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December 2, 2012
David Warsh, Proprietor


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A Symbolic Slaying

The fiscal cliff negotiation is no better than a skirmish in what promises to be an epic ten-year struggle to achieve a new fiscal compact. For evidence of that, consider Warren Buffett’s entry into the debate last week, with a suggestion that negotiators seek to bring in revenues at 18.5 percent and cap spending at about 21 percent of GDP

Those were levels that had been sustained over long periods of time in the past, Buffett wrote in an op-ed column in The New York Times; they could be reached again relatively quickly.

(Revenues were 15.5 percent of GDP in the fiscal year just ended, while spending was 22.4 percent.) His targets wouldn’t reduce the deficit, he wrote, but they would maintain a stable ratio of debt to output.

It was the right argument, but Buffett had the wrong numbers. He apparently borrowed them from the National Commission on Fiscal Responsibility and Reform, led by Erskine Bowes and Alan Simpson, now more than two years old.

The first to say so was Matt Miller, a former McKinsey consultant and Clinton era advisor to the Office of Management and Budget, who has been slowly working his way into the upper ranks of the next generation of opinion-makers as a talk-show host and weekly columnist for The Washington Post, along with Ezra Klein, also of the Post, who simply exploded into prominence on the blogosphere, starting in 2003.

If only because of the aging of the baby boom, Miller wrote, the future isn’t going to be like the past.  The number of seniors on Social Security and Medicare will nearly double in the next fifteen years, to around 77 million persons.

There is the question of the trajectory of health care costs. The Bowles-Simpson Commission, which did its work in the year during which Congress passed the Affordable Care Act – and long before the Supreme Court ratified that statute’s provision for mandatory enrollment in insurance programs – took little account of the dynamics of increasing health care costs.  Instead it simply proposed setting global targets for federal spending on health care, starting in 2020, at the growth of GDP plus 1 percent.

Moreover, the relative importance of two other items of Federal spending promise to grow substantially in the next twenty years or so, almost no matter what.

One of these is the rising bill for  Social Security Disability Insurance, almost universally known as “Disability.”  The program, which now covers 10.6 million persons who are deemed unable to find work because of one impairment or another, is growing rapidly. For a certain portion of the population, it has begun to function as the sort of a “negative income tax” or “guaranteed annual wage,” given credence in the Nixon years by policy advocates as different as Milton Friedman and Daniel Patrick Moynihan, protecting disabled persons shut out of the labor force by the effects of globalization and technological change.  (Supplemental Security Income is something else again. This adjunct to the Social Security safety net, signed into law by President Richard Nixon in 1972, extends Social Security-like benefits to  members of groups not included in the Federal system – farmers, the blind, disabled children and various others.  It is means-tested and now covers more than eight million persons.)

The other is the long list of budget items that can be classified under the heading of responding to climate change.  This includes disaster spending, naturally, and a host of preventive public works not yet on the boards for threatened coastal cities.  More largely, it is a matter of renewed spending on infrastructure – not just highways, bridges, airports, and an extensive and expensive new “smart” electricity grid, but a new generation of physicians and teachers, too.  For a good précis of the possibilities, see The Politics of Abundance, a $2 e-book, by Reed Hundt and Blair Levin.

The significance of Buffett’s faux pas is that, for forty years, he has been such a sensible guy.  He is on a victory lap with his old friend, Fortune magazine writer Carol Loomis, who has written a chronicle of their extraordinary collaboration, Tap Dancing to Work: Warren Buffett on Practically Everything 1966-2012.

Unfortunately, Buffett’s op-ed article last week showed that he is no longer thinking seriously about the future. Despite its elaborate courtesy (“ I hate to pick a fight with the sage of Omaha…”), Matt Miller’s column was a good example of the symbolic slaughter of the elders that should occur more often when their opinions are no longer relevant to the debate.

So what’s the right number?  Miller guesses 28 percent by the time the boomers’ retirement is in full swing.  That seems plausible, though of course this is not the way that such targets are set. In each new era, policies are chosen.  Appropriations are made. New sources of revenue are found (in the present instance, almost certainly a consumption tax.)

At a certain point, things are judged to have gone far enough.  Lines are drawn.  And new fiscal compacts come into being – tacit but highly binding.  It has happened many times in the 225-year history  of the United States. – after remaining at very low levels for most of the nineteenth century, outlays rose to  around 10 percent of GDP in the ’30s, more that 40 percent in the peak years of World War II,  fell to around 17 percent in the ’50s, and climbed again to around 21 percent from 1975 to 1995.  The historical tables of the Office of Managemernt and Budget make fascinating reading.

Needed more than ever now are greater fiscal sophistication and transparency. Accounting for the composition of federal spending must be refined, to measure the effects of Congress’s ever-growing repertoire of off-balance sheet tricks:  guarantees, subsidies, preferences and so on.  Referee-like organizations will assume greater importance in the coming years, among them the Congressional Budget Office, the joint Tax Policy Center of the Urban Institute and Brookings Institution, the health-policy-oriented Kaiser Family Foundation, and the Center for Retirement Research, at Boston College.

So don’t bust a gut worrying about the fiscal cliff.  Maybe we will go off it. Maybe we should go off it. For the moment, President Obama holds the cards. If Congressional Republicans don’t come around, they’ll take the blame for the recession that ensues.  It’s an asymmetric bet:  heads, the president wins; tails, the Republicans lose.

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2 Trackbacks/Pingbacks

  1. Links for 12-03-2012 | The Penn Ave Post on Monday, December 3, 2012 at 8:31 am

    [...] for 12-03-2012 Posted at 4:31 on December 3, 2012 by Mark Thoma A Symbolic Slaying – Economic Principals Data revisions mean more of the same – Econbrowser Operation Rolling Tantrum – Paul [...]

  2. [...] an issue that is unlikely to be resolved next month or even next year. The delightful David Warsh puts it this way: “The fiscal cliff negotiation is no better than a skirmish in what promises to be an epic [...]

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