from Follow the Money

The budget deficit before all the bad stuff

November 23, 2004

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Isn’t that what leaving any increase in deficit associated with partial privatization of social security off the books implies?

Bush’s formula on the dollar in Santiago emphasized the need to control both short-term and long-term deficits. I suspected he was laying the groundwork for arguing that his valiant efforts to reduce the relatively small (1.5% of GDP) deficit in the social security account after 2042 should offset the say 1.5% increase in the current budget deficit associated with many partial privatization schemes. But even I did not think they would float the idea of excluding any increase in the deficit associated with the transition off the books.

W has long spoke against the "soft bigotry of low expectations" -- the idea that you are doing a student who does not meet educational standards a favor by promoting the student to the next grade, irregardless. But isn’t that kind of like what the Bush economic team is proposing here? If you cannot meet the 2% of GDP fiscal deficit target in 2008, conventionally defined, shift the goal post/ make the test easier/ change the way the deficit is measured so a 4% of GDP deficit is now called a 2% of GDP deficit. Judging from the currency markets today, I suspect cooking the books won’t pass the global test.

That is why the market should discount the administration’s new talk of fiscal discipline -- they show no signs of being willing to make hard choices. A serious proposal for partially privatizing social security would raise taxes to fund the transition costs -- not change the way the deficit is measured so that the transition costs are kept off the official books.

Incidentally, Steve Friedman is leaving the White House. He clearly was no Robert Rubin. But I suspect he did exert some moderating influence on W’s economic policy -- Friedman and Rubin worked extremely closely together at Goldman Sachs, so I suspect he shared at least some of Rubin’s economic policy instincts. The names floating around for the NEC job right now are not encouraging.Incidentally, I am not at all sure W is doing himself any favors by emphasizing the long-term deficit:

1) Medicare is in much worse shape than social security. It has a much larger long-term deficit than social security. W made its long-term deficit worse with the Karl Rove "I want to win Florida" prescription drug benefit.

2) It is easy to see how partial privatization could increase, not decrease Social security’s long-term deficit. Roubini wrote about this recently in his blog. To cut the long-term deficit in the social security system, you need to increase revenues/ decrease benefits. Partial privatization reduces the systems’ revenues, which means the needed cut in benefits is much deeper. If you partially privatize and don’t cut benefits enough to eliminate the existing (after 2042) deficit AND the additional deficit created by diverting funds into private accounts, you make the system’s long-term deficits worse.

3) The deficit in the general fund -- i.e. the non-social security part of the government -- starts looking pretty scary after 2010 or so if you assume W’s tax cuts are made permanent. That is a much more immediate problem than the post 2042 social security deficit.