Social Security reform is dead; long live Social Security reform

Anyone who hasn't yet seen Ways and Means Chairman Thomas's comments on Social Security ought to check them out immediately.
Obviously, the main point of interest is that it is rather significant when, at this stage of the process, the Chairman of the Ways and Means Committee declares the Bush changes politically dead in the water.
Second prize, in terms of early blogosphere attention, has gone to his suggestion that women's retirement ages under the program should be later than men's because they live longer. While everyone knows this is a political non-starter, it raises a lot of interesting discussion points. Indeed, if I may be so self-serving, it raises the sorts of fundamental social insurance issues that I tried to explore, in greater depth than one would find in discussions more directed at the current political process, in my books on Social Security and Medicare.
The later retirement age might be viewed as "unfair to women" because it facially seems to treat them worse. But in fact, giving women the same retirement age as men, where both pay the same taxes for the coverage, means the longer-lived women get a benefit of greater value and thus, in effect, a transfer from men. An arm's length insurer that was permitted by law to take gender into account in pricing retirement annuities would be expected charge women more or give them nominally less, such as by deferring the retirement date. Indeed, adverse selection in insurance markets would pretty much require this outcome under fully competitive conditions.
Since I don't judge just distribution from the standpoint of market outcomes, this is not dispositive, but it is of interest. It raises the question of why we would mandate transfers from men to women relative to the market outcome.
If women live longer then men, they have greater lifetime needs, which all else equal might justify transferring resources to them. But if they live longer, then they also presumably can work longer, assuming that the longer life expectancy implied on average being more vigorous at age 65 or 70. Given that point, we might have no reason to transfer resources from men to women (keeping in mind, of course, that in two-spouse households the name on the Social Security check may not affect how the resources are actually shared). So perhaps the later retirement age for women makes sense.
But here's another idea Chairman Thomas might not like as much. Life expectancy is positively correlated with wealth and with lifetime earnings; that is, the richer tend to live longer. How about using that little factoid to make high-earners retire later? The one difference between this and the gender-related proposal is that wealth or lifetime earnings are to a degree within the individual's control, and thus potentially responsive to the incentive effects of such a rule, whereas gender (Christine Jorgensen cases aside) is not.
Plus, one could ask Chairman Thomas if this is the only gender difference he wants to take into account. For example, how about, as Ed McCaffery has proposed, lowering women's (or secondary earners') marginal tax rates on earnings because their work decisions are more tax-responsive? No? I thought not.
Still, it is good to hear someone raising the issue of the relationship between retirement age and life expectancy. One of my pet Social Security and Medicare proposals is to peg eligibility or retirement age to increases in officially computed life expectancy. Part of the idea is simply to create a different default rule than present law, so that the definition of what is a "benefit cut" changes and we don't have people automatically getting larger lifetime benefits, without Congress's expressly "increasing" their benefits, because of living longer.

Roger Lowenstein on Social Security

Overall, I thought Roger Lowenstein's New York Times Magazine cover story on Social Security was pretty good. In particular, it rebuts the sham rhetoric coming from the Administration about the supposed Social Security crisis that calls for private accounts. This rhetoric is sham because what we actually have is an overall fiscal crisis, to which Social Security makes a modest though not entirely negligible contribution, for which private accounts do nothing and which the Administration's proposals this year, especially if you count "tax reform," are likely to make a lot worse.
My main criticisms of the Lowenstein article are:
(1) it ought to say a bit more about the broader context, in particular rising healthcare costs and Medicare/Medicaid along with private sector care. Lowenstein laudably suggests that it might be better to do something more modest and traditional about Social Security finances than to do nothing, but that would be inadequate in a larger sense, reflecting the inadequacy of the Administration's purely Social Security-based approach to sustainability.
(2) Lowenstein takes the Social Security Trust Fund a bit too seriously. This year's excess of Social Security revenues over benefit payouts may conceivably encourage Congress to spend more, mainly by making the reported unified budget deficit look smaller (assuming Congress really cares about such things), or else by lowering a bit the amount of immediate third-party borrowing that the US government engages in. But the historical trust fund is water under the bridge, except insofar as the record that is kept of it influences political decisions. So when the trust fund "runs out" is only a paper or accounting event, not a real economic event apart from through its effect on perceptions or legal default settings.
3) You don't have to be a right wing idealogue to share conservatives' fears about the situation where the government explicitly owns stock, financed by issuing more debt, as a way of supposedly capturing the benefits of stock ownership without the administrative costs and lack of risk-sharing implied by 150 million private accounts. But I really don't see the point to the issue-debt-buy-stock transaction to begin with, whether done collectively or through the accounts. Objections include (a) after all the portfolio-shifting is done, nothing may really have happened, (b) if portfolios do change and issue-debt-buy-stock is a good idea, the government should do it without regard to the funding crisis, but I suspect it is not a very good idea - or more precisely that it is an idea whose merits are well captured by its net market value of zero, (c) if the idea is portfolio diversification for non-stockholders, note that both the government and all residents who are taxpayers/future benefit claimants already hold a large implicit position in the stock market via the government's fiscal stake in the economy.
Still, kudos to Lowenstein for avoiding the peril of most news reporting on current policy, which usually is limited to reporting Administration claims with no assessment of their truth content. As in, "Vice President Cheney stated that the Sun did not rise this morning. Cheney said this shows that we must give President Bush full martial law powers immediately." Then, buried in the fourth paragraph, "Some Democrats disputed Cheney's claim that the Sun did not rise this morning, and argued that even if Cheney is right giving the President full martial law powers is not an appropriate response."
Lowenstein avoided this by daring to depart from journalistic "objectivity" by noting that the Sun did rise and that martial law wouldn't help if it didn't rise.

The Tax Reform Commission

As I noted in a previous post, Grover Norquist is a classic inside-the-Beltway bunco salesman and shakedown artist who pretends to favor smaller government but in fact is working hard to install an omnipotent Republican political machine that would make Boss Tweed proud. But at least he sets us straight about the Tax Reform Commission:
''It'll come out with three or four proposals, which are already written, and already on people's desks,'' he told the NY Times reporter. ''So this is not a commission to invent something, or several somethings. This is a commission to discuss several somethings. Poke 'em, bring 'em around the country, test-fly them, run 'em up the flagpole, see who shoots at it, see who salutes.''
Since there are some principled people on the Tax Reform Commission, let's hope they don't let themselves be used in a bad way. And let's hope they emphasize the use of infinite horizon forecasting for tax reform, no less than Social Security. Beth Garrett and Jim Poterba (among others), are you listening?

Refreshing but a bit brisk

At least to the untutored eye, it certainly looks as if Titan has lakes. But even the Polar Bear Club might take a pass on liquid methane at minus 290 degrees Fahrenheit.

NYU Tax Policy Colloquium - Shaviro (me) on "The Approaching Fiscal Train Wreck"

Yesterday was our first Tax Policy Colloquium session, and I presented my book-in-progress chapter "The Approaching Fiscal Train Wreck," available here. This piece talks about how we should measure the long-term fiscal situation in terms of the true underlying issues, which chiefly are (a) the sustainability or fiscal meltdown problem and (b) the generational issue of favoring old versus young.
Since my co-convenor David Bradford and I feel free to comment on other people's papers, we think it is only fair to bring in other people to comment on our work. My commentator was Bill Gentry of the Williams College Economics Department, an excellent public finance economist who spent some years participating in our sessions when he was at Columbia.
Bill made one really important point about how to measure fiscal problems that revises how I think about the measurement issue, although it does not affect how I think about the current situation. (Bill agrees that it does not affect how we should think about the current situation.)
I have been mainly agreeing with economists such as Lawrence Kotlikoff, Kent Smetters, and Jagadeesh Gokhale that the fiscal gap offers the best snapshot measure of our failure to establish a sustainable budget policy. Kent and Jagadeesh have written and argued that, under the inter-temporal budget constraint (known more informally as the no-free-lunch principle), the only truly sustainable policy is one with a fiscal gap of zero, i.e., where you will pay for everything.
Bill notes, however, that inter-temporal budget constraints are binding in finite scenarios, whereas the infinite horizon scenario may be the right one for the US government to use (notwithstanding grotesque misuse of this idea by the Bush Administration in its "respond to 9/11 by bombing Mexico"-style arguments for its Social Security plan).
Suppose that the US currently had a debt to GDP ratio of .5, with public debt of $5 trillion and GDP of $10 trillion. Suppose that both public debt and GDP were scheduled to rise at 2% per year, keeping the debt to GDP ratio constant at .5 forever. This would lead to a very high fiscal gap as measured in present value terms from today (indeed, an infinite fiscal gap if the discount rate were 2% or less), but seemingly to no sustainability problem.
To have a problem, therefore, we need not just a fiscal gap but an exploding debt to GDP ratio over time. No need to revise what I and others have been saying about the "approaching fiscal train wreck," since indeed that is where we are headed; debt to GDP ratios are indeed slated under the forecasts to explode. But it does suggest that we need another tool as a measurement matter, in order to have the right set of budget policy terms and tools.

"Tax reform" update

A friend with sufficient inside contacts for informed speculation says that the Bush "tax reform" plan is likely to have three main elements: (1) make the tax cuts permanent, (2) fix the alternative minimum tax problem, and (3) enact enlarged (say, $7,500 per person per year) Roth IRA style tax-free savings accounts, including large incentives to convert from existing IRAs, 401(k) plans, and the like that were deductible up front.
This certainly explains why they want to do Social Security first. In the Social Security debate, they are insisting that a $10 trillion infinite horizon fiscal gap in the program is so dire a crisis that something totally unrelated to fixing the fiscal gap must be done immediately.
In "tax reform," they would be proposing, through (1) and (2) above, an increase in the fiscal gap much larger than the entire Social Security fiscal gap. But the real hypocrisy (if you set your standard high enough) is in (3), which needs a bit more technical background to explain.
Under various assumptions, such as constant tax rates over time, you can get identical tax exemption for saving by (a) allowing the investments into the savings account to be deducted up front, and then taxing the proceeds when they come out and (b) no deduction up front and no taxation when they come out. Traditional IRAs and 401(k) plans do (a), Roth IRAs do (b).
But the alternatives look very different in terms of annual budget deficit accounting, where (a) looks bad in the year when people invest in the account but good when they take the money out, while (b) looks good up front and bad several years down the road.
So here is the "revenue gain" component of "tax reform" - by giving people large incentives to convert from traditional to Roth style, the plan raises revenue within the 5 year window, in exchange for much higher deficits down the road. The infinite horizon gap goes up because of the incentives offered to convert from traditional to Roth style.
Having insisted in Social Security that the infinite horizon is the right framework and that a $10 trillion gap is intolerable, the Administration will be insisting on a 5-year horizon, or 10 at most, and proposing to increase the fiscal gap by probably on the order of $20 trillion. And it will very specifically be fighting to make people ignore the out-year deficit increase from converting to Roth IRAs, which comes up much sooner than the Social Security out years they want to include, as current workers will be retiring a lot sooner than 75 years from now.
It will be interesting to see how fast the Administration's flaks are able to turn on a dime and completely reverse the time framework and methodology that they claim are appropriate for evaluating fiscal changes.
Once again, I am almost nostalgic for the relative honesty, consistency, and openness of the run-up to the Iraq war. At least there they stuck to the same lies.

This is a full service website ...

... at least in the sense that I am willing to post worthwhile links from both liberal and conservative commentators. Having linked Paul Krugman in the past, here is Bruce Bartlett on the dubious prospects that the President's tax reform commission will accomplish anything at all.

Tales out of school

My semester begins this Thursday, but although it will make for rather a juggling act I am hoping this will enliven my blog rather than crowd it out. Fresh material.
Teaching regular classes, though hopefully not too excruciating for the student attendees, is not inherently worth sharing with the world (admttedly a grandiose way of describing my readership). But what I am doing this year for the tenth straight spring, and hopefully into the future, is running a tax policy workshop (called, in approved NYU Law style, the Tax Policy Colloquium) in which speakers come by weekly to present their papers. Or actually, they come by and we present their papers (we being myself and David Bradford, the Princeton economist who also spends some time at NYU). This can be more stimulating than listening to a rehash of the paper because it makes for fuller dialogue. From the standpoint of the blog, it should result in plenty to talk about, mainly substance but without my declining to stoop when necessary to anecdote.
The first paper (mine) is already posted here, and here is the entire schedule:
January 13 - Daniel Shaviro, NYU Law School, "The Approaching Fiscal Train Wreck."
January 20 - Thomas Griffith, USC Law School, "Progressive Taxation and Happiness."
January 27 - Reed Shuldiner, University of Pennsylvania Law School, "Taxation of Risky Investments."
February 3 - Michael Livingston, Rutgers-Camden Law School,[paper on comparative US/Italian/Israeli taxation].
February 10 - Vicki Been, NYU Law School, "Impact Fees and Housing Affordability."
February 17 - Herwig Schlunk, Vanderbilt and NYU Law Schools,"A Minimalist Approach to Corporate Income Taxation."
February 24 - Louis Kaplow, Harvard Law School, excerpt from "Taxation and Redistribution."
March 3 - Larry Zelenak, Duke Law School, "Redesigning the Earned Income Tax Credit as a Family-Size Adjustment to the Minimum Wage."
March 10 - Kyle Logue, University of Michigan Law School, "The New Market in Tax Insurance: Eliminating Uncertainty or Enabling Tax Avoidance?"
March 24 - Steve Bank, UCLA Law School, "A Capital Lock-In Theory of the Corporate Income Tax."
March 31 - David Hasen, University of Michigan Law School, "Theories of Endowment Taxation."
April 7 - Peter Orszag, Brookings Institution, "Reforming Social Security."
April 14 - Sagit Leviner, University of Michigan Law School, "Taxation: The Normative Component."
April 21 - Neil Buchanan, Rutgers-Newark Law School, "Taxing Average Income: A Progressive Alternative to the Annual Income Tax."

Off the fence?

Despite my obvious animus for President Bush and his evil crew, I have been making mostly agnostic or mixed rather than downright hostile remarks about his Social Security plans. This reflects that I have my own gripes about the current system, going not just to the fiscal gap, which I have already discussed a lot in previous posts, but to its haphazard and poorly understood redistributions, many of which are questionable or worse. For example, even if you like transferring big sums to older generations, on the ground that this is progressive redisttribution as our society's affluence rises, what about the transfers through Social Security (as well as Medicare and the income tax) from single individuals and two-earner couples to one-earner couples? And is obfuscating the redistributive patterns really as desirable, or indeed as progressive in its effects, as fans of current Social Security seem to think?
Hence my mixed tone about privatization, which led one reviewer of my Social Security book to insult me, without realizing he was doing so, with some palaver about how I am one of those "third way" Democrats. As if I would ever aspire to something so drab. (Bill Clinton wasn't drab, but that was him, not the "third way.")
Anyway, I am getting to the point where the White House's Social Security campaign is just too insulting to the intelligence of everyone who is supposed to listen to it for me to retain a tone of tolerance even though I am hoping they will stick to their guns on the benefit cuts (albeit perhaps through alternate means such as pegging retirement ages to life expectancy increases).
In some ways, the campaign the White House is rolling out makes one aesthetically nostalgic for the days when they were merely lying and cheating their way into the Iraq war. That time, at least you could half believe some of the stuff they said that has since proved false, such as about the WMD. (No one with a reading level past Dr. Seuss took too seriously their claims about the al Queda ties, even back then.)
Let's take a look at their Social Security campaign. Because Social Security has an infinite horizon fiscal gap of $10 trillion, it is a crisis we must do something about immediately. Never mind the other $63 trillion of the current fiscal gap, or the $12 trillion or so that they want to add by making the tax cuts permanent and fixing the AMT, or the fact that they added $16.6 trillion via Medicare prescription drugs in 2003, or that the Bush tax cuts are so much bigger than the Social Security problem.
No, this is a crisis and everything else isn't, and we must do something about it immediately. What must we do? We must immediately adopt a plan that, forty years from now, will still have increased the total US public debt by $40 trillion. The plan's basic feature, diverting taxes in exchange for (maybe) reducing benefits, is inherently just a breakeven under optimistic political assumptions. This really is, as Richard Clarke said about the Iraq war on 9/12, like responding to Pearl Harbor by bombing Mexico.
This is how the Bush Administration does business, and even strong Republicans, including people who would favor private accounts under the right circumstances, ought to stop tolerating it. The Bush crew continually takes real problems and pushes bogus "solutions" that they wanted to do on totally separate grounds, thus destroying any chance of reasonable discourse either about the problems or about their pet proposals. Case in point: blackout hits much of the eastern US in summer 2003, Administration ostensibly responds with "energy bill," estimated cost $31 billion over 5 (or 10?) years but possibly actually twice that. Bill includes $500 million (about 1% of the total, depending on the true overall cost) actually responding to the blackout problem by addressing the power grid. The rest is pork for Cheney's friends in the coal and oil industries. The bill becomes known as the "Hooters and Polluters" bill because it includes a tax credit for a Hooter's restaurant in Shreveport, LA. McCain calls it the "No Lobbyist Left Behind Bill." It finally fails at the end of 2003 but is still threatening like Dracula to return. The point here is less how abysmal this legislation was (just a drop in the bucket, after all) but rather how the Administration exploits real problems to pursue its preconceived agendas.
The complete hijacking of reasoned political discourse about problems and the range of possible solutions is not just insulting and nauseating, but inconsistent with the meaningful practice of democracy. So death to the Administration's Social Security proposals, I say, on salesmanship grounds alone, because this is not just a one-time thing but endemic of a serious breakdown in our political culture.

To call it "nerve-wracking" would overstate it considerably, but ...

... it can feel awkward to listen to a new CD with high expectations. The brain hasn't yet registered what classical music buffs might call the ostinatos (aka riffs), the meme viruses haven't taken root yet, and there is an anxiety about not being disappointed. Reasonably good first impressions, nonetheless, of the Wrens' out-of-print 1996 CD, "Secaucus," which I finally got to borrow from a friend. (It mysteriously remains out of print even though used copies sell for $50 to more than $100.)
Reason for the high expectations: the Wrens' 2003 album "The Meadowlands," which to put it conservatively is, for my money, the best guitar-based rock album of the last few years. (Very high praise if you like guitar-based rock.) The Meadowlands is one of the most exhilarating albums I have ever heard despite (or at the same time as) being a relentless tour of failure, inadequacy, remembered foolishness, and despair. Nothing between 1996 and 2003, due to record company problems, except for a couple of EPs and such, also out of print, one of which (Abbott 1135) is scheduled for expanded re-release this April.
Latest book, while we are at it: the new biography of P.G. Wodehouse, by the languid-looking Robert McCrum. To read this book, it helps to be a huge Wodehouse fan, as I am despite considering about 70% of his work to be dross with just a few nuggets mixed in. He wrote relentlessly, however, and the rest of it belongs on the proverbial desert island like not much else. By the way, a lesser-known gem, since all Wodehouse fans know about the Bertie Wooster and Blandings Castle novels, is Laughing Gas, a one-off about a dimwitted English lord who temporarily trades bodies with a child star modeled on the young Jackie Coogan. Most of the humor comes from this 20-something lord's being (a) every bit as immature as the child star, and (b) utterly oblivious to the fact that, if you look like a little blond moppet rather than a towering milord, you get treated like one.
Anyway, the Wodehouse biography is great fun for those who are so minded, despite its bringing out Wodehouse's extremely limited range as a person as well as a writer, not to mention his utterly uneventful life apart from the Nazi Germany broadcast dust-up. Highly recommended to serious Wodehouse fans but not to anyone else.

An idea for President Bush's tax reform panel

If President Bush's tax reform commission is looking for good ideas, here is a bit of light reading that they could start with:
Tax Policy for Health Insurance
BY: JONATHAN GRUBER
Massachusetts Institute of Technology (MIT)
Department of Economics
National Bureau of Economic Research (NBER)
(Full text is $5 for non-NBER subscribers)
ABSTRACT:
"Despite a $140 billion existing tax break for employer-provided health insurance, tax policy remains the tool of choice for many policy-makers in addressing the problem of the uninsured. In this paper, .... I find that every tax policy is much less efficient than public insurance expansions: while public insurance costs the government only between $1.17 and $1.33 per dollar of insurance value provided, tax policies cost the government between $2.36 and $12.98 per dollar of insurance value provided. I also find that targeting is crucial for efficient tax policy; policies tightly targeted to the lowest income earners have a much higher efficiency than those available higher in the income distribution."

If anything ought to be on the tax reform agenda, this is it. As a rough back of the envelope calculation, the infinite horizon revenue estimate for repealing what is now a $140 billion annual tax break, growing at the same rate as the economy (although presumably it is actually growing even faster) might be about $7 trillion. In other words, about 70 percent of the infinite horizon Social Security gap.
The fiscal benefits are much larger than this, however. Glenn Hubbard, John Cogan, and Daniel Kessler, in Brilliant Deduction, recently argued that people with catastrophic health insurance coverage should be allowed to deduct all of their medical expenses. They estimate that, even though this would expand total tax breaks for healthcare, it would actually reduce people's healthcare expenditures by 6% annually by eliminating the current tax incentive to over-insure routine expenditures and thus engage in wasteful consumer spending. Taxing employer-provided health insurance would address this as well, while also eliminating the tax preference that Hubbard et al would retain in favor of one form of consumer spending (healthcare) over others. So we get a better proposal than that of Hubbard et al (who I would guess were moved by concerns about political feasibility), while raising rather than losing revenue.
Since we want people to have catastrophic health insurance coverage, both paternalistically for their own good and because we might end up paying for their critical care otherwise, we might want to continue offering tax benefits for that, at least with targeting (such as to low-income workers) as Gruber recommends. This would admittedly cut the direct revenue gain a bit, but probably not much. And keep in mind that reining in lack of cost-consciousness in the healthcare sector, which partly results from tax-induced over-insurance, might also yield indirect fiscal benefits to the government via Medicare and Medicaid, since expenditures in those two programs are presumably influenced by healthcare industry norms.
A whole lot more worth spending "political capital" on than Social Security privatization, wouldn't you say?

President Bush's Tax Reform Panel

President Bush finally named his tax reform commission, ostensibly charged with devising his tax reform plan. The co-chairs are former Senators Connie Mack (R-Fl) and John Breaux (D-La). The other 7 members are:
--former IRS Commissioner Charles O. Rossotti
--Professor Jim Poterba of the MIT Economics Department
--former GOP Representative Bill Frenzel of Minnesota
--Professor Beth Garrett of USC Law School
--Professor Edward Lazear of the Stanford Business School
--Timothy Muris, with O'Melveny & Myers LLP in Washington
--Liz Ann Sonders, chief investment strategist with Charles Schwab.

The only member of this group not previously known to me is Ms. Sonders. With all due respect to the group, whose members generally deserve a great deal of respect, the membership of the commission tells me that we are not likely to get anywhere significant, be it good or bad, on tax reform.
To start with a cheap shot at the top, Connie Mack will never live up to the achievements of his father or grandfather, the famous Philadelphia A's owner and manager. If I am remembering correctly, he had the reputation of a right-wing hack whose only known tax policy idea was to cut taxes.
Breaux was a noted centrist or conservative Democrat available for compromise deals with Republicans. He actually is the sort of person whose involvement you'd expect if the Commission were really going to get anywhere. For example, if progressive consumption taxation, the pet idea that I and some others in the tax policy field have been pushing lately, were ever to be pushed seriously on a bipartisan basis, you might expect someone like him to be prominently involved. But I suspect he was the only prominent Democrat that the White House could line up for this.
The seven other members generally have a great deal of merit. Poterba is considered by many to be the best public finance economist of his generation, give or take one or two other people whom I would also like to call the best. Garrett is a first-rate law professor, Lazear is a fine economist, Frenzel was a highly respected member of the House of Representatives (and, believe me, I don't think most of them deserve much respect), and Muris is eminent though his field, as I understand it, is really regulation. Rossotti did a lot to restore the IRS's public image. (If this seems inherently implausible, you may need a refresher course on what its image was like before he led it.)
For the most part, however, these are not people who have been heavily involved in thinking about or designing tax reform. E.g., Garrett's writings mainly concern the legislative process and institutional design; Poterba is an outstanding econometric researcher on issues such as savings behavior by households; Lazear, while he has wide-ranging interests, is mainly a labor economist; and Muris is a former FTC Chairman. And they are not, so far as I know, identified with particular approaches to tax reform. So they would have an uphill climb under the best of circumstances. And though they might come up with some interesting ideas if given the chance, I seriously doubt the White House is interested in finding out what they really think. This is not exactly a White House that cares much either for expertise or for delegating authority to those outside the charmed circle.
Nor does the commission seem likely to have much blue-ribbon-panel-style political heft in Washington, especially as Bush nominated them unilaterally in a heavily partisan environment. (Compare the bipartisan Social Security panel that Reagan and Tip O'Neill jointly appointed in the early 1980s.)
By the way, no tax practitioners. Those guys actually do know a lot, and serious tax reformers might want to involve them. No tax law professors, apart from Garrett who is excellent but really does her work elsewhere. And, while it's hard to quarrel with the choice of Poterba, many first-rate economists on both the left and the right have done extensive work that comes closer to the commission's territory.
So with all due respect to the generally high abilities of the commissioners, I think that the decision to choose this panel is evidence that fundamental tax reform (a) either is meant not to go anywhere, or else insufficiently meant to go anywhere in particular, and (b) will in fact not be going anywhere.

Sabermetrics and Bush

I am inclined to think President Bush is the worst President in US history, but how should we really evaluate such a contention? Baseball sabermetrics provides a possible way in. The old days of pure subjective judgment have had to give way to a statistical approach that measures runs produced or saved per out and thereby likely effects on wins, normalized for era and ballpark, etc.
In U.S. politics we have only one President at a time, no objective function as clear as winning baseball games, and no similarly strong or comprehensive a statistical basis for evaluating a President’s contribution even to agreed-upon good outcomes.
Still, we can adapt Bill Jamesian ideas to ask how a given President affected actual empirical outcomes of a desirable kind, compared to the assumed average or replacement-level person who could have had the job instead.
I recall seeing a comprehensive listing of the Presidents (in order and ranked as great, near-great, average, mediocre, failure) prepared when I was a boy by Arthur Schlesinger or someone of that ilk, of course enshrining Washington and Lincoln followed by FDR and other liberal favorites. The bottom two slots went to Harding and Grant on grounds of corruption. This, I think, was narrowly moralistic rather than properly Bill Jamesian. The corruption in their Administrations was deplorable, but how much harm did it really do? Grant at least kept Reconstruction going rather than completely abandoning the recently freed slaves.
James Buchanan was next from the bottom, as I recall, and in retrospect I think he really deserves the clear bottom slot for the period through LBJ that the survey covered. His ineptitude did so much to help bring on the Civil War and then in early 1861 to increase the likelihood that the Union would collapse that it is hard for anyone else to come close. If Rutherford Hayes or Chester Alan Arthur devotees want to argue that their men could have been just as feckless in the right circumstances, that is their right, but the fact is Hayes and Arthur never got the chance. (The inverse of Clinton's apparent regret while President that he didn't face a great enough crisis to contend for "greatness.") So Hayes and Arthur can’t rate as low even if pure ability would have placed them there. Those are the breaks.
No doubt Schlesinger would have considered Nixon a candidate for the bottom ranking if the study had come out a few years later, and surely Tricky did a lot to deserve it. Not just the scandals, but possibly endangering our constitutional form of government and needlessly prolonging a losing Vietnam venture (but then again what about Johnson). On the other hand perhaps the evils were comic opera rather than serious, plus he played the China card and his domestic policy was mixed rather than all bad. Deliberately mismanaging the economy (including by strong-arming Fed Chair Burns) to prime it for the 1972 election is certainly a dark episode for which the country paid a price. And he also did the price controls, not a great idea other than for his short-term political purposes. Still, Nixon-hater though I always was, he had genuine abilities and accomplishments that move him up the ladder a bit.
Reagan is still too recent, and hence hard for people to agree about. Obviously there are people who put him at FDR level (or at the FDR-lovers' FDR level). People on the liberal end of the spectrum who think his policies were really bad have no reason to rate him like that. (This is not Time Magazine Man of the Year, given purely for influence whether good or bad.) So the lack of an objective function impedes consensus on this one. And to what extent did he help bring down the Soviet empire? This at least is a straight empirical question, not turning on values since we all are glad it happened, but the significance of his contribution is contested. Still, at the very worst you have to give him credit for not getting us bogged down in losing wars, and also for not blowing up the budget after 1981. And keep in mind that before 1981 there were 70% tax rates which no one today thinks make sense. After 1981, he participated in genuinely bipartisan efforts to do good things in tax or budget policy almost continuously through the rest of his two terms.
Skipping over a couple of other guys to bring us to the current Bush, this is a record to make James Buchanan envious. The budget disasters that belong at his doorstep are astonishing and unprecedented. He has single-handedly increased the fiscal gap by approaching $50 trillion, if we go infinite-horizon on the tax cuts and Medicare prescription drug benefit, and God only knows what abomination we will end up with in Social Security if he “succeeds” in getting something that he can call a victory. And there was no public outcry demanding that he do the tax part of this; it was just a constituency thing in the Republican base. Even if any Republican at that point would have done something to dissipate the surpluses, it didn’t have to be so extreme and also so reckless on the spending as well as the tax side. Bush ignored the pre-9/11 warnings, which certainly didn't help. Then he totally botched the Afghanistan invasion. (Read “Imperial Hubris” by Anonymous for more on this.) Then came the pointless, disastrous invasion of Iraq (although, as I will detail at some point in a later post, I was agnostic rather than opposed at the time, figuring I am no expert on that part of the world and that I hoped to God his people were). And of course the grotesque mismanagement of the Iraq post-war, and the arrogant unwillingness to do anything to improve it.
We could also count some smaller things against him, such as the egregious steel tariff. Bruce Bartlett has called him the worst President on free trade since Hoover. But admittedly this is nit-picking compared to the rest. Also, in fairness, the Medicare prescription drug benefit would very likely have been done in some way by the randomly chosen replacement-level President. A good President would have tried to do it more responsibly, but that is playing at a totally different level then you need to stay off the bottom.
In terms of gratuitous, needless harm to the US economy's long-term prospects, our world standing, and our long-term national security and defense prospects, I don’t think a conscious Bin Laden mole could have done a whole lot more than Bush has. This guy is the champ.

Torture memos and spin

I can't really see the point to voting to confirm an Attorney General appointee who appears to epitomize the sleaziest traits, to which the worst practicing lawyers in our society are prone, of seeking to give the client what he wants without regard to the requirements of law. There are plenty of tax practitioners like this, and plenty of other tax practitioners who consider such behavior reprehensible and try not to do it themselves, albeit facing fierce pressures and close judgment calls. (Not to anoint the reputable practitioners as saints or to deny their self-interest in retaining their good names, but still they have to internalize lawfulness as a norm in order to do it properly.)
When it is a matter of sleazy tax or corporate practitioners, however, at least we are not talking about memos justifying torture or slanted bum's rush death penalty memos that fail to fairly present the case for a stay. Perhaps Ken Lay's lawyers should attend the Gonzalez hearings wearing T-shirts that say: "No one died at Enron."
How bad is Gonzalez? I think pretty bad; the phrase "How do you sleep at night?" occurs to me but that is just my naivete. But one interesting bit that's been discussed a lot, but always with spin that makes it hard to evaluate properly, is the following famous quote from one of his torture memos:
"In my judgment, this new paradigm renders obsolete Geneva's strict limitations on questioning of enemy prisoners and renders quaint some of its provisions requiring that captured enemy be afforded such things as commissary privileges, scrip (i.e., advances of monthly pay), athletic uniforms and scientific instruments," he said.
Bingo - anti-Bush forces nail him for saying torture restrictions are quaint.
But counter-bingo: pro-Bush forces rightly point out that the word "quaint' is being taken out of context by the other side. No matter how strongly one feels about barring torture, "quaint" mightn't be a bad word for the specific privileges that Gonzalez describes this way. Surely we wouldn't owe Bin Laden scrip and a soccer uniform if we caught him. [Although keep in mind that the torture methods are being used on hundreds of people who know little and were picked up haphazardly.]
But then comes counter-counter-bingo. As per the New York Times today: "In fact, the conventions do not require that prisoners of war be given things like athletic uniforms and scientific instruments, but rather that the authorities allow such items to be received by mail."
Now we have it, if not spin-free, then at least properly contextualized. Gonzalez seems to have fabricated the "quaint" rules, I would have to think deliberately, so that he could use the word "quaint" in close proximity to the torture bar, thus further rhetorically discrediting the Geneva conventions as a whole (adding to the rhetorical slant of "strict limitations on questioning of enemy prisoners," i.e., banning torture). This is an old debating tactic - make one part as ridiculous as possible so you can trash the whole.
So the initial anti-Bush spin strikes me as fundamentally correct after all. Gonzalez was reaching so he could put the word "quaint" in there.
One last bit of context here is that I am inclined to think the Bush Administration favors torture as an end, not a means. This is why there has been so little concern about limiting it to genuine "high-value targets." I personally have no difficulty with the stylized hypothetical where you torture a madman to find out where he has put the bomb that would kill 10 million people. But the real world situation is quite different from the hypothetical. It seems to have more to do with being tough guys and taking it out on some non-Western people because other non-Western people did something bad to us.

Santa Claus is coming to town (but lock up the silver)

The latest NY Times article about Social Security drops hints that the plan to have a 4% payroll tax diversion, funded at least in principle by cutting the rate of benefit growth, is in big trouble politically. As in: crisis story not selling, benefit cuts likewise not selling, Democrats firmly opposed, Republican right think it doesn't go far enough, Republican moderates quaking in their boots that they will get massacred politically on it.
But help is on the way (ha ha):
"One group of Republicans is pressing the administration to make the accounts as big as possible, preferably permitting the investment of all or nearly all of the 6.2 percent levy on wages that individuals contribute to Social Security ....
"Many of the same Republicans have also come out forcefully against a proposal to deal with Social Security's long-term financial problems by reducing the part of future retirement benefits that would come from the government .... [Presumably - this is me interpolating here - the idea here that those opting in lose a fraction of their guaranteed benefits while those who stay in the traditional system lose nothing.]
"[T]he approach has been embraced by some ... high-profile Republicans, who say it would be a bold move to harness the power of markets to address social and economic issues and would in the long run leave the nation in much stronger financial condition."
Matt Yglesias does a good job of nailing this on the merits:
"Um...awesome! How about the "Yglesias Total Fiscal Freedom Plan." Under this plan, workers will be permitted to contribute not only their 6.2 percent payroll tax, but also however much income tax they happen to pay, to personal retirement accounts. The government, meanwhile, will fund itself with the 6.2 employer portion of the payroll tax, along with the corporate income tax, and fees for fishing licenses on national parks."
Whoever in the Administration is talking to the Times does not like this plan, but Bush has not decided. Political logic tells me that this may be where they are headed. It fits the underlying philosophy (dating back to Barry Goldwater's 1964 suggestion that Social Security be made voluntary). And, with the other plan simply not making a sale, it permits the claim that no one loses benefits involuntarily.
A remaining detail is that they need to sweeten it up so lots of people actually will opt in. The way to do that is by making the trade of surrendered benefis for size of account extremely favorable.

It can't happen here?

Herewith a column from prominent libertarian conservative Paul Craig Roberts that bears reading. Note the overlap with some of the aspects of concern about rising American tribalism and fascism that interested me in reading Tom Frank's What's the Matter With Kansas?, minus the simplistic view of economics and the question-begging "false consciousness" rendering of Fox News-style ideology.

A modest proposal

Although it may be only a trial balloon, the Administration is coming closer to 'fessing up to the benefit cut in its Social Security plan. This is to change the benefit formula so new retirees' initial benefit levels grow over time only at the inflation rate, rather than at the rate of wage growth. Reflecting the power of current law baselines in shaping people's definition of a "cut," the Washington Post notes that this amounts to an estimated 9.9% cut, relative to present law, for 2022 retirees, as opposed to a 46% cut for 2075 retirees.
Put another way, of course, the 2022 and 2075 retirees would now be projected to have the same benefits in real terms, leaving aside life expectancy increases which would still cause the 2075 retirees to get more on a lifetime basis. Or put still a third way, the Post's "cut" language is more accurate after all, not because of present law but because current wage levels are a reasonable framework for gauging benefit generosity. (After all, in 2005 the real benefit level that seemed opulent in 1935 would seem considerably less so, to put it mildly.)
Which is the right way to put it? There is no one right way; it depends on what you think is important. But I consider the last two ways of putting it - what is the same in real terms and what is the same relative to some contemporary gauge of income levels - superior conceptually to a present law baseline because they reflect judgments about the merits, rather than just robotic adherence to whatever Congress most recently claimed it was planning to do. Talking about "cuts" can make it game, set, and match without ever getting to the actual merits.
Anyway, since I titled this post "a modest proposal" let's get going on that. Suppose the Administration actually proposed replacing wage indexing with price indexing, without the individual accounts smokescreen/diversion, and with other measures to put the US on a sustainable policy course. E.g., allowing most of the Bush tax cuts to sunset, raising income tax revenues through base-broadening, and taking steps to rein in Medicare/Medicaid healthcare expenditures. And suppose some way could be found, such as a bipartisan commission, to make this feasible rather than political suicide. Then we would actually be getting somewhere. And columns such as Krugman's today, which argues that we have a general fund crisis rather than a Social Security crisis, would then be wide of the mark rather than being largely correct.
(When Krugman says that we have a general fund crisis rather than a Social Security crisis, he is wrong insofar as what we really have is a general fund crisis that INCLUDES the Social Security element. The latter cannot be dismissed by noting that Congress has purported to make Social Security legally separate. But Krugman is totally right that the Administration is exaggerating the Social Security issue to give the current system the "bum's rush" for its own preconceived ideological reasons. He also importantly notes that the Medicare prescription drug giveaway was bigger than the Social Security gap, and that the Bush tax cuts if made permanent are much bigger.)
The fact that the House Republicans have backed down on their outrageous ethics rules changes suggests to me that a crawldown on Social Security benefit cuts is also likely. But this could still leave us with accounts that are totally unfunded and that thus amount to promising new benefits with rubber checks.

The tragedy in Asia

On a more somber note, it is hard to say anything adequate about the tragedy out there. I do hope the United States can do more than has been promised so far. The death toll is already 50 times greater than that from 9/11, which we with our high expectations for our lives and our sense of entitlement (I include myself in this) took so hard.

Can't we all just get along?

After all, our new cat and the two beasts whose territory he invaded have already graduated from morning sing-alongs (a.k.a. growling and hissing), punctuated by brief assaults too quick for the human eye to follow, to sleeping in the same room and playing food bowl musical chairs.

Looking to the horizon

From David Wessel in the Wall Street Journal: "The president measures Social Security liabilities not over the actuaries' usual 75-year horizon but over eternity -- which generates a frightening $10 trillion in unfunded promises. But when he measures the cost to the Treasury of his tax cuts, he prefers the five-year horizon."
I agree with Bush's measurement stance on Social Security, which is that the infinite horizon offers the right perspective, subject only to the point that claims about our current intentions regarding future policy may be highly dubious. (Congress could play games with infinite horizon forecasting by pretending that totally unfeasible tax increases and spending cuts would take effect in the far future.) But people who reject the infinite horizon on the ground that we don't know what, e.g., the economy will look like in the future overlook the fact that our uncertainty may be symmetric. That is, if reputable independent forecasters reasonably deem X the median likely outcome, then presumably this means worse-than-X and better-than-X have equal weight as probabilities. It would thus be a silly error to assume that our uncertainty means we must act as if we are forecasting zero problem for the future.
It is certainly worth pointing out how phony and hypocritical Bush is being about the Social Security fiscal gap when it is small compared to the holes he has shot in the budget through tax cuts, current spending increases, and an unfunded $16.6 trillion Medicare prescription drug entitlement. But the problem isn't infinite horizon forecasting; it's inconsistent use thereof. Let's project everything on an infinite-horizon basis (though also with 5 year, 10 year, and 75 year estimates) and require that the forecasts ignore phony policy changes that are claimed for the future (such as officially sunsetting the Bush tax cuts) but that the enacters are not willing to forthrightly embrace as their intended policy.

Wow - a seven-letter word!

Safire's Sunday On Language column notes that President Bush has learned a new word: "complex." Like a 4-year old with a new word, Bush has become infatuated with using it. For example, Secretary Rumsfeld's job is "complex," meaning that Rummy can't be blamed for anything that goes wrong. And the question of criticizing Putin's march to dictatorship is "complex," meaning that we need not apply our loudly proclaimed pro-democratic standards to him.
Deliberately dismissive rhetoric by Bush, of course, but I imagine that, for him, these really are previously unimagined "complexities." (He's learning and growing!) Rumsfeld isn't totally perfect? An ally, into whose "soul" Bush once proclaimed that he had looked, who isn't 100% good? Wow, that's pretty deep.
Safire reports that Bush still eschews the word "complicated," a bit mysteriously to Safire as he considers it synonomous with "complex." I would think that "complicated," to Bush, carries the unacceptable implication that concentrated thought and knowledge should play a role in decision-making, whereas the "complexity" of a situation just is. You must unravel complications, but can simply stare slack-jawed at complexity.

The New York Times' best political writer (by far) ...

... is definitely Frank Rich, not necessarily for this weekend's column in particular, since he has been very consistent, but in general. These days it seems to take an arts critic to do justice to the mendacity and insanity of national politics. Those nurtured in the political chattering class are simply too inside the canned babble to see any further than the characters in Flatland.
(Sorry about the mixed metaphor - 2-dimensional characters on a flat page, three-dimensional can. No time to work on it just now.)

New Year's predictions

I certainly don't claim to have special intuitions about the future (I almost used the cliche "crystal ball"), nor do I have the sort of inside information that I would need to put real money down on anything. But I do think that:
1) Iraq will go really badly - as much beyond what we now expect as 2004 was relative to expectations a year ago.
2) Social Security will be going badly for Bush, and he will extricate himself with an irresponsible giveaway that offers individual accounts as a free benefit on top of everything else.
3) Though perhaps not until 2006, tax reform will turn into a small package of changes, with no significant revenue-raiser apart from (possibly) repeal of the state and local tax deduction if they can push it through despite the leeriness of blue state Republicans.
4) The Yankees will win another world championship, with at least one major superstar being added after Randy Johnson and Carlos Beltran, and with a payroll that is 2X even the Red Sox and Angels (say, $220 million). By year's end they will be adding more superstars.
5) At least one other major foreign policy disaster for the US will strike. No predictions about terror attacks here as that, literally, hits too close to home for me. (Living near Ground Zero will do that.)
6) The US economy will be doing poorly, but the timing of fiscal meltdown will still be unpredictable.
7) Bush's approval rating will be in the 40-43% range, but the Democrats will still be floundering. (Perhaps I should be ashamed of myself for making such an obvious prediction as the latter.)
8) More Administration scandals even though it is hard to see who would report or investigate them.
Cheer up, all, and pop those champagne corks. I know that I will - as Jim Carrey would say as the Mask, because I gotta.

Depressing reading

Blue state reading for me these last few days. First, Tom Frank's What's the Matter With Kansas?, the false-consciousness account of the far right revolution in the red states. Since, in my legal academic circles, economics-based thinking and ideas such as free trade are widely accepted on the left and right alike, it is a bit peculiar to read something viewing them as so obviously false that (a) no arguments need be made against them, and (b) they can only be held by deliberate stooges or the nearly insane. Frank seems to think that if, for example, you see a US factory closing somewhere because the multinational owner opens a plant in Indonesia instead, it is blind free market ideology to think that the net long term effect on US jobs might be zero [wages admittedly are a more complex matter], yet that it is simple down-home common sense to assume that NO jobs are gained elsewhere in the US. In other words, Frank thinks he does not have or need a theoretical view about how the overall labor market operates, whereas in fact he both needs one and has one that is likely to be wrong in key respects.
The basic false consciousness theory is of greater interest, however. That is, his view that the people being harmed by Bush-style economic policies (which of course in many cases are not free market at all) are being duped by "social issues" red meat, designed to lead nowhere but to an endless cycle of grievance, into favoring their oppressors and deflecting all blame to a powerless bunch of fall guys who are basically the heirs to the centuries-old anti-Semitic Christian stereotype of Jews (updated to apply to the likes of John Kerry). What gives this argument some credibility is the fact that it has happened so many times before, centuries of European anti-Semitism being one example and red state Bush Republicanism's twin and covert ally (since the two are good for each other in home politics), Bin Ladenism in the Islamic world, being another.
I am now in the middle of Imperial Hubris, by Anonymous (aka Michael Scheuer), which is if anything even more disconcerting, especially if one lives in one of the places that might actually be attacked again by Al Qaeda. (The Bush argument in the 2004 election that only he could protect us from terrorism was pitched 100% to people in states who knew with utter certainty that the places where they live will never be attacked. These people are having fun endorsing what they think is general butt-kicking, including torture, because they know full well that they are playing with the house money, since only their hated blue state brethren will pay for their spree.)
The basic point of this book, written by a leading CIA official who I believe was recently purged, is that we have already lost in both Afghanistan and Iraq, and are mostly losing everywhere else as well, due to the grotesque ignorance of our policymakers about known facts on the public record concerning the places where we are enmeshing ourselves and the people we are fighting, relying on, bribing, trying to bully, etc. This goes back before the current President Bush, however; e.g., the Clinton Administration should have had a plan in place to decapitate Al Qaeda in Afghanistan on September 12. The book suggests, though not expressly arguing in what I have read so far, that neither instituionally nor politically and ideologically in the US is there any potential to do a better job of realistically advancing our undoubted long-term interests in peace and prosperity.

Tax Reform, Bush-style

The New York Times reports today that the Bush Administration is unlikely to propose sweeping tax reform, but instead will seek incremental changes. No surprise there - they are already headed for big trouble, I think, in Iraq (obviously) but also on the Social Security reform front. Controversial fundamental tax reform would be a lot even for these guys to try. (It hasn't hit them yet, by the way, that just because they won almost every single political battle they fought in Washington in the first term doesn't mean that this will continue. I am reminded of Bertrand Russell's discussion of inductive reasoning, involving a chicken that reasons from past experience that every morning it will not be sent to the slaughterhouse. One morning, it is wrong.)
Anyway, here are the 5 main items that the Times article identifies as likely to feature in the incremental tax reform plan, with some quick reactions to them:
1) Eliminate the alternative minimum tax - Hard to quarrel with this one, since it doesn't even really have a better tax base, in many respects, than the regular tax. (For example, no personal exemptions adjusting for family size.) But of course this is immensely costly, said to be $660 billion over ten years. Repeal also would reduce progressivity, although less at the very top than at the lower six-figures range. In a different political environment, that would merely call for suitable adjustments to the rate brackets since whether we should have an AMT is a different question from how the distribution should work. By the way, a less costly alternative, although not one I advocate, is simply to raise the AMT exemption amounts and index them for inflation or perhaps even to the growth rate of the economy.
2) Expand tax-free savings accounts - I have come to favor a consumption tax, so in principle this might be fine, and again the progressivity effects could be offset elsewhere (although they won't be). But tax-free savings accounts without taxing dissaving (i.e., borrowing) could be a mistake. If I put $10,000 in a tax-free savings account, and finance the investment (although not traceably) by keeping my home mortgage $10,000 higher, I am not actually saving any more.
3) Eliminate state and local tax deductions - blue stater though I am, there is much to say for this, on the view that state and local taxes paid have some correlation, however weak, with the provision of untaxed consumption benefits provided by the state and local governments.
4) Increased income taxation of Social Security benefits - this is equivalent to means-testing for Social Security benefits, but by another name so people don't get hysterical. Fine with me, and note that it is one of the few politically conceivable ways of making better-off current seniors share in the pain of narrowing the fiscal gap.
5) Subject employer-provided health insurance benefits to income taxation - This really requires a blog all its own. I am sympathetic because it addresses the over-use of insurance to pay routine medical benefits. If car insurance were tax-free when employer-provided, we would probably see it paying for gasoline. The downside is that we may want to encourage more people to have health insurance, either out of paternalism (we think they are making a mistake if they don't have it) or because we figure we will have to pay for some of their treatment if they need it but are uncovered and out of cash. Some recent econometric research suggests that the bad effect, encouraging over-insurance for routine items, is bigger than the good effect, encouraging the purchase of some basic insurance for big items. So again I have a lot of sympathy although this is bound to be controversial. One last point - there might conceivably be hidden fiscal benefits, via Medicare and Medicaid, if healthcare consumers were forced to be more cost-conscious and this affected general treatment norms and product development in the healthcare industry. (I further discuss this point in my book on Medicare.)
Bottom line - the proposals certainly could be a lot worse, especially given what I have come to expect from the Bush Administration. But don't hold your breath that more than a couple of them (the revenue-losers?) will happen.

Already making a beast of himself (but that's okay because he is a beast)

This past weekend we adopted a new cat, our third, a 1-year-old brown-gray tabby boy named Buddy. Despite the name he came with, he has no discernible resemblance to Buddy Guy, Buddy Miles, Buddy Hackett, or the fictional Buddy Love, although perhaps a slight temperamental resemblance to Buddy Holly.
After seeing him a couple of times over a few weeks, itself a long story, we decided we couldn’t resist because he was simply too nice to pass up. Not every cat licks your face in the visiting room of an animal pound, not to mention the more common but still pleasing behaviors of purring loudly and rubbing vigorously against your hand. Plus, once you focus on a given individual whose life prospects are otherwise quite poor, it is hard to resist utilitarian principles, as extended to sentient beings generally. (The fact that those principles would tell you to just keep going is easier to ignore, albeit not, as most philosophers would perversely argue, evidence against the persuasiveness of utilitarianism.)
Heads up to anyone passing through downtown Vernon near Great Gorge: the Vernon Animal Pound, on Church Street near the main drag, is not a no-kill shelter. Not to criticize them - they don't have the resources - but this raises the stakes for the animals there.
Apart from being impossibly sweet-tempered and even calm for a 1 year old, Buddy appears to have comprehensively studied the cat handbook and memorized the list of cat behaviors that are expected of him. He is now being “fixed,” as the euphemism goes, but will soon be launched on the initially anxious (for cats, not people) project of finding his footing in a home with two other cats. The other two, 13-year-old boy Shadow and 3-year-old girl Ursula, are quite aware of what is going on and seemed unimpressed by my statement, made to them with fingers crossed, that “we have no idea how he got here, but as long as he’s here, we might as well be nice to him.”

Defending (?!) Bush's Social Security dodge at his press conference

Other bloggers, such as Timothy Noah, Chris Suellentrop, and Sam Rosenfeld, have been harsh on President Bush for flatly refusing to say anything meaningful about Social Security benefit cuts at his press conference. Certainly, as an aesthetic matter, it seems to have been the usual arrogant frat boy routine and contempt for democratic openness that make him unwatchable. Plus there were hints of triangulating, in the Clintonian sense of trying to make the Republican Congress take the blame for proposing benefit cuts.
But - Bush did appear to acknowledge, however obliquely, that benefit cuts are necessary, and that they are on the table other than for current and near-retirees. (I would put these folks' benefits on the chopping block too, presumably through means-testing to avoid impact on those who have too little else, but I recognize that this is politically beyond the pale.)
I interpret him as saying that it's too soon to be at all frank and open about benefit cuts, which to have a chance would have to be proposed further down the road. And if this is the best political strategy for moving a couple of steps back towards fiscal balance, then, however unedifying, there is something to be said for it.
Not to say that the Social Security changes will move us towards fiscal balance, or that individual accounts have anything to do with such a move, but still let's be fair at this point.
One of the big controversies on the blogosphere over the last few days has been whether there really is a Social Security crisis when the benefits are projected as lasting for a while. Alas, this debate uses an arbitrary measure, the Social Security Trust Fund, of when the money is officially deemed to run out, wholly aside from the actual financial markets question of when we can't raise the money to pay benefits without hyper-inflation. Alternatively, bloggers debate whether it is tactically wise for the Democrats to say that the Social Security funding crisis Bush keeps invoking for political cover is a sham. Should they instead be "proactive" by saying yes it's real, but let's do X, Y, and Z instead of individual accounts? This choice in turn is getting debated mainly based on whether there has been too much political rhetoric over the last 10+ years about the crisis for the Dems to change the message now. (See, for example, Andrew Samwick and the others he mentions.) So this is a debate about perception, not substance.
Granted, perceptions are important, as are political tactics, especially given how the Bush team plays ball. But I would like to see more recognition of the important substantive point, which is that we face a serious overall fiscal crisis to which rising Social Security benefits (i.e. growing faster than the economy due to increasing life expectancies) are a meaningful contributor. So we need to address the overall fiscal problem no matter what games we play with accounting fictions (or more charitably, precommitment tools) such as the "Social Security Trust Fund." True, Medicare, or more broadly unsustainably rising healthcare spending, is the biggest problem, and one that will have to be addressed no matter what. But, to quote my mother-in-law, "'Every little bit helps,' said the old lady as she spit in the ocean." It certainly would be worthwhile to address Social Security if addressing it meant significantly narrowing its $10 trillion fiscal gap. And the fact that we have other, bigger problems actually increases the importance of addressing this piece (since we have no slack), even if suggesting that this is not the most logical place to start.
All this being said, I do wonder if Bush's punt to the Congress, rather than merely being smart tactics, actually shows a lack of nerve (or clout as he heads towards lame duck status with mediocre approval ratings) that suggests nothing will happen after all.

Meanwhile, back at the "economic summit"

More breaking news from the Administration's "economic summit." President Bush's Ron Ziegleresque spokesman, Scott McClellan, is quoted as saying afterwards: "Markets will look favorably on a plan that addresses the long-term sustainability of Social Security."
Doesn't this depend on exactly how the Administration addresses sustainability? For starters, whether they make it better or worse? In their own special way, they have been tirelessly addressing overall fiscal sustainability for the last four years.
Plus, at the risk of tedious repetition, if they wipe out $10 trillion of Social Security fiscal gap but add $12 trillion via permanent tax cuts and AMT relief, just how much credit do they hope to get from the financial markets?

Increasing baseball's efficiency

I am sure all economics-minded baseball fans are as distressed as I am by the sheer wastefulness of the process whereby the Yankees have to buy all of the top players and then hope they perform in a limited number of key situations each October. Wouldn't it be much more efficient and streamlined if we changed baseball's rules so the Yankees could simply buy runs directly?
Imagine Game 4 of the ALCS last October under this rule. The Red Sox tie it up off Rivera in the bottom of the ninth - but then, before the tenth inning can begin, the Yankees simply buy a run and are declared the winners by 5 to 4! It's a sweep!
Yankee fans start celebrating. Announcers talk about how it's not just the money the Yankees have, it's how smart they are in using it. Joe Morgan gives the credit to Derek Jeter.

President Bush on thinking long-term

Comedy or nerve? You make the call.
Here is what he said today at his "economic summit," about the approaching date when Social Security will start paying out annually more than it takes in:
"Now, some will say, well, that's 2018, I'm not going to be around. But I don't think that's what a good public servant thinks, should think."
Pretty big talk for a guy who figures to add more than $30 trillion to the fiscal gap before he is done, including, on the income tax side, $12 trillion that is still to come from extending the tax cuts and fixing the AMT. Even just this remaining amount exceeds the projected Social Security shortfall.

Musical interlude

Saw the Pixies in concert last night, part of their 8-night run at the Hammerstein Ballroom in NYC.
The warm-up act was Le Tigre, who left me wishing we had gone the night before and seen Broken Social Scene. Le Tigre has this dance punk feminist thing going, very earnest in a 20-year old way (even if they are older), and they definitely appeared to be nice people. But as they largely relied on pre-recorded backing tracks that were not especially compelling, and as their words and vocal performance didn't add much, all I could think of was Ashlee Simpson. I guess Ashlee is the other way around (live band, canned vocals), but the level of creativity is comparable. Le Tigre was to a degree fun, but I had the sense they should be trying to win their dorm's talent show before they hit the main stage.
If any Le Tigre fans read this, which may be a long shot, I imagine I will hear from them.
The Pixies were pretty much all business (bills to pay?). They muffed a couple of arrangements, but were fantastic anyway. Their playlist is just exceptionally strong; hardly anyone since the Beatles could match it. They played almost everything from Doolittle and Surfer Rosa, obviously knowing where their best work is, and well-chosen scatterings from the rest. I do wish they had played Bam Thwok. One of the best concerts I've seen because the material is just so outstanding and they were generally up to playing it well.
While we're at it, my 2004 album of the year pick is Brian Wilson's Smile. True, the performance, while highly professional and skilled, has at times that generic "Beatlemania" quality to it. But the material is too good for this to matter much.
And my two picks for overrated are Franz Ferdinand (catchy but limited; once through the 80s was enough for me) and Arcade Fire (maybe I will come around, but for now they just seem too histrionic). Among the new releases I liked better were Blonde Redhead, Fiery Furnaces, Elliott Smith, A.C. Newman, Wilco, and Modest Mouse.

Knocking on Kevin's Drum

Kevin Drum, who often does a pretty good job for a political commentator at understanding Social Security fundamentals, is missing an important point when he says:
"I'm not in favor of making any changes to Social Security at the moment. The 'funding shortfall' has a strong Chicken Little flavor to it, and even if it turns out to be real there's little reason to try fixing it four decades ahead of time."
Au contraire, mon brave. The shortfall is driven by rising life expectancies, which are unlikely to change (and we certainly hope they don't change). So it is a pretty solid projection even if the timing bounces around. And the drop-dead date could move forward as well as back. Plus, with benefits being pegged to wage growth, it is harder to out-grow the problem. Why wouldn't you plan in advance for a predictable problem down the road? Should people wait until age 60 to plan for their own retirements?
I realize Kevin is reacting to the Bush Administration's absurd insistence that a $10 trillion piece of the fiscal gap requires making changes that have nothing to do with sustaining our long-term finances, while they conveniently forget the estimated $16.6 trillion hit they laid on the fiscal gap in 2003 with the Medicare prescription drug benefit, not to mention the $12 trillion hit they are planning right now via fixing the alternative minimum tax and making the Bush tax cuts permanent. But, Kevin, don't let this draw you into denying that there is a Social Security problem (albeit a smaller one than the Medicare problem) that we ought to do something about. Responsible people on all sides will ultimately have to recognize this.
On the other hand, Kevin quotes something that is right on the money with regard to proposals to eliminate wage indexing of Social Security benefits so that we only have inflation indexing: "It's as if an official in 1935 had said: 'Why does every retiree deserve a flush toilet and a telephone? Half of Americans make do without complete plumbing and less than half have telephones.'""
This is indeed the problem with eliminating wage indexing. Another way to put it is that, over the infinite long run, it means that seniors' benefits are phased down to zero as a percentage of GDP.
But this doesn't mean, as Kevin too swiftly concludes, that moving to mere inflation indexing should be off the table. Don't we need to look at all the tradeoffs and at effects on all age cohorts? Personally, what I like about eliminating wage indexing is that it changes the inertia point. Congress must vote to raise seniors' benefits relative to inflation, rather than having it occur automatically, and thus what is defined as a "cut" versus a "new benefit' changes. In a political world where seniors and the AARP are so powerful, inflation indexing strikes me as a better place to set the pre-change baseline even if we recognize that it is problematic as an actual outcome.

If George W. Bush owned the Yankees ...

... he would give Kevin Brown and Javier Vasquez the Medal of Freedom for their contributions to battle against the Red Sox.

Why must politics be so stupid?

Okay, my title is a bit too harsh. What I really mean is, why can't political discussion, at least when we're not in the middle of a Presidential campaign, focus more on the actual issues rather than on rhetorical ploys?
The Social Security debate already has the following form. From the Administration: we have a terrible funding crisis so we must adopt individual accounts to solve it. From liberal opponents of the Administration: what funding crisis? The Administration is just doom-mongering and we don't have to do anything yet, and if there's any problem at all it's a General Fund problem, not a Social Security problem.
Let me try an analogy. A swimmer is bleeding in the water. A couple of hammerhead sharks, one big and one small, are heading towards him with gaping jaws. The Administration tells the swimmer: "Your wristwatch is water-logged! You've got to fix it at once so you can time the small shark as he circles in!" The other guys say: "Don't touch that watch! The sharks are still 20 yards away, and besides the small one isn't the problem!"
As I keep saying, individual accounts are a debatable idea with both virtues and vices, but have little to do with the funding crisis. Diverting taxes and benefits of equal present value would have no effect on the fiscal gap, so the only real argument for using them to fight the fiscal gap is that they create a distraction to give you political cover. (Oops, I don't know that I can extract this lesson from my shark story.) But I am skeptical both that this trick would work and that the Administration even plans to try it.
Anti-Administration forces respond by saying there really is no problem or at least it's not in Social Security. But there is a really bad overall problem, as shown by our estimated $73 trillion fiscal gap, and Social Security does contribute $10+ trillion to it. To paraphrase Everett Dirksen (with due adjustment for inflation), a trillion here and a trillion year, and eventually you're talking real money. True, the Medicare part of the problem is far worse, and indeed the underlying problem of unsustainable healthcare growth is broader still, since private health insurance is also on an unsustainable growth path. But the effect that increasing life expectancies have on the growth rate of Social Security benefits relative to the economy is indeed a part of the huge and serious overall problem.
Suppose we could, this year, bring Social Security into long-term balance through changes that, while painful, were reasonable under the circumstances. That would be a big down payment on addressing the fiscal gap, and it also might be a signal to the markets that we are starting to come to our senses.
So here's an idea: the Administration actually does something responsible for a change and tries to lower the fiscal gap that it has done so much to expand. Since that ain't gonna happen, the left says: we have a problem but you aren't actually doing anything about it.

Bozo in Paradise

David Brooks has been an embarrassment since the day he started writing for the New York Times op-ed page. He seems to think his job is to echo White House talking points (with an occasional stab at friendly advice), not to think and write about issues in any authentic sense. This means that he is a puppy dog, not a journalist.
Worse still is his ignorance, which reached a laughable level in today's Brooks column about Social Security.
Brooks claims that the idea of having the government issue debt to buy stock is supported by faith in markets, and seems ill-advised only if you don't trust markets.
But issuing $X billion of debt and buying $X billion of stock does not mean trusting markets - it means holding a position that financial markets value at zero. You own assets that the markets value at $X billion, and you issue debt that the markets value at $X billion. Yet you think, apparently, if you are as woebegone as Brooks, that you have stumbled on a bonanza - something that will do so well that you can wave your magic wand and evaporate $11 trillion of unfunded liabilities.
Brooks notes that stocks have a historic real return over some period of 4.6 percent, while the government can issue debt at a real interest rate of 2 percent. Voila, a big money bonanza from the difference between what you pay and what you earn. But this could only happen if markets are badly awry in how they value the two sides.
If he were minimally economically literate, he would have heard of something called a "risk premium." Riskier returns generally must offer a higher interest rate, because people don't like the risk. If you are long the riskier asset but short the safer asset, you have a positive expected return, but one that the market sensibly (given people's risk aversion) values at zero because the down side is nasty.
There actually is a plausible argument, although I don't buy it myself, for having the government issue debt and buy stock. It is based on what economists call the "equity premium puzzle," or the idea that stocks shouldn't offer quite so much of an extra return given their historical track record of fluctuation. But this is an argument for individual accounts based on the idea that markets have screwed up and that the government can therefore cleverly take advantage - not an argument based on faith that markets work.
David Brooks should go back to writing about tall skim no-whip frappuccinos with Madagascar cinnamon.

Tall Tales in the Holiday Season

Anyone who believes Bernard Kerik withdrew for the Homeland Security position due to housekeeper issues, as claimed, should contact me immediately. I have a bridge in Brooklyn that I would like to sell you.

[UPDATE: Not to crow, but check this out. The degree of emphasis the spinmeisters put on the housekeeper/immigration issue, which didn't really seem so terrible, was the obvious tipoff that they were trying to distract us from stuff that was worse, plus of course several other unseemly stories had already started to surface.]

Krugman on Social Security again

Although my shock and awe about the Bush Administration's fecklessness has been pushing me ever further into Krugman's camp, I still can't join better-known bloggers such as Josh Marshalland Brad DeLong in reverently embracing everything he says about Social Security.
Case in point: Krugman's column today.
The big point he makes is that the Bush plan probably amounts to nothing more or less than "government borrowing to speculate on stocks." This is probably correct, although we haven't seen the plan yet.
So maybe I am just quarreling over the footnotes, but they are important.
I have been saying that an individual accounts plan actually could eliminate the Social Security portion of the fiscal gap IF - as I do not expect for a second - it cut guaranteed benefits by the amount of the diverted payroll taxes PLUS $10 trillion in present value terms.
For Krugman, even this would not be good enough. This difference of opinion reflects that, while I am a fan of long-term measures such as the fiscal gap and generational accounting, he seems to think that, since the good ol' deficit is the measure we have always used, it's jolly well good enough for him.
He makes the valid point that long-term measures rely on projections of future policy that may not be credible. For example, the bond markets might (rightly) not believe that a $1 trillion diversion of payroll tax revenues today was really, truly going to be offset by an $11 trillion, or even a $1 trillion, reduction of benefits in the future. Who knows what Congress will really end up doing down the road?
This type of problem has led me to the conclusion that, while the fiscal gap is analytically a coherent measure and the deficit is not, in the world of official budget measures you need both. Policymakers should be generally constrained (at least in the sense of an accepted policy norm) against increasing EITHER the deficit or the fiscal gap, lest they game the former through smoke & mirrors timing games, or game the latter through non-credible claims about policy in the distant future. (An example would be purporting to "pay" for individual accounts through a $1 million a person annual head tax, to take effect in the year 2050.)
With the Bush Social Security plan, of course, the measurement issue may boil down to whether they can ignore making the short-term deficit worse because the long-term picture ostensibly remains the same. Ignoring that it actually will have gotten worse if the future medicine is politically less credible than the current candy. And ignoring as well that the idea was supposed to be improving the long-term picture, rather than placing a bet on stocks while it ostensibly remained the same.

Read his lips: no new Social Security taxes

Now that new taxes have been ruled out to help pay for individual accounts, the only remaining way to pay for them is through benefit cuts. We are told by proponents of the change that the Admnistration's plan will eliminate Social Security's estimated $10 trillion long-term revenue shortfall. We are also told that trillions of dollars in payroll taxes will be redirected to individual accounts over the next few decades. Sounds like an awful lot of benefit cuts would have to be proposed - far more than one can imagine the Administration proposing in a sensitive political environment.
Keep in mind that this is not being billed as a full switch to individual accounts even for younger workers. So the plan is not to eliminate their traditional benefits, and certainly not to admit (or let it be persuasively argued) that they are paying for the transition.
People on the left are convinced that the plan is to destroy Social Security and shred the safety net. Frankly, that might be better than what I suspect is the actual plan, which is to recapitulate the Medicare "reform" by promising more free lunches and further endangering the US government's fiscal position.

"Look, Mommy- I'm a soldier!"

Was I the only one to laugh at the childish G.I. Joe outfit our President wore the other day when he was photo-opping with US troops? Is he trying out belatedly for the album cover of Sgt Pepper?

UPDATE: Maureen Dowd laughed at it, too. [And a reader tells me Jon Stewart did as well.]

Reader challenge: free copy of one of my books if you can find any photograph of Dwight Eisenhower in a military-style outfit while he was President. Those who are don't have to pretend. [Oops - a reader sends proof that Eisenhower wore one while President-Elect, in the course of visiting the US troops in Korea. Since I am a lawyer I guess I could embrace the technicality - he hadn't been inaugurated yet - but instead I'll tip my hat.
Maybe Eisenhower was responding to those "Swift U-Boat" ads in which Stevenson alleged he was a German double-agent.]

Shameless plugs

My latest book, Corporate Tax Shelters in a Global Economy: Why They Are a Problem and What We Can Do About It, is now available. It is actually more of a short monograph (50 pages of text), but at least it is priced to move. As in, free download available.

While you're at it, if interested you could also check out my latest full-length, Who Should Pay for Medicare?

Krugman on Social Security

Paul Krugman's column in today's New York Times, Inventing a Crisis, continues Krugman's recent career as a lightning rod or bellwether (take your pick). Some reasonably well informed readers love him; others, even if skeptical or worse about the Bush Administration, find him way too partisan and biased. I ought to know, since I have been in both groups at different times. During the 2000 election, I thought he was too harsh on Bush (who I at that time misjudged) at least relative to his harshness on Gore, who was certainly being fiscally irresponsible as well, if on a smaller scale. Thus, if both candidates proposed to make Social Security's funding problems worse, he would point out that Bush's math could be expressed as "2 - 1 = 4," without, it seemed to me, applying the same standard to Gore.
In the last couple of years, I have come to feel that his view of the Bush Administration is largely correct, and that one need not share his politics or view of government economic policy to agree with him on this, since principled conservatives should be just as appalled by this Administration, and on the same grounds (apart from different views of progressivity) as liberals.
But I still find him too unthinkingly traditionalist on Social Security. He is eager to defend the system without sufficiently asking whether it is well designed - for example, in its so strongly favoring older generations and, to name another, less well-known redistributive quirk in the system, one-earner couples relative to two-earner couples and singles. Maybe there is a sound political judgment behind this, reflecting the view that, if you open things up, the political system will adopt more bad changes than good ones. But since he is not saying that, I discern an underlying lack of full candor with the reader, or else myopia on his part.
Today Krugman accuses the proponents of individual accounts of inconsistently, and therefore in his view dishonestly, saying both (1) that the current Social Security surplus is meaningless, and yet (2) that the approaching Social Security deficit is intolerable.
I think this is a bit unfair. The real problem is that the U.S. fiscal system as a whole is deeply in the red, as shown by its estimated $73 trillion fiscal gap (expected to become $85 trillion if the Bush tax cuts are made permanent and the alternative minimum tax scaled back). One significant contributor to this - although Medicare is the biggest problem - is rising Social Security benefits relative to the size of the economy, mainly due to increasing life expectancies. We're glad seniors are living longer, but it means they get the Social Security pension for more years, without any matching increase in funding.
There is a fiscal crisis, it is potentially very serious - think Weimar Germany for one possible playout - and the trend in Social Security benefits is a contributor. True, the questions of when Social Security goes into annual deficit, and when the Trust Fund is deemed to run out, are by themselves trivial. But the trend is the problem, and it does call for at least considering Social Security changes (although Krugman is right that making greater use of general revenues is one of the options to consider).
Final point on this: individual accounts are indeed irrelevant to the fiscal crisis, unless used as a benign political trick to facilitate greater financing (and they might be more likely to end up being used as a malignant political trick to shower more goodies on current voters).
What makes individual accounts irrelevant to the problem is that they really just shift funds around. Suppose you had to save more to send your kids to college. The individual accounts idea amounts to saying, "don't save more, just change how you are investing what you save." But in practice this might just mean that the same investments are reallocated a bit between people (or merely between bank accounts) in ways that don't really matter much at the end of the day. For example, even if stock market investment really offers a higher return than alternatives over the long run, adjusted properly for risk - and that is very much open to question (the last 100 years don't prove what we should expect over the next 100) - it's not clear that there would be more stock market investment in the society as a whole under individual accounts, rather than just a bunch of offsetting portfolio shifts in who directly holds which financial assets.
Final point: given what we know about the Bush Administration, one can't rule out the paranoid liberal idea (paranoids are sometimes right, after all) that this is a scheme to let the fund managers rip off investors. In different hands, it might be a plan to hand the fund managers a costly mandate, by pressuring them to accept lots of small accounts on which they weren't allowed to recover their administrative costs. But think Bush Administration + pharmaceutical industry + Medicare prescription drug benefit, and you will have to wonder what to expect. The proof will be in the lobbying - if the securities industry pushes for this, it will mean they expect a huge windfall. If they don't, the paranoid liberals can take a deep breath although the looting might still emerge later on. (In 1965, the American Medical Association feared Medicare as a camel's nose in the tent of government-run healthcare, but it ended up being a bonanza for doctors.)
One reason for expecting a rip-off, just as for expecting that individual accounts will end up increasing the fiscal gap, is that it might aid enactment. So even a relatively good or at least innocuous plan might change for the worse as it goes through Congress, leaving principled supporters with the question of whether at some point they should pull the plug on their support.

Yoda Steroid Controversy

Fans of the Star Wars series were stunned to learn this morning, from leaked Imperial Senate testimony, that the beloved Jedi warrior with the undersized body and the oversized heart has admitted to relying on something other than the Force to help him in light saber duels against much larger warriors.

Mister "Small Government"

While this is highly unlikely to be news to anyone in the know in Washington, it is certainly interesting to read that Grover Norquist, whose supposed anti-government creed is doing so much to drive U.S. tax policy these days, is a man who sells access to his friends in government for cold hard cash. See Lou DuBose's recent Texas Observer article, K Street Croupiers.
Grover, if you are out there, at what point do the means become the ends?
And this is even leaving aside the point that, as I have argued in a number of places, such as in Cato's Regulation Magazine, Grover's tax-cutting policy actually makes government bigger over time by increasing redistribution from younger to older generations and creating such instability that people must continually lobby over absolutely everything.

Baseball and steroids

As a person whose dislike for the New York Yankees (aka the Evil Empire) is on a par with what those Canadian demonstrators apparently think about the U.S. and/or President Bush, I must admit to getting a bit of schadenfreude over the Giambi/steroids affair, subject only to concern that it would end up helping the Yankees by allowing them to wiggle out of what has become an inconvenient contract. (For them, even $80 million probably can't be described as worse than "inconvenient").
But of course there are broader implications here, not to mention that I am disposed to admire Barry Bonds although the leak about his testimony is no more surprising than that about Giambi's.
A point about the steroid controversy that not everyone gets is that the issue here is really, in a sense, more about the players than the fans. The reason for banning steroids is to protect the players. You may want to do this for paternalistic reasons if you think lots of players who would be inclined to take steroids are making a serious mistake in terms of their own long-term interests. (Bonds and Giambi have certainly been well-compensated for any enhancement to their stats, but lots of others may not be, perhaps even at the college level or lower.) Or, less controversially if you don't like paternalism, there is a collective action problem here. Players are engaged in an arm's race, and all are worse off if they must do more just to stay in place. (Without the illegality, this is the story behind Jim Courier's rise and fall as the men's #1 tennis player - he raised the bar in terms of physical conditioning, and trounced the field until everyone else realized they had to join him.)
From a fan standpoint, steroids hurt the game only in the circular sense that, if people care about them then they care about them. I personally find Bonds' achievements amazing no matter what. And of course there may be systematic changes to the balance of forces in the game, e.g., more home runs, which might be good or bad for fans without regard to whether they come for steroids. It certainly isn't unreasonable for fans to hate steroid users because they are cheating in a manner that endangers their fellow players. But player welfare is the issue here.
Separate question: will we soon start hearing about amazing late-career power pitchers and steroids? After all, you need flexibility, not just strength, to hit like Bonds or Giambi, and maybe that implies power pitchers can benefit too.