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Our treasured colleague Kulak is at it again with another post on his Substack.
I know that a slow-moving budget crisis is not the spiciest meatball, but the fiscal situation in the United States is looking bad. Debt to GDP is now above the previous high set at the peak of WWII. But whereas the post-wars years saw demographic and technological tailwinds, the current epoch is characterized by low fertility and productivity growth.
It gets worse:
While it might be possible to split a shrinking pie and remain friends, it is definitely IMPOSSIBLE to split a pie when more than 100% of the pie has already been promised to one person or another. Give a person a dollar, they are mildly happy. Take a dollar away and they are FURIOUS.
At this point, I'd encourage you to find a nearby senior citizen. Please explain to them that they don't deserve their social security check. You see, the money that was supposedly SAVED was in fact already SPENT. Far from saving money, their generation actually left a sizeable DEBT to future generations. So not only would seniors have to give up their government checks, they would have to pay hundreds of thousands of dollars in additional taxes just to get to even.
I'll wait.
Just how irrational are the expectations of our Boomer rulers? Slobodan Milošević understood.
The last politician to even contemplate reforming Social Security was George W. Bush, who claimed to have earned "political capital" shortly after his re-election in 2004. By March of 2006, his approval rating had fallen from the high 50s to just 31. Nowadays, politicians in either party don't even mention Social Security except to praise it effusively and promise to defend it at all costs.
We are well and truly fucked. The Federal government will be forced to default or inflate away its debts within the next 10-20 years. And this is BEFORE the numerous suggestions to somehow EXPAND the welfare state, whether they be student loan forgiveness, payments to favored racial groups, or universal basic income. After all, ours is a great laboratory of democracy. So while the Federal government enters a slow fiscal doom loop, some states like Illinois, California, and New York seem to be attempting a speed run.
How do we get out of this? Kulak has a few ideas, but I'm a little less dramatic.
AI. Maybe we will somehow thread the needle between doom and nothingburger. 🤷
Immigration. The U.S. could escape this problem by cherry picking the best citizens from other countries and telling everyone else to GTFO. We are still, after all, the best country (>10 million population subdivision). This would work, but it would never happen and it's probably a bad thing for the world at large.
Inflation. Many liabilities are indexed to inflation such as Social Security and Medicare. But we could inflate away all the existing debt. Debt to GDP actually decreased in 2022 because of 9% inflation. That level of inflation for a decade or two could make the problem less bad. It would also be helpful if the official inflation numbers were even more fake.
Things are just shittier in the future. Brazil is still a country. This is your future.
Surely the obvious answer is to raise taxes. According to some projections from CBO data if we had the same tax rates we did under Clinton debt to GDP would be
60% and falling. Were tax rates in the 90's really so awful?According to the CBO itself we could also raise payroll taxes by 4.9 percentage points, which would keep Social Security paying 100% through 2096. Even if we take no action Social Security will be able to pay out around 77% of benefits through 2096 and ~65% of benefits indefinitely.
I feel like the "at some point" is pretty key here. Is this money we have to spend in the next year? 10 years? 100 years? Because the feasibility of doing so is very different depending on the relevant time horizon. Obviously the US couldn't pay that over the next year, but it almost certainly could over the next 100. Comparing it to the present number of citizens only makes sense if those are the total pool of citizens who are going to have to pay for it, but they obviously aren't if the relevant time horizon is a century or more.
Scaremongering about the US national debt or unfunded liabilities or whatever basically requires you to conceptualize the issue as Big Scary Number That Must Be Paid Off Soon. When you actually look at analysis of the fixes required to resolve these issues, and the time horizon relevant for their calculation, they become much less scary. Of course, "everyone pays five percentage points more in payroll tax" sounds a lot less scary than "AMERICAN ECONOMIC COLLAPSE IS IMMINENT."
I think it would be helpful to clarify by what you mean by paying "5 more percentage points". The current Social Security tax is 12.4%, half paid by the employer and half by the employee. Are you proposing increasing the tax to 13.02%, to 17.4%, or to 22.4%? Certainly this matters.
But as messed up as Social Security is, Medicare is worse. It's tough to find good recent stats, but here's what Wikipedia says: "Households that retired in 2013 paid only 13 to 41 percent of the benefit dollars they are expected to receive". So I guess we'll have to raise Medicare taxes by 150-670% to cover that too. (This assumes that each person pays only for their own benefits. In reality, they will have to pay more as each generation is smaller than the last).
But even if we fixed those problems, we still have to deal with the fact that the rest of the budget is not balanced either. There's another tax raise. Not to mention the myriad local and state taxes that will have to be increased as well.
Endlessly raising taxes on productive members of society to pay for unproductive members of society might "solve" the problem for some definition of solve. But it leads to a country that is much poorer and more miserable. As the demands on the productive members of society grow, the temptation to drop out will grow apace, leaving even fewer workers taxed much more highly. As tax rates increase above 50%, as is now possible in New York City and California, future increases will lead to less revenue, not more.
We are already seeing this. The number of people on disability as a percentage of the workforce has grown from 0.5% in 1960 to 5% today. The labor participation rate is still well below the peak from 2000, despite record low unemployment. .
As the rewards for work shrink, the temptation to shirk will grow.
So, no, it's not a matter of just raise taxes by 5%. That won't get us anywhere close to a solution.
"Percentage points" means the actual percentage. 10 percentage points more than 10% is 10%+10%=20%, not 10%×(1.1)=11%. That second one is a 10 percent increase rather than 10 percentage points increase.
No it really doesn’t. That’s why you need to specify. “We’re only raising your taxes 1%”. Proceeds to double taxes.
But it really does and that is the defining feature of percentage points changes unlike percentage change.
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