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Guest Blogger: Bob Hormats
We are very pleased to have Bob Hormats guest blogging at MR this week. Bob is currently vice chairman of Goldman Sachs (International). Bob has extensive experience in finance and politics having served in the State Department as assistant secretary of state for economic and business affairs, ambassador and deputy U.S. trade representative, and senior deputy assistant secretary for economic and business affairs, among other positions.
Bob's latest book is The Price of Liberty: Paying for America's Wars, a superb history of wartime fiscal policy and a warning that entitlement programs and war spending are pushing America towards fiscal catastrophe.
Welcome Bob!
Posted by Alex Tabarrok on May 28, 2007 at 07:35 AM in Web/Tech | Permalink
Comments
I haven't read Bob's book, but does the book combine war spending and
entitlements into the same category of spending; if so why? if not, no
explanation needed. Just curious.
Posted by: indiana jim at May 28, 2007 7:56:00 AM
Nice work. http://pc-gamer-pro.blogspot.com/
Posted by: Freelancer at May 28, 2007 8:12:22 AM
"We are living in a post-9/11 world with a pre-9/11 fiscal policy." Hormats, WP.
I reckon the US could have easily responded to 9/11 while maintaining its current fiscal policies. There was no reason whatsoever to spend money invading useless third world countries. A simple beef-up of border security, crackdown on immigration, and bribing of hostile governments and stateless groups would have been sufficient.
Does Mr Hormats have any opinions on the efficacy of bribing foreign entities? It would have made much more sense fiscally and politically in my view, democracy in the Middle East invariably results in Hamas type victories.
Posted by: adrian at May 28, 2007 8:16:31 AM
The US pretty much bribes Egypt to the tune of 2 billion a year not to go to war with Israel, money well spent. Friendly dictators work best when it comes to that desert hellhole.
Posted by: adrian at May 28, 2007 8:18:24 AM
"We are living in a post-9/11 world with a pre-9/11 fiscal policy."
Well, the increased military spending raised the percentage of GDP spent on the military to around 4.0%. During the Cold War, the low point for defense spending was 4.7% of GDP for two years under Carter. http://www.cbo.gov/budget/historical.shtml
It's difficult then for me to argue that the levels of inefficiency there are so much greater, nor that the spending is unsustainable.
2006 had a deficit of 1.9% of GDP, and 2007 is projected to come in even smaller. Again, those are not unsustainable numbers, so it's difficult to argue that the "right now" military spending is causing economic catastrophe, unlike the projections in the future when the entitlements grow.
Lauding the war economics of FDR is also a bit unusual. Surely we spent quite a bit more our of money on WWII, not to mention had all sorts of price controls and other things. Of course, he's really just lauding the economic rhetoric of FDR; but FDR himself promised a balanced budget and cut spending even when taking office in 1930.
There are many good reasons to cut government spending, largely because of the deadweight losses and inefficiencies it causes. The debt itself would be rather immaterial if the spending were perfectly efficient. There would be no particular reason to prefer paying with taxes now as opposed to debt, considering that government debt interest rates are the lowest around and approach the standard discount rate. But it's efficient, and hence that's the problem. The amount of government spending (roughly, depending on program) measures the amount of deadweight loss; how it's paid for is largely unimportant.
Posted by: John Thacker at May 28, 2007 10:24:57 AM
Of course, before the draft was abolished, government accounting significantly underestimated the economic costs of military spending.
It's a bit rich to wonder why there hasn't been as much belt-tightening as in really expensive wars like Vietnam, Korea, or WWII. That's because it hasn't been nearly that expensive in money as those wars, and it's been, thankfully, even less relatively expensive in casualties. The military casualties are not even significantly higher than the minor wars (and training mishaps) that marked the Clinton Administration. (At least among Americans; Iraqi civilians are a different story, but since Iraqis continue to in polls show support for overthrowing Saddam and even continued occupation "for right now," it's also a bit difficult for me to claim that Americans be the ones deciding that there have been too many Iraqi casualties and we shouldn't have invaded.)
Posted by: John Thacker at May 28, 2007 10:58:22 AM
And along with maybe lumping war and entitlement spending together,
there is the more detailed matter of lumping medicare and social
security together as a single "crisis" oif entitlement spending.
While the medicare fund is currently running a deficit, and its cost
side is zooming, the social security fund is still running a rising
surplus, and if growth remains even mildly above historic rates, it
will run a surplus forever. But most of those doing this "lumping"
seem to rush about screeching about doing "something" about social
security while serenely saying very little to nothing about medicare,
or what is more the source of the problem, health care in general.
Posted by: Barkley Rosser at May 28, 2007 11:59:39 AM
I should have said "if growth remains mildly above half of historic growth rates."
Posted by: Barkley Rosser at May 28, 2007 12:00:54 PM
Now we need a guide on how to tell Bob Hormats from Alex Tabarrok and Tyler Cowen! Oy vey!
Posted by: Mr. Noah at May 28, 2007 12:27:55 PM
Barkley Rosser,
I am surprised that you find Medicare to be a problem in any case. Most of those on your side of the political spectrum think the solution to healthcare is Medicare for everyone.
On the issue of Social Security, are you trying to say that Social Security taxes, as structured today, will always be more than sufficient to pay future benefits? Or are you another of those who try to hide behind the accounting fiction of the trust fund and the "interest" and "principle" payments it collects? Every credible study of Social Security I have seen tells us that the tax revenue will be in deficit by 2020, and the shortage will then be covered by the general revenue fund, and that the shortage will eventually be about 25% of total Social Security spending. Do you deny this?
Posted by: Yancey Ward at May 28, 2007 1:43:37 PM
My question for Mr. Hormats is this: Are you the Bob Hormats who was at Camp Pocono with me in 1954?
Posted by: Jay Livingston at May 28, 2007 1:48:46 PM
Yancey Ward,
I deny this. You are taken in by one of the loudest ongoing shell games in the biz,
the mid-range projection of the Social Security Trustees Report. That projection has been
wrong since it started being issued in 1997, but they have not adjusted it. Starting in
1997 they have also had a "low-cost" or "optimistic" projection that had the system running
a surplus forever. Reality has proven to be better than the low-cost, optimistic
projection, although itself still too pessimistic than reality proved to be, which somehow
just never shows up in the media presentations on this or the public testimony by "experts,"
most of whom are fully aware of what I have just said and will freely admit it in private.
Why they do not speak of it in their public testimony is a very interesting question in and
of itself.
Anyway, the current low-cost projection continues to have the system running a surplus
forever. Just as back in 1997, the "mid-range" projection has the US growth rate going
to about half its historic levels, with immigration crashing to near zero, although as
we know there are many readers of this blog who would love to see the latter happen, not
that I or they or you would bet our houses on it. The cutoff for going from "depending on
general revenue in 2017" to "running a surplus forever" is not too far above the mid-range
projection, so it is the non-robust projection, not the optimistic one, which has proven
to be too pessimistic over the last decade anyway. So, it is in fact much more reasonable
to project surpluses forever than the fantasyland doom and gloom scenario widely believed in.
This is all publicly available, and there have been books and articles about it, although
I do not believe that Robert Hormats has been one of those pointing out what I have just
pointed out, although I stand prepared to be corrected on that point if need be.
Oh, and you would be wise not to presume what I would recommend for our health care system.
Posted by: Barkley Rosser at May 28, 2007 2:45:21 PM
Barkley Rosser,
Fair enough, I was just asking indirectly if you were part of the Medicare-for-all crowd- a cohort I find everywhere in healthcare discussions.
On Social Security, I guess we will have our answer in about 10-12 years, however, Social Security counts on interest payments to the Trust Fund from the General Fund ($91 billion dollars last year, I think the number was), but FICA alone provides an excess over outlays today. Do you mean that the optimistic scenarios project that FICA alone will always cover outlays, or do you mean that a combination of FICA, the "interest" income, and/or partial liquidation of the fund itself will always be sufficient to pay? In other words, does the low-cost projection (or even the "even-better" present trend that you wrote of) simply show that that Social Security Trust Fund need never be depleted? This is my understanding of the low-cost scenario, not that FICA alone can cover all future outlays. I am willing to be proven wrong.
Posted by: Yancey Ward at May 28, 2007 3:34:27 PM
Yancey,
FICA alone.
Posted by: Barkley Rosser at May 28, 2007 3:39:03 PM
Why entitlements? What about tax cuts? Aren't they another possible reason (along with war?).
Posted by: krishna at May 28, 2007 4:40:00 PM
Barkley,
Have any projections been made assuming vastly greater life expectancies; say 10 to 15 years longer than currently?
Posted by: indiana jim at May 28, 2007 4:56:42 PM
The standard projections have mild increases in life expectancy, not 10 to 15 years.
Of course some very recent data suggests that the baby boomers are not as healthy
as their parents. Life expectancy might not go up at all or even decline.
Of course, there are all kinds of combinations here that lead to all kinds of outcomes.
It is not zero probability that the social security system might start doing in 2017
what the medicare system is already doing right now. But we clearly have plenty of
time to wait and see which of the various scenarios look likely to happen without
doing anything. There simply is no need or reason for any kind of push now on that
front. However, both medicare and medicaid are fiscal problems right now and clearly
getting worse.
My own theory why we saw this bizarre bipartisan push this winter (which failed) to
"do something" about social security involved a higher level political calculation.
I note that this was led by Treasury Secretary Paulson for the Republicans with Senate
Finance Chair, Kent Conrad, for the Dems as his main partner. I think they were
looking at the whole budget and saying, "we need a combination of spending cuts
and tax increases."
So, there are basically only five large spending items in the budget
(noticeably over $100 billion per year): social security, defense, interest on the
national debt, medicare, and medicaid. Now, the last two are rising rapidly, but it
is unclear what to do about them, and indeed solving them probably means doing
something deeper and more fundamental about health care, which is even more difficult
and not in their bailiwick anyway (and, no, I do not have the magic bullet solution).
Interest on the national debt cannot be fooled with and can only be lowered either
by the Fed lowering interest rates or by getting the budget to have a smaller deficit,
which is what they were trying to do anyway. And, regarding defense, well, there is
a war going on, whether one likes it or not, so cutting that was not going to happen
this year.
Which leaves us with social security, which conveniently a majority of the US population
has been convinced is in fiscal "crisis," thanks to the repetition for a decade of the
constantly disproven claim that it is. So, the public might be willing to accept some
cut in its benefits in order to "save" it, since the ignorant morons don't know any
better. And, of course, Congressional Republicans are pretty much against raising
any taxes, but if one packages a social security tax increase with a social security
benefit cut, ah ha! One might just be able to pull it off politically, especially if
the tax increase is done very sneakily, such as through raising the income cap on
paying fica, which being "progressive" can help buy off Dems angry over the benefits
cut. Of course, in the end it did not happen, with the real killer coming not from
the side that said "we don't need a benefit cut," but from Grover Norquist and Dick
Cheney saying, "no tax increase on our watch, naughty naughty." So, end of deal.
So, I do have a bit of sympathy for those like Hormat who supported this (and I checked,
and it does seem indeed that he has been going around doing exactly as I said, warning
everybody about an "entitlements crisis" and then focusing on "doing something about
social security"). The point is that in fact social security itself is not in crisis
and nowhere near being in crisis and very unlikely to ever be in crisis. But because
the public has been bamboozled into thinking that is, it becomes the politically
easiest large part of the budget where a budget balancing deal becomes possible.
Posted by: Barkley Rosser at May 28, 2007 9:46:30 PM
Barkley,
If we continue toward socialization of medicine (seems likely), the lack of big improvements in life expectancy for baby boomers is plausible.
Posted by: indiana jim at May 29, 2007 11:29:55 AM
indiana jim,
it seems to me there are two kinds of people. the kind who can do arithmetic. and the kind who think in blocks of sound bites. you appear to be one of the latter.
if you could do arithmetic you would be able to calculate that even under the "intermediate projection" the necessary raise in the payroll tax starting in 2042 or so would be about fifteen dollars per week for a worker who would then be making at least a hundred dollars a week more than he is now. and the increase would be needed to pay for his own living expenses when he gets old, not for any government black hole.
and, if you could do arithmetic, you would be able to calculate that paying back the Trust Fund the money the mostly rich taxpayers have borrowed from it will cost about fifty cents per taxpayer per week starting in 2016 or so, and rising about fifty cents per week each year until about 2045 or so.
but mostly, once you got in the habit of thinking arithmetically you would realize that the Social Security money is money that people pay out of their own paychecks in order to have the government save for them and insure agains inflation so they will have something they can count on when they get old, or disabled, no matter what. it is not money robbed from you, or a burden upon the young, or a burden upon the economy.
what Hormats appears to be trying to do is steal granny's social security (her own money) in order to preserve the tax cuts Bush gave to the wealthy and still be able to buy that nuclear submarine to save us all from Osama.
Posted by: dale coberly at May 29, 2007 12:22:27 PM
dale coberly,
You said "once you got in the habit of thinking arithmetically you would realize that the Social Security money is money that people pay out of their own paychecks in order to have the government save for them and insure agains inflation so they will have something they can count on when they get old, or disabled, no matter what. it is not money robbed from you, or a burden upon the young, or a burden upon the economy."
Sure, if you believe that the government is better at saving for people's futures than are people themselves then your calculus might make sense. But I calculations I've seen suggest that the implied rate of return via saving through SS is FAR inferior to the rate on even low risk securities. If you really believe SS is a good saving vehicle that citizens should be forced into, I think that you have missed the key calculations.
Posted by: indiana jim at May 29, 2007 1:12:19 PM
indiana jim
no. but i can tell the difference between a calculation and a stock salesman running his calculator to show me the miracle of compound interest.
when you get through adjusting your returns on "low risk" vehicles for inflation, fees, risks, insurance, and what happens when two hundred million people try to get in on the same "sure thing," not to mention what is going on in the real economy (goods and services) at the same time, social security is by far the most rational way for people to hedge their retirement bets.
and the marvel of it all is that it leaves you plenty of money left over to invest in those "sure things."
Posted by: dale coberly at May 29, 2007 2:33:07 PM
indiana jim,
I did say that I do not have the answer to the medical care issue.
But I would also say that your last comment is not exactly overwhelmingly
supported by global data. While we pay far more for our medical care than
any other country in absolute terms, and are pretty much equal to a few others
at the top in percent of GDP terms, our life expectancy and infant mortality
stats are pretty abysmal compared to those of other countries. I realize that
there are a lot of other factors involved here, but while your argument may
well be correct, it is not supported by the obvious data out there.
Posted by: Barkley Rosser at May 29, 2007 2:52:07 PM
Barkley
Since almost all health care in America is paid by insurance, and most of that insurance is paid by employers who got in the habit when it was the one pay raise they could give without taxes, and since the "uninsured" are paid for out of the prices charged by care givers to the insured so they can cover the "free care" they give...
it seems to me that using the government as the center of the system rather than the multiple centers we now have (the employers) would in the first instance change nothing. the employers would give the money to the government instead of to the insurance companies. the government would have the insurance companies bid for the business of randomized blocks (without regard to prior condition) of people.
by using the money already in the system to extend coverage to those presently uninsured, and using the power to tax to force the free riders to pay their share, and taking advantage of the fact that the government is a big enough player to get a fair deal from the insurance companies, while preserving the competition between insurance companies, and the independence of the providers, we would begin to see efficiencies, and by covering everyone we would begin to stop seeing the disefficiencies that come from people ignoring preventive care until they have very expensive problems.
i think i can defend this idea in more detail, but it seems to keep bumping up against unexamined preconceptions.
Posted by: dale coberly at May 29, 2007 3:03:35 PM
Barkley,
Regardless of whatever "obvious data" you might bring up, the point remains that we do not now have anything like a free market in medical care. And the socialization continues creeping. This is the point of my comment: that the less free is the market for medicine HERE, the less efficient it will be in improving health outcomes HERE.
Yes comparisons across nations are interesting and important to consider, but as you say there are many complicating factors that might make the surface conclusions drawn from "obvious data" partially, or entirely, spurious.
In addition to cross-country comparisons, it is also interesting to consider cosmetic medicine here in comparison to other sectors here (because cosmetic medicine is a sector that is much more of a free market. In that area of medicine costs have dropped dramatically over time and quality and safety have expanded.
Posted by: indiana jim at May 30, 2007 11:30:18 AM
Indiana Jim
my modest proposal would INCREASE competition. By having the government act as the clearing house, or "employer" in a health care system otherwise unchanged from what we have now, the insurance companies would be forced to compete with each other by bidding for blocks of business, without being able to use their market power to force exhorbitant rates on individuals with prior conditions and companies which would have a high risk of becoming bad risks because their employee pool was so small that one person with a serious illness could kill the profit on the whole contract. for large enough blocks or random (within area) individuals the risks to the insurance companies would approach the average risk of the whole nation (region)...
Posted by: dale coberly at May 30, 2007 2:31:25 PM
