Here are this week’s reading links and fiscal facts:
Forty percent of major IRA manufacturing projects are delayed. New research by the Financial Times found that “some 40 per cent of the biggest US manufacturing investments announced in the first year of Joe Biden’s flagship industrial and climate policies have been delayed or paused.” That covers roughly $84 billion in subsidies tied up in delayed or paused projects (see the graphic below). As Cato’s Scott Lincicome argues, “Perhaps a broad, nationwide “boom” will materialize in the future. But it’s just as likely—if not more so—that we are again seeing what critics of targeted tax credits, subsidies, and tariffs have long cautioned regarding these types of policies (i.e., that they do not expand the overall economic pie in the United States or generate sustainable, long-term growth, but instead simply redistribute existing resources like money, materials, manpower, etc., to favored companies at a net loss to the overall U.S. economy).”
The welfare state takes too much from the young. As Chris Pope explains, “The welfare state is supposed to redistribute funds from times of plenty to times of need, as well as from rich to poor.” Accordingly, seniors receive the most generous government benefits with taxes concentrated on working-age households. The issue is that “working-age Americans, despite typically earning more income than seniors, also bear substantial child-rearing costs, have rarely paid off their mortgages, and must spend more to live near good jobs and schools. As a result, this group now has lower material standards of living than retirees […] This also means that families have less money to invest in their children.” As I’ve pointed out, “The bottom line is that promises to keep Social Security benefits exactly as currently legislated are unaffordable, no matter how Congress chooses to close the funding gap. […] The real question is how will this generation balance the promise to keep seniors out of poverty in old age with keeping the American dream alive for younger generations.”
Repealing taxes on Social Security benefits would worsen Social Security and Medicare shortfalls. Charles Blahous, a former public trustee for Social Security and Medicare, explains the historical reason why the share of taxable Social Security benefits is capped at 85 percent: “The Social Security Office of the Actuary in 1990 estimated that only about 7% of benefits had previously been taxed as worker contributions. The exact amount varied with income, sex and marital status, with 15% being the highest percentage, for upper-income single males. Based on these calculations, in 1993, Congress passed legislation subjecting 85% of Social Security benefits to income tax for those above certain income thresholds to ensure no group was doubly taxed.” Blahous highlights that eliminating these taxes, which finance both Social Security and Medicare Hospital Insurance, “would worsen shortfalls for Social Security and Medicare Hospital Insurance by 25% and 170%, respectively. It would make the latter insolvent by 2030, six years earlier than expected.” For more on why taxes on Social Security benefits shouldn’t be removed, see my recent post on X.
Slow the growth of future Social Security benefits. December 20, 1977, is the date a Social Security funding crisis became inevitable. As Andrew Biggs, John Cogan and Daniel Heil explain, on that date, Congress chose to ignore the unanimous recommendations of a bipartisan panel recommending to index future Social Security benefit growth to inflation rather than wages, dooming Social Security to a future filled with deficits. Today, Social Security faces massive shortfalls, and the trust fund (which is really just an accounting tool) is projected to be depleted by 2033. It’s not too late to make critically important reforms to the current benefit formula. As I’ve argued, tying initial benefit growth to inflation rather than wage growth would preserve current benefits and protect beneficiaries from inflation while also reducing excess benefit cost growth and putting the program on a sustainable path.
Physician services are driving Medicare spending, not drug prices. Elise Amez-Droz writes, “Reining in drug prices has long been the focus of Medicare debate and legislation on Capitol Hill. But drug prices are actually a small and decreasing portion of Medicare spending. A much more pressing cost driver is the size and rapid growth of Medicare spending on physician services, i.e., Medicare Part B. A picture is worth a thousand words.” High Medicare spending is projected to balloon the debt to unseen levels over the next few decades. Cato’s Michael Cannon argues that Congress should apply public-option principles to Medicare. Providing benefits through cash checks, for example, would let enrollees make purchasing decisions rather than government bureaucrats, encouraging more cost-conscious decisions.
Michael S. Johnson and I discuss congressional committee structures and failures and the apparent unwillingness or inability of the media to explore complicated public policy questions in our book, Fixing Congress. Readers wanting to expand their knowledge about budgetary challenges would do well to follow The Debt Dispatch.