Covering the Economy: April 19, 2006: Fiscal Policy Plus Loose Ends

Greg Mankiw has a weblog, which he is using--among other things--to try to nudge the budget debate along:

Greg Mankiw's Blog: Greg Mankiw I teach introductory economics at Harvard University. I use this blog as a way of communicating with my students. Students and teachers at other schools, as well as others interested in economic issues, are welcome to use this resource.

Here's some of the nudging:

Greg Mankiw's Blog: Is Social Security Income Risky?: A new paper by John Shoven and Sita Slavov, however, points out that our current Social Security system is far from risk-free:

Pay-as-you-go Social Security is typically characterized as a universal defined benefit pension program. Implicit in this characterization is a sense that the participant's investment in future benefits is somehow guaranteed, or safe from risk. This study develops the concept of "political risk" as the possibility that some future legislature will be forced to change the tax and benefit provisions of pay-as-you-go social security programs, when there are changes in the demographic and macroeconomic variables that support it. Thus there is a "political risk" to participants that might be compared to the "market risk" in a personal accounts retirement scheme.... The debate over personal accounts, therefore, is not one of "safe" versus "risky" benefits, but one of portfolio choice...

Greg Mankiw's Blog: Hubbard on the Fiscal Future: Economist Glenn Hubbard (who preceded me as CEA chair and is now back at Columbia) has an op-ed in today's Wall Street Journal. He reminds us that unless we see significant entitlement reform, taxes are heading higher:

Imagine the nightmare of a tax burden 50% higher -- not so farfetched as it sounds.... The Congressional Budget Office regularly quantifies these shadows of the Ghost of Tax Day Future. Their forecasts are not sanguine. A generation from now, absent any changes, increases in Social Security and Medicare spending alone are projected to consume 10 more percentage points of national GDP than they do today.

There is nothing very new here, but it is good to have Glenn saying it anyway. As George Orwell once said, "We have now sunk to a depth where the restatement of the obvious is the first duty of intelligent men." http://online.wsj.com/article/SB114522990077327169.html?mod=opinion_main_commentaries

Greg Mankiw's Blog: AMT: Catalyst for Tax Reform?: The Panel recommended repealing the AMT. By itself, repeal is very expensive. To make the reform revenue-neutral, the Panel also recommended broadening the base of the income tax by eliminating the deductibility of state and local taxes (as well as many other changes, such as cutting back on the mortgage interest deduction). There is a certain rough justice in this recommendation: The taxpayers in high-tax states would lose more from eliminating deductibility of state and local taxes, but they would gain more from repealing the AMT.... Question for ec 10 students: Should people living in high-tax states pay less in federal income taxes than other people with the same income living in low-tax states? Current law answers YES to this question, while the Panel answered NO. What do you think?

Greg Mankiw's Blog: How to Increase National Saving: Brad DeLong (econ prof at Berkeley, former ec 10 student and assistant prof at Harvard, and super-blogger) welcomes me to the blogosphere at his blog and then complains about my post on the trade deficit. He thinks that I am being "elliptical" for saying I would like to see an increase national saving. I thought that my statement was pretty clear, but I am happy to explain to Brad what I mean.

I suppose Brad wants to know how I would increase national saving. Part of the answer is that tax policy could do more to encourage private saving. I have long been an advocate of moving the tax system in the direction of a consumption tax. The Hall-Rabushka flat tax or the Bradford X tax would be ideal. But one can also do incremental reform within the current tax structure. I would, for example, vastly expand the opportunities for tax-deferred saving, such as IRAs and 401k plans. I would like to move toward allowing corporations to expense all capital investments.I also think there is some compelling evidence coming out of the behavioral economics literature that the details of savings plans matter a lot for how successful they are. My colleague David Laibson has put together some persuasive evidence that the default is crucial. If workers are automatically enrolled in 401k plans, and have the option of opting out, participation is much higher than if workers have to actively opt-in, as is usually the case today.

The other piece of the national saving picture is public saving. A smaller federal budget deficit would mean more national saving, less reliance on foreign capital flows, and a smaller trade deficit. The trade deficit and the budget deficit are not twins, but they are cousins. As anyone who has looked at the numbers knows, the federal government's current budget deficit is, in a sense, only the tip of the iceberg of the fiscal problems to come. The federal budget is on an unsustainable path. When the baby-boom generation retires and becomes eligible for Social Security and Medicare, all hell is going to break loose. The policy options aren't pretty--either large cuts in promised benefits or taxes vastly higher than anything ever experienced in U.S. history. The stalemate over Social Security reform that we have seen over the last year suggests that the Washington establishment is not ready for the bipartisan consensus that will be necessary to put the budget on a sustainable path.

In my view, there is plenty of blame on both sides of the aisle. The Democrats are not willing to entertain significant cuts in entitlement programs, but they are also not willing to admit that large tax increases that would be necessary to fund those programs as they currently exist. They talk as if reversing the Bush tax cuts on those making over $200,000 would solve the problem, even though the funding gap is far too large for such an easy fix. Similarly, the Republicans will not entertain talk of any tax increases, even as they expand entitlement spending with a costly bill to expand Medicare spending to cover prescription drugs...

Greg Mankiw's Blog: Are the Rich Paying Enough?: Now that it is tax season, there is sure to be a bunch of articles and op-eds on the question of whether the rich are paying their fair share in taxes.Before one starts expressing opinions, it is good to look at the facts. The Congressional Budget Office is one place to look for the data on such issues. Here is the Total Effective Federal Tax Rate (all federal taxes divided by income) for different income groups, according to a CBO report, for 2005:

Lowest quintile 5.5 percent
Second quintile 12.0
Middle quintile 15.6 Fourth quintile 19.6 Highest quintile 26.3

Top 10 percent 27.8
Top 5 percent 29.0 Top 1 percent 31.1

Does the average tax rate not rise sufficiently with income? Or does it rise too much? Or is it just right? Economics alone does not provide the answer. But when thinking about the issue, these are the key numbers that people should focus on.

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Dean Baker joins the 4th Journalistic Overwatch Keyboarding Taskforce:

Beat the Press: Dean Baker is an economist and co-director of the Center for Economic and Policy Research. He was author of the Economic Reporting Review, a commentary on economic reporting in the New York Times and Washington Post, from 1996-2006. He holds a Ph.D. in economics from the University of Michigan.

And my best friend since second grade, Michael Froomkin, reveals his true colors: he's with the ink-stained wretches who spend every night wrestling with hot lead:

Discourse.net: Dean Baker Wants Numerate Reporting: [Dean Baker's] inaugural posting asks, reasonably enough, why most economic journalism fails to put raw numbers in context.... In this case, though, it seems to me that this question actually answers itself: $285 billion sounds like a front-page headline; "approximately 1.7% of federal spending over the next six years" sounds like what William Safire used to call a "nine-point MEGO" where the MEGO stood for "my eyes glaze over."... And while I'm carping at my betters, let me point out that telling people that the new transportation bill will be 1.7% of federal spending or even "approximately 4.6 percent of projected discretionary spending" won't tell most readers all that much either...unless you tell them how it compares to transportation spending last decade, whether it covers deferred maintenance, current expenditures or new capital projects, and what it does to the deficit... And your economic journalist has, what, fourteen column inches on a good day?

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The Washington Post vs. the Internet, Round XXXIV?

This story in last Saturday's *Post* is being played up as Round XXXIV of the Wahington Post vs. the Internet. I don't think that's what's going on. Look here: http://delong.typepad.com/sdj/2006/04/covering_the_ec_2.html