Thursday, March 27, 2008

Small distant problems before big immediate ones

At least that is the elite political consensus on dealing with the fiscal balance sheet of the United States government. We saw in 2005 a party run itself off a political and electoral cliff campaigning against Social Security as a social insurance program. And this attempt to privatize and destroy it near the top of a bubble (amazing how that is always the case) was supported by a massive amount of elite media support. The Pain Caucus was alive and well; convinced that we could not afford as a society to guarantee our retirees roughly 32% (under current law and intermediate projections) to 40% (current law, low cost projections)replacement rate incomes. We had to destroy the system to resolve an anticipated problem in either fifteen years as the elite was seeking to renege on their promises from 1983 or thirty five years. Social Security was in trouble and non-sustainable in its current form for any length of time.

But never mind any of the other fiscal proposals that had/have larger ongoing projected costs than OASDI --- those are either critical penis enhancement projects where we must stay for 100 years to show resolve, or critical changes in the tax code that encourage dead people to be more productive.

Yet when we look at the evidence today, Social Security is not that big of a problem. Over the 75 year projection range, the Social Security Administration projects the entire program deficit to be 0.6% of GDP. In the grand scheme of things that will produce a large number but it is fundamentally a rounding error. Let us take a look at a couple of other major policy initiatives --

a) John McCain's tax proposals would result in a permanent loss of roughly net $400 billion dollars a year in revenue. That is slightly more than 3.0% GDP, or roughly five times the size of the projected long run Social Security deficit. Yet he is a 'credible' individual on economic policies.

b) The supplemental appropriation for Iraq this year was roughly $200 billion dollars this year. That is roughly 1.5% GDP

c) The economic stimulas package/bi-partisan ass covering rebate check plans this year is roughly $130 billion dollars or about 1% of GDP.

A and B are long run changes in revenue/expenditure slopes for the United States while C is a one-off policy change, but in the past year 'serious' new proposals for expenditures and revenue losses make up roughly 5.5% of GDP, or about 9 times the size of the long run deficit for OASDI. Just keep that in mind when told that Social Security is in trouble.

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