Tuesday, February 15, 2011

Balancing the Budget by Cuts Alone

The Dilbert Blog has been conducting mock interviews concerning how to balance the budget by cuts alone.

In the short term, it can't be done. Period. The scope of the cuts needed would torpedo the economy. The revenue gained by cutting would be more than offset by the damage to the economy.

In the long term, we can only prevent balancing the budget by being stupid, a.k.a., doing what we have been doing.

In the medium term, however, balancing budget is very much up for grabs by cuts alone. The key is that we do so many stupid, counter-productive, and unsustainable things. Ceasing or replacing those policies with better policies would generate sufficient economic growth to balance the budget in the medium term.

Without getting too deep in the weeds, here's my plan:

Social Security

Social Security is actually the political issue that makes me more cynical. It makes me cynical because it is childishly simple to fix, yet we can't do it. Social Security did not anticipate reduced population growth nor extending lifespans. Fortunately, those are probably one-off changes. Therefore, they require a one-off solution. My plan is simple. In 2012, the retirement age will be 65.25 years. In 2013, 65.5. In 2014, 65.75. In 2015, 66. You increase the retirement age by a quarter every year until it becomes feasible to peg the retirement age to life-expectancy.


It is much better to give money than goods, mainly because it can be delivered more efficiently. For those aspects of Medicare and Medicaid that are pretty well universal, such as doctor visits, we should remove that funding from Medicare and add it to Social Security. Rather than devoting money to a notoriously inefficient sector, we could delivery the same benefits more cheaply.


The basic principle of effective taxation is that you tax things you don't want to fund things you do. In the U.S., we've turned that principle on its head. We tax things we do want--income, capital gains, sales, property--and don't tax things that we don't--pollution, congestion, sprawl. If we replaced the taxes on things we do want and replace them with things we do, it will generate more of the goods, and less of the harms. This is where the long-hanging policy fruit that will generate out-sized economic growth lies.

Also on the subject of taxes, just because we don't collect revenue doesn't mean they're free. The main culprit in this regard is the mortgage interest deduction. It skews our economy tremendously towards real estate, particularly single-family homes, rather than more productive uses. It also generates more pollution, congestion, and sprawl. Removing this deduction would be political suicide, though we may be able to avoid it by ceasing to tax income. If we don't, the best solution would be to freeze the maximum amount and let inflation reduce the value of the deduction. That's basically my solution for all of the deductions. Freeze the amount and reduce them through inflation.

The Military

I'm quite confident that there's systematic waste in the military, just based on our total spending as compared to other nations. Enough people have pontificated on military waste, that I don't need to add to the cacophony.


Blogger Yoel Natan said...

Reagan gave tax cuts to the wealthy, but he ran $200 billion deficits each year. We are still paying for Reagan's debt. Right now just debt maintenance is $500 billion per year--almost as much as the defense budget. That's a huge part of why we have to make cuts, or raise taxes, or both.

Lot of good sense in this post. I like the anti-sprawl provisions, especially since people are sticking big houses here and there in pristine wildlife areas, often on hills. It ruins the view. You can't get away from seeing house outdoors anywhere now. I'm sure the sprawl ruined the post office since they have to deliver mail here and yon (or drive past the boxes at least), and barely anyone has the red flags up on their boxes either!

Obama is getting the federal govt out of the mortgage business, i.e., Fannie Mae and Freddie Mac. I don't see why if that's possible, he can't eliminate the mortgage deduction. In fact, our budget problem is so large with the Baby Boom generation retiring, that I don't see how the mortgage deduction could survive long without a housing shortage. Moreover, how much will people want a mortgage deduction if they know it means higher taxes?

4:58 AM  

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