Sorry, I misread the piece, it was "schools vs. nursing homes." In a 35-year period in which we have seen the most massive upward redistribution of income in the history of the world, Robert Samuelson tells us that the only way that we can pay for our kids' education is by breaking contractual obligations to public sector workers and cutting Social Security and Medicare. Yeah, where else could we possibly find money?

The starting point here is the bankruptcy of Detroit, which Samuelson tells us is an omen of things to come. In the case of Detroit, Samuelson wants the government to renege on its pension obligations to workers. This is striking because pension payments are a contractual obligation; they are part of workers' wages. Samuelson tells readers that the government has little choice in this situation, it is either cutting schools or breaking contracts with workers.

There are in fact many other contracts that the government could break if it is going to follow this path. It could not pay contractors for work they done for the government, it could retake patent or copyrights it had granted (imagine the benefits from taking back some of the patents issued to Apple), it could even retake land which might have been sold off for a small fraction of its current value.

Economists generally consider it bad policy to break contractual obligations, not just as a moral issue, but because it undermines incentives. If people cannot count on contracts being respected, then they will not value them in the same way and a contractual commitment will not provide as much motivation as in a society in which contracts are honored.

Samuelson doesn't seem to take this effect into account. He apparently assumes that breaking contracts with workers has little consequence, both in the sense that it will still be possible to find workers even if they cannot count on receiving the pay for which they contracted, and also that breaking contracts with workers will not have any spillover effect in making it more likely that other contracts will also be broken.

The other parts of Samuelson's piece are even more bizarre. Rather than seeing a future in which budgets look increasingly constrained, the recent slowing of health care costs suggests the opposite. In fact, the sharp slowdown in projected health care cost growth has reduced CBO projections of Medicare and Medicaid spending in 2023 from 7.7 percent of GDP (Table 1) to just 5.7 percent of GDP in the most recent Budget and Economic Outlook. This reduction in spending would be roughly $320 billion a year in the current economy or nearly $4 trillion over the 10-year budget window.

Of course there are many ways that the government could raise revenue without cutting Social Security and Medicare benefits. For example, a financial speculation tax on trades of stock, derivatives and other assets could raise close to $2 trillion over the next decade with most of the burden born by Goldman Sachs, Citigroup and other financial firms. There are enormous potential savings to the government and the economy as a whole from opening up the health care industry to free trade. The revised GDP data show that after-tax corporate profits in the last three years have been far higher than at any point in the post-war era, suggesting that the government could also raise revenue with a well-designed corporate tax reform. In fact, recent polling data from the National Academy of Social Insurance indicated that most people would be willing to pay higher payroll taxes rather than seeing Social Security cut. 

In short, the trade-off between meeting obligations to seniors and ensuring that our children receive a decent education is entirely an invention of Robert Samuelson. There is no economic reason that both cannot be easily met. The only problem is the political opposition of special interests, like Wall Street banks, health insurance companies and highly paid medical specialists, and high level corporate executives who rip off both their companies and taxpayers.

Samuelson's trade-off story is especially ironic since it comes at a time when the Congressional Budget Office estimates that the economy's output is roughly 6 percent (@ $1 trillion a year) below its potential. This means that if the demand were there (i.e. we spent the money necessary to support both our seniors and our children) then output and employment will increase. While CBO projects that this demand gap will gradually be eliminated over the course of the decade, at the moment our problem is too little spending, not too much.

The squeeze that cities like Detroit now face is entirely the result of political decisions to deny them resources. It is also the result of really bad economic policy over the last  decades in which we allowed an over-valued dollar to create large trade deficits and then filled the gap in demand, first with a stock bubble in the 1990s and then with a housing bubble in the last decade. The moral of that story is that we probably need economic policy that is designed by people who may not be as smart as Larry Summers, but who have a better understanding of the economy.

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