I.O.U. an Answer
A film about a problem we can solve: the federal deficit
January 12, 2009
Fred Foldvary, Ph.D.

I.O.USA, a film about the US debts and deficits, has been playing in theaters and on television. I saw it on CNN. The film’s website is click here. The producer, the Peter G. Peterson foundation, has a web site click here, where you can view 30 minutes of the film. The movie explains how the US government debt has escalated, and also discusses the trade deficit, and touched on the savings deficit and the “leadership deficit.”

With many visual effects and interviews, the show explained how the unfunded liabilities for Social Security, Medicare, and Medical are the biggest elements of federal debt, and these deficits — promises not backed by funding — threaten the viability of the US economy.

Despite the show featuring a prominent economist and past government officials, the film lacks answers to the deficit problems. The only specific remedies are on Social Security, in which the answers suggested were to raise the age for full benefits, reduce the rate of growth of payouts, and increase taxes.

The film does not discuss the alternative of replacing Social Security with private accounts that would hold US treasury bills. Such accounts would provide a greater retirement payout, and since the funds would belong to the individual, he would be able to borrow against it in an emergency. Today’s Social Security account is not your money until you actually receive it, and how much you receive depends on how much Congress wishes you to get.

There were no remedies provided for the biggest entitlement problems, Medicare and Medicaid. As the population ages, the Medicare costs of treating the elderly is escalating, and without changes, will dominate the federal budget. The film also had no answers to the trade deficit and the savings deficit. Maybe the new administration will at least end the leadership deficit.

One can ask, why no answers? Over and over again, the film talks about the problems, but provides no solutions other than for Social Security. The aim of raising awareness of the deficits is good, but the film fails when the viewers are left hanging there with no remedies.

It seems to me that possibly I.O.USA lacks answers because the producers don’t have them. Another reason for the lack of remedies is that they would be unpopular. To reduce the Medicare deficit, one needs to reduce the benefits, to change it to only insurance for catastrophic expenses. But that would be unpopular with those receiving Medicare benefits, and might result in criticism for the film. So they are silent on the remedies.

The film has been compared to the movie An Inconvenient Truth by Al Gore, about climate change. It is a good comparison, because An Inconvenient Truth also lacks meaningful remedies such as pollution charges. Perhaps there too, answers would reduce the popularity of the film.

Of course the general answer to a budget deficit is to reduce spending and raise revenue. But that is not a real answer. We need to analyze which programs would be reduced, and which would be the sources of new revenue. Without specifics, there is no real answer.

The effectiveness of remedies depends on how radical you want to get. The more effective the remedy, the further one needs to go away from the status quo. For example, one can reduce benefits in Medicare, but that leaves the elderly with insufficient medical care. The elderly do not have sufficient funds for care because of the high expenses and lack of savings. They lack savings because taxes have drained their wages of funds that could have been saved. If taxes for Medicare go up, then that leaves even less for savings, and can reduce the incentive to work.

These deficits come from deep flaws in the structure of taxation and government, ultimately from flaws in the constitutions of the federal and state governments. The incentive of government chiefs is to please the voters and the special interests that fund their election campaigns. People like benefits such as medical care, and they don’t like to pay taxes on their wages. So the inexorable incentive is for government to provide benefits and push the cost into the future. The special interests provide needed campaign funds in exchange for favors such as trillions of dollars to bail them out of their failed financial speculations.

The US Constitution endows Congress with the general power to tax and to borrow. That was a big mistake. Congress should have authorized Congress with the power to tax only land value and harms such as pollution. The Constitution should authorize Congress to borrow only for productive investments, not for consumption spending including military expenses.

With no taxes on wages, folks can then save much more, and they would have more incentive to save with no taxes on interest and dividends. Higher wages would enable folks to buy their own medical insurance and retirement insurance. Federal entitlements could then be scrapped. But such remedies are radical, and I.O.USA did not seek radical answers. Indeed, the film favors keeping Social Security. But status-quo thinking is what got us into the deficit mess.

So, unfortunately, this well-intended film will become part of the problem rather than the solution, because without answers, the film crowds out attention that could have been placed on the remedies. The deficits are deep problems, and only radical remedies can extirpate deep problems.

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Fred Foldvary, Ph.D.

FRED E. FOLDVARY, Ph.D., (May 11, 1946 — June 5, 2021) was an economist who wrote weekly editorials for Progress.org since 1997. Foldvary’s commentaries are well respected for their currency, sound logic, wit, and consistent devotion to human freedom. He received his B.A. in economics from the University of California at Berkeley, and his M.A. and Ph.D. in economics from George Mason University. He taught economics at Virginia Tech, John F. Kennedy University, Santa Clara University, and San Jose State University.

Foldvary is the author of The Soul of LibertyPublic Goods and Private Communities, and Dictionary of Free Market Economics. He edited and contributed to Beyond Neoclassical Economics and, with Dan Klein, The Half-Life of Policy Rationales. Foldvary’s areas of research included public finance, governance, ethical philosophy, and land economics.

Foldvary is notably known for going on record in the American Journal of Economics and Sociology in 1997 to predict the exact timing of the 2008 economic depression—eleven years before the event occurred. He was able to do so due to his extensive knowledge of the real-estate cycle.