Social Security is patronizing.  Implicitly, it assumes that individuals lack the discipline to save enough money out of current salaries to be financially comfortable when paychecks end with old age.  So, it forces us to save the same percentage of our earnings below a ceiling at present $106,800, regardless of our cash demands and the predictable trajectory of our salaries.  And then Social Security tells us that it will be in charge of those savings.  And then it spends them.  It spends our forced savings (see link to last week’s piece   ).  The kindest reaction to this behavior is to call it “ironic”.  But isn’t it really criminal?

Something has to change with Social Security.  To find good solutions, it’s best to start by trying to understand the goal the program professes to advance and then judging the adequacy or inadequacy of its means to this end.  This column is the second in a recent series on Social Security.  Click here to visit or revisit the first.

The structure of Social Security reinforces the idea that its mission is to force people to save while they’re earning money so that they won’t be poor after they retire.  How else can we justify funding the program through payroll taxes at all, much less zapping earnings only below a ceiling that, to be sure, is steadily rising — just like the debt ceiling.

The first problem with this structure is that, in pursuing the laudable objective of  reducing poverty in old age, it may be creating poverty in young and middle age.  Before the Earned income Tax Credit (EITC) was passed in 1975, payroll taxes were appallingly regressive: the lower class paid a higher percentage of their total income than the middle and upper classes.    Poorer people started work early, and all their income was taxed (they had no financial assets to speak of and therefore no interest or dividend income).  Richer people earned income well above the ceiling, and supplemented it with “unearned income”, none of which was taxed for Social Security.  The EITC fixed part of this problem by rebating payroll taxes to individuals and families whose income totals are below certain levels, but it doesn’t help people right above those levels.   And even some of the poorest families remain injured.  Social Security taxes both employers and employees.  Employers try to pass on some of these taxes to their employees by lowering their wages.  For example, if a boss lowered wages by $2 in response to higher taxes, workers would in effect be paying $2 of those taxes.  Worse yet, particularly in the case of minimum wages where business cannot shift the tax burden, low-skilled workers may be fired or never hired.  Their income goes down to or remains zero.

This regressivity of revenue is exacerbated by what happens on the benefits side.  Poorer people tend to live shorter lives than richer people; their benefits accordingly last longer on average.  They pay more, in percentage terms, to get less.

Another problem with Social Security is its lack of flexibility.  Most workers have jobs with a life cycle of earnings.  Their wages grow with age and experience,  on-the-job training.  And they tend to spend according to the “permanent income hypothesis”.  If they had their druthers, they’d save less in their youth and more as they age. Forced saving through payroll taxes makes it harder to smooth out consumption.  Doctors provide a good example here.  Many of them accumulate staggering levels of debt as they pay for their college and medical school expenses and then are paid modest wages during prolonged internships and residency.  The rewards are prestige, the satisfaction of doing good, and the high wages they’ll get finally fully credentialed.   Should physicians be taxed to “save” while their wages are low and already being reduced by debt payments?  Should they be taxed at all?  Should we really be worried about doctors being poor in old age?

Not only does Social Security act as if people must be forced to save for old age, it also dictates how those savings are invested — in special-issue bonds.  For decades, our savings have financed government deficits.  We’ve made it possible for the government to spend well beyond its means without increasing taxes.  Now, the only way to pay baby boomers their retirement promises will be to buy those special issues back.  The debt ceiling will have to be raised.  Why even bother with setting a debt ceiling when whenever it becomes a binding constraint it’s just raised?  Or maybe the government will just print money to redeem its debt to Social Security.  That’s easy, until inflation expectations adjust and interest on new debt rises significantly.

One alternative popularly suggested until the recent stock-market crash is having the government invest the savings (!!) in stocks and bonds.  This strategy is dangerous.  There are already too many conflicts of interest between Government and Big Business.  Imagine the favoritism, punishment, and insider trading that could result.

How about letting individuals invest their forced savings by picking their own combination of index funds, ETFs, and fixed income from a list prepared by Social Security, which would also require a  percentage in the fixed income category that rises with age?  Well, this approach is better than government investing directly, but it’s still fraught.  And people are still too wounded by recession to think logically about long-term returns.

Social Security has already raised the age of retirement with full benefits and will continue to do so.  The rationale, that people live longer than they used to, would be more compelling if the rules weren’t being changed in midstream.  At least the adjustments are being announced well in advance.

Still, if the real issue is poverty — and it should be,  isn’t it better to treat this problem directly?  As a cohort, seniors actually have more assets than younger groups.  Indeed, the boomers are not only the largest, but also the best educated and wealthiest in American history.  Why should tomorrow’s workers be supporting them as they retire, on average about 7000 a day for more than a decade?  For many seniors, Social Security benefits are simply not necessary.  Medicare and Medicaid are already addressing issues of declining health and rising medical bills (although they’re both statistically bankrupt, too).  And yet, we tinker with economic efficiency to get seniors the defined benefits of their “saving”, driving a wedge between the benefits and the costs of employment.   Better education and mentoring are the best tools to help youth emerge from poverty.  But for the rest of us, shouldn’t the same safety-net solutions be appropriate for all adults who are in hard times, regardless of our ages?

Social Security should be phased out.  It costs more than it’s worth, and it cannot be fixed in a way that reverses this inequality.  Our government has been proved untrustworthy with our savings, and we should make it harder, not easier, for politicians to meddle with personal decisions.  Education and a negative income tax are probably the most cost effective, and respectful, way to address and ameliorate the problems of poverty without discriminating on the basis of age.

This set of facts could be the death of a prosperous and competitive America unless we start acting to avert disaster right now.  Next week, we’ll talk about solutions.  But we’ll start today by outlining some of the reasons for this apocalyptic prognostication regarding Social Security and the history that got us where we are today.

First, our public pension program is statistically bankrupt and therefore reduces the national confidence and power necessary to remain the world’s economic and political leader. Current deficits retard our recovery from recession as the rules keep changing and businesses cautiously await clarity before increasing hiring and investing.  But today’s problems pale in comparison to what will happen in the future unless we reform Social Security.  Benefits began to be paid out as soon as the program began — that is, before contributions could be saved to fund them.  The system accordingly quickly became a “pay as you go” affair. Benefits have also been raised and widened throughout the years.  The result is a “defined benefits” retirement program that, until recently, has redefined benefits only in an upward direction and is financed off the backs of current workers. Individual benefits have precious little connection to individual contributions.

Aggravating the problem are demographics.  In 1945, there were 50 workers for every one retiree on Social Security.  In 1950, the ratio had fallen to 17.  In ten years, it fell to 8.6, and by 2025, it is expect to drop to 2.27, with a further decline to 2.1 in 2031.   Even with “full” employment, senior boomers are going to be supported by a smaller and smaller relative work force.  Something has to change.

But that something should not be raising payroll taxes again. These taxes already put us at a competitive disadvantage internationally and make it harder to reduce unemployment domestically through job creation. Raising the rates again is not a good solution for future insolvency because doing so increases the cost of labor even more without concomitant improvements in productivity.  What it really raises is unemployment.  Perhaps it takes a sustained global recession with many nations trying to solve their unemployment problems by enhancing exports to highlight these unintended consequences.  No crisis should fail to be exploited.  Let’s just hope this one doesn’t accelerate into an international trade war with battling currencies as well as quotas and tariffs.

Additionally, in all the years when revenues exceeded benefits, our government didn’t save Social Security surpluses for a future that could well be predicted to need them for boomer retirement years.  Rather, it spent these extra billions of dollars, using noxious payroll taxes to fund other government programs.  Social Security supported $99 billion of other government spending in 2009.    What did it get in exchange?  “Special issues” from the US Treasury, with both principle and interest backed thereby.  Safe?  Not necessarily, at least for individuals who have already contributed through payroll taxes and rightly should own their own shares of retirement “savings”.   The rules of eligibility and tax bases are already changing. At least the average annual interest return in 2009 was 4.860%.  That would be a nice return on private savings.  And those savings could have been secured in private nest eggs.  Many Congressional Democrats consider “privatizing social security” criminal.  That’s what we should instead call  keeping forced savings “public” and then spending them on other programs.

Social Security probably had to be run in the red at first.  After all, it was created during the Great Depression in response to the severe and unexpected suffering of seniors who’d already retired from work and lost most of their carefully built-up nest eggs because of Black Tuesday’s 12% drop in the stock market and continued declines for more than a decade thereafter.  It’s not as if retirees could rejoin the work force in response to destroyed savings:  unemployment rates were as high as 25% and didn’t fall below 14.3% until 1941.  Actual unemployment was probably even worse – much worse.  The elderly, if not yet disabled, were likely to be in that invisible pile, “discouraged workers”, who didn’t make it into the unemployment statistics because they’d given up trying to find jobs – any jobs. And we think today’s bad…

While we can approve of — and even applaud — running Social Security in the red during its early years, in no way can we honestly justify plundering Social Security surpluses to finance other government programs in later years.  With all their equity and efficiency issues (see an earlier centermovement.org post), payroll taxes are an acceptable source of revenue if and only if it’s appropriate to force individuals in the work force to save a significant percentage of their earnings for a future when they’re too old to work.  Is this kind of mandate appropriate?  Is it even Constitutional?  State challenges to Obamacare’s requirement that all individuals carry health insurance make one wonder.

In any event, the irony here is that our government forced working individuals to save, and then spent rather than saved their savings.  Until recently, economists have bemoaned how low the national rate of saving has been. More saving typically means more investment, which raises productivity and therefore growth and general prosperity.  National savings are likely as a whole to have actually decreased under this opaque system of  Social Security funds and their raidability.  It’s likely that voluntary participation in company pension plans and  contributions to 401(k)’s declined with forced participation in Social Security.

Sunk costs are sunk; the past is past – although it does inform the present.  The questions we should now be asking are how to reform Social Security or eliminate it as a public program altogether.   Perhaps there’s a better way to prevent poverty in old age.  Regardless of what the changes will be, it’s also important to figure out how to make the transitions from old to new as smoothly and equitably as possible.

One fact we should already know: the sooner the rule changes are announced and the more gradually they occur, the better off for all concerned.  We’re then given time to adjust to the new framework with whatever variables we control and decisions we can make.

Three lessons we must learn from Social Security’s history so far and keep in mind before architecting improvements.  First, perfection is beyond our reach – and even our definition. Wishing so won’t make it so. Second, the law of unintended consequences is fierce and ubiquitous.   How will behaviors change as we alter the rules of the game?  Will they offset or advance our objectives? And third, it’s not enough to have a problem in the private sector to justify involving the government.   At least Social Security has taught us this: we must first try to insure that the government has the resources, incentives and information to ameliorate the situation.

Unless we learn these lessons and have the political and personal courage to fix Social Security, and fix it soon, our whole society will join seniors in facing profound insecurity on all levels – including national defense.   A broke and broken nation cannot successfully defend itself.  And Social Security is just a baby of a problem compared to Medicare and Medicaid.  We need to cut our bipartisan teeth fixing the Social Security mess before we can address these pressing health-care problems with an American First attitude.  All sorts of issues will come to a head with upcoming debt-limit debates and decisions.  Unless this ceiling is raised, the government is likely to run out of funds by March 31.  One thing’s for sure: our government can no longer avoid tough decisions about spending cuts or tax increases by raiding Social Security surpluses.  Why?  Because the surpluses are vanishing.  There will soon be nothing left to raid.  Rather, the debt ceiling will be raised yet again, this time in part so that seniors can continue to receive their monthly checks.

Next week’s post will outline some of the ways to make Social Security secure.  They’ll range from the modest to the extreme.  Please come back, read the piece, and add your own thoughts and suggestions.  We need all the help we can get.

This is a case of considerable urgency.  The United States, and several of those states individually, are on course to go bankrupt.  One of the major problems is the current and projected rise in medical costs.  If present trends to pack on weight continue, treating problems related to obesity will eat up $344 billion – or 21% of our health-care expenses – by 2018.

What’s behind all these bulges in waistlines and budgets?  Have we become a people and a nation who just can’t say no?

Uncomfortably aware of how quickly 2010 has come and is about to go, most of us resolve to accomplish more in 2011 and beyond.  Let’s start by reflecting on Yogi Berra’s observation, “We’re lost, but we’re making good time.” We’re so busy, all of us.  But where are we headed?  You tell me the meaning of life and perhaps we can work out a definition of what “success” is.  Meantime, we can reflect on my daughter’s observation, “You know, Mommy, I slow down to hurry, and you just rush.”  She was four years old at the time.

Americans eat too fast.  We’ve developed a whole “cuisine” of meals we can consume while watching and thinking about something else – TV, for example.  Why do we want “fast food”?  Why don’t we respect eating and cherish family time around the dinner table?  If we savored our gathering together, and talked between mouthfuls, our stomachs would be able to tell us we’re full, and maybe we’d even listen to them and stop scarfing down everything in sight, and out.  Must we eat, instead, while driving and writing papers and going to the movies?  No.  Instead, we should be measured and mindful with our meals.  Michelle Obama is on the right track with her “Let’s Move” initiative, and Sarah Palin is simply being silly with her defense of desserts.

Americans do almost everything too fast.  We want quick solutions to problems –for example,  pills or bariatric surgery instead of slow and steady weight loss from eating less (and better) and exercising more.   When there’s a problem in the private sector, we want the government to solve it, immediately and painlessly, as if we’re children and government is our benign, powerful, and wealthy set of parents.

Americans also multitask all the time, instead of focusing on one project at a time, consciously and conscientiously.  While we feel – and are – busy, we’re less productive with these work habits, particularly in the most important job of all: raising children. Kids know when their parents aren’t really listening.  Too many parents try to protect their children from failure, even as they ill prepare them for success.  Do we want our children to have their first disappointments at the age of forty?  Do we want to bail our kids out of problematic situations or teach them that problems are challenges that must be met?  Surely, the best way to gain confidence is to fix mistakes and keep moving forward.  Life is not easy, and trying to make it so just makes it less deep.We must raise children to be accountable.  And then perhaps we can make governments accountable, too.  We need to slow down and find the time to raise our children and monitor our politicians, rewarding both sets for good behavior, and chastising  them for bad.

Ours is a nation in relative and perhaps absolute decline because politicians and ordinary people alike are chasing money rather than value.  We have a public school system that some say benefits teachers more than students.   We go around calling every kid a “winner”.   This “culture” is making us a country of many self-delusional losers. While our colleges and graduate schools remain first rate, our high schools have become merely mediocre.  The most recent OECD Programme for International Student Assessment (PISA) report ranked American teenagers rank 14th out of 34 OECD countries in reading skills, an average of 17th in science, and a below-average 25th in math.

To reflect on President Obama’s recent  trip to Asia is to realize that we are no longer considered the preeminent economic and political leader of the world.  And justified as many of the criticisms of how we abused some of that power have been, can you think of a nation that would have used it better?  I can’t, and find the exercise discouraging.

We won’t regain our strength without a well trained and disciplined workforce.  We need to grow our way out of our problems.  And while it’s convenient  to blame teachers’ unions for our decline, parents and culture must share the responsibility for helping youths grow up.  We also need to say no to all the gravy — on the dinner plate and in politics.  You may love your Congressman for all the pork he brings home to your state, but do you realize you’re paying for other states’ pork and all the omnibus spending bills that pork makes possible?  Overall, your deal may not be good for you — or the country.  The real price is too high.

My favorite book is my mother’s old leather-bound dictionary.  It provides five definitions for “resolution”, starting with “Act or process of resolving, or reducing to simpler form; also, its result; answer; solution”.  After the fifth definition, which involves music, it sends the reader to the definition of  “decision” to add nuance.  “Resolution,” says Mom’s Webster’s Collegiate Dictionary Fifth Edition, unlike mere decisions “implies constancy and courage, esp. in the face of difficulty or danger.”

Here’s hoping our resolutions for this new year of 2011 fit that first definition and that implication.  Then, and only then, can we save our children and our country.  We need to grow up so they can.

No Labels  has many slogans, one official and numerous unofficial ones.  The official slogan is: “Not Left.  Not Right.  Forward.”  This suggests a label: “Centrist.”   The No Labels “Statement of Purpose” is little more than a series of slogans and skimpy platitudes.  A page called “Deep Dives” provides some better information, but this space mostly outlines problems with incomplete solutions.  What does it all mean in practice?

The best No Labels slogan is frequently uttered by co-founder, John Avlon:  “No Labels is not an ideology; it is an attitude.”  Avlon’s excellent point is that ideological compromise is better than allowing terrible problems to go unaddressed.  There is absolutely nothing wrong with strong beliefs, but ideology must sometimes give way for the good of the country.   We must be patriots first, and ideologues second.  Add some real-world substance to this idea and No Labels might have something.  Here are three concrete positions that No Labels should embrace in the spirit of Avlon’s slogan.

The growing public debt is a true national crisis.  We should expect our politicians to act like the heroes of the Debt Commission, Economist Alice Rivlin and Senator Tom Coburn, who are not necessarily moderates, but rather citizens who put their ideologies and political allegiances aside for the good of the country.  A No Labels candidate should be required to support the Debt Commission’s product, but it should be understood that subsequent elections can be about changing it.  In this way, conservatives can still fight on for lower taxes and spending, and progressives for more taxes and spending, so long we agree that the debt will be controlled on an agreed-upon schedule.  In the case of our looming fiscal catastrophe, ideology that keeps government from getting its fiscal house in order borders on treason.  No Labels should make this point clearly.

Controlling healthcare costs is a key to cleaning up the nation’s fiscal mess.  Obamacare does not control rising medical costs, and must be substantially changed.  As we have argued many times, there are more fiscally responsible bipartisan alternatives, namely the market-driven, consumer-empowered approaches of Senator Ron Wyden, Economist Alice Rivlin, and Congressman Paul Ryan.  Any candidate claiming to be part of No Labels, who fails to adopt such an approach, should be called out as a fraud.

Finally, President George W. Bush and the late Senator Edward Kennedy worked out a compromise on immigration that was killed by the extreme ends of both parties.  The nation obviously needs secure  borders, and the immigrants who are here should have a path to citizenship.  Unyielding ideology keeps our borders open and our illegal neighbors, whom we willingly employ, in limbo.  Immigration is another issue crying out for compromise.  No Labels should make a stand here too.

To these three areas we must add a series of election reforms.  They should be reforms that strike at the heart of the corruption that is crippling our democracy, rather than simply those that will help Centrists get elected.  Without reforming our system of elections and re-elections, difficult problems become nearly impossible to solve.    Meaningful election reform will be our niche at Centermovement.org.  We are already busy doing more than writing  and will be rolling out our plan of action over the coming months.  We hope No Labels will join us in our campaign for specific actions to fix our broken democracy.

I wish No Labels well, but fear that it is currently at risk of being the “Seinfeld of politics” – a movement about nothing.   An entire platform is not necessary, but we concerned citizens can only sing “Kum Bah Ya” for so long.  Politicians, without making hard choices, will embrace the No Labels label in order to win Independent votes.   No Labels leaders rightly criticize our politicians for their lack of political courage, but No Labels, too, seems afraid to take controversial positions.  It’s time to put some meat in the No Labels movement.

Am I saying to the States that those special benefits your Congress got for you weren’t free – or at least subsidized?  Yes.  For most of you, yes.  Because you’re paying your fair share, or even more, for all those earmarks that benefit other States, and perhaps even more importantly for all the omnibus bills that wouldn’t have passed without earmark handouts.

The two major insights of Economics are first that however rich we are, we live in a world of scarcity and second that behavior follows incentives.  Two of the most important scarce goods are information and time.  Facts are mostly generated locally, and the desire to get ahead inspires people to get the knowledge they need to prosper.  Just that, not much more than that – time is one of the other most important of scarce goods.  Had we “but world enough and time”…oh, well, we don’t.

One of the most important insights from the Federalist Papers lodges in #51 and, while political, reflects these sad facts of Economics.  As James Madison shared on February 6, 1788:

[W]hat is government itself, but the greatest of all reflections on human nature? If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself.

Madison used this somber reflection to emphasize the importance of checks and balances.  But let’s be clear: the Government acts, in many circumstances, like a monopoly, particularly, but not only, at the federal level.  Even worse than being unrestrained by competition, it’s a monopoly that has to centralize information in order to act intelligently (this is a particularly sobering truth for its new responsibilities for health-care decisions) and its incentives follow the money, which come from special interests.  Uncle Sam is not impartial.  He prefers some of his nieces and nephews over others – and the main metric he uses to choose is money.

So there’s no such thing as Santa?  Such a question demands nuance in reply.  There are several levels to reality, and he’s real on some but not all of them. Symbols are important and real.  So Francis P. Church was telling the truth more than one hundred years after Madison when he responded in 1897 to eight-year-old Virginia in The New York Sun: 

Yes, Virginia, there is a Santa Claus. He exists as certainly as love and generosity and devotion exist, and you know that they abound and give to your life its highest beauty and joy.

Just remember that on other levels of reality, facts in fact matter.  The private sector certainly has its flaws.  But before we rush to government solutions, we’re obliged to act as adults and ask ourselves, “Will the Government make it better or worse?”  Perfection is beyond our reach, even if we could define it.  We’re never going to get rid of all problems, and sometimes our efforts will just increase and even entrench them.

Angels are real, too, in Church’s sense and maybe more.  Abraham Lincoln appealed to “the better angels of our nature” in his first inaugural address.  In the Christmas spirit, and all year round, we should be appealing to them too.  Our problems as a nation are huge and many.  They can only be solved by working together, respecting facts and different perspectives, and continuing conversations until reaching consensus.  This is my grownup Christmas wish.

Yesterday, December 13, 1,100 people gathered together in the Alfred J. Lerner Hall at Columbia University.  Every seat was taken, and many were standing in the aisles.  No Labels National Founders Meeting was not only a launch; it was also symbolic of what this movement is all about.  We want people to talk to one another, to interact as fellow human beings rather than predominantly politicians. We want them to reach across the aisles in Washington.

“We are brought together by a simple idea, no labels,” Founding Leader Nancy Jacobson began.  “Don’t give it up, just put it aside… This day, at this very moment, this becomes your movement.  I look forward to working with all of you.”

“Nobody sent you here, you sent yourself,” Founding Leader Bill Galston continued.  “This is as fresh as today but as old as America – throughout our history, this is how change happens.”  And then he quoted Margaret Mead:  “A small group of thoughtful people could change the world.  Indeed, it’s the only thing that ever has.”

It is, of course, No Labels’ plan for this to become a large group of thoughtful people, and of people who organize and act as well as think.  As Founding Leader John Avlon said, “What divides us is not larger than what unites us.  Here’s the Big Secret: WE have the numbers.”

Founding Leader Mark McKinnon then concluded the opening remarks.  “Welcome to our little Woodstock of Democracy.  You feel as if you don’t have a voice in Washington.  The system punishes good behavior and rewards bad.  Now, members of opposite parties don’t even talk to each other…[but] YOU can move markets.  Politicians and elected officials respond to numbers.  You just haven’t had a vehicle.  We’re a catalyst for us, creating that vehicle…We’re going to create a ruckus for democracy…[no longer] confusing conformity with courage.  No!  It’s cowardly…We  are already the majority.  We want to move not Right, not Left, but Forward.”

And then these Founding Leaders left the stage.  This is a grassroots movement, their movement back into the audience reminded us.  And thereafter, the voices of prominent people in person alternated with those of common folks with mobile mikes and common folks who couldn’t participate in person but whose thoughts Founding Leader Kikki McLean shared by reading their written communications.  Particularly notable was diversity not only in ethnicity but also in age. Engagement of youth is one of No Labels‘ notable successes, and our oldest participant at the launch is 90 years old.

In an era of “truthiness”, it was encouraging to hear how many times “fact based” was uttered.  As David Brooks said, for many politicians, lazy politicians, “all your facts are sorted before you see them.”  Practicality can be liberating, and this movement is all about problem solving and patriotism so strong that we can and will make the tough, and painful, decisions necessary to secure and improve the future for those who follow us.

In an era of vitriolic and stalemating partisanship, it was encouraging to hear bright and informed individuals from different political parties and perspectives speak to one another with civility and respect in two panel discussions.  Better yet, they listened to one another.  A key difference between intelligence and wisdom is the ability to listen than imbues the latter and is often missing in people with high IQ’s.

Wise people are also good-humored people.  Freud studied jokes at the same time he studied dreams.  Both, he said, serve to vent emotions.  They’re mostly negative in the case of jokes, which you’ll note, generally have butts.  Humor, on the other hand, is a gentle tweaking of perspective, one that can open the listener to change and compromise or reach consensus.  How telling, then, that, under the opening topic of “Conversation Nation,” NYT columnist David Brooks began with some sensational comedy! (My favorite lines were those that likened little third graders to beetles, weighted down with backpacks stuffed with materials to get them into Harvard and whose mothers you could identify as those who weighed less than their children and drove SUV’s approved by society only if they were imported from nations hostile to America.)

Here’s how some speakers enlivened and engaged the audience by making us chuckle  — and it’s the insight in the humor that makes it so energizing.

Joe Scarborough – now Co-host of MSNBC’s “Morning Joe”, but previously a four-term US Congressman from Florida: “The reality is that the politicians are all working together to get us deeper and deeper in debt…In two years, we’ve gone from Obama as the agent of change to Boehner as the voice of change???!!”

Michael Bloomberg – Mayor of NYC: “Politicians make sure they don’t have competitive races.  It’s scary, having to get jobs in the private sector – there are no jobs there, because of them…[Politicians] have a long history of saying one thing before they’re elected, and another after…”  All this, before asking a very serious question:  Is “fair” “equal opportunity” or “equal results”?

Cory Booker – Mayor of Newark, NJ:  “Mayor Bloomberg gave me this advice: ‘Before you become a mayor, become a billionaire!’”  I guess Booker didn’t act on that suggestion, but he does have riches comparable in magnitude: those of strong intellect.  Booker also quoted the Ben Franklin pun: “From now on we either hang together or HANG together.”

Douglas Palmer  — former mayor of Trenton, NJ: “If you don’t have a seat at the table, you’ll be on the menu!”

And Booker again: “Democracy cannot be a spectator sport.  Accept reality as it is, or take responsibility for change.”

There’s strength in numbers – not just because they translate into votes but also because individuals gain confidence and energy from like-minded others. Many Americans are dedicated to civility, cooperation, and the real courage that stands for the truth and acknowledges the necessity of sacrifices to solve problems.  But we’ve felt lonely.  And now we know we’re not alone.  We’ve come together.

No Labels recognizes both kinds of strength in numbers.  All fifty states were represented at our National Founders Meeting, and we ate our box lunches with folks from our own states as part of a “’Citizens’ Meetup’ Lunch Breakout Session”.  This session may be the most important  factor in keeping the movement going and growing.  We met and began to know the people who live in our states and districts, the people we’ll interact with to change politics at the grassroots level.

And now most of us are back in those states, eager to stay connected and build a movement that keeps politicians accountable and rewards them for good behavior.  The angry shouldn’t be the only ones to speak.  We have the numbers, and now we have the voice.

Remember when some pundits thought the internet would replace shopping malls?  This was as stupid a prognostication as when the WSJ suggested business cycles might be a thing of the past.  It’s in real space that we make connections.  One of the reasons  politicians aren’t reaching across the aisle is that they no longer talk across the dining table.  It’s by being with people, seeing them in the complexity of their humanity, that real and sustainable cooperation  and change take place.  No Labels knows this and will use the knowledge to change the world.  We share an attitude, not an ideology.

Bob Inglish, US Congressman from South Carolina, spoke of creative cooperation. “The ties than bind us as a nation,” he reminded us, “are greater than those that blind us.”  And Evan Bayh, former Senator from Indiana, inspired us to take action.  “We search in vain,” he said, “for a kind of Golden Age of Political Comity…Gathering challenges are going to define the future.  We have a deep moral responsibility to not let  future well being decline.  Practical Progress can be good politics.”

The Founding Fathers of American knew they had to compromise on huge issues to create our Constitution.   So they did.   The Founding Leaders of No Labels –mothers as well as fathers — share this understanding.  More than two centuries later, we must compromise to save our nation.  So we will.  Because of No Labels, we will.

Analysis is never more important than when emotions and stakes are high.  Let’s start by organizing our thoughts about the roles of taxes in general and develop the language that’s useful and clear .

The first step is to define and study the legitimate economic purposes of taxes.  They’re pretty straightforward.   Taxes should be imposed to raise revenue, to act as user fees, and to internalize externalities.   The revenue question is the most relevant economic consideration for the Bush Cuts, but we’ll discuss taxes that advance the other two goals next week.

The second step is much more complicated than the first.  It’s to analyze equity issues.  Taxes redistribute income, even if the rates are the same across income classes.  Should rich people pay more because they have more?  How much more?

The third step to refine the vocabulary.  What does it mean “to raise taxes”?  I don’t know.  Do you?  Does it mean “to raise tax rates” or does it mean “to raise tax revenues”?   You don’t have to love Laffer and the curve he developed on a paper napkin to understand that sometimes raising rates reduces revenue.  Why?  Because people alter their behavior when the rewards and punishments change.  Rich people are particularly good at this.  They have ample incentives and enough money to pay clever lawyers and accountants to reduce their tax burdens – and do so legally.  Increasing the tax rate of dividends, for example, acts like a subsidy to tax-free municipal bonds.  Why?  Because it’s the after-tax reward that matters and changing IRS rules affect the relative returns between taxed dividends and untaxed interest.

So, if we agree that the rich should pay more, we should clarify that statement by replacing “more” with “a higher percentage of their total income than they’re currently paying” and realize that raising rates may not advance this objective.  Hurting the rich may not help the poor unless envy and anger are considered acceptable feelings to act on through the IRS.  Even if they are, the possible loss in revenue needs also to be taken into account.

With all these matters in mind, let’s start studying taxes on capital gains.  In 2003, President George W. Bush reduced the tax rates on long-term capital gains from 10% and 20% to 5% and 15%.  Both reductions were substantial in percentage terms – a full 50% for people in the lower income bracket, and a still attractive 25% for people in the upper income bracket.  What does “long term” mean here?  It applies to gains on any stock sold more than a year after it was purchased.  Is this your idea of “long term”? No wonder ours is a country that has trouble planning ahead.  The characterization is important, because short-term gains continued to be taxed at the same rates as other sources of income.  The highest rate is currently 39.6%.

What happened to tax revenue from capital gains?  It went up.  It went way up.  But how much of the increase should be attributed to reduced rates and how much to other factors?  Buying and selling stocks is not free.  Lowering the tax rate on capital gains made transactions less expensive, thereby increasing activity and income from  fees on Wall Street.  An indirect effect of lower rates was accordingly most likely a rise in the revenue from taxing profits in the financial sector.  Making stocks a better – more liquid, more rewarding — form of investment also probably contributed to a rising DOW.  Both of these secondary results would be another plus for Bush’s policy.

But a lot of other factors were surely also in play, and many of the direct effects of lowering capital gains tax rates on revenue were surely temporary in nature.   Before the cuts, individuals and institutions were refraining from selling some stocks because they felt “locked in” by how much capital they’d lose by altering their portfolios.  For this reason, we would expect to see a spike in sales – and tax revenues – shortly after the rates were cut. And wouldn’t their scheduled demise keep sales brisker than what they’d have been if the rate cuts were regarded as permanent?

We’ve seen that the effect on long-term revenue from permanent or at least quasi-permanent rate reductions cannot be assessed with complete accuracy, and even then we’d have to adjust for other variables.  What, though,  about the equity?  Is it fair that someone who’s made $50,000 just sitting on a stock for one year and one day would pay the government less than someone who worked long hours week after week – even before we add in the payroll taxes?  Of course not.  But there are extenuating circumstances.  Particularly for truly long-held stocks, much of the gain is due to inflation.  Adjusted for inflation, a stock sale could actually result in real loss.

SOLUTION: Index the cost bases of stock for inflation, and then tax capital gains at the same rate as other income, regardless of how long the stocks are held.

On to dividend taxes. In 2003, Bush also reduced the tax rates on dividends to the same levels that applied for capital gains. If you think the discrepancy between the tax rates on capital gains and wage income is deplorable, just wait until you consider this scenario.   A cardiologist and an unemployed debutante both report $250,000 in income.  With today’s rules, if the Bush tax cuts don’t expire, all of the doctor’s earned income over $34,000 will be taxed higher rates than what the socialite gets just by breathing.  Aren’t you outraged even before you factor in all the medical school debts that need repaying?

So you’re ready to go to the mat, fighting any extension of the Bush Cuts, right?  The top tax rate on dividends is scheduled to increase from 15% to 39.6% on January 1, and this is a good thing, yes?

Not necessarily.  Some of your rage should be assuaged by awareness of the double dividend taxation.  When companies make profits, they’re taxed at rates of 15% or 35%.  Some of the remaining profits are then invested or at least saved by the company, while others are distributed to the shareholders, based on the number of shares they hold.  If our debutante’s wealth was invested in Fortune 500 companies, most of her income had already been taxed at 35% before she received it.  Total marginal tax rate? With today’s rates, 50%, well above that of the doctor.  If the Bush Cuts are allowed to expire, dividends can be taxed at combined rates as high as 74.6%.  Wow.

A corporation is a legal fiction.  All of the profit (business net income) is owned by the shareholders, who are rewarded either when part of those profits are distributed to them as dividends or when retained profits are wisely invested and raise the stock price.  The double taxation of distributed dividends distorts the decision of what to keep and what to pay out.  It’s probably good public policy to encourage more business investment at this point.  We need rising productivity to compete with Asia and grow out of our deficits and reduce the percentage of our debt to GNP.  But is this the best way?

SOLUTION; Eliminate the corporate income tax and tax dividends at the same rates as other income.  Such a policy still rewards retaining profits and increases the level of investment from what it otherwise might be.

These are bold policies, and they should be for problems are big as those we face.  Tweaking is not enough in troubled times.  It’s time to think big, for America, not different classes and interest groups.

Socking it to the rich may look attractive because it’s fun to be angry and punitive, it’s not fun to see someone living a lavish life style while we’re counting pennies, and it’s not, not, not fun to have to be part of the painful solutions to returning to fiscal sobriety.   But anger, envy, and denial are a poor basis for policy.  And guess what?  The rich may actually be paying more taxes if these reforms take place.

One of the many proper roles of law is to make at least somewhat predictable the consequences of our actions.  All of the Simpson/Bowles recommendations are accordingly unfair: they change the rules of engagement after people have made plans, adapted, and acted according to those rules .  We should accordingly endorse even the proposals we like most — or dislike least — with a certain reluctance, as well as with the understanding that there is no pain-free solution to our problems as a government and as a country.

It helps first to establish the fact that not all deficits and debts are equal.  Some are actually acceptable; others, even beneficial. The government should run deficits under two circumstances:  when government investment is high and when employment is low.

In Economics 101, undergraduates learn about macroeconomics by starting with a closed economy (no international trade) and the simple equation that C + I + G = Y.   A nation’s income (Y), it tells us, equals the sum of private–sector spending on consumption (C), private-sector spending on investment (I), and public-sector spending regardless of type (G).  In evaluating a nation’s financial health, however, it makes sense to break down government spending into the same two components of consumption and investment that deliver so much insight into where an economy is headed.

Economists like investment, and we should, too.  It’s what raises productivity.  It’s what turns inventions into innovations, fueling per-capita growth through new and improved technology.

Going into debt to finance an investment can be appropriate and praiseworthy in both the private and the public sectors.  A college graduate is living only briefly beyond her means when she gets a loan to pay for medical school: she is investing in her future, one she hopes will be financially as well as intellectually and emotionally rewarding.  On the other hand, expenditures on clothing and haute cuisine that result in debt of equal magnitude would be properly considered profligate, by parents and strangers alike.  Similarly, for the government, our response to deficit spending should vary according to whether or not assets as well as debt are being created.  Going into debt to improve long-lasting infrastructure like bridges should be evaluated for the nation just as a banker would decide whether or not a prospective homeowner qualifies for the mortgage he requests to buy some real estate.  Those who benefit from years from better transportation can pay for that convenience through years of higher gasoline taxes; families that own their homes can pay monthly mortgage bills rather than monthly rent.  Our nation’s biggest debt and deficits, as percentages of our GNP, occurred during World War II.  The Great Generation, just then emerging from the Great Depression, were sacrificing their lives and their family’s peace of mind  to save the future for us.   Should they have also paid in higher taxes to balance the budget immediately?  No.   Unequivocally no.  We are the ones who have benefited the most from a war that defeated dictators.

In times of recession, budgets that would be balanced under “full employment” generate deficits when unemployment rises about “natural” rates.*  They do so because in hard times tax revenues automatically decline along with profits and other income, while spending on unemployment compensation automatically rises.  These “automatic stabilizers” are a great tool.  They suffer from none of the lags that plague the fiscal policy of spending.  It takes too long to get tax-rate cuts through Congress in response to a recession, and even longer to approve of spending, sign contracts, and get projects going.  Robert Barro’s opinion said that “shovel ready” is one of the stupidest notions he’s ever encountered  is now endorsed, more politely, by Barrack Obama, who acknowledged there’s no such thing.  Automatic stabilizers are the part of Keynesian Economics that unabridgedly makes sense.

In sum, the requirement that all budgets be balanced is a dangerous and inappropriate goal.  A better approach to fiscal sobriety involves first analyzing government budgets by asking and answering the following two questions:

(1) Which spending is properly categorized as “investment”, and which as “consumption”?

(2) What kind of deficit would the same spending and taxing formulae yield if there were full employment?

Some “deficit hawks” push for a Constitutional amendment that would require all budgets to be “balanced”.  Simpson and Erskine don’t soar this high.  They stay aquatic in their imagery, and properly so.  The orcas we’ll study next week will all involve government spending, and we’ll use the framework we’ve just developed in deciding whether or not to harpoon them.

*Zero unemployment would be far from optimal; 4-5% is a better target.  Here’s why.  In a dynamic economy, some sectors and industries shrink while others grow — think “typewriters” and “computers”.  And many people in our advanced economy search for good jobs rather than accepting their first offers or being “underemployed” – working below their skill level, just to get a job. Unemployment benefits subsidize job search and allow individuals to be more picky — or think more long term.

Simpson may have chosen his metaphor because the problems he and Bowles been tasked to address are truly oceanic in scale. Or perhaps Simpson was making sly reference to going public with their template while our President was across the Pacific Ocean, getting pounded by a tsunami of criticism for “quantitative easing “ (QEII) at the G-20 summit meeting in South Korea.  What Obama pitched as expansionary monetary policy designed to combat American unemployment of an obdurate 9.6%, other G-20 participants saw as exchange-rate manipulation.   “If QEII works,” blasted his foes,  “it will be by willfully devaluing the dollar at the expense of our recoveries!”

Printing money also delays the domestic day of reckoning.  When the government can pay its bills and buy its debt by printing money, it can avoid necessary fiscal reform and keep interest rates on that debt lower than they would otherwise be – until nominal rates begin to rise to incorporate expected inflation.

Simpson and Bowles have a better solution for raising revenue, and it’s bipartisan.  (Simpson is a Republican and former Senator from Wyoming; Bowles is a Democrat and former President Bill Clinton’s Chief of Staff.)  The Co-Chairs of the National Commission on Fiscal Responsibility and Reform want radically to reform the IRS tax code, eliminating or at least limiting all deductions and replacing marginal rates that currently range from a low of 10% to a high of 35% with three brackets: 8%, 14% and 23%.  The corporate tax rate would also be cut from 35% to 26%.

This plan is good Economics.  The best way to tackle deficits and debt is to grow our way out of these problems, and the best way to enhance growth is to improve incentives on the margin, where we get the most bang for the buck. Presidents Bush 43 and Obama made big mistakes in giving lump-sum gifts of cash, respectively, to Americans below certain income levels and Senior Citizens of all income levels. Long-term reduction of tax rates on extra income make people work longer and harder and spend more.  Lump sums have no effect on work and minimal consequences for spending.  They look good politically – and then only to the recipients and the economically naïve.  There’s nothing pretty in pandering.

Over time, if lower tax rates increase economic activity and growth, they may actually increase tax revenues.  To speed up and ensure the process, however, Simpson and Bowles suggest limiting or eliminating deductions as well.  This is also an economically wise policy plan, but it may be politically foolish – and catastrophically so.

Special interests build around deductions and rally to increase them.  Their setbacks will be focused and visible, while the benefits will be diffuse and difficult to pin down.  The housing industry – including real-estate agents, bankers and lawyers — will become fear mongers, insisting that eliminating or radically reducing the deductibility of home mortgage interest payments will prevent their markets from recovering.  Insurance companies will bray about increasing personal health-care costs if premiums become a taxable part of earned income.  Low-income and large-family individuals and couples will go public with their extra hardships.

The oil, gas, and auto industries may join the protest: Simpson and Bowles also recommend raising the federal tax on gasoline from 15 to 33.4 cents/gallon.  This change, too, is commendable for the country as a whole.  It advances efforts to reduce carbon imprint and urban sprawl and it operates as a user fee to cover a greater percentage of road and bridge maintenance.

The most important factor in determining tax reform, however, is President Obama.  Was he seeking serious recommendations and results or just political cover when he established his bipartisan fiscal commission?  How – and when — will he respond to the Simpson/Bowles draft?   Our President, who pledges better communication with us folks as his strongest response to midterm shellacking at the polls, has been home from Asia for a week and has yet to weigh in on the matter.   Perhaps he’s testing its traction.  Twelve Members of Congress and six private citizens comprise the panel he created, and fourteen of them must approve the Simpson/Bowles recommendations before they’re considered by Congress.

As the lead  editorial in Sunday’s New York Times succinctly put it, “There is no way to reduce the deficit without strong leadership from President Obama and honest cooperation from the Republicans. The ideas are out there. Now we are waiting for the politicians.“

“Honest cooperation from the Democrats” will be essential, too.  Particularly if Simpson/Bowles advances from the commission to the Senate, where Democrats still hold a majority.  And then there’s the matter of spending cuts, even more politically fraught.  Here’s hoping we can act as Americans with concerns about future generations rather than opting for short-term expediency on party lines.

Returning our country to fiscal sobriety cannot be accomplished without pain and sacrifice.  We’ll be moving there more for future generations than for ourselves.  Most of our politicians are therefore following the President and opting for silence at this stage.  With issues this large and this serious, no plan is likely to be popular with the electorate. Why, then, take a stand on something that may prove ephemeral?

Three notable exceptions spoke out quickly and decisively.  Republican Paul Ryan, who has his own “Roadmap for America’s Future”, clearly prefers his own approach, but applauds the bipartisan effort to compromise and start solving problems.  Senator Jim DeMint, a Republican from South Carolina and Tea Party darling, gives the draft two thumbs down.  Minority Head of the House Nancy Pelosi, a California Democrat, calls it “simply unacceptable”.

Ryan, DeMint and Pelosi are talking about all the whales and some of the minnows harpooned by Simpson and Bowles, while this first in a series of posts covers only tax orcas and their first stab at capture.  We need to study how the draft recommends reigning in spending before voting with our thumbs and deciding what’s acceptable and what’s not in the proposal as a whole. We must also leave many of the details to the experts.

Reducing both deductions and tax rates is a good start to raising both revenue and growth. What’s already abundantly clear is that there’s lots of blubber in the federal tax code and therefore lots of blubbering from special interests. That’s why we’re talking about “Political Economy 101″ and not just “Economics 101″.

Why, then, didn’t the supportive New York Times feature in yesterday’s well-read Sunday edition Obama’s diplomatic and economic mission in Asia, with all the luminaries, speeches, photo ops and photos?  Why was their no mention of Obama at all on the front page and, under “International”, only in the articles “Reporter’s Notebook: Heartfelt Moments on an Up-and-Down Global Trip” by Sheryl Gay Stolberg and “Leaders of China and Japan Meet on Summit’s Sidelines” by Martin Fackler, both buried on page A-12?

Quoting “Heartfelt” would be impossible to do without sounding snarky, and we at Centermovement.org are determined to sustain civility of tone.  At least “Leaders” includes a snippet noting that, at a meeting with Obama, Japan’s Mr. Kan thanked us for our support during the territorial disputes with China and Russia.  This gratitude may, of course, have less to do with our President than with our Secretary of State Hillary Clinton, advancing her career more than it does his.

The NYT’s “Week in Review” also chose to downplay Obama’s Asian Adventure, almost to the point of not playing it at all.   For example, it didn’t even mention the G20 Summit, which The Washington Post’s Jonathon M. Trugman called “a mud-slinging match with President Obama being placed squarely in the bull’s-eye” and “a ‘Bash Uncle Sam’ fest”, becoming perhaps “one of the most unsuccessful and fractious since the G20 was established in 1999, in response to the Asian financial crisis.”  The object of friction?  The United States’ QE2 – our expansionary monetary policy, which Trugman defends indirectly by bashing our detractors.  So angry is Trugman that his title changes “G20” into “G(ang of)20”.

The NYT’s editorial on China’s currency manipulation, uncivilly entitled “Now, Will China Get It?”, describes two rebuffs to “Washington” and “America” and mentions our President by name only in the assertion that “the Obama Administration may be close to achieving one of its core objectives…let[ing] the value of [China’s] currency rise.”  Seeing will be believing on this score.  The editorial fails to note, or maybe even to understand, that the United States can also be accused of manipulating the dollar (see CenterMovement.org’s  “Jeevan ka Parihas: The ‘Irony of Life’ as Obama Visits India”) and provides no corroborating detail whatsoever for our alleged proximity to success in this endeavor to increase the relative value the yuan.

In a similar fashion, the NYT’s customary summary of seven days’ worth of events in “Week in Review” notes that efforts to renegotiate our free-trade agreement with South Korea in time to announce success at the G20 Summit “fell short”.  The NYT then gives President Obama an out and an extension by reporting that our President sought were “some improvements for American exporters” and the deal had “languished” in Congress because Democrats are “leery” of free trade, so the “White House” decided to wait until the “more trade-friendly” Republicans take charge of the House in January.  Okay, then!

Increasingly in the American news media, the truth is conveyed more by comedians who tweak viewpoints than by serious reporters who may not own up to their partisan perspectives.  Such appears to be the case here.  Under “Laugh Lines”, the NYT quotes Jay Leno thusly: “President Obama was in India yesterday, visiting our jobs.  Tomorrow he goes to China, to visit our money.  So it’s a nice trip.”

It was not a nice trip for Obama.  It was not a nice trip for America.  Rather, it was one of many indicators that the United States is not the political and economic power it once was – for decades and decades it once was.