Statement on CBO Update of Budget and Economic Outlook

August 24, 2011 at 3:56 pm

The Center has issued a statement by James R. Horney on today’s CBO update of the nation’s budget and economic outlook.  It concludes:

The bottom line is this: for the long run, we must carefully consider the best way to reduce deficits and debt.  In the short run, we must focus our efforts on how to get the economy growing more rapidly and put millions of Americans back to work as soon as possible.

Click here for the full statement.

Why Some State Economies Are Healthier Than Others

August 24, 2011 at 10:53 am

Almost all states were hit hard by the recession and are recovering very slowly, but a few — most notably Alaska, North Dakota, and Texas – experienced only a mild recession and/or are recovering more rapidly.  Do these states’ tax and spending policies explain why they avoided the same economic fate of other states, as some have suggested?  Actually no, according to a new analysis by Goldman Sachs.*

What really mattered, the analysis found, were three things:

  • Energy. States that are sitting atop active reserves or otherwise linked to the oil or natural gas industries, as Alaska, Texas, Wyoming, and North Dakota are, have done better.  The oil industry declined somewhat when prices fell during the recession, but it has recovered much faster than most other industries.
  • Exposure to the housing bubble. States that entered the recession with a larger share of residents holding subprime, adjustable-rate mortgages have done worse.  This helps explain why Texas, for example, has performed relatively well.  Its long history of strong regulatory control over mortgage lending — with roots dating back to the 1800s — helped limit its exposure to the housing bubble.
  • High-end services or technology. States with stronger professional business services or technology industries got a boost. Virginia, Maryland, and Colorado, for example, have more jobs for lawyers, accountants, architects, computer systems designers, and other high-end business service or technology experts.  These people tend to be in demand in good economic times and bad, and they’ve continued to do relatively well despite the recession.

These factors alone, Goldman Sachs found, account for as much as three-quarters of a state’s relative job performance since December 2007.

In contrast, the study found no relationship between a state’s job performance and its income tax rates, property tax rates, or state spending as a share of the economy.

* “US Daily:  State of the States,” August 16, 2011 (available to subscribers only).

Raising Medicare’s Eligibility Age Would Raise Costs, Not Reduce Them

August 23, 2011 at 2:56 pm

Raising Medicare’s eligibility age from 65 to 67 figures to be one option before the new congressional “supercommittee” on deficit reduction, and there’s speculation that the Administration will include it in the budget plan that it will release after Labor Day.  As former Obama White House advisers Ezekiel Emanuel and Jeffrey Liebman argue in today’s New York Times, this proposal is a “classic example” of “cost-shifting cuts [that] don’t actually reduce health care spending, they just shift costs from the government to the private sector.”  In fact, it would raise overall health care spending, as we explain in a new report.

Raising Medicare’s eligibility would save the federal government money by shifting costs to individuals, employers, and states.  These increased costs would be twice as large as the net federal savings, according to a study by the Kaiser Family Foundation.  (See figure.)

Specifically:

  • 65- and 66-year-olds losing Medicare coverage would face higher out-of-pocket health care costs, on average.  Two-thirds of this group — 3.3 million people — would face an average of $2,200 more each year in premiums and cost-sharing charges.
  • Employers that provide health coverage to their retirees would face higher costs as more 65- and 66-year-olds received primary coverage through their employer rather than Medicare.
  • Medicare beneficiaries, as well as people under age 65 who buy insurance through the new health insurance exchanges, would face higher premiums as 65- and 66-year-olds left Medicare and many of them bought coverage through the exchanges.
  • State Medicaid costs would rise as some of the people who lost Medicare coverage would shift to Medicaid.

That’s not all.  By shrinking Medicare’s share of the health insurance market, raising the eligibility age would reduce Medicare’s market power and weaken its ability to serve as a leader in controlling health care costs.  Moreover, if Congress repealed the health reform law, as the House has voted to do, large numbers of 65- and 66-year-olds who lost Medicare would end up uninsured.  For all of these reasons, raising the eligibility age would be a large step backward.

Alarmist Stories Misportray Social Security Disability Insurance

August 23, 2011 at 11:20 am

Social Security’s disability-insurance program is forecast to run short of money in 2018, more than six years from now, and policymakers can plug the hole for several decades by reallocating some taxes from the related old-age program as they have done in the past.  But that’s not the impression you’d get from some alarmist reports.  “Social Security disability on verge of insolvency” blares a Fox News story, a theme echoed by other outlets (see here and here).

Here are the facts.  In December 2010, 8.2 million people received disabled-worker benefits from Social Security.  (Payments also went to some of their family members:  160,000 spouses and 1.8 million children.)  Demographic and economic factors have pushed more people onto the disability rolls in recent decades; the number of disabled workers has doubled since 1995, while the working-age population — conventionally described as people age 20 through 64 — has increased by only about one-fifth.  But that comparison is deceptive.  Over that period:

  • Baby boomers aged into their high-disability years. People are roughly twice as likely to be disabled at age 50 as at age 40, and twice as likely to be disabled at age 60 as at age 50.  As the baby boomers (people born in 1946 through 1964) have grown inexorably older, disability cases have risen.
  • More women qualified for disability benefits. In general, workers with severe impairments can get disability benefits only if they’ve worked for at least one-fourth of their adult life and for five of the last ten years.  Until the great influx of women into the workforce in the 1970s and 1980s, relatively few women met those tests; as recently as 1990, male disabled workers outnumbered women by nearly a 2 to 1 ratio.  Now that more women have worked long enough to qualify for disability benefits, the ratio has fallen to just 1.1 to 1.
  • Social Security’s full retirement age rose from 65 to 66. When disabled workers reach the full retirement age, they begin receiving Social Security retirement benefits rather than disability benefits.  The increase in the retirement age from 65 to 66 has delayed that conversion.  Over 300,000 people between 65 and 66 now collect disability benefits; under the rules in place a decade ago, they’d be receiving retirement benefits instead.

The Social Security actuaries express the number of people receiving disability benefits using an age- and sex-adjusted disability prevalence rate that controls for these factors.  Over the 1995-2010 period, that rate rose from 3.5 percent of the working-age population to 4.4 percent.  That’s certainly an increase, but not nearly as dramatic as the alarmists paint (see graph).  And it’s no surprise that the rate creeps upward during periods of economic distress.

While legally separate, Social Security’s Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust funds are both funded by a payroll tax on the first $106,800 of earnings (a ceiling that’s updated annually).   The DI trust fund is expected to run dry in 2018, but the two funds combined could pay full benefits until 2036.  Congress has often reallocated payroll-tax revenue in the past — in either direction — to shore up the OASI or DI trust fund.

Disability benefits are an integral part of Social Security, closely woven into its package of retirement and survivor protections.  Policymakers should act soon to restore solvency to all of Social Security and make any necessary tax-rate reallocations between the two trust funds at that time.

Timely Reminder of the Perils of Another Corporate Tax Holiday

August 22, 2011 at 5:07 pm

Over the last decade, U.S. multinationals have dramatically reduced their American workforces while expanding their overseas workforces, the Washington Post reports today.  While the federal government publishes these data in the aggregate (see graph), many individual firms don’t publicly disclose their number of U.S. versus foreign workers, and some of them are among the firms lobbying Congress for a new round of tax amnesty on their growing foreign profits.

Members of Congress should keep this graph in mind as they consider another tax holiday, which would only sweeten the pot for corporations looking to shift income and investments overseas.  Instead of paying the regular 35 percent corporate rate applied to domestic investments, corporations would receive a bargain-basement rate of just 5 percent on their foreign profits.

The message to multinationals would be clear:  they can invest massively overseas and then, through periodic tax holidays, repatriate the resulting profits at extremely low tax rates.  This would give them even more incentive to move more investment and jobs overseas, as it appears they have been doing since 1999.

As we’ve explained in detail, the 2004 tax amnesty failed to produce the promised economic benefits, and repeating it would be an even bigger mistake.