Political bugs: six fixes to the US budget deficit

A couple of months ago, in the midst of the hype around the US government debt crisis, someone on a mailing list posed the following question: what are some of the "real" things that can be done to solve the problem?

The premise of the question is that the politicians were not proposing rational solutions but rather, were speaking tactically, with ulterior motives, in other words being craven, pandering, demagoguing, etc. Indeed, the US deficit is one of those things where there are a few clear "right things" that the majority of rational informed people would agree with, and yet, wrong things keep happening over and over again. Much like the "design bugs" I like to occasionally rant about, these are political bugs. I don't mean the fundamentally difficult issues where reasonable people can sincerely disagree: a carbon tax, medicare for all, a flat-tax, consumption tax, etc. etc. Those aren't bugs, rather they are unsolved problems, or new "features" to be designed. But for this post, I'm only taking about no-brainers, the bugs.

So coming to the US budget deficit specifically, here was my list of bugs (originally written on July 1, 2011):
  1. Eliminate mortgage interest deductions. Why should renters subsidize owners? No good reason.
  2. Eliminate corporate healthcare deduction i.e. count employer provided benefits as income. Why should employees of larger companies that provide health benefits be subsidized by people who get their health insurance in other ways? Why would society want to encourage linking health insurance to employment, as opposed to say children's education? No good reason. 
  3. Abolish payroll taxes and shift that all into income tax. Payroll taxes ostensibly pay for social security and medicare but really are just a regressive extra income tax, why not roll it into the overall progressive income tax? 
  4. Reduce social security by making it means tested. Why should anyone above the median income get any additional income from the government? If the purpose of a social safety net is to have the fortunate help the less fortunate, what's the point of helping the rich? 
  5. Reduce social security by raising the threshold age. The retirement ages were set a long time ago, when people aged earlier. Sixty five years old in 1930 was like being 75 or 80 today. If the population distribution shifts older, retirement age should rise. The ratio of retired people to working people has to be kept more or less constant otherwise a) it obviously won't work, and b) it will be clearly unfair. 
  6. Reduce military spending to a level where it can be called a "defense budget" as opposed to an "offense budget": 50% would still leave it twice as big as the next biggest military budget, and still greater than the next 5 countries combined
The combination of the above would easily eliminate the structural deficit. Not only that, none of these points fundamentally challenging any principles or stated societal goals, nor are they suggesting qualitative change These are straight quantitative adjustments that, in principle, libertarians, leftists, fiscal conservatives, and most mainstream economists would probably agree with. They should be no-brainers.

And yet, they can't happen. The reality is that regulatory capture makes these things almost impossible. So the debate goes on and on about tiny meaningless slices of spending that are easy to demonize, but have no impact on the real problem. Maybe something will bump the political economic system out of this miserable Pareto optimum. Unfortunately it looks like for now, the main lesson of the last three years of economic crises remains that the first casualty is causality.


  1. Great post Nemo. I agree that all of these are economically optimal, and if I were designing a modern state by fiat I would implement most or all of them.

    - Eliminate mortgage interest deductions.
    - Eliminate corporate healthcare deduction.

    In principle, I agree with both of these ideas. You're right that these deductions introduce market distortions; they are also regressive, especially the mortgage interest deduction. However, I feel that an instant end to either would cause some extremely unpleasant short-term disruptions to the housing market and health care markets, and I'd be careful categorizing these as bugfixes. If I had made an investment in a house based on current tax law, I'd be pretty upset if that law suddenly changed. That goes double for health care; I really really don't want to shop for insurance as an individual. The incidence of these deductions means that they have a large base of support among middle-class and wealthy Americans, making their repeal a giant political undertaking.

    The best path forward I see is to cap each of these deductions. This will undercut the regressive nature of the deductions, and allow for a natural phase-in mechanism, as inflation pushes the real value of the cap lower. Note that Obama has proposed this for mortgage interest, and a similar scheme is currently law as part of the Affordable Care Act.

    - Abolish payroll taxes and shift that all into income tax.
    - Reduce social security by making it means tested.

    From a social justice angle angle, I agree that these are good changes. I'm not sure that I would actually implement them though; one of the most important components of these programs is that they're baked into the American social contract at this point, which may explain their remarkable resiliency. I feel that program's political sustainability is as important as its fiscal stability, and I think that having Social Security apply broadly to all Americans is a good way to ensure it has the support of the vast majority of Americans.

    - Reduce social security by raising the threshold age.

    Disagree on this point. Studies have shown that longevity is correlated with income, and as such this would be a deeply regressive cut.

    - Reduce military spending.

    Totally agree on this point, though I think that free riding by American allies is an important reason for the "as much as N other countries combined" stats. As such, hopefully cuts would ensure a more multilateral foreign policy where a number of other countries that generally support American foreign policy share more of the costs.

  2. Hi Harvey, thanks for the comment!

    Re: mortgage and healthcare deductions. I agree it would be disruptive if they were ended overnight... But as you point out that is not really a problem, you could easily phase them in over time. The real problem as you say is that they favor the middle class and wealthy at the expense of the poor so good luck finding the political will for such changes.

    Re: social security and being baked into the social construct... The problem is that it is baked in in a deceitful way. It is sold as a if it is a personal saving system but in reality it is a pay as you go system. Being honest about it's true nature would make it easier to make the rational reforms to make it sustainable.

    Re: military spending and "free riding" nations... Yes to some extent, but when you say "countries that support american foreign policy", I think you really mean a narrow slice of people in those countries. The US role as a global military empire doesn't really benefit most of the US population let alone that of the allies.