Streams

You Can Solve the Budget Puzzle

Friday, November 19, 2010

David Leonhardt, who writes the "Economic Scene" column for The New York Times, talks about the paper's "budget puzzle" and how different cuts to programs and aid could make a dent in the US budget shortfall.

Guests:

David Leonhardt

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Comments [37]

Scott Baker from New York City

(From my article on Op Ed News referring to the NYT puzzle):

I solved the Federal Deficit And then some...You can too!

Frankly, I didn't think it would be so easy.

I took the New York Times interactive "Budget Puzzle: You Fix the Budget" challenge, thinking it would give me a host of draconian choices between tossing widows and orphans on the street and abandoning needed infrastructure fixes etc. No, nothing of the sort. You can see my results here:
NY Times Balance the Budget Survey

and take the test yourself here:

http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html

By 2015, I had achieved a $730 billion surplus, and by 2030, nearly $2 Trillion, and I was just getting started (see below).

I mostly cut military expenditures, and if I had had the choice, I would have reduced troop levels in Iraq/Afghanistan much more quickly and thoroughly then the Times allowed only to 30,000 by 2013. In its partial place, I would support money for Afghan/Iraq secular schools, microloans (supervised so that excessive levels of interest are not imposed, but mostly using already existing lenders like Kiva, Grameen Bank etc.). These would be built and staffed by local populations as in the model of Rory Stewart's "Three Cups of Tea." This would obviously add some costs, but far, far less, and would have much, much greater "bang for the buck" in lasting changes, especially for the oppressed female half of the population.

I cut Social Security benefits, but only to the wealthiest, who live longer, have other resources, and take more benefits anyway. This is a debatable cut, and I might be willing to give on this one if there were enough savings elsewhere. What I am NOT willing to do is eliminate the option for retirement at 62 for those who are just too worn out to work longer and need immediate benefits there is a huge difference, up to 20 years, in longevity between an upper middle class office worker and a lower middle class factory worker, and there has to be a Safety Net below which Americans are simply not allowed to fall. Ever. No matter their bad economic choices in life.

There is also little point in raising the retirement age much more than it is now (67 for the youngest workers, 66 & 8 months for me), until it can be proven that a substantial number of people will live a healthy life into their 80s and 90s. I did allow for raising the age to 68 (but not 70), but only over time (the Times' interactive doesn't say when, but I wouldn't accept it before 2030, and then only if the other options for Medicare and early retirement are retained).

(for the rest of my article, see here: http://www.opednews.com/articles/I-solved-the-Federal-Defic-by-Scott-Baker-101116-38.html

Nov. 23 2010 12:31 PM
Helen Northmore from New York

I listened to the podcast of this program. Thank you for this segment.

I agree with your guest David Leonhardt and some of the posters below about the need to tackle Medicare spending.

I printed out the puzzle last Sunday and tried tackling it. I came out with $560 billion in spending cuts, and $795 billion in additional revenue, or $10 trillion more in savings to the deficit than was the goal of the puzzle.

While I certainly don’t think the items I’ve included in my solution are the only one’s that need to be addressed on the Spending Cut side, by tackling just 1 of 23 items, Medicare spending (saving $560 billion), and by addressing some of the the Revenue Options, all the other Spending Cuts that would result in additional jobs cuts could be avoided.

Additionally, there would be no need to further raise the retirement age for full Social Security. It is already 67 for those born in 1960 and later.

On the Revenue Side of the puzzle, by adopting 7 of the 15 items, the problem is solved with an additional $10 trillion to spare:

1. $315 billion in savings to the deficit results from choosing the plan to reform and simplify the tax code that closes tax loopholes and reduces current income tax rates, but reduces those rates by less than the Bi-Partisan Commission.

2. $115 billion in savings to the deficit would be generated, by allowing the tax cuts, introduced earlier in this decade, to expire on individuals who have yearly incomes over $250,000.

3. In light of the current financial calamity, $105 billion in savings to the deficit could be generated by a new tax on banks that taxes larger banks at a higher rate, as the puzzle notes, to “discourage them from taking big risks and to help cover the costs of future financial crises.

4. Continuing the Social Security Tax on pay over $106,800 each year would generate $100 billion in savings to the deficit. Right now once someone earns $106,800 in a year, Social Security Tax is no longer deducted from their payroll check.

5. $70 billion in savings to the deficit could be generated by a new $23 per ton of carbon dioxide emissions.

6. By re-instating the 2009 Estate Tax that exempts $3.5 million for and individual and $7 million for a couple, and taxes at a rate of 45% after that, $45 billion in savings to the deficit would be generated.

7. By returning to the capital gains tax and dividend tax rates of the 1990’s, another $45 billion in savings to the deficit could be generated.

Nov. 20 2010 01:22 PM
jezus from mars

easy,..just do what you do to your computer when you have an issue, REBOOT, shut down wall st, let everyone start from scratch, China does it, we can get all our allies of the world and pause the whole world system [we can take a vacation in time, starting at a designated point and ending and ending on one.]..then we can calculate everyone in America for example and we give everyone twenty grand to start with calculating that the rich obviously will get a little more, ..i mean how much do you need to survive??..we will still do the same we do everyday, just now the account of everyone is a little different numerically..we make money from nothing anywayss

Nov. 19 2010 03:47 PM
Tax trade surpluses for countries who run them. from The REAL deficit reduction committee


Focus on *BILATERAL* trade data.
Some countries run chronic *bilateral*
trade surpluses with the U.S.. Although this moderately decreases costs of consumption, it substantially harms employment, economic growth in the U.S., and the deficits. This is neo-mercantilist behavior. Rather than stall for decades trying to figure out WHY and negotiate for years before the WTO - focus on the outcomes and fix them.

How ?
Put an increasing tax ONLY on goods from
these offending countries. If our trade deficit with them is more than 15 % of total
BILATERAL trade then tax these goods.
Allow the reverse for IF we ever run a surplus (to keep it fair).

Would this cause a trade war ?
These countries WILL bluster and lobby,
but a trade war would hurt them far more
than us, it is against their interest - so if
we stand firm - they will back off.

Bottom line :
Tax chronic BILATERAL trade surpluses
to stimulate domestic employment, growth
and deficit reduction.

Nov. 19 2010 02:16 PM
ASSET Tax on the Rich (>$5 Million) to fix deficit from the REAL Deficit Reduction Committee

TAX *ASSETS* - ONLY above $5 million - at 4 % per year.
ASSETs NOT Income. Most of the income of the wealthy is in the form
of RECOGNIZED CAPITAL GAINS - this is highly manipulable, and the
rich can use tax accounting shelters, offshore accounts and delaying of
recognition of capital gains to reduce their "income" during higher tax periods
(until they can lobby to get the tax reduced). ASSETS on the other hand are
harder to manipulate.

The richest 1 % own 38 % of the assets in the U.S.. The richest 40 people
have 1.2 trillion in assets. They have also gained from both the bubble and the
bailouts, and from the Bush tax cuts and other policies far more than the middle class.
An annual asset tax of 4 % of assets above $5 million - on rich American citizens' and
residents' worldwide assets will fix our deficit with little to no suffering required for
America's troubled middle class. The fact that less than 1/2 of 1 percent of the
population has the power to keep such proposals from even being considered
speaks volumes about the excessive power of wealth in our democracy.

Bottom line :
To fix the deficit : Create an annual ASSET tax on the Rich ( > $ 5 Million)

Nov. 19 2010 02:06 PM
Give a FIXED AMOUNT as a tax break to ALL. from NYC


Republicans want a tax break for all. Fine. Estimate the MEDIAN tax
reduction from the Bush tax cuts to all taxpayers. DOUBLE IT.

Give this amount (2 x the median tax reduction) AS A FIXED AMOUNT to ALL taxpayers. This will avoid being grossly regressive, and will save money for all (since benefits are grossly skewed to the rich, so the mean tax cut is much higher than the median). It will also increase the economic stimulus since more money will go to the middle class and working poor who are more likely to spend it.

Republicans who oppose this can and should be properly labelled as Schills for the Rich.

Nov. 19 2010 02:00 PM
Make Capital Gains Tax Rates Progressive from NYC


The top 400 people make over $120 billion per year in aggregate.
Much of it is capital gains which is taxed at a much lower rate than earned income.
As Buffett observed, many of the rich pay a lower tax rate than their secretaries and maids.

One way to fix this is to make the capital gains tax rate progressive.
For example, capital gains in excess of $1 million per year could be taxed
at the same rate as earned income - or higher. This would generate subtantial income to invest in growth or reduce the deficit.

Nov. 19 2010 01:55 PM
Henry from Katonah

Thank you for reading my comment, Brian.
And I was glad to hear Mr Leonhardt's reaction. I realized that this was supposed to be a budgetary exercise, not a politcal one.
But I was surprised , once the stimulus worked , and the economy did not go belly up , how the GOP got traction on this issue. They created most of the deficit - by setting up the tax system from 2002 to the present , and by their reckless financial sector policies.
And now the Dems actually have to answer to the GOP-leaning / tea party sector of the public that the rescue plan was too expensive?
Anyone who does not like a particular class of government expenditures can criticize overspending - - and once Reagan set the example of not balancing the budget in peace time/ non-Depression times and Grover Nordquist shrink the gov't thinking becomes a force to be reckoned with, the next step is what we have now. The Obama administration used the power of goverment to avert economic disaster but gets punished for it.
I do not see a political solution for easing the deficit until Obama's second term.

Nov. 19 2010 12:18 PM
geTaylor from Bklyn., NY

Slight editing correction:
[replace sentence #3 with the following]

Who is doesn't realize doctors would rather seek large financial compensation for pediatric and geriatric surgery rather than seek the lower cost solutions offered by preventive care and homeopathic remedies?

Nov. 19 2010 12:17 PM
Margaret from GWL, NY

I did it earlier in the week and sent my solution to David Leonhardt. I split the savings about 50-50 through cuts and tax increases. Here is my solution.

http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html?choices=fryl5b7c

Nov. 19 2010 11:52 AM
geTaylor from Bklyn., NY

I get the idea that doctors, indeed the entire medical industry, are "can't-help-themselves" "greedy".
President Obama seemed to have won that argument during his very rational and non-threatening discussion in support of his health care insurance mandate campaign last year.
Who is going to argue that doctors would rather seek large financial compensation for pediatric and geriatric surgery rather than seek the lower cost solutions offered by preventive care and homeopathic remedies?
Why can't we subject the personnel of the medical industry (and the military-industrial complex) to the same education that produces the thrifty and non-self aggrandizing people who work for the New York Times, WNYC, and the various non-medical non-military agencies of government at all levels who provide such instructive gordian-knots as this to be solved.

Nov. 19 2010 11:50 AM
Menno from Westbrook, CT

How does a consumption tax factor in to the fact that 70% (ish) of the economy is driven by consumer spending? Won't discouraging consumption (via consumption tax) work against growth?

Nov. 19 2010 11:43 AM
jawbone from Parsippany

Regarding raising the age for full SocSec benefits, Leonhardt MUST be aware of these statistics, via Paul Krugman:

November 10, 2010, 5:05 pm
Income And Life Expectancy

I’ve referenced this before, but here’s the Social Security Administration study. Look at Table 4: since 1977, the life expectancy of male workers retiring at age 65 has risen 6 years in the top half of the income distribution, but only 1.3 years in the bottom half.

So, yes, increase the retirement full benefit age for SocSec -- and just wait for the lower income earners to die off quickly. Waaaay cool, eh?

Nov. 19 2010 11:41 AM
Jack Jackson from Central New Jersey

What about the tax effect of raising middle class incomes?

Average hourly in 1968 was $3.03/hr, in 2008 $18/hr. If average wages had tracked along with GDP, average hourly would be $48! Instead, they barely kept up with inflaction. (CPI 6.19x over 40 years)

I also posit that middle class earners pay MORE (percentagewise) in taxes than the rich - even though the rich have higher marginal rates. The rich also have accountants and lawyers and tax policies that let them shield income from the tax man. Not to mention the 15% (employee+employee) FICA bite.

You want to close the gap faster, make sure the middle class earnings rise FASTER than the rich earnings.

Nov. 19 2010 11:40 AM

why no gas tax?
let drivers pay for oily wars

Nov. 19 2010 11:37 AM
jawbone from Parsippany

Leonhardt is saying the massive wealth redistribution upward should mean higher (how much higher?) taxes on the rich.

OK.

How can this be accomplished with the Citizens United decision allowing virtually unlimited spending by the wealthy individuals and Big Corporations to buy the Congress and president they need to keep their wealth?

It's been noted in the past that buying elections actually comes relatively cheaply to the Uberwealthy. Their payback for those donations is monstrously large.

Nov. 19 2010 11:35 AM
chet from nj

Why not combine negotiation on drugs - VA and Medicare. They both represented by the same government.
In addition open Canada's border for drugs importation.

Nov. 19 2010 11:34 AM
Ben from Park Slope

I wish the Times has focused more on inter-generational priorities.

Like many people, I chose to raise the Social Security eligibility age to 70. With a growing life expectancy, and the system's insolvency, this seems an obvious move.

But this is essentially penalizing a bunch of people who are teens or in their twenties right now for the mistakes their parents, and their parents' elected representatives, made over the last 20 years.

So here's a bit of political suicide -- since we are asking so much of today's teens, how about the CURRENT crop of retirees forgo ONE year of benefits in exchange for their kids foregoing FIVE years. Who is willing to step up to this?

Certainly one year without expenditures would put Social Security solidly in the black.

Ben

Nov. 19 2010 11:33 AM
christine sander

It was so easy, leave social security and disability, control medicare, deeply cut military, remove farm subsidies (which would cure healthcare problems by eliminating cheap processed foods)!!!!! and cut the federal government jobs, get rid of estate tax, raise the taxes of very rich... Done easy easy :)

Nov. 19 2010 11:31 AM
Dave

Brian,

The military budget is nowhere near $600B. It is between $880 billion and $1.03 trillion in total. Please correct this.

D

Nov. 19 2010 11:30 AM
Accra Shepp from Queens

What about raising the corporate tax rate? This was cut decades ago under Ronald Reagan. At the time corporations were not seeking lower rates and were making excellent profits. Perhaps this is a good time to raise them.

Nov. 19 2010 11:29 AM
mike from NYC

The best source for models of economic reform would be from our most successful competitor country, Germany. The first step would be a truly progressive income tax that is not punitive. The rate of income tax in Germany ranges from 0% to 45%. The German income tax is a progressive tax--the rate increases as income increases, but in their system an increase in taxable income never results in an decrease of the net income after taxation. Germany also makes it difficult and expensive for companies to move manufacturing jobs out of the country. It also makes it difficult and expensive to lay off workers, and works with companies and unions to prevent job loss. For example in the current recession the government worked out a deal where workers accepted reduced hours instead of job cuts.

Second, according to the Heritage Foundation, the US military budget amounts to almost twice the combined budgets of the the countries with the next 9 largest expenditures. $607B vs $377B. If you include spending on "overseas contingency operations" the US military budget is $663.8B. The military budget is obviously a target for significant cuts.

The best way to limit the growth of medicare budgets is to include ALL citizens and legal residents in the medicare system and to charge a more realistic monthly rate for pre-retired people. Young people don't get sick as often so don't cost as much to the system. Restructuring the payments so the incentives do not reward unnecessary treatments is also necessary. (Changing the related laws to protect providers from law suits when making professional judgments in line with professional consensus is of psychological value but does not directly result in significant cost savings.)

The US currently subsidizes inefficient energy use, including cars and roads. Increasing gas taxes to the standards of Germany would increase revenue that could be devoted to increasing access and improving energy efficient public transportation. It would also improve our balance of payments.

Nov. 19 2010 11:26 AM
Norma from NY

By removing the $109,000 yearly wage cap for deductions for medicare & social security both funds would no longer be in danger of going into deficit.

Nov. 19 2010 11:26 AM
Henry from Katonah

Didn't Dick Cheney tell Paul O'Neill that deficits don't matter? It would appear that he was correct, Clinton and the Dems ( you might include the GOP Congresses from 1995 to 2000) got zero credit for erasing the last deficit.
Clinton's tax system was fair; if the Bush cuts expire, we will have a fair scheme again. I realize that it would be bad for the economy - - let the GOP House worry about that.
Wasn't there a poll this year where a purality said that they trust Republicans (!!) to deal with the deficit? If that poll was correct the public has a very short memory.
Balancing the budget is for chumps!

Nov. 19 2010 11:25 AM
E Rorschach from Manhattan

I solved it, focusing on the big four that you're discussing. And, with a cringe, I raised my own taxes and added more years before I can retire :( But we all have to share the pain. Tax savings/spending cuts ratio in my solution is 18/82. I don't like the job losses that will come from this, but what are the options?

Nov. 19 2010 11:24 AM
Edward from NJ

kathy from NY, have you tried the puzzle? You're plan doesn't cover it.

Nov. 19 2010 11:24 AM
lauren

PLEASE stop saying ' drill down' on. it doesn't apply in this context!

Nov. 19 2010 11:24 AM
jawbone from Parsippany

I asked about the Fed to try to have the guest explain the difference between nations with sovereign currencies (which they can devalue to better export their way out of debt) and nations which have a currency controlled by others (Greece, Spain, Portugal, Ireland are current examples of nations who cannot devalue their currencies to try to deal with debt issues).

Also, families are much more like Greece than the US Federal government, right?

Nov. 19 2010 11:23 AM
Dan from Brooklyn

Reverting to Clinton-era economic is the easiest way to solve the budget issue. If we didnt call them "Clinton-era" would the obvious choices be chosen?

Nov. 19 2010 11:21 AM
kathy from NY

Cut the military budget and tax the rich.

Nov. 19 2010 11:21 AM
jawbone from Parsippany

Does the game have a Federal Reserve and do the players have a way to utilize the options the real Fed has?

,

Nov. 19 2010 11:19 AM
kathy from NY

Cut the military budget and tax the rich.

Nov. 19 2010 11:15 AM
Brian from Brooklyn

I solved the budget crisis mostly on the revenue side. I removed the Bush tax cuts for the rich, created a millionaire's tax, carbon tax, and bank tax, returned the estate tax and investment rates to Clinton levels and raised the Payroll tax cap. I capped medicare growth, however, this will require medical care regulation through reform not through taxation. Over-utilization is the major problem here, i.e. doctors make more money when they provide more medical care. A cost incentive that must be outlawed.

I also eliminated loopholes but kept taxes slightly higher and reduced the mortgage income tax deduction.

I cut military spending (but NOT non-combat compensation and overhead. I did reduce combat troops in Afghanistan by 2013) and 250k government contractors. I eliminated earmarks and farm subsidies (most of which goes to corporate agribusiness).

The budget was balanced.

Nov. 19 2010 11:13 AM
Edward from NJ

Perhaps Leonhardt can go into more detail about the consequences of capping Medicare growth. It's the easiest way to solve the puzzle, but how feasible is it practically and politically? The puzzle explains, "Among other things, this would crack down on many hospitals and doctors with the highest costs." What are the "other things"?

Nov. 19 2010 10:50 AM
Bob from Maplewood, NJ

A question for Mr Leonhardt regarding raising the Social Security retirement age: Doesn't raising the retirement age simply increase the unemployment rate? Retirement takes people out of the active workforce, but does delaying it increase the level of total employment or demand for goods and services by any significant amount? If not, it seems that raising the retirement age may reduce Social Security expenditures but put pressure on employment across the age spectrum.

Nov. 19 2010 10:38 AM

here's my solution
https://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html?choices=0ky5hbm3

that was much easier than learning to cook

Nov. 19 2010 10:36 AM
Dan Kennedy from Staten Island

I completed the "puzzle" the other day. Here is my solution:

http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html?choices=nm1k68jl

Nov. 19 2010 10:10 AM

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