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Monday, June 26, 2006

Everything Old is Still Old

This National Review Online commentary urges Republican leaders to reconsider their opposition to tax increases as part of the solution to growing entitlements. The idea is to trade concessions on taxes for the creation of personal Social Security accounts with the hope that, once the door has been opened slightly, salesmanship can open it further and allow conservatives to reach their goal of privatizing Social Security. Beware of compromise in sheep's clothing:

Entitlement-Reform Realities A little conservative compromise will go a long way as we attempt to revamp today’s safety-net system, by Jagadeesh Gokhale, NRO: Some conservatives are apoplectic about the prospect of abandoning the “no-tax-hike” pledge as part of entitlement reforms. ... Unfortunately, the political and economic arithmetic of entitlement shortfalls does not permit them much hope; remaining wedded to high principles and shunning compromise will only worsen their choices. They should learn from past experience and adopt a more strategic approach. ...

As the aphorism goes, “possession is nine-tenths of the law.” Liberals’ programs have been in operation for decades and are now supported by a large bloc of voters, making it especially difficult for conservatives to challenge or modify them. It’s quite telling that liberals are viewed as having no new ideas. But that could be because most of their ideas are already in operation.

Liberals are in a peculiar bind. Entitlement shortfalls are growing larger and threatening to undo their legacy. ... That presents an opportunity for conservatives to revamp today’s safety-net system by introducing their own market-oriented framework, with personal Social Security accounts as the crown jewel. Unfortunately, worsening entitlement shortfalls also make adopting personal accounts more difficult each year. The closer baby boomers come to retirement age, the less likely they are to acquiesce to smaller entitlement benefits than they are currently promised in exchange for adopting personal accounts — as last year’s debate showed. ...

Now the cake of higher future taxes is in the oven, with the temperature rising rapidly. Could conservatives remove the cake and replace future tax hikes with personal accounts? As last year’s stalled Social Security debate showed, that’s unlikely. But conservatism’s high priests continue to answer this question with a “yes.” Perhaps they have a closely guarded strategy for guaranteeing overwhelming electoral success.

Could conservatives do better by agreeing to accept some of the taxes in exchange for removing the cake earlier and replacing a part of future tax increases with personal accounts? The answer of the high priests is “no,” which is puzzling given that their choices would only worsen over time.

What are the strategic tradeoffs? Three items seem relevant: First, resolving the entitlement shortfall by paring scheduled benefit growth is becoming less feasible as time passes. The large baby-boomer voting bloc would increasingly view those benefits as inviolable and would likely possess the political muscle to enforce those claims. Thus, intransigence on compromise will make higher taxes more, not less, likely. ...

Second, the fact that personal Social Security accounts do not yet exist and thus cannot compete with the existing system to demonstrate their superiority is a huge disadvantage. Their absence allows liberal opponents to compare personal accounts with placing one’s retirement on a Las Vegas roulette table.

Third, if personal accounts were introduced and proved successful, they would incorporate property rights much more compelling than existing claims on Social Security benefits. Those rights on income-earning assets would also be bequeathable.... Such rights would not only be irreversible, they would carry strong momentum for expansion as more groups clamored for access to personal accounts.

So any arguments that the advantages of introducing personal accounts are not worthy of a few early concessions on taxes appear far from credible.

First, there is nothing that necessitates linking tax changes to personal accounts - no such linkage was made when taxes were cut. This is nothing more than a strategy for attaining personal accounts, it is not a solution to the entitlement problem. Medicare is the problem, not Social Security. Here's Robert Reich on this point who, while bemoaning turning 60, is compelled by his 60th birthday to think hard about Social Security:

On Turning 60 (Postscript), by Robert Reich: Commentator Rodger doesn't believe we can grow our way out of the pending Social Security crisis, but I think he's (almost) wrong. Look, I was a trustee of the Social Security trust fund. I saw up close how the actuaries made their projections for when the fund will run out of gas. They plugged in (and continue to plug in) very low estimates of average annual economic growth over the next seven decades. But if the U.S. economy grows anywhere close to its average growth over the LAST seven decades -- which is over 3 percent a year -- the trust fund will do just fine. How can we grow that fast when we won't have enough new entries into the labor force to support the vast baby-boom generation? Two ways: First, productivity gains will be substantial, as new technologies work their way through the economy (consider the astounding productivity gains what's over the last five years). Second, America will continue to have lots of legal and illegal immigration, despite whatever Washington does in the meantime. So don't worry too much about Social Security. Fix your worried gaze at Medicare instead. There's the real problem.

And I'm tired of the "we're the party of ideas" claim. The recent Republican agenda includes:

Flag Burning
Line Item Veto
Tax Cuts
Gay Marriage

This is the party of new ideas? Where?

Update: MaxSpeak has more to say about the NRO commentary.

Update: Brad DeLong has even more. And in response, I like pomegranates, always have, and as an add-on to the main course or as a snack they're great (though watch out for the stains). But, like Brad, I wouldn't feature them as the main course.

    Posted by on Monday, June 26, 2006 at 10:44 AM in Economics, Policy, Politics, Social Security, Taxes | Permalink  TrackBack (0)  Comments (26)


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