Thu. July 24, 2008
Federal Budget Policy
The demographic shift resulting from the aging of the baby boomer generation presents a number of potential dilemmas for policymakers. Whether a shrinking working-age population can support its own dependents, in addition to retirees, has led to debates about the increasing size of Social Security, Medicare, and Medicaid budgets—now and in the future. Questions have been raised about whether these government programs can continue to function in the same manner, and achieve the same goals, as they do today. Will structural reform be necessary? Do we wish to provide the same, or a higher, level of support equally throughout the aging population? Should some, or all, benefits be “income tested”? What can be done today to offset the problems of the future?
In aggregate terms, fiscal debates have turned from what to do about growing federal budget surpluses to what constitutes the necessary size and composition of a stimulus package. Some economists have argued that, by creating a wider pool of funds available for investment, “fiscal responsibility” resulted in greater access to investment funds by private sector firms, which, in turn, stimulated economic growth. Others contend that the unprecedented growth of the 1990s happened in spite of budget surpluses, and that if the composition of private versus public funding had been more in balance, growth and employment would have expanded even further. These debates are related to those that surround the current demand shortfall and to calls for fiscal stimulus: if budget surpluses were the cause of economic growth, an argument can be made that fiscal stimulus should focus on investment-targeted tax cuts. If, however, surpluses were the result of economic growth, then demand-led fiscal policies, such as spending programs and tax cuts aimed broadly over the income distribution, should be the focus.
In responding to the above-listed issues, Levy Institute scholars have concentrated recent research on evaluating proposals that would alter the structure of Social Security to deal with future funding shortfalls, privatize any or all of the Social Security program, and restructure Medicaid financing to widen the availability of funding for long-term care. Other recent analyses deal with specific budgetary issues, such as tax-cut proposals and evaluation of the causes and effects of federal budget surpluses.
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Program Publications |
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Working Papers
| July 2008
The Return of Fiscal Policy The monetarist counterrevolution and the stagflation period of the 1970s were among the theoretical and practical developments that led to the rejection of fiscal policy as a useful tool for macroeconomic stabilization and full employment determination. Recent mainstream contributions, however, have begun to reassess fiscal policy and have called for its restitution in certain cases. [more] Working Paper No. 539 |
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Working Papers | August 2006 Population Forecasts, Fiscal Policy, and Risk This paper describes how stochastic population forecasts are used to inform and analyze policies related to government spending on the elderly, mainly in the context of the industrialized nations. The paper first presents methods for making probabilistic forecasts of demographic rates, mortality, fertility, and immigration, and shows how these are combined to make stochastic forecasts of population number and composition, using forecasts of the U. [more] Working Paper No. 471 |
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Working Papers | July 2006 Differing Prospects for Women and Men Although elderly men and women share many of the same problems as they age, their lives are likely to follow different courses. Women are more likely than men to live into old old-age and are more likely to spend part of their young old-age caring for husbands or parents. [more] Working Paper No. 464 |
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Working Papers | July 2006 Working for a Good Retirement The choice of retirement age is the most important portfolio choice most workers will make. Drawing on the Urban Institute's Dynamic Simulation of Income model (DYNASIM3), this report examines how delaying retirement for nondisabled workers would affect individual retiree benefits, the solvency of the Social Security trust fund, and general revenues. [more] Working Paper No. 463 |
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Working Papers | July 2006 Wage Growth and the Measurement of Social Security's Financial Condition Government spending on the elderly is projected to increase rapidly as the American population becomes older. As a result, many policymakers and budget analysts are concerned about the continued viability of entitlement programs such as Social Security. [more] Working Paper No. 461 |
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Working Papers | May 2006 Extending Minsky’s Classifications of Fragility to Government and the Open Economy Minsky’s classification of fragility according to hedge, speculative, and Ponzi positions is well-known. He wrote about fragile positions of individual firms and of the economy as a whole, with the economy transitioning naturally from a robust financial structure (dominated by hedge units) to a fragile structure (dominated by speculative units). [more] Working Paper No. 450 |
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Working Papers | May 2006 The Temporal Welfare State: A Cross-national Comparison Welfare states contribute to people’s well-being in many different ways. Bringing all these contributions under a common metric is tricky. [more] Working Paper No. 449 |
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Policy Notes | April 2006 Debt and Lending Many papers published by the Levy Institute during the last few years have emphasized that the American economy has relied too much on the growth of lending to the private sector, most particularly to the personal sector, to offset the negative effect on aggregate demand of the growing current account deficit. Moreover, this growth in lending cannot continue indefinitely. [more] Policy Note 2006/4 |
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Policy Notes | April 2006 Twin Deficits and Sustainability In the mid-to-late 1980s, the American economy simultaneously produced—for the first time in the postwar period—huge federal budget deficits as well as large current account deficits, together known as the “twin deficits”. This generated much debate and hand-wringing, most of which focused on supposed “crowding-out” effects. [more] Policy Note 2006/3 |
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Policy Notes | February 2006 The Fiscal Facts Today’s federal budget deficits are a preoccupation of many American citizens and more than a few political leaders. Is the American government going bankrupt? [more] Policy Note 2006/2 |
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Policy Notes | September 2005 Social Security's 70th Anniversary Social Security turned 70 on August 14, although no national celebration marked the occasion. Rather, our top policymakers in Washington continue to suggest that the system is “unsustainable. [more] Policy Note 2005/6 |
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Public Policy Briefs | August 2005 The Ownership Society As his new term begins, President George W. Bush has been trying to focus his domestic agenda on what he calls the “ownership society,” a sweeping vision of an America in which more citizens would hold significant assets and be free to make their own choices about providing for their health care and retirement, and educating their children. [more] Public Policy Brief No. 82, 2005 |
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Public Policy Brief Highlights | August 2005 The Ownership Society As his new term begins, President George W. Bush has been trying to focus his domestic agenda on what he calls the “ownership society,” a sweeping vision of an America in which more citizens would hold significant assets and be free to make their own choices about providing for their health care and retirement, and educating their children. [more] Public Policy Brief Highlights No. 82A, 2005 |
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Public Policy Briefs | June 2005 Breaking Out of the Deficit Trap For some time, Levy Institute scholars have been engaged with issues related to the current account, government, and private sector balances. We have argued that the existing imbalances in these accounts are unsustainable and will ultimately present a serious challenge to the performance of the American economy. [more] Public Policy Brief No. 81, 2005 |
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Public Policy Brief Highlights | June 2005 Breaking Out of the Deficit Trap For some time, Levy Institute scholars have been engaged with issues related to the current account, government, and private sector balances. We have argued that the existing imbalances in these accounts are unsustainable and will ultimately present a serious challenge to the performance of the American economy. [more] Public Policy Brief Highlights No. 81A, 2005 |
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Policy Notes | February 2005 Manufacturing a Crisis For seven decades, the far right has never veered from its avowed mission to gut America’s most comprehensive, successful, and popular safety net: Social Security. While it had won a few small battles (most notably, the Greenspan Commission’s huge 1983 payroll tax hikes and two-year increase in the normal retirement age), its efforts never gained much political traction before 2000. [more] Policy Note 2005/2 |
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Policy Notes | May 2004 Those “D” Words Recent economic commentary has been filled with “D” words: deficits, debt, deflation, depreciation. Deficits—budget and trade—are of the greatest concern and may be on an unsustainable course, as federal and national debt grow without limit. [more] Policy Note 2004/2 |
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Public Policy Brief Highlights | November 2003 Understanding Deflation Most recent discussions of deflation seem to overlook the main dangers posed by a deflationary economy and appear to offer superficial solutions. In this brief, the authors argue that, barring drastic changes in asset and output prices, deflation itself is not the main problem, but rather the recessionary conditions that sometimes give rise to deflation. [more] Public Policy Brief Highlights No. 74A, 2003 |
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Public Policy Briefs | November 2003 Understanding Deflation Most recent discussions of deflation seem to overlook the main dangers posed by a deflationary economy and appear to offer superficial solutions. In this brief, the authors argue that, barring drastic changes in asset and output prices, deflation itself is not the main problem, but rather the recessionary conditions that sometimes give rise to deflation. [more] Public Policy Brief No. 74, 2003 |
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Policy Notes | September 2003 Is International Growth the Way Out of U.S. Current Account Deficits? The current account deficit of the United States has been growing steadily as a share of GDP for more than a decade. It is now at an all-time high, over 5 percent of GDP. [more] Policy Note 2003/6 |
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Policy Notes | September 2003 Deflation Worries For the first time since the 1930s, many worry that the world's economy faces the prospect of deflation—accompanied by massive job losses—on a global scale. In a rather hopeful sign, policymakers from Euroland to Japan to America all seem to recognize the threat that falling prices pose to markets. [more] Policy Note 2003/5 |
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Working Papers | May 2003 The Case for Fiscal Policy This paper reconsiders the case for the use of fiscal policy based on a "functional finance" approach that advocates the use of fiscal policy to secure high levels of demand in the context of private aggregate demand, which would otherwise be too low. This "functional finance" view means that any budget deficit should be seen as a response to the perceived excess of private savings over investment at the desired level of economic activity. [more] Working Paper No. 382 |
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Working Papers | May 2003 Reinventing Fiscal Policy Recent developments in macroeconomic policy, in terms of both theory and practice, have elevated monetary policy while downgrading fiscal policy. Monetary policy has focused on the setting of interest rates as the key policy instrument, along with the adoption of inflation targets and the use of monetary policy to target inflation. [more] Working Paper No. 381 |
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Working Papers | May 2003 How Long Can the U.S. Consumers Carry the Economy on Their Shoulders? The consumer has been on a tightrope since the bursting of the "new economy" bubble, as losses in equity markets have been partly offset by gains in real estate and fiscal support and mortgage refinancing have partly offset increased consumer cautiousness. The consumer will remain on a tightrope in the near future, but if the economy were to stumble, the fragile consumer might contribute to turning the downturn into a deep and protracted recession. [more] Working Paper No. 380 |
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Working Papers | May 2003 The Conditions for Sustainable U.S. Recovery The anemic U.S. [more] Working Paper No. 378 |
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Policy Notes | January 2003 The Big Fix Keynesian economics is back. As John Maynard Keynes stressed, total spending matters—and not who does it or for what purpose. [more] Policy Note 2003/1 |
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Working Papers | October 2002 Threshold Effects in the U.S. Budget Deficit This paper contributes to the debate on whether the United States' large federal budget deficits are sustainable in the long run. The authors model the government deficit per capita as a threshold autoregressive process, finding evidence that the deficit is sustainable in the long run and that economic policymakers will intervene to reduce the per capita deficit only when it reaches a certain threshold. [more] Working Paper No. 358 |
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Working Papers | June 2002 CRA's 25th Anniversary This paper focuses on the past, present, and future rules and regulations implementing CRA as developed, applied, and enforced by the federal bank and thrift regulators. The past rules and regulations refer to those in effect during the law's first 18 years, through 1995, when CRA underwent its first major reform. [more] Working Paper No. 346 |
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Policy Notes | October 2001 Are We All Keynesians (Again)? It is now widely recognized that economists and policymakers alike had been living a 30-year fantasy. The best government is not that which governs least. [more] Policy Note 2001/10 |
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Policy Notes | June 2001 Killing Social Security Softly with Faux Kindness The President’s commission claims that the Social Security program is “unsustainable” and requires a complete “overhaul.” It also claims that the program is a bad deal for women and minorities. [more] Policy Note 2001/6 |
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Policy Notes | May 2001 The Backward Art of Tax Cutting This policy note examines the case for large tax cuts, focusing on the issues surrounding the purpose and overall size of the needed cut. Although Congress has passed a significant package of tax relief, many have worried that the budget surplus on which it was based will never appear. [more] Policy Note 2001/5 |
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Policy Notes | February 2001 Fiscal Policy for the Coming Recession Growing government surpluses, a ballooning trade deficit, and the resulting growth in private sector debt have placed the United States' economy in a precarious position. Papadimitriou and Wray agree with President Bush that fiscal stimulus is necessary to reinvigorate the economy; in the current economic environment, monetary policy will not work. [more] Policy Note 2001/2 |
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Policy Notes | January 2001 Fiscal Policy to the Rescue The United States' economic expansion of the past eight years has been fueled by a rise in private sector indebtedness. In 1997 the private sector spending exceeded income for the first time since 1952, and since then the gap between the two has risen markedly. [more] Policy Note 2001/1 |
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Working Papers | October 2000 Crowding In or Crowding Out? This paper investigates the effects of budget deficits within a classical-Harrodian framework in a closed economy. In this framework, growth and cycles are endogenous, underutilized capacity is a recurrent phenomenon, capacity utilization fluctuates around the normal level in the long run, and unemployment is persistent. [more] Working Paper No. 315 |
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Policy Notes | July 2000 Why Does the Fed Want Slower Growth? The Fed has raised interest rates six times in the past year to slow the economy, in the belief that unemployment is too low. There is scant evidence, however, that low unemployment leads to inflation, that the economy is in danger of overheating, or that higher interest rates will reduce inflation. [more] Policy Note 2000/7 |
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Policy Notes | June 2000 Drowning in Debt The economic expansion in the United States has been driven to an unusual extent by falling personal saving and rising borrowing by the private sector. If this process goes into reverse, as has happened under comparable circumstances in other countries, there will be severe recession unless there is a big relaxation in fiscal policy. [more] Policy Note 2000/6 |
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Public Policy Brief Highlights | February 2000 Financing Long-Term The nation is not prepared to deal with the jump in expenditures for long-term care that will come with the aging of the baby-boom generation. Only a small part of that care is paid for privately (out-of-pocket or through private insurance). [more] Public Policy Brief Highlights No. 59A, 2000 |
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Public Policy Briefs | February 2000 Financing Long-Term Care The nation is not prepared to deal with the jump in expenditures for long-term care that will come with the aging of the baby-boom generation. Only a small part of that care is paid for privately (out-of-pocket or through private insurance). [more] Public Policy Brief No. 59, 2000 |
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Public Policy Briefs | December 1999 A New Approach to Tax-Exempt Bonds The current system of tax-exempt bond financing is inefficient and inequitable because a large portion of the federal subsidy provided by the tax exemption does not reach state and local governments and accrues instead to the wealthiest investors. In addition, the current system excludes large institutional investors, both domestic and foreign, with their huge pools of capital, and it lacks the stable oversight characteristic of the taxable bond market. [more] Public Policy Brief No. 58, 1999 |
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Public Policy Brief Highlights | December 1999 A New Approach to Tax-Exempt Bonds The current system of tax-exempt bond financing is inefficient and inequitable because a large portion of the federal subsidy provided by the tax exemption does not reach state and local governments and accrues instead to the wealthiest investors. In addition, the current system excludes large institutional investors, both domestic and foreign, with their huge pools of capital, and it lacks the stable oversight characteristic of the taxable bond market. [more] Public Policy Brief Highlights No. 58A, 1999 |
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Policy Notes | October 1999 Social Security Privatization Would privatization yield sufficient benefits to support low-income retirees and satisfy all others? Does a focus on private management of assets [more] Policy Note 1999/10 |
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Working Papers | October 1999 Financing Long-Term Care The nation is ill-prepared to finance the quantum jump in long-term care spending that is on its way as the baby boom ages. By default rather than by design, Medicaid has become the main source of funds for long-term care. [more] Working Paper No. 283 |
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Policy Notes | August 1999 More Pain, No Gain Neither the Breaux plan nor President Clinton’s proposal for “saving” Social Security promises much gain, but the Breaux plan, unlike the president's proposal, would inflict real pain in the form of reduced benefits. [more] Policy Note 1999/8 Revision |
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Public Policy Brief Highlights | August 1999 Does Social Security Need Saving? Projections of an impending crisis in financing Social Security depend on unduly pessimistic assumptions about basic demographic and economic variables. Moreover, even if the assumptions are accepted, the projected gap between Social Security revenues and expenditures would not constitute a “crisis” and could be eliminated with relatively simple adjustments when it occurs. [more] Public Policy Brief Highlights No. 55A, 1999 |
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Public Policy Briefs | August 1999 Does Social Security Need Saving? Projections of an impending crisis in financing Social Security depend on unduly pessimistic assumptions about basic demographic and economic variables. Moreover, even if the assumptions are accepted, the projected gap between Social Security revenues and expenditures would not constitute a “crisis” and could be eliminated with relatively simple adjustments when it occurs. [more] Public Policy Brief No. 55, 1999 |
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Policy Notes | July 1999 Capital Income Taxes and Economic Performance Tax reform that reduces tax rates on capital income, no matter how successful it is in reducing the user cost of capital, will have at best minimal effects on capital formation and output and therefore on the growth of the United States' economy. [more] Policy Note 1999/7 |
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Policy Notes | May 1999 How Can We Provide for the Baby Boomers in Their Old Age? The search for the solution to the problems faced by the Social Security system should focus not on how to amend OASDI but on how best to achieve faster long-term economic growth. Achieving such growth is better left to the purview of fiscal and monetary policy, not the OASDI system. [more] Policy Note 1999/5 |