You Ask, I (try to) Answer

September 12th, 2011 at 2:44 pm

Q: A question I keep wanting to ask all these balanced-budget fetishists: Should the US have maintained a balanced budget through WWII?  If not, then we agree that there are some circumstances in which a balanced budget is undesirable, and all we are talking about is details.

A: OK, this is what you call one of them there rhetorical-type questions…but you’ve got a point.  Debt as a share of the economy was over 100% in 1945-46 and there weren’t too many people freaking out about it (though some were).  In fact, it’s notable that folks back then also suffered from premature contraculation—the well-known , for example.

But the larger point is that if you believe we’re facing an emergency or at least a serious threat to our well-being, and you believe gov’t actions can help, you’re more likely to advocate for say, the President’s jobs plan without worrying so much about its impact on the debt.

A second, equally important lesson is that following the war and a return to full economic capacity, the debt to GDP ratio began a long slide all the way to the Reagan years, when it started climbing again (see figure). This stuff is dynamic and very necessary, high debt levels now don’t imply such levels forever.  This is especially the case when the spending measures are temporary.

But to get to the sustainable fiscal place, we need to get that act together as well…we just can’t do it at the expense of targeted jobs measures today.

Source: OMB

Q: [Re my kvelling about the President’s jobs plan:] Jared, it really concerns me that you didn’t mention the cuts to Social Security, Medicare and Medicaid that Obama is going to use to pay for his jobs proposals.

A: I share your concern, especially about the increase in the eligibility age for Medicare.  As I’ve , based on the work of my colleague Paul Van de Water, this kind of shifting may save money for the gov’t, but the savings are elusive—system-wide costs (public+private) are likely to go up.

Still, I think Social Security et al need to be on the table.  To keep them completely off is too close to the R’s pledge to never raise taxes.  As I’ll stress below, any cuts need to be balanced with new revenues as well.

It’s a high-stakes strategy, I know, as there are those who just want to kill social insurance.  But to say there are no savings to be had in ‘Care, ‘Caid, or Soc Sec is not credible.  We could save billions in Medicare by shifting to generic drugs (which cost about 70% less than brand names).  Medicaid, on the other hand, is plenty lean already and it’s not at all clear to me how you cut there without diminishing the program’s ability to serve vulnerable families.  (I recently had a good talk with a trustworthy specialist who convinced me she loses money on Mcaid patients.)

Making the switch to the “chained CPI,” a more accurate price index that grows more slowly, is definitely a Social Security benefit cut relative to current promises, but that’s another idea that I think merits consideration, especially if you use that same price index for tax brackets, which implies higher revenue collections (because people’s nominal income will pass into higher brackets a little more quickly).

Of course, what really matters most here is much more attention to cost effectiveness in health care spending, again, throughout the system—public and private—which implies less spending on procedures that have little or no benefit (or worse!).  And that’s part of the Affordable Care Act.

So, I don’t come cavalierly to this position, but neither do I subscribe to the view that we can never contemplate savings in these programs.  However, and this is essential, I would never accept new cuts without new revenues…never…Never…NEVER!!!

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24 comments in reply to "You Ask, I (try to) Answer"

  1. Jim says:

    However, and this is essential, I would never accept new cuts without new revenues…never…Never…NEVER!!!

    That is exactly the problem with the democrats. Do you think the average American would trade health care or social security for a rise in revenue? SS benefits average less than $1,200 per month! How can anyone pretending to represent the majority claim that we need to cut this program? It’s downright immoral. Raise income taxes to where they were in the 60’s, slash the bloated military empire, read Abba Lerner and even Milton Friedman and recognize the soundness of a full employment monetary / fiscal program via understanding fiat currency. But it disgusts me that democrats are so ready to slash already meager benefits.


  2. Jeri says:

    More on the chained CPI: first, can you guesstimate how much difference it will make to some average recipient at, say, 1%, 3%, and 5% inflation? What would the actual dollar difference be between an increase under the current system and under the chained CPI?

    Also, re: the argument that the resulting cuts won’t be so serious because people’s income will move into higher tax brackets more slowly: that won’t help the more than half of SS recipients for whom SS is pretty much the whole ball of wax. When you’re looking at an average monthly benefit of somewhere around $1,100, the difference matters.

    Your thoughts?

  3. Tom says:

    Jared, I am sure you are well aware of Dean Baker’s writing about the possibility of a senior citizen cpi. This whole business about chained CPI is an attempt to cut without calling it a cut. Given that SS finanaces are solid for decades, any cuts to SS should be a non starter. The first thing to do for SS ought to be to raise the wage cap to cover 90% of wages.

    Raising the Medicare eligibility age is also a bad idea. Perhaps one could justify it by saying that we gotta work until 67 anyway, except this ignores the large fraction who don’t work until 67 or even 65. This is a cost shift from gov to individuals. It’s also an argument that we wouldn’t be having if we had single payer. Obama is a numbskull if he thinks liberals will go along with cutting Medicare like this when he didn’t raise a finger for single payer.

    But yes, reducing costs without reducing care is a good idea. Throwing people off Medicare will not do that.

  4. Cat says:

    Re: Government Retirement Plan for Private Sector Workers, i.e. Medicare/SS, Cuts.

    My parents made slightly above the median income while raising 3 children.

    My wife and I will make three to four times more money while working for more years then my parents, but I will feel lucky if we can match their retirement lifestyle. This is because they both have Government pensions and then they worked in the private sector long enough to qualify for SS as well.

    My parents don’t have college educations while my wife and I are both the highly educated information workers of “tomorrows economy” everyone claims are the “good jobs” that replaced the good jobs of my parents era.

    The problem I have with any talk of reducing any of the old age benefits is how a median income household can retire in the same style as my parents when a household has to be in the top 10% on the income chart to try and match it.

    Liberals shouldn’t be fighting to keep SS/Medicare benefits at current levels, they need to be expanded and more money given out to American workers. It should come from the top 1% who’ve externalized their workforce’s retirement planning to the Federal Government and given all the savings to the owners and executives and none of it to the workers.

  5. Dan Furlano says:

    So I see the Obama administration is now suggesting they can pay for the entire AJA by removing tax breaks for corporations and the wealthy (>200k).

    So again a few observations.

    1) I am sure the republicans will go for what they will frame as increasing taxes for corporations and people making over 200k. No, I really don’t believe that but I also can’t see any reason for a humorous comment to such a stupid policy consideration.

    Is there anyone on the left that has any capability to develop a strategy? Was this the details that we were promised when he made his speech? It sounds more like something they just thought up and figured if they say it real fast no one will hear them.

    2) The Obama’s administration two step plan to getting the US out of the hole. First, you take dirt and place it under our feet and we will be lifted out of the hole. Part two; the dirt that will lift us out of the hole will be dug from the bottom of the hole.

    A stimulus really won’t work unless you add new money to the economy. I am not a economist but I know that is a fact.

    As far as cuts to social security I guess that the fact that social security has not added to the debt and won’t until something like 2037 is just a fact that is not important. But lets put it on the table. Democrats don’t want to look unreasonable.

  6. foosion says:

    >>Making the switch to the “chained CPI,” a more accurate price index>>

    What evidence do you have the chained CPI more accurately tracks costs for those on Social Security? Are there any studies of the costs to seniors? If the goal is accuracy, why not have a senior CPI?

    • jo6pac says:

      Yes and chained cpi doesn’t contain food or fuel does it? Then again neither does govt numbers on inflation, what a concept. It’s ust more kill the little people, how sad.

    • Jared Bernstein says:

      There is one! And it could be “chained” too, which is the key point here–most inflation analysts believe that chain weighting provides a more accurate measure of price growth. I’ll try to follow up on this–but must run over to the Kudlow show on CNBC to defend the honor of Soc Sec!!!

      Up, up, and away.

  7. pjr says:

    My impression over the years is that politics have greatly influenced claims about the CPI overestimating or underestimating “real” inflation. If CPI overestimates inflation, then it should be replaced for ALL purposes. Furthermore, Social Security benefits should be last, not first, on the list for a change that would reduce estimated inflation–low income elderly should not be the first target. There are several ways to fix the long-term, out-years Social Security challenge without cutting benefits and it is unwise to link this challenge to larger (on-budget) deficit problems.

  8. D. C. Sessions says:

    Alternately, index everything (tax brackets included) to the median wage.

    Among other things, that makes it a lot more visible. It gives the upper brackets a stake in the median wage, and it has a sense of justice about it — If I’m making 3x median, never mind inflation: if I’m going up in brackets, it’s because I’m less affected than most.

  9. bmull says:

    So social security beneficiaries should pay for the Bush tax cuts, unnecessary wars, and a Wall Street-caused recession? I don’t think so.

  10. Michael says:

    I believe that the President should never give the nuclear launch codes to the dictator of Syria.

    I know, it’s crazy. But sometimes, you gotta be a little like the Republicans.

  11. grooft says:


    I look forward to you analyzing the CPI-E (for Elderly) which seems like it more accurately tracks the things that should drive the COLA for social security recipients. Seniors are significantly higher consumers of health care which has a significantly higher rate of price inflation. Elderly also have a higher share of expenditures to for housing. I don’t think either of these is particularly amenable to ‘chaining’ — what is the proper substitute for ‘health care’ — Dying, or morbidity? It’s not like you can just switch to alternative, equally good purchases of health treatments as are suggested as the logic behind chained CPI (C-CPI). “Beef got more expensive so eat chicken” is not comparable to “Knee replacement got more expensive so switch to hip replacement”. The other thing to note from the share of expenditure tables for the CPI-E is exactly how little of the expenditure categories of the elderly are substitutable. Health care at 10.45% doesn’t have substitutes. Housing at 45% doesn’t really have much substitutability either (especially given the “owners equivalent rent” which applies for the much higher ownership rates of the elderly.

    Of course, the whole premise of C-CPI is to cut entitlements by reducing cost of living adjustments. (Correct me if I am wrong that it was invented under the Bush administration).

  12. Christopher says:

    In your answer about Medicaid cuts, you say – “I recently had a good talk with a trustworthy specialist who convinced me she loses money on Mcaid patients”.

    I am always suspicious about how doctors get there. Say a specialist currently charges $100 for a procedure and their costs are $50 and therefore they profit $50. If Medicaid says it will only pay $95 I guess they can say they “lost” money, but it still doesn’t seem right.

    How did your doctor friend convince you?

    • Peter says:

      this is a question that occurred to me as well. losing money relative to what, operational costs including schooling etc or relative to what the private market would bear as a price point? because if it’s the later i would argue that basic care and catastrophic coverage are merit goods and the concern should not be marginal profit for providers. we need to reverse this question, start with the outcome we want to achieve and find policy solutions.

    • bmull says:

      In our for-profit health care industry, a medical practice is essentially a business. Sure you can talk to a business owner who is losing money, and she can be very convincing that she is being paid too little, but maybe she’s just a bad businesswoman…

  13. BarbD says:

    For your next round of Q&As, here’s my question: is it realistic to think that the construction industry will return to the old “normal”? When I drive through my neck of the woods (and the same holds true for other parts of the country I’ve visited), I see endless strip malls and big box stores, either standing empty or filled with things like dollar stores, beauty parlors, check cashing businesses, religious organizations and other signs of a lagging economy. I also wonder how realistic it is to think that people will return to building huge homes (especially far from their places of work). My personal bias is that we spent the bubble years overbuilding and don’t need to go back to the old normal. What do you think?

  14. Procopius Furioso says:

    Re: The chained CPI is a “more accurate” measure.

    Meshugge. If you think we need a more accurate measure to base COLA on, you should be pushing for the BLS to create a specialized index measuring a basket of goods that really reflects what people over 65 spend their money on. Adopting the chained CPI results in reduced benefits, which is what any reasonably liberal person should be trying to avoid. In normal times it wouldn’t be that hard, but I realize that the Republicans are cutting government services to the point where even the BLS may not be able to function. Although, now that I think about it, that would mean there would not be any CPI anyway. Therefore no COLA. Disaster.

  15. Larry Fleisher says:

    for the next, next round of questions and answers…

    consensus seems to be that the the german economy, for that matter, the european economy will not be able to handle greece forfeiting on the loans it was extended and that the u.s.a. will have to step in and bailout the entire european union.
    how does one explain to the tea partiests that we are in a world wide economy and if this problem is not handled there will be a world wide economic and monetary collapse. at which point there will be no ruling class or structure of any kind and the world that they have pined for will be here ,except it will be early 10th century not early 20th century

    • Michael says:

      We don’t, because until banksters start going to jail for fraud, it’s not true. We’re not in this together, unless we actually are in this together; if our role as members of the middle class is to be regularly looted for an international elite, then it might be worth bringing the house down in order to start a new dynamic.

      Remember, Obama’s Treasury and the EU are risking global financial meltdown in order not to throw 2000 thieves into minimum-security prison.

  16. Rory Carmichael says:

    For the next round of questions and answers?

    I seem to remember a lot of arguments from the Bush years about tax cuts paying for themselves due to the stimulative effects of cutting taxes. They clearly got that one wrong, but it doesn’t seem like the fundamental idea is crazy. Shouldn’t things with real stimulative effects help to pay for themselves? Like, for instance, the stimulus package created/saved jobs and put some upward pressure on GDP which clearly should have increased tax revenues over the alternative universe without stimulus and with much lower GDP. I’m surprised that this isn’t occasionally a talking point. If it helped pass bad policy for the Republicans, maybe it could help pass good policy for the Democrats. Is there any evidence to support this whole “stimulus increases revenue in the long run by improving the economy in the short run” idea?