March 26, 2011
This is what readers of his column presenting a hypothetical presidential address to the country in 2026 must be wondering. In this speech, Mr. Mankiw’s president explains to the country how the rising cost of Social Security, Medicare and Medicaid let to unsustainable deficits. Of course Mr. Mankiw’s president knows that the real story is the explosive growth of the costs of Medicare and Medicaid. These were in turn driven by the soaring cost of private sector health care. If per person costs in the United States were the same as in other wealthy countries then the United States would be looking at a budget surplus, not a deficit.
Given the basic facts, it is hard to understand why Mankiw’s president did not propose a system that allowed the United States to take advantage of trade in medical services by letting Medicare beneficiaries buy into the more efficient health care systems in other countries. The tens of thousands of dollars in annual saving could be split between the beneficiaries, the host government and the U.S. government. The total savings to the U.S. government would reach hundreds of billions of dollars each year.
If Mankiw’s president were not such a protectionist then surely she would have pushed for such a policy long before this speech. Opening to trade certainly seems preferable to cutting off health insurance to middle income beneficiaries, as Mankiw’s president proposed.
Mankiw’s president is also playing politics when she says:
“We have to cut Social Security immediately, especially for higher-income beneficiaries.”
She knows that a very small share of Social Security benefits goes to higher income beneficiaries. If she intends to have any substantial savings in the Social Security program then she will have to cut benefits for people who are very much middle class.
It is also worth noting the benefits paid out by Social Security at that point will be fully covered by the annual flow of Social Security tax revenue and the bonds held by the trust fund. The program is not projected to first face a shortfall for another 11 years after the date of this presidential address.
In effect, Mr. Mankiw’s president will be taking benefits from retirees that they have already paid for. Congress may insist that before going this route that the president consider the option of a partial default on the debt. It might make more sense to stiff foreign and domestic investors than our retired workers. Some countries, most notably Argentina, have quickly recovered from defaults and sustained rapid growth. Unless Congress is still controlled by the financial industry, it may demand that the president explore this option.
It is also reasonable to ask why the Federal Reserve Board did not hold on to debt purchased during its quantitative easing policy and raise reserve requirements in subsequent years, as an alternative to reselling its bonds, in order to keep inflation under control. If it held $3 trillion in debt, this would save $150 billion a year (@ 0.7 percent of GDP) in annual interest payments.
In short, Mankiw needs to tell us more about the peculiar situation that his president faces. A lot of facts just don’t add up.
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