Today I’m giving a public talk to and for the Michigan Intergenerational Network. I’ll be discussing how government budget policies and priorities are affecting the generations. This is a topic worthy of an entire college course or even a MOOC, but unfortunately I’ve only got a couple hours at most. This post isn’t a full explanation and is far from a script for that presentation. I’m only going to try to list some of the highlights and give the slides.
Budget & Intergenerational Issues
This time it’s different
Intergenerational transfers are social programs (usually governmental for good reasons) that collect resources from the working generation(s) in a given year and transfer that value to generations at either end of the lifespan – seniors or children.
In the past when I’ve discussed intergenerational transfers in the Federal budget, I’ve emphasized how the hype about the “insolvency” of Social Security or its supposed impending bankruptcy was overblown. There is no real economic or necessary budgetary/monetary reason why Social Security or Medicare or public education or any of the other intergenerational programs should be in jeopardy. Things are different now. I wasn’t wrong then. Financially, the system is operating fairly well. As I’ve said for years, there’s a strong chance of needing to make some minor tweaks in maybe 5-10 years, but it’s nothing that should cause us to panic and cut benefits now. There still isn’t a financial reason.
But there’s political reasons for fear now. So instead of keeping calm (always good advice, BTW) I’m switching to “be concerned and get active”.
To understand why we need to get active and be concerned, we need to understand how political budget rhetoric and processes suck us into a big game, a game that pits each generation against the others instead of bonding.
Budget and Policy
There’s a gap between the supposed process for creating the federal budget and the actual process. Supposedly, both houses of Congress, reacting to a recommendation proposal from the President, create a budget resolution that sets out spending and tai xing parameters and goals. Then many committees in both houses of Congress spend most of each year preparing detailed appropriations bills that eventually the President signs and then federal agencies are authorized to spend the money.
In reality, there’s increasingly a heated rhetoric amongst politicians using emotionally-laden trigger words to posture for political advantage. Meanwhile high-paid lobbyists work with Congressional staffers behind closed doors and craft the actual language of the spending bills. Usually Congress can’t get this done in time and kicks the can down the road with short-term “continuing resolutions” until, like this 2018 fiscal year, it finally passes an “Omnibus” spending bill for 2018 almost half-way through the year. When they vote on the bill virtually no one is able to read the actual language of the 2000 plus bill before voting.
All this matters because we really only have 3 broad categories of policy with which the government can strongly affect macroecomomics performance: fiscal spending, tax, and monetary (interest rates) policies. The budget covers fiscal spending and taxing. The Federal Reserve handles monetary.
Taxes for 2018
The big news for 2018 was the comprehensive, or at least wide-ranging, tax reform bill passed in December 2017 for effect in calendar year 2018. This bill continues and greatly accelerates a long-run trend dating back to the sixties of decreasing corporate taxes and a significant shift towards regressive, payroll taxes. In 1967, corporations paid as much as in taxes, approximately 24% as workers did via payroll taxes. In addition, workers also shouldered 42% of federal revenues via income taxes. Today, corporations are well below 10% and dropping. Meanwhile the workers now pay for over 80% of federal taxes via a mix of income and payroll taxes.
Tax policy long ago ceased to be a highly effective macroeconomic growth tool. This is because tax rates were repeatedly lowered over 4 decades to the point where tax rates really don’t effect growth-related investment or consumer spending decisions as they once might have. Yet political rhetoric remains that somehow tax cuts and tax rate cuts in particular for the wealthy and for corporations are somehow growth inducing. They are not anymore. We’d have to go back to the fifties or sixties to see that.
Instead, tax cuts are about redistribution. While claiming this tax bill will stimulate growth, the reality is it won’t. Even the very conservative, free-market, neo-classical model-based forecasts of Barro and Furman foresee only a +0.4% increase in real GDP over 10 years. Real GDP growth rate only increases 0.04 percentage points. Not much.
Instead, this tax bill is about redistribution. It overwhelmingly shifts money towards the very wealthy and towards corporate owners. Tax breaks are now the larger than federal discretionary spending.
Spending – Ok this year, but….
The Omnibus Spending Bill for 2018 was just passed a couple days ago and signed yesterday to cover $1.208 in discretionary spending. This is an increase over 2017 of 12.9% and it largely reflects two political realities. Despite having majorities in both houses and controlling the White House, Republicans cannot assemble the votes necessary to implement the domestic spending cuts they have been pushing. Both parties are now looking to the 2018 midterm elections and spending cuts won’t get anybody re-elected.
The military, homeland security, state, foreign operations, and energy (think nuclear weapons) are the biggest winners with increases in the 12-15% range, but even domestic programs and agencies such as Labor, HHS, and Education manage to get a 10% increase. Essentially, 2018 is similar to the spending budgets of the last few years in terms of priorities. No particular major cuts. Yet.
However, the 2018 budget proposal that President Trump put forward last year has now pretty much become the 2019 budget proposal. We will get more details in coming weeks. This budget proposal is indeed drastic. It calls for very serious, very deep cuts in a wide range of discretionary programs that are important intergenerational transfers, such as education, Medicare and Medicaid information and research, senior housing support, senior nutrition, and non-entitlement health spending.
Whether or not the 2019 Trump budget priorities become the 2019 federal budget depends more than ever on political activism. The election of 2018 and the polls leading up to it will drive a lot of what actually happens.
The Deficit and The Game
As bad as the 2019 budget proposals are for discretionary intergeneration transfer programs, the rhetoric and political objectives of the currently ruling Republican leaders in Congress portend an even worse possibility. For generations, the idea of cutting Social Security or other significant transfer entitlement programs was considered political suicide. As Speaker of the House Paul Ryan’s comments openly targeting reductions in Social Security and Medicare benefits indicate, political leaders are now trying what was once considered unthinkable: cutting, eliminating, or privatizing Social Security, Medicare, Medicaid, and public education.
This is where an enormous rhetoric game ensues. Politicians such as Ryan drove the large tax cuts. Ryan and Company falsely claimed the tax cuts wouldn’t cut Federal revenues because they supposedly would spur dramatic growth. But they weren’t structured to do that. The tax cuts were really massive redistribution of income to the wealthy. In the process, the reduced tax revenues open a larger federal deficit. Ryan and Co. then use the increased deficit to argue that we must cut entitlement spending in order to balance the budget. They depend on people being both afraid of the concept of government deficits and confusion between deficits-debt and between public and private debt.
The reality is that the federal deficit doesn’t really need to be closed. In fact, a balanced federal budget (i.e. no deficit) means the private sector, households and firms, will not in aggregate be able to accumulate risk-free financial assets like government bonds for pensions. Deficits and public debt aren’t really problems as long as the economy has the real resources to produce. They are actually a reflection of a growing, healthy economy with a bright future. Growth of private debt, however, can be risky problem for the macroeconomy as it was in 2007-08. But cutting federal spending and entitlements long run will not fix Social Security solvency issues. It will, however, create risky private debt problems. The federal government is not a household and such analogies fail and misguide policy.
An Alternative: Build Intergenerational Productivity
The current political rhetoric which is based on fear- and a false, but emotion-laden analogy of the government’s budget to a household budget ultimately pits one generation against another. Millennials see baby boomers as taking their future SS benefits. Boomer seniors tend in increasing numbers to vote for cuts in schools because they don’t have school kids themselves.
There is a way out. Every generation works its way through its lifespan. When young, it needs subsidies. When middle-aged it works and generates the economic value that supports everybody at the time. When aged, they need support again – even if only to have a younger generation work and generate profits to pay the dividends for a private pension scheme.
If people want to insist on thinking of the federal budget as a “household” then we need to see all the generations as equal members of a dynamic family – our national family. That means we need the intergenerational transfers. But transferring economic support from a working generation to either children or seniors doesn’t have to mean the working generation does with less.
Rather if we support the working generation and the soon-to-be-working generation, we can make our collective production greater, boosting the welfare of all generations.
For example, three proposals that at first glance appear to be irrelevant or even budgetarily competitive for seniors and children are anything but. Seniors and children should actively support the following proposals:
- Immediate boost of the minimum wage to at least $15 per hour and to restore the real purchasing power of minimum wage to late 1960’s levels. How would this help seniors? It is estimated that as much as 31% of the workforce would see a payroll boost from this proposal. Empirical studies in the last 30 years of minimum wage boosts indicate that product prices and inflation would not follow. Rather, the higher payrolls would mean greater Social Security and Medicare payroll tax collections. Some analyses have indicated that the minimum wage boost alone might be enough to prevent the medium-scenario projected depletion of the SS Trust Fund in the 2030’s. Workers win. Seniors win.
- Free college or at least free Community College. Making it easier for more people to get college degrees and certificates will dramatically boost workforce productivity. Productivity increases, over time, boost GDP and boost tax collections. More importantly, they increase the real resources and capacity available in the economy, making intergenerational transfers more feasible.
- Student Loan forgiveness. While at first glance, this proposal sounds like a give-away to the Millennial generation, the generation most saddled with the greatest student loan debt, it’s actually win-win. The Millennial generation is having difficulty with household formation and home buying. This is largely due to heavy student loan repayment burdens. Eliminating that burden will boost spending and aggregate demand, increasing GDP – and payroll taxes with it. It will also increase home buying and house construction, which in turn, will strengthen property values. Stronger property values and stronger household formation each, in turn, lead to greater property tax collections and more support for schools. Kids win too. Then those kids become highly productive adults and fund the next generation after them.
Our ability to fund intergenerational transfers is limited only by the availability of real resources and will, not by current year government budget policies and rhetoric.
Slides for the Presentation.
If these slides do no display properly here, feel free to open the Google Slide file in a new window.
Additional links to some selected budget resources for 2018-19:
- Impact of FY 2019 and FY 2018 budget proposals for Seniors-related programs
- HHS 2019 budget in brief: https://www.hhs.gov/sites/default/files/fy-2019-budget-in-brief.pdf
EconProph 