Towards A Good Samaritan World

Friday, February 25, 2005

Here's a Democrat I like:

The challenge for Democrats, and for anyone else seeking a coherent view of political economy in the era ahead, is this: How do we propose to make the health and pension programs for seniors sustainable while also paying for needed nonelderly initiatives? And how do we do all that while keeping overall taxes as a share of GDP at levels that don't hurt economic growth (without pushing taxes beyond levels Americans are likely to support)?

"I don't think that conversation has yet taken place in the heads of most Democratic economists," says Robert Litan, a former Clinton aide who heads up policy research at the Kauffman Foundation. Many who urge tax hikes to fix Social Security assume we can also raise taxes later to achieve those other goals. But they've never laid out a macro budget that adds this all up. Still, there has to be number locked inside their heads that captures how high taxes as a share of GDP should go to cover the full progressive monty. Think of it as the Democrats' secret number.

So what is it? Triangulating from chats with economists, plus a glimpse of a coming book edited by Isabel Sawhill and Alice Rivlin of Brookings that will (finally) frame these issues explicitly, I'd say the number is somewhere around 28% of GDP.

Well! Federal taxes today are at 16.3 % of GDP, historical lows not seen since the 1950s. At the end of Clinton's tenure, taxes reached nearly 21% of GDP, a historical high. As the boomers retire, everyone knows taxes are going up. Newt Gingrich recently told me so himself. But 28% of GDP? Yikes.

Why does this matter? If Democrats are forced to consider their secret number explicitly, they may discover we shouldn't, or can't, go that high. In that case Democrats may begin to frame the Social Security debate as part of a broader generational budget challenge. Seen through this prism, Democrats might then be open to spending-side changes in Social Security that they rule out today because they're thinking too narrowly—betting unconsciously on their secret number.

To make people take more responsibility for aspects of their lives like health care and retirement is an indispensable element in controlling costs, so as to protect America's free-market capitalist model from exploding entitlement costs. That's why Social Security reform is essential.


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