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Saturday, February 02, 2008

Mankiw's Birthday Wish

The birthday boy points out that we have a problem with an aging population and rising health care costs. Shall we hope, at his age, that he doesn't have the wind left to blow out fifty candles and get his wish?:

My Birthday Wish: Not Burdening Our Children, by N. Gregory Mankiw, Economic View, New York Times: It's official. As of today, at 6 a.m., I am a half-century old. ... As I reach this particular milestone, it is hard not be worried about the economy. No, I am not talking about the subprime meltdown and the possible recession that looms on the horizon. I am confident that the team at the Federal Reserve can contain that problem.

Moreover, from the broad vantage point of history, the next recession, whenever it occurs, will likely be a minor blip. ... What worry me are the problems that we will bequeath to our children.

Long before I was born, Franklin D. Roosevelt established a compact among the generations. Families had long cared for their elderly members, but Roosevelt federalized that responsibility in the form of the Social Security system. Social Security is sometimes viewed as a pension plan, but it is mostly pay-as-you-go. The working-age population taxes itself to support its parents, in the hope and expectation that its children will do the same. On the day of my birth in 1958, the payroll tax to pay for this program, including both the employer and employee shares, was 4.5 percent.

Around the time I started grade school, Lyndon B. Johnson expanded the generational compact to include health care for the elderly. The Medicare system increased the payroll tax... By 1968 ... the payroll tax for both programs had risen to 8.8 percent.

Today, the payroll tax for these programs is 15.3 percent, far higher than the programs’ creators ever imagined. More worrisome is that this 15.3 percent is nowhere near enough to maintain solvency in the future. When my generation of baby boomers retires in large numbers and starts claiming benefits, spending on these programs will far outstrip revenue at the current tax rate.

Two problems are working in concert. The first is demographic. Because people are having fewer children and living longer than past generations, the number of working-age people supporting each elderly person has fallen and will continue to fall. ...

The second problem is that the cost of health care has risen significantly and is expected to continue rising.

From one perspective, these problems are really blessings. Life expectancy ... has risen by about eight years over my lifetime... Part of this improvement is attributable to technological advances in medicine, which sadly do not come cheap. But they are worth it nonetheless. ...

The big question for the green-eyeshade crowd is how to pay for these blessings. It is an issue that no presidential candidate has taken up in earnest.

Republican candidates are fond of saying we should cut tax rates because doing so would incentivize more rapid economic growth (true) and raise tax revenue (wishful thinking). But unless we figure out a politically acceptable way to reduce the benefits now promised to future retirees, taxes are going up in the coming decades. ...

Democratic candidates like to talk about expanding the social safety net with universal health insurance. But they blithely ignore the fact that the safety net we already have was bought on credit and that the bill is almost due. The Democrats claim fiscal responsibility by advocating taxes on the rich, but the numbers don’t back up the rhetoric. ...

Inside the Beltway, meanwhile, in a rare outbreak of election-year bipartisanship, checks are being prepared to send to voters nationwide. If all goes as planned, a few months before the November elections, a typical family of four will get a windfall of $1,800. Whether the economy needs a short-run fiscal stimulus is debatable. But there’s no doubt the stimulus will add to the national debt we are passing on to future generations of taxpayers.

My birthday wish is for all of us to stop asking what the government can do for us today. Instead, we should focus on what we can do together to prepare the economy for our children and grandchildren. That means getting ready to care more for ourselves in old age, perhaps by retiring later, perhaps by saving more. I hope that when I celebrate my 100th birthday in 2058, my descendants won’t look upon Grandpa and his generation as the biggest economic problem of their time.

I wish Greg would have actually said that Social Security is not the problem instead of leaving it implicit. That will surely leave some people confused on this point.

On the rebate, whatever is done to stabilize the economy now is, to use Greg's term, a "minor blip" on the long-run horizon. Fear about rising health care costs in the future is not a reason to oppose fiscal stimulus today. The problems that people have when unemployment hits their families, people who show up to work every day, work hard and make it possible for us all to have the things we have, are difficult. It's hard to even imagine what it feels like on that day when you have to go home and tell your family that you lost your job and things are going to be tough for awhile, to tell your kids that promises - both explicit and implicit - cannot be kept. These aren't people who are looking for a handout or a way to avoid working, they have been hit by an unfortunate circumstance beyond their control and suddenly those dreams such as sending their kids to a decent college are evaporating - they'll be lucky to pay the bills at all or be able to keep the house, in any case savings will be depleted. If we are worried about future generations, keeping tragedies from hitting families with children - and losing a long held job unexpectedly is a tragedy - is every bit as important as making sure the tax rate our children face is a few percentage points lower.

(I should also note that stabilization policy today, minor blip or not, will not necessarily raise the level of federal debt in the longer run - there is nothing in the economics that says this has to be true - it's a matter of having the political will to actually implement Keynesian style stabilization policy and balance the budgetary changes used to smooth the economy over the business cycle. Update: I should have also noted the extent to which expanding health care coverage is an investment in children, and an investment in the future more generally.)

    Posted by on Saturday, February 2, 2008 at 03:05 PM in Budget Deficit, Economics, Health Care, Social Insurance | Permalink  TrackBack (2)  Comments (62)

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    » On Greg Mankiw’s Birthday – Does He Trust His Kids More than Himself? from EconoSpeak

    ...I could go all Dean Baker on this criticizing Greg for mixing up three things: the projected increase in Federal health care spending, the massive general fund deficit (which Greg fails to even note), and the Social Security system which is not that... [Read More]

    Tracked on Saturday, February 02, 2008 at 05:34 PM

    » Do We have a Budget Problem? from Free Exchange

    AS MENTIONED in the morning memo, there's a new federal budget proposal out with a whopper of a deficit figure--$410 billion for 2008. To celebrate the occasion, (and his own birthday, best wishes to you, sir) Greg Mankiw writes in the New York Times t... [Read More]

    Tracked on Monday, February 04, 2008 at 01:24 PM


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