Navigating America’s Entitlement Dilemmas

>> Audience 1: Thank you, so I have a question in terms of Social Security and specifically elderly benefits. And along with the problems that you point out, obviously we also have a demographic issue which a lot of economists actually, Boskin, who I understand was a Hoover fellow, talks about specifically the graying population and how that contributes.

Even if we return these policies back to their initial intention, we still have a graying population who is living longer and increasingly is taking up more of the population, so if you could speak on that, that'd be wonderful.

>> John Cogan: It's a great question, here we are, and we've gone for the last 20 years of raising the debt relative to our economy at a time we should be preparing for what we knew was coming, this demographic bulge of seniors, right?

We knew it was coming, and yet we had policies not of preparing for it, but of running up the debt. But it turns out, I think, that the demographic problem is overstated, and here's why. If you were to limit the benefits of Social Security, future benefits, to their real value today, their inflation adjusted value today, so you don't increase them, you just keep them where they are today.

Inflation adjusted terms, purchasing power are the same, you do the same for Medicare, and spending relative to GDP on those two programs will not rise. That is, you will limit the growth in those programs to the rate of growth of the economy. So all those big increases that I showed you, not all of them, the vast majority of them would be taken out of the budget.

And so, yes, demographics is a problem, but it's not as big as the problem of rising expenditures in both of those programs per recipient, okay? Cuz we didn't start Social Security at a level that provided benefits that we see today. So a typical couple today will receive Social Security benefits, about $70,000 a year, this is far beyond a measure of economic security, right?

And so our problem is that we've been increasing the real value of these benefits in Social Security and Medicare over the years. So, yes, demographics are important, but if we were to just stop the growth in those programs, that would go a long way towards solving our financial, fiscal problem, okay, yes.

>> Audience 2: Well, thank you, sir, my name is Don Parker, I'm a recent graduate from Harvard University and soon to be recipient of Social Security, so go easy, if you will, please.

>> Audience 2: But my question is, I'd like to hear your thoughts on the degree to which it matters who holds the debt, and the reason I say that is a good portion of the debt is held by the government itself, and the interest payments are used to provide services.

And then when the American citizens hold the debt and I get interest payments, I pay tax on the interest payments, I go down the street, get a haircut, buy a shirt, there's tax again. So my question is, how important is it? Or what effect is there of who holds that debt?

>> John Cogan: Yeah.

>> Audience 2: Thank you.

>> John Cogan: Yeah, so what I've tried to emphasize is that the economic cost, if you will, comes ultimately from higher spending, because that higher spending takes resources away from the productive side of society and transforms them into, we'll call it consumption services. And that's the primary effect of spending and then borrowing, and so, if you will, think about it as an opportunity cost.

You're taking money out of a relative productive private sector and transforming it into consumption. So you're reducing investment in the private sector and innovation and putting it towards pure consumption today, and that's really where the cost comes from, okay? So I don't know if that gets at your question, but we tend to think about the problem as debt or the problem as taxes.

I sorta see the problem as spending, and when you spend, you've gotta withdraw resources away from the private sector and put them to public sector uses. And as I said, if this money that we were borrowing from the private sector went to investments, and these government investments were as productive as the private sector, then all the borrowing in the world wouldn't have an adverse effect on the economy.

It was just that we're taking money away from the productive side and transforming it into consumption. And by the way, along with that comes consumption, comes disincentives for work, for investments in human capital, and for investments in physical capital. Okay, we had a question in the middle here.

>> Audience 3: My name is Maeve Larco, and I'm from the University of Michigan. I wanted to bring it back to the graph you showed about the percentage of GDP spending. And I was looking at the graph, and at the lowest point in around, I chose the year 1850, right before the Civil War, the US population was about 23 million, and today our population is around 330 million.

So our population growth from that time is about 14 million, and the percentage and increase in spending, I believe it was 12% or, excuse me, so it was 15% and then 12%.

>> John Cogan: Yeah.

>> Audience 3: So if you think of that proportion, I guess, what's your response to that?

>> John Cogan: Yeah, good, think about it a little bit differently. Ask what was GDP in 1850 and national income in 1850, and what is national income today? It's like, I don't know, somebody should look it up, but it's got to be like 500 times or 800 times. And that's what you wanna compare to the growth in the population, right?

You don't wanna ask, what is the growth in the population compared to the growth in the budget as a percentage of GDP. You might wanna ask instead, what's the growth in spending per person after you take out inflation over from 1850 until today? That would be the right statistic to use, so it might be good, actually, if you could go back into your individual sessions and look up what real GDP was in 1850 and make that calculation.

I think what you're gonna see is this enormous growth in real inflation adjusted government spending per person in the US population, make sense?

>> Audience 4: Hello, so thanks for your talk, a key idea on public finance regarding taxes and spending is the recurring equivalence suggesting that as economic agents internalize the government's budget constraint, the way of financing greater spending, whether by taxes or debit, does not fundamentally matter.

In fact, another Hoover fellow, Robert Barrow, has put forward and elaborated this to make the case for tax smoothing. I would like to ask you, how accurate do you think these ideas are and are they useful to think about fiscal policy?

>> John Cogan: Yes, I think both are very useful for thinking about economic policy in an ideal world, that is, as you step back, and you ask, how would I build a model to think about debt and taxes and spending?

I think both of those approaches are the way to go, but the reality is that for at least 60 years, and actually, if you go back to the 30s, we're talking about 90 years, almost a century, we haven't ever raised the taxes to finance the debt that we're issuing.

And so this idea that an increase in the debt is associated with an increase in taxes, well, down in the future, were conceptually right after 100 years or 90 years of failing to do that, people begin to wonder, gee, is the government gonna raise future taxes to finance today's spending?

The answer is probably not, and this gets to a point then that John Cochran has made. Once they start thinking that that's not so, then you start seeing inflation as individuals say, well, gee, I better spend now and not withhold for future taxes, okay? So I do think that the reality is somewhat at odds with the theory, and as Cochrane would say, it creates then the inflation that we have today.

So there's some discounting of this recording equivalence, I guess, is what I'd say.

>> Audience 5: Quick question, expanding on John Cochrane's ideas and just curious about your perspective with changing the way that the government borrows from short term to long term. And would that really just exasperate the incentive system for policymakers and just expanding the benefits?

And I've seen some very interesting takes with, I think Stephanie Kelton's, the Deficit Myth, and there seems to be this new change where they just think, it doesn't matter at all. I know you talked about it a little bit, but I would just love to hear you expand.

>> John Cogan: Yeah, my sense is that on the margin, it might matter in some cases whether you borrow short or borrow long, depending upon the economy that you're in, right? We've been living in this world where real long rates have been very, very low for a decade. And so it makes sense then to when you're refinancing maturing debt or incurring new debt, to put it into those long range securities, right?

Now, with an inverted yield curve, you've got the same phenomenon at work. But again, I wanna come back to this point is, don't think so much about the debt being the problem and how we should finance this expenditure. We should be thinking about reducing the expenditure, because ultimately that's where the harm comes from.

Because once you spend that dollar, you've got to borrow, and maybe it matters whether you borrow long or borrow short, but you've got to borrow to finance it, or you've got a tax to finance it. And so when you think about the nature of this problem, keep going back to the spending side and think of these two as two means of financing, both which have some economic harm given the structure of spending.

>> Audience 6: Hi, good morning, my name is Valerie, I'm a student at Grinnell College. I know that today's talk mostly focused on the Affordable Care Act and Social Security as major spenders in entitlement programs. However, I did notice something that was interesting to me was that you said that we needed to cap eligibility for means tested programs, particularly for welfare programs for the needy and the people and poor.

My question was just how would you suggest going about this? For example, I'm thinking of TANF, which caps people at five years and aren't able to reapply. And I'm thinking about how it has become more difficult across time to qualify for TANF and receive TANF assistance. So I was just curious, what exactly do you mean by capping the means tested?

>> John Cogan: Yeah, very good, so we do cap eligibility for all means tested entitlement programs, right? We cap food stamps at 130% of the poverty line, I think we cap the ACA at 400% of the poverty line. So each of these programs provides benefits well in excess of what we thought their objective was, which was to alleviate poverty.

So my point is just, we have to reduce the eligibility levels for those programs to provide fewer benefits for the middle class, right? I think you could provide benefits to, I said you're spending five times the amount of money that we need to eliminate poverty in the United States.

If we're gonna solve the budget problem, one component should be to reduce the income eligibility level for these programs down to, it could be to 130% of poverty, could be 120%. In my calculations, I think I said 200% of poverty should be the limit, okay? It doesn't mean that all programs have this high eligibility thresholds, the ACAs is very, very high.

Food stamps is in the middle, TANF, which is really set at the state level, often below the poverty line. SSI, Supplemental Security Income, is right around the poverty line, so they're varying levels. And I just say take the whole group of programs and try to coordinate them and limit the eligibility to 200% of poverty.

And along with those Medicare and Social Security changes, you'll have an effect. And you have to keep in mind this, that as much as we want to provide assistance to the poor or to the middle class, when we do so through means tested entitlement programs or any means tested program, we create disincentives for work, for improving oneself.

We now impose, if you will, a financial penalty associated with getting ahead. It is inevitable, you can't get away from it, it's a fact of life in these programs, because every one of these programs says if you are poor, you get a basic benefit, call it $1,000 a month.

But then after your income rises above some level, we're gonna start phasing down those benefits. And that phase down then imposes a tax penalty on your effort for work and for investments in human capital, because each dollar you make ends up reducing the level of benefits in the programs that you're receiving the benefits from.

And that acts as a tax, reduces the after tax wage, if you will, for people. And so again, there's no black and white here, but you've gotta have a balance between the help that you're providing individuals and then the costs associated with providing that help and the work disincentives.

And the disincentives for family formation or advancements in one human capital, those are real, and they can't be dismissed. But again, it's balance that we're trying to seek, and I tried to show you with those numbers that I think we've gotten a little bit out of balance, so

>> Audience 7: Hi sir, my name is Karina, and thank you for your presentation. So I know this question may not be welcomed, but my question regards to immigration trends and specifically waves of undocumented migrants. Is there any correlation between the spending and those trends? And specifically in California, we know we have generous programs for undocumented persons or their children, but again, that's another expenditure, so just your thoughts on that?

>> John Cogan: That's a good question, so at the federal level, most undocumented individuals are not eligible for benefits, right? At California, they are, and of course, educational expenses just rise for a community substantially when you have a group of undocumented workers, so there is a budget issue. But again, undocumented workers provide an enormous benefit to our society, they always have.

And to me, what makes immigration such a difficult issue is the provision of benefits to individuals that are fairly generous. And that is what if you had a system wherever individuals that wanted to work could come here and work, I doubt that there would be much pushback against immigration, legal or illegal.

But when it overwhelms the community, because you have undocumented workers who now, a lot of the undocumented workers that come to the United States aren't getting work permits. And so there's no means by which they can contribute to the community, and that creates this bit of tension. But again, these undocumented workers, so many of them are beneficial to society, but they also come with a cost, and what you're trying to do is balance the two in a bit.

Okay, well, thank you.