on resources.
In short, our national family is going to go bankrupt unless we sharply curtail use of the plastic. Anyone who doesn't acknowledge that SS and Medicare are going to have to change significantly before 2040 is off in lala land with Paul Krugman, America's most blissfully deluded economist and the darling of the Democratic reactionaries.

You did a good job of laying out the points via Greenspan. I really don't see any resolution to this problem as long as we continue our combination of do-good socialism and feel-good capitalism. At some point we will have corrections, but I don't see any progress unless we decide to sacrifice some personal comfort for greater good.

I just don't see where the impetus for that is going to come from on the broad social scale.

Have you got opinions/ideas on what action you might advocate?
I come up with nada on this. I guess my scenario is that we will swing one way or the other: either highly taxed socialism-like some of Europe, or keep strongly capitalist with large segments of society hurting from the lack of private compassion coupled with reduced government paternalism.

Yes, I do. But first I wanted to define the problem. There is so much nonsense in the press about the SS debate and so forth that most of us are somewhat confused.

"I don't see any progress unless we decide to sacrifice some personal comfort for greater good."

You summed it up nicely there, but I think we can forge that consensus. The problem is that people will want a convincing case first that they are sacrificing for the common good. An awful lot of mechanics, clerks, and secretaries I know are well aware that we took their excess SS contributions and spent them. In order to do what we have to do we are going to have to put some guarantees in place ensuring responsible behavior in government.
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