From Musgrave to Shaviro
By Arnold Kling
I was sent a copy of Daniel N. Shaviro’s Taxes, Spending, and the U.S. Government’s March Toward Bankruptcy.
Our march toward government insolvency is a complex historical event with multiple causes. The central causes involve health care technology and demographics, and are being faced by countries around the world…Recent tax cuts and spending increases, however, have made the problem much worse.
Some other quotes from the book.
corporate executives would not go to fail for failing to publish fiscal gap-style measures…But they most assuredly would go to jail if they published financial statements that ignored accruing liabilities…the consequence of this omission for Social Security in 2002…was that the system reported a $165.4 billion increase in assets, whereas it should have reported a $467.5 billion loss (p.7)
…One peculiar consequence of this use of Social Security and Medicare for hidden redistribution has been a frequent tendency for Democrats to favor making the programs less progressive, while Republicans favor making them more so (p. 154)
The theme of the book is that we are in fiscal trouble and that the political environment surrounding fiscal policy suffers from a number of ailments.
I found myself longing for an overall analytical framework. Back when I studied Public Finance, we learned Richard Musgrave’s approach (Shaviro briefly mentions it on page 30). Musgrave said that you could think of government as having an allocation function, a stabilization function, and a distribution function.
Allocation means changing the mix of goods and services produced in the economy through production, regulation, taxation, and subsidies. Stabilization is Keynesian changes in fiscal policy. Distribution is redistributing income.
What has happened since 1959 (when Musgrave wrote), is enormous growth in what might be called the intertemporal allocation/redistribution function of government, namely Social Security and Medicare. Musgrave did not have to pay attention to this function. Now, it is the dominant factor in fiscal policy.
Unfortunately, Shaviro does not offer any sort of framework for optimal intertemporal allocation/redistribution. We are left to assume implicitly that the challenge is to try to come up with a politically balanced way to make our existing Social Security and Medicare systems sustainable.
In other words, we don’t know what it is about Social Security and Medicare that we ought to want to save, but we need to find a politically centrist way to save them. Kind of unsatisfying in the end. I wish we had a Musgrave-like explanation of what the economic functions are for our entitlement programs.