Matt Miller - The Archives
What Is The Democrats' Secret Number?
Fortune, February 23, 2005
Dissecting the tacit assumptions in the Democratic mind

Democrats smell blood in the water on Social Security. Between President Bush's call for gazillions in scary "transition" debt, fine print showing gains from private accounts would be "clawed back" by the feds when folks retire, and Bush's admission that these accounts won't do a thing to make the system solvent, it's no wonder congressional Republicans are panicky. With Democrats dreaming of political payback, it's surely churlish for a liberal to utter a discouraging word. But there's no avoiding the matter of the Democrats' secret number.

What am I talking about? Democrats know they can't simply be against Bush's Social Security plan, because even if the system isn't "in crisis," it faces problems that a serious political party has to tackle. The stock Democratic answer is that Social Security can be fixed with a few benefit trims here and a hike in the payroll tax there. Repealing Bush's tax cuts, which are bigger than Social Security's fiscal hole, also does the trick.

Sounds so reasonable, only a privatizing taxophobic nutcake could object. Except for one thing. These Democratic intellectuals frame the debate as if Social Security were a self-contained program needing a fix, and as if this program were all there is that needs fixing. But there are many more challenges making compelling claims on aggregate levels of federal taxation.

Medicare and Medicaid are much bigger problems—they're scheduled to double from 4.5% of GDP today to 9% by 2030. Then there's the plethora of other Democratic priorities, from covering the uninsured, to wage and child-care subsidies for the working poor, to R&D and infrastructure backlogs. As much as I would cheer a repeal of Bush's tax cuts, you can repeal them only once. They can't pay for (1) a Social Security fix, (2) Medicare and Medicaid fixes, (3) unmet nonelderly needs, plus (4) [fill in your own bonus progressive goals].

The challenge for Democrats, and for anyone else seeking a coherent view of political economy in the era ahead, is this: How do we propose to make the health and pension programs for seniors sustainable while also paying for needed nonelderly initiatives? And how do we do all that while keeping overall taxes as a share of GDP at levels that don't hurt economic growth (without pushing taxes beyond levels Americans are likely to support)?

"I don't think that conversation has yet taken place in the heads of most Democratic economists," says Robert Litan, a former Clinton aide who heads up policy research at the Kauffman Foundation. Many who urge tax hikes to fix Social Security assume we can also raise taxes later to achieve those other goals. But they've never laid out a macro budget that adds this all up. Still, there has to be number locked inside their heads that captures how high taxes as a share of GDP should go to cover the full progressive monty. Think of it as the Democrats' secret number.

So what is it? Triangulating from chats with economists, plus a glimpse of a coming book edited by Isabel Sawhill and Alice Rivlin of Brookings that will (finally) frame these issues explicitly, I'd say the number is somewhere around 28% of GDP.

Well! Federal taxes today are at 16.3 % of GDP, historical lows not seen since the 1950s. At the end of Clinton's tenure, taxes reached nearly 21% of GDP, a historical high. As the boomers retire, everyone knows taxes are going up. Newt Gingrich recently told me so himself. But 28% of GDP? Yikes.

Why does this matter? If Democrats are forced to consider their secret number explicitly, they may discover we shouldn't, or can't, go that high. In that case Democrats may begin to frame the Social Security debate as part of a broader generational budget challenge. Seen through this prism, Democrats might then be open to spending-side changes in Social Security that they rule out today because they're thinking too narrowly-betting unconsciously on their secret number.

In the near term, none of this means Democrats shouldn't bash Bush. And most Republicans have their heads embedded even more deeply in the sand when it comes to long-term fiscal reality. Still, the shocking thing in Washington is that not even the brainiacs pose the macro budget question this way—when it's the only way to think seriously about how to make progressive ideals and economic growth add up.