Wednesday, October 22, 2008
My new draft
The Impending Entitlement Mess
My father has taught me many lessons, but two jump to mind today: “the hardest choices in life aren’t between good and bad, but good and better—or bad and worse.” Second, “it’s better to think critically then to be critical.”
America is going to face a problem soon, that will put her between a rock and a hard place: the impending entitlement crisis. It is a choice between hard and harder, and it’s an easy one to whine about. Instead, today, I’d like to talk about solutions.
In order to do so, of course, we need to accurately assess the problem—so that’s where we begin.
Dr. N Gregory Mankiw, a Harvard Economist has put it better than I possibly can:
“The federal budget is on an unsustainable path…. When the baby-boom generation retires and becomes eligible for Social Security and Medicare, all hell is going to break loose…. The choices aren't pretty -- either large cuts in promised benefits or taxes vastly higher than anything ever experienced in U.S. history.”
He and others have described the roots of this problem. They include a demographic problem (too many elderly and not enough children to provide for them) a technology problem (too many good (but expensive) ways to save a life) a political problem (it’s easy to be elected by promising either lowered taxes or increased benefits) and a sociological problem (it is the government’s job to take care of me when I’m older, not my own.)
We are left with roughly five obvious solutions: raise taxes (by 22%) borrow (205% of GDP by 2050) cut some benefits to the elderly (small things, like their medical benefits and pensions) pray (that there is a great increase in productivity, for example) or find a new solution. I’ll start with a bit from column D.
#1. Immigration and Technology Investment
Praying for an increase in productivity is like the poor man that prays for the winning lotto ticket. We all know the joke—let’s buy the lottery ticket. Here’s how:
Increases in productivity come by innovation—Inventions, technology, science—and there are two easy ways to do it. First, incentivizing research (funding the National Science foundation, for example.) Second, and more controversial, is change our immigration laws.
If someone is a PhD from Mexico, I want them here. If they’re a brilliant sociologist from Jamaica, I want them in America. If they’re a Russian biologist, I hope that they would always be welcome in America. If we want innovation, then let’s create a critical mass of intelligent people.
#2. Tax Reform
We spend more money collecting taxes then I’ll be able to comprehend in my lifetime. The first step in solving this crisis is deep reform: a flat tax, for instance. Secondly, we need to tax things that hurt us, and relieve taxes on things that help us. For example, taxing cigarettes means there’s less smoking, so taxing investment means…
#3. Good taxes for all
While taxing the poor seems distasteful, there’s an exciting solution here: what if tax breaks were given to those seeking to further their education? For those who have no criminal record? For those who give 6 hours of community service a month?
As healthcare costs are on the rise, let’s apply a similar idea to that arena: what if Medicare and Medicaid benefits came with a special tax break for those who don’t smoke, don’t drink, or whose weight is in the healthy range? Encouraging healthful living would pay long-term dividends.
#4. Raise the retirement age
When Social Security started, the life expectancy of the usual person was much lower, but the retirement age was about the same. Many economists agree—raising the retirement age is one of the most effective (and least convenient) ways to solve this mess.
#5. Control spending
I remember being at the store with my mother from time to time, while I was younger, and asking for a treat. She would sometimes say, “we can’t afford it” but would also sometimes reply “you don’t need it.” Both proved to be good lessons for me.
We need to recognize that “Good, Better, and Best” applies to what we spend as a government. I like the idea of universal healthcare, I just don’t like the price tag.
#6. Have kids
I’m serious. (http://www.economics.harvard.edu/faculty/mankiw/files/sept98.html)
#7. Band-aids vs. preventative medicine
Liposuction works. If eating habits don’t change, however, then liposuction will be forced to work again and again. We need to make sure that we aren’t merely fixing the façade, but eliminating the root problems. Political promises that can’t be kept, spending more than we earn as a country, welfare-state mentalities; these are all good places to start.
If you don’t like my solutions, then thrill me: write about your own.
Saturday, October 11, 2008
Sight-writing
Posterity will get to see me become a better writer.
Begin Article:
Three cheers for impending doom.
I don't know of anyone who thought it was ever a good idea to spend more than we earned--economics just proves that it's stupid. If the US were a small country, we'd be living in a 5 story house, with 8 TV's, and 6 cars. Worse yet, whenever the family council gets together, they vote on whether to buy a piano or a swimming pool. While monstrously in debt, we fiscally restrain ourselves, and buy only the piano. Well done, family! Only 50 grand to add to the debt! That's way better than last week!
In all seriousness, within 20 years, the baby-boomers will retire. They will then ask for the social security, medicare, and other entitlements that they have been promised--our bills will be due; and there will be weeping, and wailing and gnashing of teeth.
Except, perhaps, by a few. The congressional budget office will probably be too busy saying "I told you so," (which they have, repeatedly) and some economics professors will shake their heads with wry smiles--the smiles that creep onto their faces when you ask them why you did so poorly on your exam. They start smiling after you start your next sentence with "well, I haven't studied very much." Yes. Those smiles. The "I-saw-it-coming" smiles.
Dr. N. Gregory Mankiw will be smiling a wry smile, that's for sure. In 1998, he wrote, "For the next couple of decades, things look pretty good. An approximately balanced budget (and even some small surpluses) together with normal economic growth will reduce the U.S. government debt….
"After that, however, all hell breaks loose. The [congressional budget office] projects that… government spending will take off, leading to budget deficits …. Worse yet, the debt will still be rising, with no end in sight."
So what's wrong with a little debt? Well, let's be more careful—what's wrong with exponentially increasing debt? A few things.
I don't much care for entitlements. I don't like the fact that the government is paying for my parents—that's my responsibility; but I also think that my parents, who have been promised social security, medicare, etc., deserve to receive what they've been promised. We owe them.
We could always borrow more. In a world without credit scores, it'd be like getting as many credit cards as you want. Once one is maxed out, you simply pay that bill with another card. You'd have to keep getting an exponential number of cards, (and you'd never pay it off) but in theory, it wouldn't hurt you unless the chickens came home to roost. Which they would.
Then there's crowding out. Imagine if the bank and the government both offer you a percentage of your savings, if you invest with them. The government needs the money, so they offer you a lot—and you buy the government bond. The money goes to Medicare. If it had gone to a bank, it would have been spent on a loan to someone looking to build a house, a company, or something of economic value. Instead of investing in capital—which increases our future GDP—we spend it now, while we have it, and receive a worse future economy.
But wait! We could always raise taxes! That's another option! We could just up our taxes, just enough to cover our costs—22%!
We could also cut the number of services that will be rendered. Sadly, since voters elect politicians, and many stand to lose a great deal in entitlements if they aren't protected, chances are good that politicians will increase, not decrease entitlement spending.
Another possibility: we could suddenly have a huge increase in productivity, paying for the future. This is assuming ceteris paribus—congress doesn't spend that extra money, there aren't additional wars, politicians don't build bridges to nowhere, and our productivity increases enough to pay off this debt (which, incidentally, will be over 200% of GDP, by CBO estimates.) In other words, we can hope that daddy's job will give him a promotion that will bring a check home that is 5 or 6 times what he currently makes. I'm not holding my breath.
Impending doom is good stuff.
How about some real solutions:
1. Increase the retirement age.
While this isn't exactly politically correct—at all—the fact remains that people are living longer, and it costs more to do it. When social security began, we were living a decade less. This meant that we paid for a decade less of medicare bills. If people went to work longer, and needed less time as collectors of benefits, this would reduce the weight of the burden. After all, retirement wasn't meant to be the last 30 years of one's life, wherein they do what they want; it was originally the point in life when one cannot work any longer. We've grown a bit too comfortable.
2. Reform the tax code.
I'm not talking about cutting marginal rates, or the "Bush tax cuts." I'm talking about a fundamental tax reform. For instance, all anti-growth taxes go—including dividend taxes, corporate taxes, and capital gains taxes, making investing in our future economy worth the wile. Also, a flat tax of 20% for everyone—including the poor—would do wonders.
3. Tax the poor? Are you crazy?
Yes, I am. I also think that everyone needs to feel that they have a stake in this country. Second, I don't want poor people earning less on purpose because it protects them from a worse tax bracket. Our tax system needs to push people up, not pull them down. Progressive taxes encourage people to be poor, which is the last thing we need.
I can hear you saying "But 20% taxes? Isn't that… well… a lot for the poorest in the county? How will they get out of their slums?" Instead of tax breaks for the poor (which incentivize low earnings) give tax breaks to those who give 5 hours of community service a month, who give up smoking and drinking, who gain an education, and who take certified career placement classes. Here's some intuition behind my thinking: imagine a health insurance agency which has a no-smoking policy—wouldn't their costs be lower? Now, imagine that the government does the same thing. Saints be praised for positive incentives for positive externalities.
4. Lower the gates, and let 'em in. Some of them.
If we're praying for a productivity explosion, we might as well do something to help it. Many of us don't like illegal immigration—that's a topic for another day; but we should be the first to welcome any PhD into our country, right away. In fact, we should subsidize their coming here with a 3-year, no-tax policy, that after three years begins to increase slowly. We could create a place that has a critical mass of educated people—maybe even enough to create the technology that will reduce health care costs, or increase our productivity.
5. Have kids.
Our biggest enemy in this is demographics—let me give a simplification. When social security started, 10 people would pay for the social security of one person, for a few years, before they passed away. Now, as the baby-boomers retire, 2 people are going to pay an increased cost burden, for several years. If 3 people were paying for that same cost, it'd be less out of your pocket.
6. Spend less, and spend it wisely.
Congress has to get a hold on things. They need to stop spending, and earmarks are barely a drop in the bucket. Of course, while everyone hates congress, no one hates their congressman. I suggest a new strategy: if things in congress don't change, someone begins an anti-incumbent party. Just to shake things up.
Impending doom can be rough sometimes, but wouldn't it be cool if we could fix education, health care, taxes, and maybe free trade, all while congress is flailing about? Maybe if we don't tell them we fixed things, they won't be able to screw them up.
Taxes and Beer...
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that's what they decided to do.
The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. 'Since you are all such good customers,' he said, 'I'm going to reduce the cost of your daily beer by $20.' Drinks for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free.
But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?'
They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.
And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four continued t o drink for free. But once outside the restaurant, the men began to compare their savings.
'I only got a dollar out of the $20,'declared the sixth man. He pointed to the tenth man,' but he got $10!'
'Yeah, that's right,' exclaimed the fifth man. 'I only saved a dollar, too. It's unfair that he got ten times more than I got'. 'That's true!!' shouted the seventh man. 'Why should he get $10 back when I got only two? The wealthy get all the breaks!'
'Wait a minute,' yelled the first four men in unison. 'We didn't get anything at all. The system exploits the poor!'
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn't show up for drinks so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!
And that, ladies and gentlemen, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.
David R. Kamerschen, Ph.D.
Professor of Economics
University of Georgia
For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.
BYU Political Review
http://www.byupoliticalreview.com/?p=70#comments
I disagree with his main argument: I think that Americans want to be different, and better on the whole, and that that makes us great. You can read my response to his article below.
Benjamin Pacini wrote:
To Zach and Jason–
Zach, your article was informed, but vaguely saddening. You have a view of America that stokes a sense of profound loss inside.
If I may be so arrogant, I’d like to say what thoughts I had while reading Jason’s comments—perhaps describe what I learned from what he was saying. I agree with him in essence, if not in particulars.
Historians define American exceptionalism as the thought that Americans are different, not simply the thought that they are greater; but in this case I would prefer to side with history than historians. I believe that America’s exceptionalism stems from her commission, not her greatness.
I believe that calling America the “city on the hill” is an accurate statement. Perhaps even clearer would be the statement, “America can choose to be the city on the hill.” The idea that America will reach higher heights by ceasing to strive for them is ludicrous. As Jason wisely pointed out, America’s success has coincided with its return to basic principles of goodness and virtue—and its belief that it ought to be, and ought to try to be, exceptional.
Alexis de Tocqueville has long been purported to have said “I sought for the greatness and genius of America in her commodious harbors and her ample rivers - and it was not there . . . in her fertile fields and boundless forests and it was not there . . . in her rich mines and her vast world commerc - and it was not there . . . in her democratic Congress and her matchless Constitution - and it was not there. Not until I went into the churches of America and heard her pulpits flame with righteousness did I understand the secret of her genius and power. America is great because she is good, and if America ever ceases to be good, she will cease to be great.”
The notion that America is failing due to some monstrous ego is wrong; America’s sins are more varied than some vague over-patriotism. Think of apathy, not caring for the poor, arrogance, impatience, incontinence, lust. America’s sins are many and varied; but I suspect that we see America as a person who was not acting as herself when she committed such crimes. Exceptionalism is the hope that America will come to herself, and stand in the place prepared for her. It’s the archetypical struggle to remember her royal birth—not only by birthright, but by the courage to become the noble royalty that is expected.
In other words, we may or may not be the rallying point for the nations—that will be for them to decide; yet we certainly should not be ashamed to hope to become one. In life, many of us would be willing to do much more good in the world, if only there was someone else leading the way, someone to rally around. Of course, when such people appear, they are taunted as self-righteous and proud, because people fear the light which they could otherwise bring. Parenthetically, I’ve never heard anyone assert another’s self-righteousness without some degree of hypocrisy.
It is not America’s desire to be exceptional that has caused its decline—no more than it is our belief that we are sons and daughters of God. Rather, it is the loss of such a desire that weakens us. It is our abandonment of the principles—including humility—that have previously made us great that can bring our downfall. The Zoramites of Antionum serve as a good warning, but the city of Enoch serves as a better exemplar.
I've thought about it, and I suppose the difference is between mediocrity and averageness. We have no right to be mediocrity, nor do we have a right to seek to be "above average." We need to strive to be good. There's nothing wrong with that.
It's been too long...
I have lots of ideas, so I'm going to write them; feel free to respond. I'll also keep a running journal, even if it's short.
Of late, I've developed a man-crush on Greg Mankiw. He's a Harvard economist and he's both intelligent, witty, and perfectly adept at making people quite upset; that is, he's the quintessential economist. I'll probably be quoting from him now and again.
This may or may not have something to do with the fact that I passed an Economics test (381--Macroeconomics) and his book helped me to do so. I felt quite good about the test, although I haven't a clue what my grade shall be. We'll see if I'm so chipper in three days. I quite like being an Economics major, as a side note.
I also applied to the strategy minor, and think that I did well--again, time will tell.