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Friday, May 30, 2003

Structural Reform US Style

Well it looks like Paul Krugman as relayed by Brad Delong has it just about right: the Bush administration is well aware of the fiscal situation of the US government long term. And Ari Fleischer yesterday was drawing the conclusions that Paul suggested he would: that the US social security and health benefits systems need to be reformed. (Fleischer is of course leaving soon, just in case this catches too much flack). I think I need to say two things. Firstly these are 75 year projections, and while I imagine that someone somewhere needs to conduct these, if only to have some sort of benchmark to work from, I don't thing we should place a great deal of importance on any kind of detail. Things are getting faster, faster. Strategic lack of visibility and fundamental uncertainty abound, and it's hard enough seeing ahead to 2005, while 2010 is a very, very long way away, in the sense that a great many things can change. In particular we need to know what kind of growth (or shrinkage) the EU and Japan can achieve in what remains of the decade. There are too many non-linear processes at work to see anything clearly.

Secondly, whatever the wrongs of the Bush tax cut, these mid-term demographic problems are going to be there. If the 'soft patch' continues indefinitely the US Federal Government is going to have difficulty fulfilling its obligations whatever the political flavour of the President. A bullet is going to have to be bitten. And it may be better to explain this sooner rather than later to the American public. In this sense there is a danger in both the 'if we get the cut we need we'll have the growth we need' argument, and in the 'it's all the fault of the Bush tax cut' one. The real problem gets lost in the in-fighting. One day or another the American public is going to wake up to find that structural reform is not only a European or a Japanese problem.

The White House said on Thursday it agreed with the conclusions of a study prepared by former Treasury officials that argued the US faced a future of chronic deficits worth at least $44,200bn."We agree with their thoughts," Ari Fleischer, White House spokesman, told a press briefing. But the report underlined the need for big changes to benefits, rather than tax increases, he said. "There is no question that Social Security and Medicare are going to present [future] generations with a crushing debt burden unless policymakers work seriously to reform those programmes."

The study, reported in the Financial Times on Thursday, attempted to estimate the gap between all future federal revenues and expenses. It concluded that large, "immediate and permanent" tax rises, spending cuts or some mix of the two would be unavoidable without big changes to federal retirement and healthcare programmes that threaten to overwhelm the Treasury as the "baby boom" generation retires.The deficit study was commissioned in 2002 by Paul O'Neill, then Treasury secretary, and co-authored by then deputy assistant Treasury secretary Kent Smetters and then consultant Jagadeesh Gokhale. A decision was made after Mr O'Neill's resignation not to include it in the annual Budget report for 2004.

Mr Fleischer denied allegations made by Laurence Kotlikoff, a Boston University economics professor, that the deficit study's figures were deliberately suppressed. "That is absolutely not true," he said.He noted the 2004 Budget included a discussion of 75-year projections of Social Security and Medicare actuarial deficits but many economists consider these measures incomplete and less accurate since they count future tax contributions without accounting for new benefits "earned", or expected, as a result of those contributions. They do not include costs that extend beyond the 75-year horizon.The Bush administration has repeatedly pushed for reforms to benefit entitlement programmes but has so far been largely stymied. Much of its focus has been diverted in recent months towards efforts to bolster the struggling economy, including the $350bn tax cut package signed into law this week.
Source: Financial Times

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