San Diego Union-Tribune, January 21, 1998
Milwaukee Journal Sentinel, March 1, 1998
Now that the budget is finally balanced, there are calls for paying off the national debt and protecting future generations from sinking under the weight of retired baby boomers. The whole debate is immersed in a sea of gross exaggerations and misconceptions about entitlements, the national debt, and the so-called problem of intergenerational equity.
These need to be cleared up if we are ever to free ourselves from the threat of imaginary economic problems, and take on some of the real problems that actually make a difference in people's lives.
First, even under the assumption that the next 32 years will give us the slowest growth in American economic history, the Social Security system will meet all of its obligations until 2030. And this is on automatic pilot, without touching the system at all.
Projections farther out than this are little more than fortune-telling. But if we wanted to make the system balance for the whole 75 year period, which is the Social Security Trustees' planning horizon, it would not take much. For example, a payroll tax increase of about 1.3 percentage points for both employer and employee, phased in slowly from 2011-2034, would do it.
More equitable solutions would involve raising the ceiling on the payroll tax (currently only the first $65,400 of wage income is taxed). Or we could tax non-labor income, which has taken an increasing share of national income in recent years. But no matter what we do, the after-tax real wages of future generations will still be a lot higher, on average, than today's wages. This is simply the result of economic growth: we can reasonably expect an average wage in 2030 that is about 35% higher than today, in real (inflation-adjusted) terms.
Under these circumstances, it can hardly be considered intergenerational highway robbery if employees 35 years from now have to pay a little more in social security taxes to support parents and grandparents who never lived as well as they do.
In other words, even at slow rates of economic growth, our economy can easily provide enough to retire the baby-boom generation and still raise living standards for everyone else. The real difficulty has nothing to do with demographics, but is rather a problem of distribution: over the last decade, almost all of the gains from economic growth accrued to the top 5% of the income distribution. Now there's a problem that needs fixing.
Concerns about the national debt are similarly off the mark. The absolute size of the debt is irrelevant; what matters is how big it is (and even more importantly, how fast it is growing) relative to the economy. In 1946 our national debt stood at 111% of GDP. This debt did not "burden" the young baby boomers or their parents, who went on to experience the highest economic growth of our history over the next 27 years. We pushed the debt steadily downward to 26% of GDP by 1979-- not by running budget surpluses and paying it off, but through economic growth.The debt then took off again in the 80's, due to a combination of tax cuts (mainly to the well off), an unprecedented peacetime military build-up, and high interest rates. It hit 50% of GDP by 1993. It has since been declining slowly, and therefore should not be considered a problem.
The main lesson to be learned here is that the only sensible way of drawing down the debt, relative to our economy, is to let the economy grow. The expansionary monetary policy of the Federal Reserve-- that is, low interest rates-- during the period from the end of World War II up to the 1970s was what made the most difference. We could use some of that remedy today, and it would also lower the interest cost of the debt.
Any attempt to actually pay down the debt would be self-defeating and pointless-- why bother? The whole idea that people alive today can actually burden future generations by passing along a national debt is actually a logical error. When some future generation pays part of its taxes to finance interest on the debt, this revenue will go to the bondholders-- who are members of the same future generation.
Those who lose sleep worrying about the national debt, or the state of Social Security's financing really need to get a life. They got their balanced budget-- which of course will have no perceptible effect on the economy-- what more do they want? This country has a quarter of its children in poverty and 41 million people without health insurance. Even middle class families are struggling to put their kids through college. Maybe it's time we put these more pressing problems first on the agenda, and leave the phony crises for later.