Yes, on this great day when we hear the unemployment rate is 8.3 percent, NYT columnist Bill Keller is still pressing on the need to curb Social Security and Medicare spending and calling on his fellow baby boomers to rise to the occasion. He has even brought in Jim Kessler, the senior vice-president for policy at Third Way, to help him make the case.
I'm sure that Keller and Kessler would consider my mention of the 8.3 percent unemployment rate to be rude, after all what does that have to do with the need to cut Social Security and Medicare? There is a simple answer to that. The 8.3 percent unemployment rate should be seen as comparable to a school fire where the children are still inside the building. Tens of millions of people are seeing their lives ruined.
This is not a short-term story. Many of the families that will break up under the stress of high unemployment or the loss of their home will not get back together when the unemployment rate falls back to a more normal level. Similarly, the kids who have their school lives disrupted because their parents lose their homes or must move in search of jobs and/or family break up will not have the damage repaired later. This is why 8.3 percent unemployment should be problems #1, #2, and #3.
And yes, we do know how to fix this. Spending money puts people to work. Contrary to a bizarre cult in policy circles, it does not matter whether money comes from the private sector or public sector --dollars will get people to work. And the people who get those dollars will spend them and put other people to work. If Keller and Kessler want to be responsible baby boomers they will do everything in their power to try to get us back to full employment quickly so that so many children do not have to grow up in families that are troubled by unemployment. The next generation will thank them for their efforts, I assure them.
Kessler's comparison of the U.S. to Spain, which he confesses to regretting using but uses anyhow, is inappropriate for reasons that he should understand. The United States has its own currency, Spain does not. This means that it can never face the sort of fiscal crisis that Spain does. If we got to a situation where financial markets were literally not willing to buy U.S. debt (we're pretty far from that now with 10-year bonds selling at a 1.6 percent interest rate), the Federal Reserve Board could always buy government debt.
Of course that could create a problem with inflation, but that is a world so far removed from anything we see on the horizon that it is difficult to believe that anyone would seriously bring it up. To take a comparison that is more appropriate than Spain, Japan has a debt to GDP ratio that is more than three times that of the United States. The long-term interest rate on its government debt is less than 1.0 percent. And, it continues to struggle to prevent deflation. There may be a world where Kessler's debt concerns are real, but we are incredibly far removed from that world at this point.
Let's return to the concrete story about Social Security and Medicare posing a burden on future generations. In the case of Social Security, Kessler is unhappy with Jamie Galbraith because he looks at the projected increase in spending as a share of GDP from 4.5 percent in 2009 to 6.5 percent over the next 75 years and pronounces it no big deal. Kessler's response is that this is an increase of 45 percent in the share of the economy devoted to Social Security.
This is indeed perverse. After all, we used to not spend any money at all on Social Security. That meant that the initial expenditures were an infinite increase in the share of the economy devoted to Social Security measured as percent of prior spending. (Perhaps it would make Kessler feel better to know that our spending is already up to 4.9 percent of GDP in 2012, which means that the increase to 6.5 percent would just be a 33 percent increase in the share of the economy going to Social Security.)
But seriously, our job as policy wonks is to give the public a clear idea of the policy choices in front of them. Suppose we were to say that the projected increase in the cost of Social Security would be paid entirely by an increase in the payroll tax. (That's not my preferred route, but let's just use this to give orders of magnitude.) Working off the Congressional Budget Office's projection of a shortfall of 1.6 percent of payroll, if we phased in a tax increase of 2 percentage points of payroll over the next three decades, that would come to a bit more than 5 percent of the projected 38.8 percent increase in real wages over this period.
Should I, or any other baby boomers, feel guilty if over the next three decades, our children or grandchildren end up only seeing a 36.8 percent increase in after-tax real wages rather than a 38.8 percent increase in order to support their own longer retirements? There are things in my life that I do feel guilty about, but this would never be one of them.
At this point many folks will no doubt be yelling that ordinary workers haven't been seeing any real wage gains. These folks are on my side here. The problem is that we have rigged the economy to benefit the one percent -- a bloated and corrupt financial sector that operates with implicit too big to fail insurance from the government, laws that are structured to deny workers the right to organize unions, trade policies that are designed to depress the wages of ordinary workers -- there is a long list that readers of my blog and CEPR's website know well.
This rigging will have hugely more impact on the well-being of our children and grandchildren than any plausible increase in the Social Security tax. Baby boomers who care about future generations would find it a far better use of their time to fight the institutional structures that have redistributed so much income upward than to try to cut our children and grandchildren's Social Security benefits (Keller and Kessler's agenda).
Keller and Kessler can much more legitimately point to the projections of exploding Medicare and Medicaid costs as posing an unbearable burden on government finances. This is true, but it hides the fact that the underlying cause is a projected explosion of private sector health care costs. Under the standard projections, health care costs will take up more than 20 percent of GDP in 2022.
In today's economy, this would imply health care spending of almost $40,000 a year for an average family of four. That is obviously an unbearable burden. And, the projections show the cost continuing to rise further relative to income in subsequent decades.
Again, the policy wonk's job is to define the problem for the public, not to conceal it. The problem is not Medicare and Medicaid. The problem is that we have a broken health care system. Even if we zeroed out the public sector health care programs altogether our children and grandchildren would still face an unbearable burden from the standard projections of health care costs.
The real answer is of course to fix our health care system. If our per person health care costs were in line with those of any other country we would be looking at long-term budget surpluses, not deficits. Of course we know that fixing health care is not easy, but I thought these budget cutters were supposed to be the tough guys.
It seems that they can only get tough when it comes to taking away Social Security and Medicare benefits from ordinary workers. They get weak knees as soon as we start talking about going after the insurance industry, drug companies, medical supply companies, and overpaid medical specialists.
There are many things that can be done to reduce health care costs that many progressives have talked about at length. A simple path that everyone should like is expanding the opportunity for trade in medical services.
We can also talk about getting rid of government patent monopolies for prescription drugs and looking for more efficient mechanisms for financing research. The savings in drug spending would soon exceed 2.0 percent of GDP, more than the projected increase in Social Security spending that has Kessler so worried. In addition, we would likely get much better health care since the huge mark-ups created by these monopolies provide enormous incentives for abuses by drug companies. Stories of these abuses appear almost daily in the newspapers.
In short, if baby boomers owe any apologies to our children and grandchildren it is for allowing people like Robert Rubin, Alan Greenspan, Ben Benanke, and George W. Bush to run the economy off a cliff. This was an entirely preventable disaster. They are and we are paying an enormous price for allowing incompetents to manage the economy. We owe them no apologies whatsoever for a Social Security system that pays retired workers an average monthly benefit of $1,200 or a Medicare program that provides them with health care coverage in their old age. In fact, we will do our children and grandchildren a huge favor if we can prevent the Kellers and Kesslers of the world from taking these programs away from them.