Ezra Klein: More Thompsonian Economics

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April 14, 2007

More Thompsonian Economics

By Ezra

From a bit later in his op-ed:

This issue is particularly important now because massive, unfunded entitlements are coming due as the baby-boom generation retires. We simply cannot afford higher taxes if we want an economy able to bear up under the strain of those obligations.

What the hell sense does that make? It's like saying a decade from now, I'll have huge expenses, so I'd better not make more money in the meantime. The entitlement crisis exists because government is not taking in enough revenues to pay for future outlays. Thompson is suggesting that the only way to prepare for it is to...avoid increasing revenues.

April 14, 2007 | Permalink

Comments

It's like saying a decade from now, I'll have huge expenses, so I'd better not make more money in the meantime.

I respectfully disagree. There is a point -- and reasonable people can disagree about where that point lies -- at which higher taxe rates will result in fewer tax revenues over the long term, because they will hurt economic growth and therefore the tax base will be lower than it would have been. Progressives think that point is much higher than conservatives do, but even most progressives agree that there is such a point.

Posted by: TigerHawk | Apr 14, 2007 4:17:18 PM

Tigerhawk, there certainly is such a point. And respectable people disagree about it. But respectable economists pretty much all agree that that point is significantly higher than the range of current (or plausible near-future) tax rates.

Clearly there is some offset, but most folks think it's in the range of 5-30%.

Posted by: ptm | Apr 14, 2007 4:36:06 PM

But absolutely no one serious -- including conservative economists like Mankiw -- think keeping tax rates at their current levels will allow us to withstand the entitlement crunch. No one. Thompson can propose cutting entitlements, or raising taxes, but to suggest retaining the tax cuts in order to absord the boomers is simply horseshit.

Posted by: Ezra | Apr 14, 2007 4:38:20 PM

Isn't the worst case scenario for future Social Security benefits that 85% of current benefits will be paid under the same system with no tax or formula changes? So instead of getting $700/month as a retiree you get $600/month. So scary.

Posted by: joejoejoe | Apr 14, 2007 4:43:58 PM

But absolutely no one serious -- including conservative economists like Mankiw -- think keeping tax rates at their current levels will allow us to withstand the entitlement crunch. No one.

Agreed.

Naturally, I think the compromise on the Social Security side is obvious: Republicans have to give up their dream of privatization, and in return they should get a massive extension of the retirement age. Whether or not it is politically possible, the right answer is to say that the new retirement age is something like 75. Graduate people to that reality with some intervening adjustment -- say, for every year under 55 you are today, your own retirement age extends 3 months. If you are under 35, you get nothing until you are 75 (unless you can prove functional disability).

For starters, that would shock people into saving more money so that they could retired earlier on their own nickel if they were so inclined.

Retirement is a big waste of time, anyway, and much less necessary now that even most blue collar labor isn't all that demanding physically.

Posted by: TigerHawk | Apr 14, 2007 4:47:32 PM

"now that even most blue collar labor isn't all that demanding physically."

Is there any way we can get Tigerhawk the effects of driving a semi for forty years in like 15 minutes? We are going to add ten more years? I am not sure I want 74 yr old tractor-trailer drivers.

There is a crisis in the entitlements and SS, and it has to do with too-low tax rates, especially top-marginal rates. And the passionate desire to rip-off the Trust fund. We need to tax the Waltons at 90%. I will not compromise. Thith meanth war.

Posted by: bob mcmanus | Apr 14, 2007 4:56:16 PM

I am not sure I want 74 yr old tractor-trailer drivers.

What are you, some sort of ageist? I'm glad you don't work in my human resources department.

Obviously, people need to be able to perform the core functions of their job, and as people age and otherwise deteriorate -- as one does if one has MS, for example -- they have to change their work to match their altered abilities. So what? Who made the law that a person has to do the same job for 40 years?

Posted by: TigerHawk | Apr 14, 2007 5:04:10 PM

Tiger Hawk,

How old are you?

Since when has blue collar work gotten so easy? I have spent my career working with people in the building trades, and I can tell you that there aren't too many 74 year old iron workers running around. People physically break down in these kinds of jobs. Their backs and knees give out, their productivity decreases. No one wants to hire a 70 year old pipefitter, I assure you.

There is no compelling need to raise the retirement age and it's not going to fly politically.

Posted by: klein's tiny left nut | Apr 14, 2007 5:31:43 PM

"Who made the law that a person has to do the same job for 40 years?"

Well, I look around and seen ten payables clerks for every manager, and 3 managers for every director, and I don't see the mobility and opportunity you do. Or waitress or nurse. And given a choice between the director being able to retire at 55 and the payables clerk staring at the CRT til 75, I go for the clerk.
Increase the director's taxes.

Posted by: bob mcmanus | Apr 14, 2007 5:37:34 PM

Vote for Thompson: Fucking the GOP voters over, but good.

The GOP must have a hate pack for elderly conservative voter. They just won't be happy till all the "old people" are digging around in trash bins for dinner at night - so with the overloaded code words of "unfunded entitlements -- coming due as the baby-boom generation retires", I mean - let's hate us some voters.

Does the GOP hate old people,and those nasty entitlement programs that also includes veterans of wars like, you know those old veterans that suffer from agent orange and the recent Walter Reed rat infested hell holes for current injured military members.

Is the GOP hoping that old people and military veterans will NEVER vote Republicans?

Thomason and the GOP can't burn though the GOP voters fast enough. I guess they don't need to stinking voters cause they sure act like they don't believe that those old "entitlement denied" folks are going to vote at all. Is the GOP banking on Bush as the US king 4-EVER?

Thompson will follow that nasty guy Bush right off a clift and that guy Karl Rove's, who's real legacy will be that he purge the GOP of any voters.

Posted by: Cheryl | Apr 14, 2007 5:39:33 PM

klein's tln: I'm 45. How old are you?

Posted by: TigerHawk | Apr 14, 2007 5:44:08 PM

I think Thompson's just giving a wink and a nudge to those potential primary voters who would prefer that the government not provide those entitlements at all.

Also, he shouldn't get away with the complaint that the richest 10% pay more in taxes than the bottom 60%. If anything, that just means the top 10% benefit from a regressive tax scheme, since they control more wealth than the poorest 90%.

More here:

http://bajillion.blogspot.com/2007/04/thompsonomics.html

Posted by: Paul | Apr 14, 2007 5:44:29 PM

Well, show us ONE recent rate reduction that resulted in a DECREASE of revenue from that segment?

There are not any. Back in the 1980s and after when capital gains rates were reduced, much more revenue came in. same with marginal income tax rates.

So, when you guys quit using your "street smarts" and start showing the rest of us the results, knock it off and accepr that the government gets more revenue as long as we reduce rates until below the point of deminishing margin of return gives us lower revenues.

Why are Ezra and David Weigel so afraid of Fred anyway?

Posted by: Anonymouse | Apr 14, 2007 5:53:50 PM

We've had so many years of GOP budget 'magic' (and emergency supplemental appropriations) that I'm not sure anyone knows what either the government revenue or expense side really is anymore. So a pol can say almost anything, and no one listens to economists anyway.

It seems like literally everyone thinks that the nation can't afford to meet our existing committments to Medicare and Social Security as we go forward 5 to 10 years - except maybe me, of course.

And if that was/is true, we obviously can't solve the health care crisis (coverage and affordability) that will be upon us in the same time frame - with the result that poor health care won't support an average retirement age of 75 unless you want working folks to literally fall over dead on the job and not have to pay them Social Security or Medicare.

Hey, that might actually work! The employer-provided benefit (instead of health insurance) would be modest caskets stocked on the job ready for the harvest. Just check the cubicles daily to prevent unwanted odors - prying rigid fingers from keyboards and phones could be done with some office tools for breaking joints.

There is perhaps a better solution ahead than that though. The classic (1973) movie Soylent Green had the presciption:

Edward G. Robinson, an old man in a mad age, takes his option to go to his maker (a.k.a. the soylent recycling plant) by going to the dying place where a drug is administered for death while the dying person views a wide-screen flic of open spaces - which no longer exist - and then the body is turned into good high protein green bars (mmmmm, tasty!) for the occasional treat for the populace. Fred Thompson and the GOP could adopt this and have a 75th birthday party (at work, of course) where all the celebrants view the 'retirement movie' and have 'refreshments' (GOP Kool Aid).

When the party is over, the employer gets a body bonus for each retiree delivered to UPS the next day - with a green tag thereon. No retiree, no Social Security, No Medicare, No worries. Cut taxes time! Let's party!

Posted by: JimPortlandOR | Apr 14, 2007 6:54:40 PM

There are not any. Back in the 1980s and after when capital gains rates were reduced, much more revenue came in.

This is true. When taxes were cut in 1981, this was followed by higher revenues in 1983. Of course, the reason for this was the tax increase in 1982.

Posted by: Constantine | Apr 14, 2007 6:57:30 PM

"and no one listens to economists anyway."

Lord help me, I try. Somebody else direct the wingnuts to Thoma or Angry Bear or DeLong and, for instance, the long discussion with Krugman and Bruce Bartlett. "supply Side" includes Friedmanite monetarism in addition to tax cutting? Well, heck, it all gets so complicated. I no longer have any patience with Bartlett and Mankiw, and I wondering about the people who do.

My Confusion for the Day ...pgl at Angry Bear

"...suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent." ...Mankiw paraphrasing a paper by Romer & Romer

Simple enough, right? PGL disagrees with this. Well, apparently the comment section has trouble even agreeing with what those words are sayng.

Let me see, we have Federal taxes of roughly 16% of GDP. total including State etc around 33%. Let us say that Sweden is at 45%. Do Mankiw/Romer mean that if the US went to 45% we would have a 1/3 lower GDP? If we went to 70% would have a zero GDP forever? Not GDP growth, mind you, actual real GDP.

Zero GDP sounds interesting. Let's try it. We can catch up on our reading.

Posted by: bob mcmanus | Apr 14, 2007 7:36:59 PM

Plonking, Part 2 ...Mark Thoma.

Maybe the end of a damn book-length multi-blog discussion, today between Bruce Bartlett and Jamie Galbraith. They were on the JEC(?..I think Joint Economic Council,Congress) during the eary 80s. An illuminating and frank discussion of supply-side theory and practice, but only a fraction of what was said. I can't believe how much I read last week about this. Probably without understanding or learning anything. Y'all may do better.

Posted by: bob mcmanus | Apr 14, 2007 8:09:20 PM

Omigod, I cannot recommend the 5:09 link highly enough. Passionate summary defenses of the opposing Keynesian and supply-side theories by people present at the creation.

Jamie Galbraith is a hero of some kind to me.

"The major joint impact of monetarism and tax cuts in 1981-83 was, I think, not fully anticipated by either side. It was the rapid appreciation of the dollar, increased trade deficit, and financial globalization. (I began to write about this in my 1989 book, Balancing Acts). The effect was the early and *permanent* elimination of domestically-generated inflation from the system" ...Jamie Galbraith

"Elimination of Domestically-generated inflation" read "flat wages". I disagree, Greenspan understood very well at the time.

Posted by: bob mcmanus | Apr 14, 2007 8:34:36 PM

Tigerhawk,

I'm 47 - and I have the luxury of sitting at a desk every day, working indoors. The heaviest thing I pick up at work is a cup of coffee or a thick file.

First of all there is no reason to raise the retirement age. The Social Security shortfall is such a remote event that the notion of making changes to the program now of the kind you suggest would be foolish. If we achieve slightly better growth than the very conservative assmptions that are the basis for the future shortfall, Social Security will remain solvent with no changes at all.

Second, even if there were a need for changes, raising the retirement age is not one I'd pick. There are simply a lot of people in physical professions for whom work into their late 60s and early 70s is not always feasible.

You could take the current surplus, consider it a true trust fund, and invest a portion of it in equities to generate additional funds if you really want to assure solvency. Of course, then the deficit masking quality of the Social Security surplus would cease to exist and additional general revenue would need to be raised to bring the books closer to balance. I'd suggest looking at the capital gains and dividend tax rates.
People don't have to do any heavy lifting to earn that money.

Posted by: Klein's tiny left nut | Apr 14, 2007 9:43:18 PM

Bob McM: thanks for the link. I'd read the earlier chapters of this multi-person discourse, but missed this update.

Some gems:

An interesting feature of our current discourse is, of course, that twenty-five years later mainstream monetary macroeconomics has still not figured out what happened.

And one wonders how Congress or us plebians could be confused on the economic consensus? LOL

This disconnect is inherent in the nature of public policy and leads to cycles. The liberal Keynesian cycle lasted 30-some years from the 1930s to the 1960s. The conservative supply-side view also last about 30 years from the mid-1970s to the present. Both were successful initially because they offered solutions to real problems that could be embodied in specific policies that Congress could enact and which appealed to the philosophical and political interests of one of the major parties. They both ended when the problems they were initially created to deal with were essentially solved and when the advocates of their position lost touch with the fundamental truths of their position. Increasing, their advocates' arguments became caricatures of those that were made originally, became increasingly incoherent, and less able to deal with new problems as they arose over time.

Like flat median wages for almost 30 years? Like out of control redistribution of wealth to the top 5% or 1%?

The Galbraith/Barlett discussion is very unusual in that both are candid and clear - a not widely prevalent attribute of economic big thinkers (can we say Greenspan?).

But the bottom line is that both parties are somewhat adrift in myths left over from arguments decades ago under very different economic conditions. The GOP knows what it likes: tax cuts under any conceivable condition, and the Dems are not quite sure what they like but know they don't like more tax cuts.

Anybody think that any of the candidates have advisors that will lead them in some designed for or coincidentally correct economic policy? Or if they did, they will talk about that policy during the campaign?

Posted by: JimPortlandOR | Apr 14, 2007 10:04:27 PM

There is a crisis in the entitlements and SS, and it has to do with too-low tax rates...

Either that or government entitlements are too high , or more likely a combination of the two. I really don't think you can raise enough revenue to fund the nanny-state no matter what the tax rate. These programs are indexed and not to national income either.

This is not a value judgement, it's an opinion of possibility.

Posted by: Fred Jones | Apr 15, 2007 6:04:44 PM

"These programs are indexed and not to national income either."

Somebody with more smarts than me could balance higher taxes = lower aggregate demand = lower inflation + greater savings ----- etc.

Gotta read that General Theory thingy.

Posted by: bob mcmanus | Apr 15, 2007 8:50:40 PM

You know...I save my money, and don't buy anything on credit cards. I understand how interest works. I buy a house, I finance for the shortest period of time I can. Or I double up on payments when possible. I work hard, and I live much lower than my means. I pay for my own health insurance...self-employed...but I eat healthy and I exercise. If I get cancer...I am covered...after I pay 5K for my deductible. Which, by the way, I have saved up for if that should occur. I have one car...a fuel efficient one at that. Buy my clothing used or on sale...I know..what a weird woman. Believe it or not, I am happy. I am on target to retire a millionaire by 60. That is taking into account I won't see a dime in Social Security. I am not an economic powerhouse. I learned how to do this at my grandfather's knee. Spend less...be thrifty...make your money work for you. There are many of us out there in the flyover states that know how to do this. We make it work. You can go to Barnes and Noble, and for free...sit and read everything you need to know about how to take care of yourself financially. It is our responsibility to take care of ourselves. Most simply don't choose to. Choice. It is a powerful word. It actually has meaning. Go back to the basics, guys. It works.

Posted by: stacie | Apr 16, 2007 1:35:33 AM

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