This tweet caught my eye:
Use of the term “unprecedented” is becoming disturbingly common. Let’s review the past 5 years:
Unprecedented situation #1: In 2018 and 2019, I warned that the doubling of the budget deficit over four years was unprecedented (and reckless), for a period of peace and prosperity. Lots of pundits ignored these warnings, pointing to low interest rates.
Unprecedented situation #2: In 2020 and 2021, I warned that the huge size of the budget deficit was unprecedented (and reckless) for a period when we were not at war. Pundits pointed to the low interest rates and basically said, “don’t worry”. (Some spending was justified by Covid, but much of it was not.)
Unprecedented situation #3: And now we have another unprecedented situation, the deficit doubling in just one year (to a very high level) during a period of peace and prosperity.
But this time I’m seeing a flurry of article in the mainstream press, concerned that our debt situation is unsustainable. They are correct, but where were they in 2019?
PS. I suspect our candidates will ignore the budget deficit in the upcoming presidential campaign. But (with apologies to Leon Trotsky), politicians may not be interested in budget deficits, but budget deficits are interested in politicians.
READER COMMENTS
Matthias
Sep 4 2023 at 7:40pm
I wonder, if in the end the Americans will end up with a European style VAT system in a few years?
Thomas Hutcheson
Sep 4 2023 at 9:18pm
I think that should be part of the solution basically to make the SS/Medicare/Medicaid/ACA, unemployment insurance self financing, but higher personal income tax rates will also be needed (over and beyond what will b needed to eliminated taxation of business income).
Richard
Sep 4 2023 at 10:34pm
Possible US will have no choice but to do so. Canada overspent and had to do so years ago. But if so, VAT likely to end up as additional taxation — effectively a substantial deferred wealth tax — and not as a substitute for income taxation.
Scott Sumner
Sep 5 2023 at 2:23pm
That’s possible. A higher payroll tax is also possible.
Jim Glass
Sep 5 2023 at 9:28pm
I wonder, if in the end the Americans will end up with a European style VAT system in a few years?
People forget, somehow, Social Security went broke in 1983, and we know what happened then. As Social Security, Medicare, federal pensions, etc. are the big drivers of the problem coming at us, the dynamic (funding retiree benefits) is the same, so a similar solution is the most likely (albeit on a much larger scale).
What happened then was the politicians stalled to the very last moment, then enacted a “reform” that was near exactly 50% tax increase & 50% benefit cuts (compromise!) by the accounting of the day. The bulk of the cost landed on the young of the day, not on those at or near retirement (who voted with great motivation!). The net result was that Social Security became a program that provided a net financial transfer to persons born before 1953, from persons born after 1953. (As a self-funded program the transfers of course have to balance out to $0 in the end.)
This was done by (1) increasing the payroll tax; (2) gradually increasing the future ages at which the then-young could take a full benefit, and (3) enacting a cleverly disguised “means test”, by making up to 50% of benefits taxable at normal income tax rates — with the tax returned to the Social Security Administration (instead of going to the Treasury like all other income tax), thus effectively reducing the size of one’s net benefit as one’s income rises. The amount taxable has since risen to 85%, and because the tax “brackets” aren’t indexed for inflation that tax amount (benefit reduction) increases every year.
I’d expect the like of these to be the first “reforms” applied in the future to Medicare etc., although on a scale where means testing is going to have to become visible and overt. Greatly cutting future benefits and their present value will be task #1 again, of necessity. There’s going to be more need for current revenue too, simplest option: higher income tax brackets (they’ve been a lot higher in the past) and slashing the “tax expenditure budget”.
Adopting a VAT in the USA is not so simple. The space it needs is already largely taken up by our state & local sales tax system. It would be totally unpopular bipartisanly with a lot of existing powerful government interests (and be very complicated.) I’d wager my money on seeing a significant carbon tax first. And the gov’t could also sell off some national parks to Universal and Disney.
robc
Sep 5 2023 at 10:13pm
Your #2 raised the age from 65 to 67 by raising the limit 2 months per birth year over a 12 year period.
If they had continued that, it would have solved SS forever, barring a dramatic increase in life expectancy.
I think my full retirement age would be about 68 is it had continued.
Scott Sumner
Sep 7 2023 at 1:34pm
Good comments.
Jim Glass
Sep 5 2023 at 8:36pm
The real problem is much worse. The Treasury reports that using accrual accounting — the form legally required by the govt of any entity of any size, other than itself — the deficit for 2022 was $4.2 trillion, and the just the one-year increase in it was $1.1 trillion. So don’t be bothered by the piddly $2 trillion ‘official’ number projected for 2023, the reality is going to be a lot worse than that.
https://www.fiscal.treasury.gov/reports-statements/financial-report/government-financial-position-and-condition.html#chart1
The fact that a WaPo piece that doesn’t know the difference between cash and accrual accounting (apparently unaware the latter exists), and doesn’t bother to look at the Treasury’s own fiscal report, is deemed “explosive”, well, it’s a comment on the sad quality of the journalism covering the subject.
Although that’s not entirely an accident. If there’s one item of uniform agreement across the political spectrum — uniting Democrats and Republicans, Progressives and Conservatives, AOCers and Trumpistas — it is: “don’t look at the budget deficit! … don’t look at the budget deficit! … don’t look at the budget deficit!”. So why would their allies in the media be any different?
James Alexander
Sep 6 2023 at 1:30am
Exactly the same in the UK with deficits.
Maybe worse overall as the UK government seems to be consciously using fiscal policy to offset monetary policy. And the silence of the Bank of England on such reckless fiscal policy is deafening.
What is Jay Powell saying about the fiscal deficit?
spencer
Sep 6 2023 at 10:30am
Robbing Peter to pay Paul won’t work. The deficits must be cut. The only thing untouchable is interest.
Rafael
Sep 6 2023 at 3:30pm
The glass half full view of the deficit is that we had a ‘mini-recession’ in the first half of the year and end of last year, and the economy already bottomed and is bouncing back.
And an increase in the deficit is obviously associated with recessions, we’re just waiting for Godot instead of realizing Godot already arrived and left.
Scott Sumner
Sep 7 2023 at 1:34pm
Except we didn’t have a mini-recession, we had a boom during the period you cite.
Comments are closed.