Tag Archives: deficit

04.11.2013 | The CPI: Social Security COLAs

Our story starts with Ida Mae Fuller.

At 65, in 1940, Ms. Fuller got the first US monthly Social Security retirement check for $22.54. In 1941, she got $22.54 each month. In 1942, 1943, and 1944 she still got her $22.54. Until 1950, she received $22.54 a month.

You can see that Ida May Fuller had a problem. Each year, her check bought less. In 1949, she needed a monthly check for $38.32 to have the same buying power.

Realizing that beneficiaries’ purchasing power was plunging, in 1950 Congress gave Social Security its first taste of a COLA, a Cost-Of-Living-Adjustment. Since then, at first through special legislation and then automatically based on the CPI, Social Security check amounts have usually risen.

And that takes us to Social Security’s problem. A pay-as-you-go system, current workers pay current beneficiaries. With the baby boomer population bulge, today’s wage earners just won’t provide enough money. Add to that the pressures of a ballooning national debt and you get the need to control the future cost of Social Security.

One way is through COLAs. Just diminish any cost of living increase and the checks can be smaller. Proposed by President Obama, a chained CPI is one way to create these lower COLAs. For the regular CPI, the prices of close to 80,000 goods and services ranging from hockey gloves, to navel organges to hotel rooms are checked regularly. Month to month, exactly the same item is monitored. With a chained CPI, the approach recognizes more realistic buying habits. For example, by recording discount buying, it inputs lower prices. (Please see AARP graph, below.)

Opposing the chained CPI proposal, elderly beneficiaries point out that it does not reflect how they spend. Living in smaller apartments, they do not buy in bulk from a Costco. Unable to drive, they do not search for discounts. Older, they are uneasy with new technology. And finally, unlike a typical market basket, medical spending is a sizable chunk of their spending.

This PBS Paul Solman video provides an excellent explanation.

Just like Mayor Bloomberg has had difficulty downsizing COLAs, so too might President Obama. The Mayor is talking about sugary drinks and the President about Social Security. Both though are talking about what government can give us and what it can take away.

Sources and Resources: For the complete picture, combining an excellent Bloomberg article with the PBS Paul Solman video, you can grasp the whole chained CPI issue. Then you can add this Social Security Administration site for historical facts and COLA stats. For example, during 1980, the COLA was 14.3%. For 2010 it was 0.0%. This year, the COLA will be 1.7%. Finally, for the specific impact of a chained CPI, you might also look at the AARP (American Association of Retired Persons) report that is the source of the following graph:

CPI-E is a market basket based on typical elderly purchases. C-CPI-U is chained CPI. CPI-W is the current CPI market basket used to calculate Social Security COLAs.

Posted by: adminEcon
Tags: COLAs, CPI, deficit, federal budget, social security
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03.21.2013 | Tax Increases: Yacht Lessons

Called a fairness issue, proposed corporate jet tax increases have been described as an offset to poverty program cuts. However, supporters of the taxes might be disappointed.

Some history…

The Omnibus Reconciliation Budget Act of 1990 included a luxury tax on yachts, aircraft, and more expensive furs, jewelry, and autos. It was supposed to be a relatively painless way to add $31 million to federal revenue.

But it did not work out that way. With higher prices depressing quantity demanded, the government actually lost money. Job cuts in each of the impacted industries meant elevated federal spending for unemployment benefits. Diminished sales decreased government revenue. The net result? A loss of $7.6 million rather than a $31 million gain.

I wonder whether current proposals to diminish tax breaks on corporate jets are a 1990 rewind. The rationale is the same, the need for revenue is similar and the tax bite will go up. The question is whether higher taxes again will create unanticipated consequences.

In Wichita, Kansas, the mayor is concerned. Home to Cessna, Beechcraft and Learjet, one tenth of all jobs in the region depend on private aviation. As one employee at Yingling Aviation explained to Reuters, just having the industry stigmatized has caused diminished sales, created less maintenance work, and hurt local grocery stores.

I know that fairness and revenue are potent arguments for tax increases. However, I keep worrying about their impact on economic growth. Can I confirm that my concern is valid? This summary of a paper from economists Christine Romer (former chair of the President’s Council of Economic Advisors) and David Romer indicates how tough it is to determine the connection between tax hikes and economic growth.

Your opinion?

Sources and Resources: It was amazing to see in this Reuters article how similar the current protests to new tax legislation resembled the 1990 tax act debate. For more on the content and impact of the 1990 legislation, this Washington Post article and the NY Times provided details. For much more detail, here is the text of the The Omnibus Reconciliation Budget Act of 1990.

Please note that the history of the luxury tax was taken from a past econlife entry.

Posted by: adminEcon
Tags: corporate jets, deficit, tax increases, yachts
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03.01.2013 | The Federal Budget: Sequester Déjà Vu

Today’s sequester is not the first.

Just like now, in 1985, cutting the deficit was popular…in theory. The question, though, was how to get legislators to do it. The answer was Gramm-Rudman (aka the Gramm-Rudman-Hollings Act or the Balanced Budget and Emergency Deficit Control Act of 1985). One of its authors, Warren Rudman, called the act, “a bad idea whose time has come.”

The goal of Gramm-Rudman was to intimidate lawmakers into acting by making the alternative much worse. Yes, it is all about BATNA, Best Alternative To a Negotiated Agreement. Targeting 1993 as the year that the budget had to be balanced, a rewritten Gramm Rudman listed annual automatic cuts that would kick in if the Congress did not pare spending down gradually.

Did it work? If we rewind to 1990, we could say, “Yes.” Most analysts say that the first President Bush and the Congress agreed on a 1990 deficit reduction package because of it. Basically, the 1990 deal said “paygo.” Any tax cuts or spending increases? They have to be paid for before they happen. Soon after, Alice Rivlin, President Clinton’s OMB head said, “it isn’t that no one ever thought of adding prescription drugs to Medicare. We just couldn’t find a way to pay for it. There was very real restraint.”

Paygo expired in 2002.

Now, do we have Gramm-Rudman Part 2?

And, just a bit more history:

1. A deficit summary:

2. The following CR, Continuing Resolution, from the Congress suspended the 1991 sequester:

NECESSITY TO SUSPEND SEQUESTRATION
Currently, the economy is weakening. The country is sustaining an economic shock made worse by oil price increases. The cost of Operation Desert Shield in Saudi Arabia is putting additional pressure on the deficit. The Congress and the Administration are working to address these problems, but the actions needed to work out this situation have not yet been implemented.

The Balanced Budget and Emergency Deficit Control Act recognizes that when the economy is weak, special circumstances regarding sequestration are required. Provisions included in that Act establish a procedure for the suspension of sequestration in these circumstances. Clearly, the economy has been weakening in the last several quarters. Examples indicative of this weakness are rising unemployment, fewer construction starts, a drop in retail sales, declines in industrial production, and increases in the consumer price index. Reports in the press indicate some regions of the country are already in recession.

The effect of the pending sequestration on domestic programs is massive. It would result in needless impact on a weak economy, if it were implemented, not to mention the impact on the Department of Defense during Operation Desert Shield.

Section 113 of the 1991 CR was what suspended the sequester:

SEC 113. (a) Any order on sequestration for fiscal year 1991 issued before, on, or after the date of enactment of this joint resolution pursuant to section 252 of the Balanced Budget and Emergency Deficit Control Act of 1985 is suspended and no action shall be taken to implement any such order.

Sources and Resources: Here, here and here are articles about Gramm Rudman and the Budget Control Act of 2011. For more on the current sequester, we presented a summary yesterday and here is my source for the Congressional suspension of the 1991 sequester. And for the federal debt, here is an excellent overview.

Posted by: adminEcon
Tags: debt, deficit, federal budget, Gramm-Rudman-Hollings Act, sequester
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02.28.2013 | The Federal Budget: Sequester Facts

Understanding the sequester means we have to start with the Supercommittee.

Formed during 2011, the Supercommittee was the solution to the debt ceiling impasse. At the time, the Congress refused to pass a debt ceiling increase unless we had a plan to cut spending. So they passed the Budget Control Act (BCA) of 2011 with several spending reduction approaches. The first step was the Supercommittee. Composed of 6 Democrats and 6 Republicans, the committee was supposed to create a deficit plan. If they failed, then the alternative was future automatic cuts.

You know what happened. Because the members of the committee could not agree, the cuts kick in tomorrow, March 1. They target 4 areas that you can remember with DDMM: Defense, Discretionary, Mandatory, Medicare.

And finally, a detail. The sequester hits on March 1, but when? The White House says 11:59 p.m. while the GOP says 12:01 a.m.

DDMM Details:

I also hope the following graphs are helpful. The first provides a “macro” perspective while the second, with the specifics, is “micro.”

From the Washington Post

Sources and Resources: To look at additional details about the sequester, you will find this Washington Post article ideal. I used it and a Heritage.org graph and a Post graph for most of my facts. Also, here is the Budget Control Act of 2011 and here is more detail about the disagreement over when the sequester kicks in.

Posted by: adminEcon
Tags: debt ceiling, deficit, federal budget, sequester
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01.04.2013 | The Trillion Dollar Coin Solution to the Debt Ceiling Problem

Through a hypothetical Oval Office meeting, a Yale law professor describes a platinum solution to the debt ceiling problem. The basic idea is that if Treasury can get the money to cover government spending without borrowing then it does not need to exceed the debt ceiling maximum. How? Just use 2 platinum coins.

At this hypothetical meeting, Secretary of the Treasury Geithner explains to the President, Vice President and Harry Reid, that an obscure provision in “31 U.S.C. Section 5112(k) says that we can print platinum coins in any denomination at our discretion…”

Geithner continues, “So we told the Mint to make a couple of trillion dollar platinum coins. Then, if the President gives the order, the Mint deposits the two coins in its account at the Federal Reserve. The coins are legal tender. We direct the Federal Reserve to move this money into the Treasury’s accounts, and we are up around two trillion dollars.”

That means the Treasury has an extra $2 trillion to spend and does not need to have the debt ceiling raised.

While no one takes the idea seriously, it could happen.

Please note that Bloomberg says Secretary Geithner has indicated he will be leaving Treasury before the next debt ceiling crisis strikes. He has already notified lawmakers (posted here at econlife) that we have hit the ceiling but not to worry because he can manipulate spending for approximately 2 months to avoid a default. And by then, he will be gone.

One question: Whose picture should appear on the coin?

A 2009 $100 Platinum Coin From the US Mint:

A Platinum Coin Can Have Its Face Value Determined by the Treasury

Sources and Resources: Since Yale Law Professor Jack M. Balkin described the idea here in his hypothetical Oval Room meeting, it has spread through countless blogs and new articles. A summary of the comments on the platinum coin solution is here and recent articles from The Washington Post and Businessinsider are here and here. For my information on Secretary Geithner’s departure, I used this Bloomberg column.

Note: The title of this note has been slightly edited.

Posted by: adminEcon
Tags: $1 trillion platinum coin, borrowing, debt ceiling, deficit, Jack Balkin, President Obama, Timothy Geithner, US debt, us mint, US Treasury, Yale Law School
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