The IMF and the NYT

Prometheus 6 called the NYT’s reaction to the latest IMF report to my attention. I found the paper through this column before I realized that he had found a link also. I suppose I can take a look at it now.


There is little doubt that significant macroeconomic gains could be reaped from reforms of the U.S. tax code, with the Council of Economic Advisers (CEA, 2003) citing estimates of potential gains in the range of 2–6 percent of GDP. The tax system places a disproportionate burden on personal and corporate incomes, compared with a consumption-based tax system, discourages labor market participation and saving, and is, hence, economically less efficient. The administration’s 2003 proposals were viewed as a significant move toward a consumption-based tax system, because the initial package of measures announced in February would have lowered marginal income tax rates, eliminated the double taxation of dividends, and significantly expanded the extent to which income earned on saving would have been tax free.

I really didn’t expect the IMF to wholeheartedly endorse consumption tax like that, and ratify the Bush tax cuts in the same breath. They did have an important caveat:

The measures also did little to address the complexity of the U.S. tax system. A number of the originally proposed simplifications did not pass, including on tax-preferred savings instruments. Indeed, in many respects the legislation appeared to have only added to the complexity of the system, for example, by using phase-ins and sunsets to obscure the true budget cost and expanding the number of tax preferences.

Here is the meat and potatoes of the report — the fact that Socialism Security is getting ready to ravage the American economy:

From a long-term perspective, higher U.S. fiscal deficits are especially worrisome because of the precarious financial position of the Social Security and Medicare systems. Although U.S. demographics compare relatively favorably with most other industrialized nations (see discussion in Section III), both systems are projected to run sizable deficits about a decade from now when the baby boom generation enters its peak retirement years, and accumulated surpluses are exhausted 10-20 years thereafter.

Reading on, it shows that the main thing that needs to be done is for spending to be reined in, meaning simply reinstating the law that the 1990 Republican Congress put in place:

To support efforts to rein in public spending, greater weight could be given to reintroducing and strengthening the budget rules contained in the Budget Enforcement Act (BEA), which expired in October 2002. The international and U.S. experience is that fiscal adjustment tends to be more effective if it is based on formal rules embedded in a fiscal policy framework with clearly defined medium- and long-term objectives, similar to the fiscal responsibility legislation adopted by a number of industrial countries. Such a framework – and the political consensus that would surround it – could help provide policy-makers with an appropriate basis for facing the difficult trade-offs in the period ahead.

The other thing that needs to be done is to drop the entitlements. Raising taxes would do more harm than good:

At this stage, relatively modest changes would still appear to be sufficient to close projected pension shortfalls. For example, an immediate 2 percentage point hike in the Social Security payroll tax could be sufficient to close the system’s 75-year actuarial liability. However, payroll taxes in the United States are already high and further increases would tend to be regressive and could adversely affect incentives to hire labor. Other options include measures to stem the growth of benefits, including by indexing the calculation of pension benefits to the consumer price index (CPI) rather than wages, further increasing the normal retirement age, or reducing the benefits for early retirement. In general, however, the longer such decisions are delayed, the larger and more painful the required adjustments will be.

They also hit Medicare and the stupid fuggin prescription drug handout:

Medicare reform is even more critical. The Medicare trust fund begins to run into deficit in 2016, and the unfunded actuarial liability (in net present value terms) has been estimated at 130 percent of current GDP. This raises the question of whether it would have been prudent to defer an extension of benefits, including to cover prescription drugs, until credible measures to address the system’s longer-term financial problems are established. Indeed, the broader weakness of the U.S. health care system – which has left health care spending the highest among OECD countries (relative to GDP), without a commensurately high ranking in public health indicators (see Figure 1.8) – suggests that more sweeping reforms of the system may be needed.

The bottom line? The New York Times ignored all of this.

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