Thoughts On The Recently Completed Debt-Ceiling Agreement

Thoughts On The Recently Completed Debt-Ceiling Agreement

August 18, 2011

(This item originally appeared in on August 18, 2011.)

The debt-ceiling debate has mostly come and gone, leaving in its wake a torrent of commentary from both right and left.  I thought I’d add to this with a few observations of my own.

I was surprised and impressed by the conservatives in general and the Republican Party in particular. When most of Europe is spiraling down the black hole of “austerity,” they stuck with the idea of “don’t raise taxes in a recession.” We come a long way from when the Republican Party acted as the tax collector for the Democratic Party. You don’t have to raise taxes just because someone else spends more money than they should.

The liberals and Democratic Party want to blame the Bush tax cuts, as if the deficit, appearing in 2008, was caused by tax changes in 2001 and 2003. Between 2003 and 2006, federal revenues actually grew by 35%, mostly due to the economic recovery at the time. In 2006, federal tax revenues recovered to 18.4% of GDP, almost exactly their long-term average since 1950.

The federal deficit was 1.9% of GDP in 2006, and fell to 1.1% in 2007.

Republicans and Democrats actually agreed, for a brief period, on a plan for major tax reform that would eliminate many deductions and reduce top income tax rates to the neighborhood of 26%. The idea behind this plan was to generate roughly the same 18.5%-of-GDP of tax revenue, but in a way that was much more friendly to the economy.

I’ve said that the best plan would be Less Spending and Lower Taxes. This is very different from the typical “austerity” approach of less spending (in theory, rarely in practice), and higher taxes, which has a history of abject failure. By “lower taxes” I mean the sort of tax reform that lowers tax rates, but delivers the same revenue as a percentage of GDP. I would say that recent Republican efforts are very much in line with this strategy.

I think these tax-reform discussions were one reason that the U.S. stock market was quite healthy-looking during the early debates, as it anticipated the potential for major positive action. Although I would blame the latest downturn mostly on the state of European banks and sovereigns, the fact that these talks ultimately fell through was an additional negative.

Conservative thinking these days is exciting and dynamic, while liberals hardly seem to have any ideas at all except “don’t cut off the money,” and a general strategy of denying that a problem even exists. This is particularly amusing when numerous governments in Europe – including Italy’s – have hit the wall and would have defaulted already if not for sovereign bailouts. But, Americans have always tended to deny that something could be learned from the rest of the world, or that it even exists.

On the spending side, huge changes are needed. With the retirement of the baby boom generation, expenditures will be increasingly driven by Social Security and the health care programs, although the discretionary side of the budget – notably the military – is also grossly bloated.

Too many discussions revolve around cutting services. There are many needy people today, and just as Republicans might focus on “don’t raise taxes in a recession,” a Democrat might focus on “don’t cut welfare in a recession.” The end result is that nobody does anything.

Rather, we need a discussion about providing more or better services, for a lot less cost. This should be a Democrat issue, since the entitlement programs are their baby, but they seem to be fumbling the ball so perhaps they need some encouragement from conservatives.

Raising the Social Security retirement age, for example, is just cutting benefits. While life expectancies have grown considerably since Social Security was introduced in 1937, this was mostly due to declining mortality at a young age. In 1940, a male age 65 could expect to live for 12.7 years. In 1990, that increased to 15.3 years. Not much has changed for retirees, except for the addition of a few sickly years at the end due to medical technology.

The Heritage Foundation has an excellent plan for the reform of Social Security, which would provide a flat-rate “income insurance” payment for those over 65, with a phase-out for people of retirement age with incomes over $55,000. Considered as a welfare program, the Social Security system is rather perverse. The biggest payments go to those who had the biggest incomes during their working lives. These people are also the most likely to have private retirement accounts or corporate pensions. The truly needy, those who had the lowest incomes over their working lives and perhaps no assets or pension at all, get the smallest payments. Thus, the Heritage Foundation’s plan would channel more money to the truly needy, reduce payments to those with other income sources, and cost less overall than the present plan. This is the kind of better-for-less-money solution I’m talking about.

The health care system in the U.S. today is a total catastrophe. Oddly, it is a uniquely American catastrophe. Other countries don’t have these problems.

The basic problem is that it costs way too much. With 17% of GDP spent on health care, whoever gets stuck with the bill – the federal government, state governments, individuals, corporations – will go bust. The focus should be on a system that is much better, but costs much less.

Taiwan introduced its single-payer national health care system in 1995. Previously, up to 40% of the population had no health insurance. Today, health care spending in Taiwan is about 6.3% of GDP. The government spends about 65% of that, or 4.1% of GDP. This is less than the 5.6% of GDP presently being spent by the U.S. federal government, not even including another 2.0% of GDP from state governments.

It is perhaps taboo today for a conservative to suggest a universal health care plan, even though the most libertarian places in the world – Hong Kong and Singapore – use these systems quite successfully. Perhaps there is a path by which Republicans could acquiesce to such a plan, as long as it costs a Taiwan-like 4%-6% of GDP.

Consider this Republicans: a Taiwan-like national health care system would not only be cheaper than Medicare/Medicaid, but it would eliminate almost all corporate health care expenses. Think about that.

If Republicans are going to ask for big changes to the entitlement programs, they should also be willing to make big changes to their own favorite defense-contractor-entitlement program. Twenty years after the Soviet Union disappeared, do we really need 78,000 troops in Europe? Maybe 40,000 is enough?

At some point there may be an opportunity for a grand agreement between Left and Right in the U.S.: “Give us the top-to-bottom tax reform we want, and we’ll give you carte blanche to design the retirement income-insurance and universal health care system of your dreams, as long as you stay within a budget of 10% of GDP for both.” I could sense the possibility of this in the most recent debt talks.

The political situation is such that perhaps little will be done, and a crisis will ensue. However, I think it is very worthwhile to formulate ideas as to what could be done, and should be done. At some point, the political environment could change rapidly, and what was once an impossibility becomes easy, even expected.