Asymptosis

He could have written my last two posts, or I could have written the script for this:

Media Player | WBUR and NPR – On Point with Tom Ashbrook.

The Stockman interview starts at 12:03. It would be uncanny, if both of us weren’t simply stating the obvious.

He got two things wrong — it’s the last thirty years, not the last forty (he corrects himself later), and yes, there is a responsible party, that consistently pays its bills.

I’ve asked my good friend Steve many times over the years to explain the graph in my previous post:

How can he rant on so much about federal debt while continuing to champion policies that seem to have resulted in a stunning, spectacular thirty-year runup in federal debt (except under Clinton), as compared to a 35-year post-WWII decline in debt, mostly under Democrats?

One time his answer was “it doesn’t matter; I don’t care.” Other times he just didn’t answer. And he definitely never answered in writing.

But he did give an explanation over drinks the other night that gave me pause:

That runup in debt was a result of a “time bomb” left by the Democrats who created Social Security, and — especially — Medicare and Medicaid.

And now, as I’m writing this post, I’m delighted to find that he has answered in writing.

There’s a very long blog post below showing entitlement costs over the years, and demonstrating that at least 75% of Reagan’s debt increases had nothing to do with entitlements. (It’s mainly a matter of deciding which spending you want to blame the deficits on, and assuming that insufficient revenues had nothing to do with it. But at most, 25% of his debt runup was entitlement spending. The rest he managed on his own.)

But I want to cut to Steve’s key paragraph:

the big bills will kick in long after you’ve left office, and with any luck at all, you’ll likely have an army of bloggers [thanks for the link love!] who will blame it on the ideologically incompatible leaders who come after you.

Bold italics mine.

“Ideologically incompatible.” I’d say that’s true. When they put those entitlement programs in place, with enthusiastic (and ongoing!) support from a large percentage of the American people, the Democrats had every intention of paying for them. And as you can see from the debt graph, they did so, responsibly and consistently (as did Dwight D. Eisenhower, Richard Nixon, and Gerald Ford).

But I guess Reagan and his dee-sciples have an ideology that doesn’t involve paying your bills. When they came into office, those entitlement programs were the law of the land, and had been for 15 to 45 years. They weren’t going anywhere. The American people didn’t want them to. And — you’ll notice — they haven’t.

And the projected costs were clear. A responsible leader would plan to cover those costs.

But those elitist leaders knew better than the American people. They knew that those entitlement programs were bad for the people (they were certainly bad for all the people they knew). And since they knew they couldn’t convince the American people to understand their god-like wisdom and cut the spending for those programs, they’d have to do it another way. They couldn’t possibly just establish a tax regime that payed for the services the people wanted.

“Ah,”  you’ll say, “but the tax increases would have had to be MASSIVE, to cover the GARGANTUAN promises made by those profligate Democrats!” (Did I mention “sky is falling”?)

Uh, not so much. If tax revenues had been only 6% higher from 1981 to 2009 — 17.7% instead of 16.6% of GDP, an extra 1.1% –– we would not have added a single nickel to our debt over those 38 years. And we would still be the lowest-taxing prosperous (large) country in the world (excepting Japan — that hotbed of economic growth).

A few more fractions of a percent, and our then-existing national debt would have been paid off long ago. We’d be sitting pretty into the foreseeable future. Sad thing we didn’t do that.

Here’s the spreadsheet. Goal-seek it yourself.

And here’s what I want to say: True conservatives pay their bills — especially when you’re only talking one penny on the dollar. How dare these people call themselves conservatives?

It’s actually mind-boggling to hear entitlement programs described as “time bombs,” when we’re in the midst of defusing George W. Bush’s utterly intentional and shamelessly transparent Monster Bomb: the supposedly “expiring” tax cuts — the most audacious, despicable instance of budgetary chicanery and legerdemain since Stockman’s “Rosy Scenario.”

All that said, here’s the post that I was writing.

In writing this post I also realized that there are two key issues to  grasp in understanding our disagreement:

1. Steve is talking about unfunded future liabilities, and I was asking him about past cash flows. A lot of our disagreement stems from cash versus accrual accounting. I’m absolutely right about entitlements’ minor role in the Reagan/G.H.W. Bush debt runups. He’s absolutely right about the long-term future impact (and I’ve never disagreed on that; it’s obvious from the numbers and from everyone’s analysis of the numbers).

2. Medicare and Social Security don’t just do spending, so fixating on spending is missing the real picture. They’re funded (in large part) by tax revenues.

Social Security has been steadily cash-flow positive forever. Even in 2009 it took in $130 billion dollars more than it spent. So it’s had no impact at all on the public debt. (On government borrowing from Social Security and the implications for future liabilities, be patient; more below.)

Medicare gets part of its revenues from taxes, and part from government transfers. Those government transfers each year contribute to the annual deficits and cumulative debt.

Medicaid doesn’t have its own income stream; it’s all paid for off the general government budget, so it contributes directly to deficits and debt.

So let’s look at Medicare and Medicaid, because they’ve affected past deficits and public debt. Here’s the spreadsheet.

Medicare

I’ll only show hospital insurance (HI) and supplementary medical insurance (SMI) here, because obviously George Bush’s Part D drug insurance program didn’t have any effect on earlier budgets. (Though it’s had — and will have — mondo effects on budgets since it was enacted using intentionally false accounting by the Bush administration. Love those pharmas.)

Each program, as an independent entity, has a basic income statement — revenues minus expenditures. Simple. Based on their income statements, the two programs combined have been cash-flow positive in every year since 1996, with three exceptions (’82, ’95, and ’97). (For the curious: Each individually has also been generally cash-flow positive.)

So it might seem that they’ve actually contributed to the unified budget (SS and Medicare [etc.] combined with the general government budget) — reducing deficits and debt almost every year.

Except: part of those revenues are from taxes; they’re “General Revenue Transfers” from the government. Those are direct subsidies to pay for unfunded expenditures, cash transfers that will never be paid back to the government. Those transfers are part of the annual deficits, and they increase public debt.

Here’s what that looks like:

You can argue about whether the transfer amount or that amount minus the programs’ nets should be used for our cash flow discussion. I think the nets should be included because they’re actual cash balances that can be used to pay for future Medicare expenses, so the government won’t have to make future transfers to cover that. But it doesn’t matter much because the two figures aren’t very different.

Whichever figure you use, the question we’re asking is how those Medicare costs compare to the federal deficits over past years. Here’s what that looks like:

Note that I’m being incredibly unfair to Medicare here, implying that all its transfers are assigned to increasing the deficit, but that the defense budget (for example) has no responsibility for the deficit.

It’s too bad I don’t have Medicare numbers for 2009 (tables 8.A1 and 8.A2 in the 2010 Statistical Supplement haven’t been published yet), because you’d see the deficit go spectacularly off the chart, while Medicare would only go up some.

The on-budget deficit is the one you need to use here, because we’re trying to see what Medicare actually costs the government each year, out of pocket. We’re already pulling those costs — the transfers from the (on-budget) government account to the off-budget Medicare account — out of the total deficit for comparison.

Medicaid

This program has no dedicated revenues. It’s all out-of-pocket for the government. (States have Medicaid trust funds, but that’s a whole other bundle of spaghetti.) Here’s what those expenditures look like (I just figured out how to do transparency in Excel!):

And here’s Medicaid and Medicare combined (including Medicare’s net for each year):

As you can see, prior to 1990, entitlements made up a pretty small share of deficits — and that’s assuming you post all those expenses against the deficit, instead of posting, say, the defense budget. Here’s what that looks like:

But let’s go with the underlying assumption — that the government shouldn’t have spent anything on health care for the poor and the elderly, and anything it did spend was just adding to deficits and debt. That’s a pretty huge assumption. But given that, here are the numbers:

	Increase in Debt	Medicare Share	Medicaid Share	Medicare % of Debt Increase	Combined % of Debt Increase
Reagan (’81–’89)	1,613	182	217	11%	25%
Bush I (’89–’93)	1,240	155	244	12%	32%
Combined	2,853	337	460	12%	28%

We can say this for certain: of the $1.6 trillion in debt added under Reagan, 75% had absolutely nothing to do with entitlements. He managed that via other means.

I realize that this is all history, and doesn’t address unfunded future entitlements. I’ve already bemoaned the fact that they’re unfunded because we didn’t pay the penny on the dollar to fund them over the last thirty eight years, but that’s not much help for the future. Everybody knows the rule of compounding returns: invest early. But since the Republicans wouldn’t allow us to do that, we’re going to have to raise taxes a lot more now than we would have otherwise.

Cause I got news for you: no matter how much the Tea Partiers wave their widdle flags, they don’t want to cut Medicare, Medicaid, or Social Security either.

I’ve laid this out before, but I wanted to give it its own post so I could refer to it — notably in my next post.

The Reaganomics Strategy is a brilliantly effective (and profoundly irresponsible) political strategy. It goes like this:

Borrow money from our children and from abroad, and use the money to buy votes here with the world’s oldest political pander: “I’ll cut your taxes.”

Just tell the people they don’t have to pay for the government they insist on receiving. Borrow to pay for it instead. It gets you elected, right? Deficits be damned.

When Cheney said “Reagan proved that deficits don’t matter,” he was making a political, not an economic statement. People (especially Republicans) love to self-righteously complain about deficits and debt, but they vote for the person who promises to cut their taxes.

Here’s the legacy of The Reaganomics Strategy:

After declining steadily for 35 years after WWII (from 120% to 35% of GDP) — with Republicans and Democrats alike responsibly paying off the debts of that war during a multi-decade economic boom — in 1981 debt started spiking, and has been doing so ever since (except under Clinton).

The Bush II spike in particular is simply stupefying, and we know the four sources of that spike: two wars, Medicare Part D, the economic bailout, and — of course — massive tax cuts.

Is it any wonder that Democrats complain of hypocrisy, when Republicans — supposed “fiscal conservatives,” vilifiers of Keynesian stimulus — have been engaged in a nonstop thirty-year binge of deficit spending and Keyensian stimulus gone wild — in both good times and bad? (Keynes advocated deficit spending during recessions, and building surpluses during expansions — straightforward stuff that both economists and everyday people see as being sensible, prudent, and the best path to growth and prosperity. Maybe Republicans don’t really believe in sensible, prudent policies that yield growth and prosperity.)

But even with that endless flood of government stimulus, Reaganomics-driven government- and regulation-slashing — supposedly such spurs to growth — have resulted in only tepid economic growth compared to the pre-Reagan era — and little to no growth in middle-class incomes. (Trickle-down is supposed to … trickle down, right? Eventually?)

We’ve done the experiment. It failed.

Now don’t get me wrong. I don’t blame all this on what Ronald Reagan did. He was a pretty good Keynesian compared to today’s lot — he raised taxes when times got good, to the tune of about half his bad-times tax cuts. I blame it on the ideology he promulgated.

Reagan loved to spout the Government Is Bad gospel — it was good rhetoric, good politics — but he didn’t actually live by it. He spent half his life in government. But his dee-sciples, they’re another story. With the wild-eyed (glassy-eyed?) zealotry of typical disciples, they’ve translated that rhetoric into a childishly simplistic and unabrogatable gospel that is a cartoonish caricature of Reagan’s relative pragmatism.

That’s the legacy that Obama is saddled with — thirty years of profound fiscal malfeasance. He’s set to flatten out the debt curve (once again, responsible Democrats cleaning up after Republican profligacy), but he won’t be delivering robust economic growth, much less a balanced budget, any time soon. That opportunity was squandered long ago.

Reagan was able to come off looking pretty good, because Volcker was able to turn on the monetary tap in ’83. The economy — including the unemployment rate — turned around within months.

Bernanke and Obama don’t have that luxury. The Republicans have had the tap wide open for thirty years.

So while Obama’s popularity ratings seem to be tracking Reagan’s almost perfectly right now, don’t expect that to continue. He’s in the unhappy position of dealing with a fiscal time bomb that was planted starting in 1981.

But way way way way richer.

I’m rich; tax me more Congress should let the Bush tax cuts expire for the wealthiest Americans and use the additional tax revenues that are generated to invest in infrastructure and research. – Los Angeles Times.

Update, 4/16/15: A friend points out that this post misrepresents what’s reported in the linked Census data table. From the Census definitions (PDF), emphasis mine:

Receipts from the following sources are not included as income: capital gains, money received from the sale of property (unless the recipient was engaged in the business of selling such property); the value of income “in kind” from food stamps, public housing subsidies, medical care, employer contributions for individuals, etc.; withdrawal of bank deposits; money borrowed; tax refunds; exchange of money between relatives living in the same household; gifts and lump-sum inheritances, insurance payments, and other types of lump-sum receipts.

So you should either increase the $11K a year in the headline by some amount, or reduce the 19 million.

Even better, it would be great to see a similar calculation based on the Census’s Supplementary Poverty Measure, “a more complex statistic incorporating additional items such as tax payments and work expenses in its family resource estimates.” It also includes in-kind “income.” Matt Bruenig provides about the best explanations and discussions of this measure that I’ve seen over the years.

 

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All Time Record Level of Severe Poverty | Angry Bear.

19 million people in the USA live in households with income less than half the poverty line (severe poverty implies income significantly less than $ 11,000 yr for a family of four)

6.3% of the population.

Figures for 2009, they include all public assistance and transfers in addition to market income.

This is before taxes. Now if your household is making $11K you not paying income tax, but you’re definitely paying payroll tax and sales tax.

But if these people were contributing something of value to our great economic muscle machine, they’d be rewarded, wouldn’t they? Must be laziness.

Update from the comments, Nov. 3: Harold gives us this brilliant link. Completely contradicts my surmise below. Definitely watch the video.

Being cursed with a curious mind, when I’m driving — especially on the highway — I’m always wondering about the hydrodynamics of traffic. Here’s an interesting insight:

With cars moving fluidly in a tight pack even a seemingly innocuous change of lanes may cause a tiny disruption which is propagated backwards for many miles.

[A new study fingers] timid and aggressive driver behaviour as the main culprit. … vehicle speeds drop to zero if just a few drivers accept shorter distances between their car and the one in front, and a handful of others in the same lane prefer a greater gap, relative to the “equilibrium spacing” which in theory ensures a steady ride.

It’s been my impression that one car leaving excessive distance —especially in the left lane — can clog up everything. I’m not advocating tailgating (I hate that), but…

Here’s my solution to highway traffic congestion: the government or some civic-minded nonprofit should give away these bumper stickers:

My friend Steve wonders at all the college students who study Lithuanian folk dancing and the like, and wonders whether they shouldn’t study something useful instead, and pursue less remunerative interests when they’re past their prime earning years.

This makes some sense to me, theoretically. But here’s what’s weird, something I’ve been wondering at myself for quite a while:

America is the only country in the world where “liberal arts education” is widespread, actually pretty much ubiquitous in higher ed. (And Canada? Je ne sais pas.) Every other country has a much more voc-tech model: even at Cambridge and Oxford (and certainly in France or China), when you get to college you declare your major immediately, pursue that major, then get a job in that major. In many countries you have to make that decision, or have it made for you, far earlier — at 12 or 15.

America also has, far and away (by everyone’s measure, here and abroad), the most, best universities in the world — maybe even equivalent to its military dominance. America is the number-one magnet location for students from across the globe. And countries across the globe are soliciting American universities to set up satellite shops — with their liberal arts models — in their countries.

How to explain this? The standard, loosy-goosey nostrums about developing critical thinking skills, flexibility of mind, adaptability in a fast-changing work world, etc. seem so vague and wooly up against hard-eyed, nuts-and-bolts preparation for the world of work. But on a national and global level they seem to be born out, in spades.

It’s worth noting that those university rankings give a lot of weight to the strength of graduate schools — which are, essentially, voc-techs at a high level. But (almost) all the people in those graduate schools came up through the liberal arts undergraduate system.

It’s possible, of course, that we have the best universities in spite of the liberal arts model, not because of it. Perhaps if we were more utilitarian and instrumental, we’d be even more profoundly dominant in higher education. But I’m thinking that that imagined counterfactual has the burden of proof on it, up against the existing evidence.

This reminds me of the comment I read a while back from history professor. His students would ask him what they could do with a history degree. He said (paraphrasing from memory here), “Unless you’re going to teach, nothing. But that’s the wrong question. The right question is ‘What do people with history degrees do?’ The answer is — everything.”

Me, I got my B.A. in Literature, Theory and Criticism, and went on to be an equity partner and/or principal in a whole string of startups, with combined values totaling tens of millions of dollars. Did that degree help me do that? I have absolutely no idea. I do know that it’s what I wanted to do at that time — what I’d work at day and night because I was fascinated by the subject. (Even though I had absolutely no intention, at any time in my life, of becoming a teacher or a professor.)

And that interest has continued, greatly enriching my life ever since. Viz. (Competing for the most life-enriching prize is what I call my pre-graduate degree, which I took in downhill skiing — paid for by loading chairlifts in Very Cold Weather for two winters at low wages, and by the opportunity cost of not doing something more remunerative and/or career-enhancing. Shoulda become an investment banker, right? I considered it at the time, it was quite clear where the money was…)

I don’t call myself representative — I’m somewhat smarter than the average bear, and I had a lot of other advantages of birth. Certainly many people will enhance their lives far more by studying something more practical.

But on a national level, I like to think about one of my kids’ best friends, who is currently at the Annapolis Naval Academy, majoring in … literature.

Wacky? Maybe so. But when I look at the world around me, the balance of the evidence tells me that our country and our world are better off because he has the freedom and opportunity to do that. It’s another aspect of the freedom that our country provides — cultural, institutional, intellectual, psychological. It’s among the main reasons — maybe the main reason — that we’re such a remarkably successful country.