Monday, September 12, 2011

So what do I Think Our Long Run Financial Problems are?

After thinking about it, I think my last post would be clearer if I stated what I believe our long run financial problems to be.  The big three would be:

1. Health Care.  Health care expenses simply aren't something that we're willing to see people go without.  From the bum passed out and rushed to the hospital every few days at the Albany Armory bus stop to Steve Jobs, every American gets urgently needed medical care, if in a more or less timely fashion.  Unless what it means to be American changes enough that we're willing to let bus stop guy freeze to death/overdose, the focus has to be on delivering this care efficiently.  The available data says that for this particular industry private care isn't delivered cheaply, partially due to needing to treat bus stop guy, but as long as we're Americans we won't be letting this particular service be delivered on ability to pay rather than need so the profit motive can't optimize.  While it's easy to find some model that will support individual prejudices regarding the type of health system that's more efficient, the empirical evidence shows that the US is way more costly than everyone else relative to our per capita GDP.  Usually, when someone is doing something better than you, the solution is to learn from their successes, as American manufacturers learned from Japanese lean manufacturing techniques.  When this became only the American way when private concerns were involved and not public, I don't know.

2. Revenue issues.  We don't collect enough in taxes given our changing demographic makeup.  Our old age dependency ratio is going up, this will mean slower growth and higher taxes.  No way around this, demographics impact growth rates and someone is going to have to pay for the benefits.  The question is how do we most efficiently pay for this.  Personally, I like what the economists say, get rid of most tax expenditures, lower corporate tax rates, tax inheritances at the individual level, introduce a small VAT, tax externalities (even if not taxed at theoretically optimum levels undertaxing or overtaxing by some amount is superior to general income or profits*), etc.  Instituting this would take a magic lamp, however.  Still, eliminating some deduction sin return for lower rates is likely possible, both at the individual and corporate level.  Inheritances can be taxed, moving this to an individual level tax rather than an estate tax would probably make it more popular too, not sure why this hasn't been done.  Sooner or later some form of pollution tax will likely be passed, perhaps with lower rates to compensate.  I'm confident in the long run about this getting somewhat better.  What I doubt is that we'll make the tax code more favorable to labor at the expense of capital, which is another direction I'd like to see things go.

3. Defense.  We spend too much on defense and could see this go down.  Mostly, I think the changes we've made to our force structure to meet the challenges of Iraq and Afghanistan have been terrible directions for us to take.  These aren't the wars of the future, these are wars that should have never been fought the way they were (of course, the lack of other options means that they should probably have never been fought at all, both have objectives that are outside the capabilities of military force, every society learns the limits of power sooner or later).  Wars like Kosovo or Libya are the kinds of wars that we should really be able to fight.  They also synergize well with the need to defend our actual territory in addition to complementing NATO forces effectively.  America's strength has always  been on long range force projection and our ability to build and design new equipment.  We've never had great capacities as an occupying force and I don't think we should develop these capabilities, it just isn't us.  Scale back the manpower and focus on the technology and production which has always been our strengths.  We can be the main strike force, let others put the boots on the ground.

Those are the three big ones.  I could also mention international imbalances (which are the opposite direction they should be, we should have a trade surplus right now when we're at our peak workforce and should have a trade deficit when the demographics turn, this will hurt both us and those currently running a surplus with us since when they try to claim what is owed we will have less productive capacity to produce for them, they'll get less than if their timing were different) and Social Security.  International imbalances aren't something that we can fix easily an Social Security just isn't that big of a deal.  The shortfall is more than 20 years in the future and the changes that are needed are pretty much those expected when the program was created.  It needs to keep up with demographic changes.  They didn't know enough to work those in originally, and we probably don't know enough now to come up with the perfect formula.  Like anything that lasts more than 10 years it needs to be tweaked as new information comes in, I'm confident that it will.  The only thing blocking this is the shrillness of the debate which makes it sound like root and branch reform is needed rather than some tidying up due to the progress of time and better information.

* I found it amusing that my browser spellchecker includes overtaxing, but undertaxing is apparently not a word.

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