It's really hard to overstate just how bad "The New New Deal," the cover story in the New Republic by Laurence Kotlikoff and Niall Ferguson is. It's extremely bad. As Kevin Drum noted, the writing is at the level of a high school essay -- although Ferguson is a fine historian and writer (The Cash Nexus and Empire are both worthy books) -- and the reasoning and economics are even worse -- although Kotlikoff is certainly a capable demographic economist, even if his long-term, generational approach to fiscal policy is controversial.
But the question of what the next stage of the U.S. social compact should look like is so important that it's worth trying to figure out what went wrong here.
After a long preface setting up an intergenerational doomsday scenario that would require doubling taxes or cutting Social Security and Medicare by two-thirds, the authors put forward three basic ideas, which seem only loosely related to the problem as they've described it:
1. Replace all taxes -- personal income tax, payroll tax, estate and gift taxes -- with a 33% retail sales tax. To make it more progressive -- or less blatantly regressive -- all households would get a rebate "based on the household's demographic composition, and equal to the sales taxes paid on average by households at the federal poverty line with the same demographics."
(To do a little of the simple math that the authors don't, what this means is that if the average family of three at the poverty line spends 100% of its income, the rebate for all families of three would be about $4,000. So a family of three earning $50,000 and consuming $40,000 would pay sales tax totaling $9200. ((40,000*.33)-4000) That same $50,000 family of three, with one earner and taking the standard deduction, would currently pay about $2400 in federal income tax and about $3500 in payroll tax, so they would be worse off, unless you count the employers' share of payroll tax, in which case they would break even.)
More importantly, the tax would not be 33%. As Bill Gale of the Brookings Institution has shown, such a tax would have to be somewhere between 40% and 45%, calculated in the same way as Kotlikoff and Ferguson ("tax-inclusive") in order to finance projected spending for the next ten years, never mind the long term.
And even that's assuming that all spending would be included. State sales taxes exclude housing costs, health care, and food, which together total half of personal consumption. If a federal sales tax actually became law, there would surely be pressure to exclude home mortgage interest. Having excluded interest, why not also exclude payments of principal, since that is not really consumption but savings. And what about education? After all, you're investing in your future. As soon as anything is excluded, the plan starts to become less "transparent and efficient," and the more that is excluded, the higher the rate goes. And anyway, what makes this system so much better for the future than, say, a balanced combination of income tax and smaller consumption tax? The authors don't say.
2. On Social Security, Ferguson and Kotlikoff propose to pay only currently accrued benefits, then close out the system and replace it with what they call personal retirement accounts into which workers would contribute 7.15% of their wages. (Oh, and that thing about eliminating the payroll tax? Never mind.) The accounts would be administered by the Social Security Administration, invested in an index fund, and everyone would receive the same rate of return, with a guarantee against negative returns. Near retirement, the accounts would be replaced with annuities.
So you have the worst of all worlds: none of the sense of ownership and flexibility that the Bush plan promised, but the forced annuitization that was one of the least appealing features. Again, how is this different in effect from simply investing a portion of the Trust Fund in equities, as Clinton proposed in 1998? It's different in only one sense: since apparently only half as much money is going into the system (the employers' share of payroll tax having been eliminated) a retiree would get only half as much retirement income as under Social Security, and probably less than that.
(I may be reading this wrong, since at the beginning the authors declare that one of their first principles is that "when they stop working, all Americans should be guaranteed a basic income of at least 40% of their pre-retirement earnings," something which could not be achieved with a 7.15% contribution alone. Perhaps some form of the employers' share of the payroll tax remains.)
3. The health care reform, on the surface, is a universal system of vouchers to purchase insurance, replacing Medicare and Medicaid and covering everyone else as well. But unlike other voucher-based plans, in this one, the size of the voucher would be individualized based on your own expected health expenditures over the coming year. "Thus, a 75-year-old with colon cancer would receive a very large voucher, say $150,000, while a healthy 30-year-old might receive a $3,500 voucher." The insurer would bear the risk of the difference between your personalized year-to-year voucher estimate and your actual expenses.
Can you even imagine the bureaucracy that would be required to determine what each individual's voucher should be, with the insurers and individuals all lobbying for them to be higher, and government trying to keep them lower? The question with any system of universal vouchers to purchase insurance will always be, why do we need insurance companies? In this case, that question is especially relevant. If the government is going to make a payment for an individual based on his or her expected health care costs in the coming year, why not just pay the actual costs?
The plan promises to "promote healthy competition in the insurance market," but that competition would take the form of a market for government error. That is, insurers would make money only when government overestimated an individual's cost. Companies would compete to insure individuals whose estimated cost was likely to be higher than their actual costs, and avoid those whose vouchers were lower. Imagine the bizarre incentives this would create, and the regulatory structures that would be necessary to manage it. At this point, the logic of a single-payer plan is unavoidable.
I'm tempted to exercise my policy wonkiness and go into more detail about how this health plan wouldn't work, but it gets tiresome. The more important question is why? Why did these two intelligent authors wind up with such a lousy package?
The common theme to these proposals, especially on retirement security and health, is that they insist on embracing the language and ideas of a laissez-faire, individualistic model, but adapting it to create a secure platform to protect against risk. Thus you have private retirement accounts that aren't really private accounts (since there's no ownership, no choice, and no risk). Or vouchers to purchase insurance that aren't really vouchers to purchase insurance (since to the extent that the government gets the estimates right, there's none of the risk-sharing involved in insurance).
And the price of these faux-individualistic policies is an enormous level of complexity that belies their original promise of "simplicity and efficiency."
The "New New Deal," then, isn't actually a thought-out policy response to the failings of the current safety net, it's a pose. The authors -- and they are not alone in this, I've done it myself -- like the sound of the idea that we need something new, individualistic, market-oriented, but they don't like it enough, so they proceed to build around it protections against all the individualism and market-orientation that they have created.
There may be other ways to construct such a hybrid that work much better. But at the end of the article, when Kotlikoff and Ferguson repeat something they said at the very beginning of the article -- "The old New Deal is all but dead. It and the Great Society programs of the 1960s are being inexorably killed by demographic changes...keeping them on life support is not an option" -- I'm suddenly unconvinced. At the beginning of the article I nodded along; at the end I was ready to defend the old programs. Because if this is the alternative, they look damn good.