October 19, 2015
I know this is getting old, but let’s go over the latest version. Robert Samuelson is unhappy about the presidential candidates’ “flight from reality,” which to him means they don’t want to cut Social Security and Medicare, restrict immigration of less-educated workers (he means Democrats here), and promote more rapid economic growth. I will focus on the Social Security and Medicare story.
Samuelson tells us:
“Inevitably, the costs of Social Security, Medicare (federal health insurance for the elderly) and nursing home care under Medicaid (a federal-state insurance program for the poor) will grow dramatically. From 1965 to 2014, spending on Social Security and the major federal health care programs averaged 6.5 percent of the economy (gross domestic product). By 2040, the CBO projects this spending to exceed 14 percent of GDP.
“If we do not trim Social Security and Medicare spending — by slowly raising eligibility ages, cutting benefits and increasing premiums for wealthier recipients — we face savage cuts in other government programs, much higher taxes, bigger deficits or all three.”
There are several points worth mentioning here. First, giving us the average spending from 1965–2014 on these programs as a baseline is the columnist’s version of three-card monte. Spending in 1970 is not relevant to the increase going forward. What matters is what we are spending in 2015. The answer to that question is 10.1 percent of GDP. This means that the 14.2 percent of GDP projected for 2040 is an increase of 4.1 percentage points of GDP, a bit more than half of the increase implied by Samuelson.
It is also worth mentioning that the increase in spending on these programs in the years since 1965 was much larger than what we expect to see going forward. So what’s the problem?
The second point is that we actually have been doing something about this problem. Due to a sharp slowdown in health care cost growth, the Congressional Budget Office (CBO) has lowered its projection for spending on Medicare and Medicaid in 2040 by more than two percentage points of GDP. If we pull out the increase to Medicaid costs due to its expansion under the Affordable Care Act, the level of spending currently projected for 2040 is almost 30 percent less than what had been projected by CBO in 2007. Samuelson might be ignoring the costs of these programs, but other people are not.
The second point is that it is not correct, as Samuelson implies, to say that Social Security spending will rise as share of GDP under current law. The program is actually prohibited from spending more money than is in the trust fund. This means that unless Congress votes to increase the revenue available to the program, benefits will fall by roughly 20 percent from projected levels in the years after the trust fund is projected to be depleted in 2034. This means that there will be no rise in Social Security spending as a share of GDP barring some additional revenue.
It is also worth noting that the necessary revenue to maintain full funding for the program will not be a terribly big deal in a healthy economy. The Trustees project that real wages will rise by more than 50 percent over the next three decades. If the payroll tax were raised enough to pay full benefits for the rest of the century, it would require taking back less than 10 percent of this increase in real wages.
If we actually see the rise in real wages projected by the trustees, this should not be a very big lift. In 2013, the Social Security tax was raised by two full percentage points in a single year. Even with a weak labor market, less than 10 percent of the public even noticed this tax increase. If we are able to see the healthy wage growth projected by the trustees, surely we can absorb a somewhat larger tax increase phased in over 2–3 decades.
Switching to Samuelson’s last topic, he complains:
“Third, U.S. economic growth has slowed sharply. Since World War II, annual growth has averaged 3 percent to 4 percent. Now it’s about 2 percent. Some of the slowdown reflects the exit of retiring baby boomers from the labor force, but the rest is a mystery. Lagging technological progress? A Great Recession hangover?”
First, it is per capita income growth that matters for living standards, not total growth. With population growth projected to be about a percentage point lower than in the past, most of Samuelson’s problem disappears. However, we have seen weak productivity growth in recent years. There is one very obvious explanation for this slowdown. We have had slow growth in demand in large part because deficit hawks, like Samuelson, have been yelling that we have to cut the budget deficit. With no other source of demand to replace the demand lost from the collapse of the housing bubble, we end up with slow demand growth.
In this context, we end up with people taking low paying low productivity jobs in sectors like retail and restaurants because they have no alternatives. If we had more demand, these people could switch into higher paying higher productivity jobs. So there is a real problem here, but Samuelson is among those blocking a solution.
One last point on this topic: if you think the robots are taking all our jobs then you think Samuelson is completely off the mark. The robots story is one of too rapid productivity growth. Samuelson is worried about the exact opposite. Only in Washington could “intellectuals” be worried about both simultaneously.
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