Financial Crisis and Public Policy

This Policy Analysis explains the antecedents of the current global financial crisis and critically examines the reasoning behind the U.S. Treasury and Federal Reserve's actions to prop up the financial sector. It argues that recovery from the financial crisis is likely to be slow with or without the government's bailout actions. An oil price spike and a wealth shock in housing initiated the financial crisis. Declines in stock values are intensifying that shock, threatening to deepen the current recession as U.S. consumers and investors cut their expenditures. An offsetting wealth injection from additional risk-bearing investors could initiate a quicker recovery. Thus, supporters of government intervention justify the bailout's debt-financed fund injections -- in essence, they want to compel future taxpayers to join the group of today's riskbearing investors. However, the bailout is poorly designed and its implementation appears panicky -- marked by a knee-jerk trial-and-error process that may have heightened market uncertainty. Worse, current interventions in market processes and institutions could become permanent, to the probable detriment of the nation's long-term economic prospects. With or without the bailout, the ongoing recession is likely to be deep and long. From a philosophical perspective, any bailout action provides a host of bad incentives. Moreover, we should be mindful that future generations already face massive debt burdens from entitlement programs. Increasing those burdens by expanding the bailout program or enacting a massive fiscal stimulus will hasten the long-anticipated crisis in entitlement programs. Thus, the ongoing economic crisis could usher in permanently higher taxes, greater government involvement in the private sector, and a prolonged period of slower economic growth

Medicaid's Soaring Cost: Time to Step on the Brakes

Current trends and policies imply unsustainable growth in federal Medicaid outlays. In the year 2006, federal Medicaid spending was 11.9 percent of federal general revenues and 1.5 percent of GDP. Making conservative assumptions about future growth in Medicaid enrollment and spending per beneficiary, this paper estimates that the present value of federal Medicaid outlays over the next 100 years will take up 24 percent of the present value of federal general revenues and 3.7 percent of the present value of GDP calculated over the same period. By the end of the next 100 years, that is, in the year 2106, Medicaid's share of federal general revenues will be 48 percent -- four times larger than its 11.9 percent share in 2006. In the year 2106, federal Medicaid spending as a share of GDP is estimated to be 7.4 percent -- a fivefold increase from its current share of 1.5 percent. If the federal government continues to match state Medicaid outlays at the current rate, Medicaid's share of GDP in the year 2106 will become 13 percent -- or one-eighth of GDP in 2106. If current policies and trends are maintained, federal Medicaid outlays will take up 36 percent of lifetime federal general revenue taxes for males born in 2025 and 69 percent for females born in that year. For females born after 2050, almost all of their lifetime federal nonpayroll taxes will be consumed by their lifetime Medicaid benefits. Higher tax rates cannot plausibly cover this growing spending commitment. On average, today's 35-year-old males are projected to have 15 percent of their lifetime federal general revenues returned in the form of Medicaid benefits. Maintaining that ratio for today's newborn males would require a 78 percent increase in their lifetime nonpayroll taxes. Limiting Medicaid spending growth is, thus, an essential component of putting the federal budget on a sustainable course without imposing crushing tax burdens on younger and future generations, thereby harming the prospects for future economic growth

The Connection between Wage Growth and Social Security's Financial Condition

The conventional view that faster wage growth would improve Social Security's financial condition rests on several measures of the program's finances that the Social Security trustees emphasize in their annual reports. These measures include annual cash-balance ratios, the 75- year actuarial deficit, the "crossover date," and the "trust fund - exhaustion date." All of these measures show that Social Security's financial condition would improve if future wage growth were faster. This conventional view also suggests that the trustees' relatively conservative assumptions about future wage growth cause the program's financial imbalance to be overstated. Unfortunately, the measures highlighted in the trustees' annual reports have a short-term orientation that biases calculations toward showing an improvement under faster wage growth. The connection between wage growth and Social Security's finances should be evaluated using measures that are free of a short-term bias. This Policy Analysis evaluates the connection under the more comprehensive infinitehorizon "fiscal imbalance" measure. It uses simple cases of the program's operation to explore the impact of the relevant forces -- population aging, wage growth, discount rates, and the projection horizon. It shows that although faster wage growth is desirable in and of itself to increase general prosperity, it would likely worsen Social Security's overall financial condition. By implication, a "do nothing" policy motivated under the conventional view would be diametrically opposed to the correct perspective: Early reforms of Social Security should receive higher priority under faster wage growth

Demographic change, generational accounts, and national saving in the United States

An investigation of how alternative population projections affect measurement of the intergenerational imbalance in the distribution of resources and an analysis of the impact of demographic change on U.S. national saving.Fiscal policy ; Saving and investment

The decline in U.S. saving rates: a cause for concern?

An examination of the decline in the net national saving rate since the early 1980s, which identifies an ongoing, fiscally induced wealth redistribution toward older generations and a sizable gain in annuitized forms of saving as underlying reasons.Saving and investment

Social Security's treatment of postwar generations

Social Security's tax treatment of distinct groups varies widely among postwar generations: Women, whites, and the college educated have lower lifetime net tax rates than do men, non-whites, and those without a college education. Among income groups, the middle class faces the highest lifetime net tax rateSocial security

Has someone already spent the future?

A look at how four trends in the U.S. economy -- high taxes, low savings rates, an aging population, and astronomically high health care costs -- could constrain Americans' living standards over the next few decades.Budget deficits ; Saving and investment ; Insurance, Health

Generational equity and sustainability in U.S. fiscal policy

If U.S. spending goes as projected, future generations will give up almost half their lifetime labor income to balance the government's books. After showing that current policy is not sustainable, this article reports the size and timing of the changes necessary to make it so.Fiscal policy ; Taxation