On Friday, I published a blog post on the national debt with key points that can be summarized as:
(1) The idea that we will have anything like currently anticipated entitlement payouts plus currently anticipated tax rates is a fantasy;
(2) This gap is enormous, and represents the “mother of all bubbles”;
(3) Our debt situation means that we need to address it quite soon or face a funding crisis; and therefore
(4) The correct primary metric for evaluating anybody’s plan to do this is what practical measures it puts in place now and how much additional time this creates for us prior to this crisis, rather than theoretical and unenforceable promises about the distant future.
A very smart commenter at the American Scene called “cw,” who almost always disagrees with me in a highly productive way, asked what I think is an excellent question:
So here is a technical question for Jim or whoever else can answer it: how much would taxes need to be raised to maintain our current entitlement regime?
The total present value of payments expected under Social Security and Medicare beyond what is expected to be collected under current tax laws is about $100 trillion. One way to put that amount of money in context is to note that it is about twice the amount of all the net private assets that exist in America today.
To answer cw’s question directly, the best back-of-envelope estimate is that meeting this unfunded portion of our Social Security and Medicare commitments would require roughly an immediate 80 percent increase in federal income taxes, sustained forever.
That is one end of a spectrum. The other is to cut out $100 trillion of present value of anticipated entitlement spending.
I was at a dinner last year with about 15 well-known Washington think-tankers, academics, journalists, bloggers and budget experts, entirely focused on the question of where on this spectrum we will end up. What was striking to me was that as we went around the table, the majority of these people asserted confidently what would be politically feasible or infeasible positions. Many of these equally confident-sounding assertions were contradictory and, not shockingly, tended to line up roughly with each speaker’s political inclinations.
It would be simple for me as an economic conservative to dismiss the idea of a tax increase equal to an 80 percent increase in income taxes as politically unrealistic, but I’m not so sure about that. In the event of a crisis, I could easily imagine “emergency” income taxes on the “most fortunate among us” plus some increases in middle-class tax rates, plus the introduction of a VAT, amounting to something like that.
If you had asked me at a New Year’s Eve party in 2006 what I thought the odds were of the U.S. government taking a controlling interest in the largest bank, the largest car company, and the largest insurance company in America, I would probably have laughed at you. Yet within 36 months, this is exactly what had happened.
My friends who are more liberal than I probably should not make the analogous mistake of imagining that benefit reductions that seem absurd politically right now might come to seem less absurd, and surprisingly quickly.
If you think about it, any real solution to the federal deficit problem is currently politically impossible; yet we know mathematically that, barring a productivity miracle, the situation cannot persist indefinitely. Therefore, we know that some change that currently seems politically impossible is all-but-certain to happen sooner or later. I have no idea what change will become politically feasible in the future, but then again, I don’t think anybody else does either, because it is not written in the stars — it will depend on some combination of events and political leadership.