How To Make Mr. Grumpy Happy

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Part I: Background and Idea

People often say to me, “you’ve identified some serious problems…so how do you think we should fix them.”  That’s an interesting question.  I wish that I had an easy answer to solve a $52 trillion unfunded liability.  Most of the things that I tell people involve structural changes (term limits, changing the credit ratings agencies, etc.).  They do not involve answers such as “decrease spending by 2%.”


The reason for this is that telling people that I think we should increase taxes or cut spending just gets into huge political issues.  They are difficult to implement.  Even if they are implemented, they are often changed by the next administration.  My best analogy would be that you could either tie your child’s shoes or you could teach him how to tie his shoes.  Tying his shoes for him solves the problem now, but problems will return when the shoes become untied again.  When it comes to dealing with the government, the best solution is to simply replace the shoelaces with Velcro so that anyone could get the job done…


So today, I want to tell you what would make me happy and more optimistic about the future direction of our country.  It involves structural changes.  I’ll start with the big picture.  Then, I’m going to discuss an article that my ideas really evolved from and then I’ll conclude.


I would feel confident about our future if we implemented the following:

1. put together an independent board (similar to the Fed or similar to the federal judiciary) that had long tenure (or even lifetime tenure) to oversee the entitlement programs (particularly Social Security and Medicare / Medicaid)
2. require this board to put together a plan every five years (using the average balances for the past five years so that we’re not affected by one major move in the market or the budget) that balanced these programs (so that they were fully funded)
3. this board would have authority to cut the spending on these programs (limiting benefits, raising the age, means testing, etc.) or raise the amount we pay into these programs

In other words, all I’m asking for is a plan.  I’m simply saying that we can’t keep kicking the can down the road.  GM kicked the can down the road.  Greece used their little legs to do the same thing.  We know how it ends and how it will eventually end for the US, even if we can print our own currency.  We know that problems become worse.


Sometimes we just can’t afford things.  Life sucks.  Or sometimes, we have to save more and spend less.  Again, life sucks.  But ignoring the problem is not the solution.  We also know that Congress is incapable of making hard decisions.  We’re going to have to make serious changes, even if it requires a Constitutional amendment that grants this taxing and spending power to this board.


I’ll talk a bit more about this idea later.  But first, let me tell you about the article that triggered these thoughts.


Part II: Economic Growth and Institutional Innovation

On Tuesday, I read “Economic Growth and Institutional Innovation: Outlines of a Reform Agenda” by William A. Galston.  It was published this week by the Brookings Institute.  Below, you will find some of the main ideas from the article (and note that I am only covering the part of the article that relates to our unfunded liabilities – my main fear).


We Need to Change Institutions, Not Policies

1. Policies are political suggestions, such as higher taxes or spending cuts.
2. Examples of institutions are the Defense Department, the Congressional Budget Office and the Department of Homeland Security.

To Have Sustained Economic Growth, We Need to Solve Three Deficits

1. Fiscal Deficit
2. Savings Deficit
3. Investment Deficit

The author has many suggestions as to how to solve these problems – some of which I either don’t agree with, don’t understand how they would work or are outside of my interest.  But, he recognizes that our polarized political system is an obstacle to reform.  He suggests that we try two suggestions that resulted from collaboration between Brookings and the Hoover Institution:

1. alter redistricting authority so that state legislatures can no longer practice gerrymandering
2. experiment with compulsory voting (in a few willing states) so that politicians have to attempt to appeal to everyone, rather than just their political base

I’ve discussed the political problems (such as gerrymandering) in the past.  Some countries have “nonpartisan” authorities in order to determine voting districts.  With respect to compulsory voting, this seems like an interesting idea, but it seems like it would be difficult (and expensive) to implement.  Just look at how much trouble we have getting people to complete the Census form.  The bottom line is that we have political problems, but I’m distrustful that Congress will ever be able to solve the problem of our unfunded liabilities.  Don’t forget, they caused this problem.


Regardless of the political issues, he mentioned a suggestion for fiscal sustainability.  Apparently, the suggestion came from a bipartisan group that included three former CBO directors.  The idea is to require a review of our entitlement programs every five years to determine whether projected revenues and outlays are in balance.  If not, Congress would be required to restore balance through dedicated revenue increases, benefits cuts or a combination.  Again, I think that this is a great idea – I simply don’t believe Congress is capable of getting this done.  (If you have faith in Congress, why don’t we let them control the money supply too…)


He further promotes the idea (of several other writers) that we should have a VAT that would be dedicated to paying the federal share of health care programs.  That way, Congress would have to either raise taxes or cut benefits.  Personally, I’m not a fan of the VAT, but the intuition is good – simply forcing Congress to address the problem, rather than kick the can down the road.


Another suggestion (based on how we do base closures and trade agreements) is to have an independent commission with members from both political parties that could submit proposals in designated areas of fiscal policy.  Each proposal would require a super-majority of the Commission.  Each party in Congress would then have the opportunity to offer only one amendment to the proposal.  Again, I’m not a big fan of this.  California has a supermajority vote requirement for their budget and it’s been a disaster.  It simply gives more power to the minority party.


He also described the idea of empowered commissions as similar to federal judges and the Fed.  Federal judges have lifetime employment and their salaries can not be reduced by Congress.  Fed Governors have a 14-year appointment.


In sum, those were his thoughts and I agree with the basic intuition.


Part III: Conclusion

Now you know my thoughts and where they evolved from.  Here are my final thoughts:

1. We can disagree on a lot of things, but I don’t understand how any of us can disagree that we should have a plan that inflows should equal outflows.  We need to have a plan.
2. Political polarization has become so intense that I have lost all trust in Congress to handle these important issues.
3. I’m sick of the fraudulent accounting that the Executive and Legislative branches engage in.  One recent example is the Bush tax cuts.  When President Bush was in office, we were told that his tax cuts would have little impact on our long-term deficit because they would be eliminated in ten years (once he was out of office).  Whether you like or dislike tax cuts, it’s unfair to say that we’ll have low taxes while I’m in office and then tax rates will jump back up for the next guy.  I can easily see our Congress putting together a plan where we do nothing in the next ten years but we assume that the tax rate goes up to 90% in year 11 (and thus, we’re in balance).  We need independence.
4. An independent Board comes from a promise of employment (either for life or a long term).  I wouldn’t even have a problem if the board was comprised of federal judges – these are largely smart individuals.
5. I haven’t studied what it would take in order to give an independent Board this spending and taxing power.  My guess is that it would take a Constitutional Amendment (which is very unlikely).

The bottom line is that I will not be optimistic until we address our problem and come up with a plan as to how we’re either going to spend less (on Social Security and Medicare / Medicaid) or fund these programs.  If we don’t, I’m not sure how we’re any different than the migrant worker who makes $20,000 per year and bought an $800,000 house in California.  He lived well for a while, but eventually it had to end.

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