Tuesday, September 07, 2010

Whom Did Deficits Really Help?

-- Posted by Neil H. Buchanan

In my post this past Friday, I discussed some recent comments by a genuine card-carrying liberal, a consummate insider in the D.C. establishment, who completely misrepresented several issues in the debate over Social Security. A reader of this blog then offered some interesting thoughts in the comments section, thoughts that provide a good opportunity to clarify some important points. Even though I do not ultimately agree with the commenter's arguments, I do appreciate that he made his points so clearly.

The basic objection to my post is that the Social Security system is merely one part of the fiscal picture of the United States, which means that any attempt to assess whether the Baby Boomers have cheated their children and grandchildren cannot focus on Social Security alone. I agree, with the caveat that Paul Krugman has repeated frequently: You have to be consistent about it. If you want to say that Social Security is merely one part of the federal government, and that its financial posture is meaningless on its own, then you cannot also claim that the Social Security system is "broken" and needs specific fixes aimed at balancing the system's long-term balance sheet.

If, in other words, Social Security really is just a tax system and a benefit system that happen to have the same meaningless label attached to them, then the debate over Social Security is not really a debate over Social Security. Arguments that FICA tax rates should be increased, or that the retirement age be increased, or that benefits otherwise be cut, must be based on an argument not only that taxes must go up or expenditures must go down, but that there is a reason why Social Security's taxes or Social Security's benefit structure are the best way to enact those contractionary measures. Other than pointing out that Social Security is the biggest program in the federal system, no one has ever successfully made that argument. I am not aware of anyone who has even tried, come to think of it.

With that as a background principle, I can now more clearly discuss the comments on my Friday post. The commenter in question argued that the Baby Boomers "have gorged themselves on spending (both general fund and for promised Social Security)," thus being guilty of "selfish actions" that have harmed future generations. These are hardly idiosyncratic arguments, as they are held by a large number of commentators, although the arguments are rarely made with the commenter's flair and clarity.

A few thoughts on this concept of generational unfairness (the analysis of which, as many readers know, is my bread and non-dairy butter):

(1) If it is inappropriate to think about Social Security in isolation, it is also inappropriate to think of deficits in isolation. If we are going to assess blame or praise for one generation's economic treatment of those who will follow, we need to know the big picture. As I have noted in numerous places (including here and here), even the numbers provided by the Social Security trustees -- the very numbers that are cited to prove that Social Security is doomed -- show future living standards rising smartly under every forecast scenario.

In 2035, two years before the Social Security trust funds are supposed to be depleted, real per-capita income is projected to be 45% higher than it was in 2008 (under the "intermediate scenario," with the other two scenarios showing incomes 31% or 61% higher than in 2008), and 226% higher (or 135% or 352%) in 2085 than in 2008. (This economic growth is, in part, caused by the deficit-financed public investments to which the other commenter on Friday's post referred, echoing my recent posts here and here.) And this is taking into account the deficits that have supposedly ruined things for future generations. It is (almost) always possible that a generation could do even more for its heirs, but these are not numbers that one would associate with generational selfishness or engorgement.

(2) It is true that deficits were increased in the years preceding the Great Recession, and for mostly stupid reasons. The wars in Iraq and Afghanistan will end up costing over $2 trillion, by reasonable estimates. These are the opposite of public investments: They are pure waste, that is, money spent that made us worse off as a nation. It can only be described as the result of cost/harm analysis, not cost/benefit analysis. But who exactly was engorged by this stupid action? Certainly not the vast majority of the Baby Boomers, whose real wages have continued to stagnate for the last thirty-plus years. Their children and grandchildren were similarly left out of this financial gravy train. Young men and women of mostly modest economic means paid the ultimate price, just as 50,000 Baby Boomers paid that price in Vietnam due to the stupendously misguided policies of Washington hawks. The deficit-financed wars, in other words, cannot reasonably be described as the Baby Boomers enriching themselves at the expense of their offspring.

What about the Bush tax cuts, another example of selfish fiscal engorgement? Whom did they benefit? Not the people who will rely on Social Security for their survival in retirement -- Baby Boomers or otherwise. The larger point, therefore, is that it is highly misleading to analyze fiscal issues from a generational standpoint. The people who are being screwed over by bad fiscal (and general economic) policies have in common being non-wealthy, not being in one generation or another. Telling middle-class Boomers that their benefits must be cut because George W. Bush is a Boomer, too, ignores the distributional effects of Bush's policies. A small slice of Boomers have benefited handsomely from Bush's policies, as has a small slice of post-Boomers. And because of Bush's push to reduce the estate tax, small slices of future generations will also benefit. That is not generational warfare. It is warfare, but not between generations.

(3) Even if the bad fiscal decisions by the Bush administration can be identified as harming post-Boomers, the fiscal decisions themselves cannot be blamed on the Boomers. Neither Cheney, nor Rumsfeld, nor Wolfowitz are Baby Boomers. (W. was born in 1946, putting him in year 1 of the Boom.) Did the Boomers elect Bush? OK, Bush was not actually elected in 2000; but in 2004, was Bush given a second term by a concerted effort of Baby Boomers over the unified objections of post-Boomers? I suspect that younger voters skewed slightly toward Kerry, but they also voted in smaller numbers. If we really want to blame generations, we know for sure that Bush's razor-thin margin in 2004 (and his negative margin in 2000) would have easily been overcome by even mildly higher turnout by younger voters. There is a story by which every age cohort is at least guilty of acts of omission that could have changed policies from bad to good.

The point here is that the very notion of generational blame breaks down upon close inspection. For all the talk about "greedy seniors" and the idea that generations vote in blocs to benefit themselves, there is just no evidence to support that framing of the issues. In fact, when Bush unveiled his plan to partially privatize Social Security in 2005, he specifically tried to buy off the AARP and other groups representing seniors by promising that their benefits would not be cut. Those groups refused to be bought, however, because they believed that Social Security is an essential element of sound policy for all generations. Even if they were wrong about that, they certainly were not motivated by selfish concerns.

(4) As I pointed out, however, the current policy discussion in Washington does not actually include any policies that would harm the Baby Boom specifically. For very good reasons, we do not tell 64-year-olds that they should have known that the rug would be pulled out from underneath them. This means that all such proposals must involve changes in the relatively-distant future. If we are choosing between extending the retirement age or cutting benefits (if the trust funds are ever depleted), then we definitely do not have to "act today" to make the change. If, as 2037 approaches, the trust funds are near depletion, policymakers could, for example, decide to give people the option of extending their working years (if possible) or taking the automatic 22% cut in benefits. Or, as the commenter suggested, they (the future post-Boomer policymakers) could decide to reduce living standards of still-younger generations by borrowing from general funds. They can make that decision based on the overall picture facing the country at that point. If the economy, like today, is otherwise set to increase average living standards significantly, then paying for retirement benefits with borrowed funds would not visit net harm upon future generations. If not, then the choices will remain as before.

Moreover, if we are really looking at Social Security not as a stand-alone program but rather as a part of the overall fiscal picture, why are we talking about cutting Social Security benefits or raising Social Security taxes in 2037, or any other year? If we are harming future generations by running deficits qua deficits, then we should be talking about the overall deficit, not the Social Security trust funds (or taxes or benefits) at all.

There are many difficult issues in assessing the future of Social Security. However, whether looking at the system on its own, or as part of the bigger fiscal picture, it is not possible to sustain the claim that the Baby Boomers have used Social Security or other fiscal devices to steal from future generations. There are a lot of bad policies that should never have been enacted, and there always will be. That does not make entire generations selfish or short-sighted.


Paul Scott said...

"The wars in Iraq and Afghanistan will end up costing over $2 trillion, by reasonable estimates. These are the opposite of public investments: They are pure waste..."

I agree with everything else you said, and this I agree in large part. I do think, however, that this overstates things.

I don't think there will be much disagreement that the initial action in Afghanistan was justified. I think its continued action is debatable (I, for one, think we are now wasting our lives, money and time there), but even then I don't think "complete waste" is a fair description. That is, some portion of what we are doing there is still reasonable.

In a way I think this is a nit to your overall point, since even completely eliminating the action in Afghanistan, the point remains the same. I am just concerned that the premise as a whole might be rejected by those who, reasonably, think that the action in Afghanistan has or had merit.

tjchiang said...

I agree with the need to be consistent, and so yes, the spending cuts or tax increases could come from anywhere. A corollary, however, is that the Trust Fund is irrelevant in this big-picture view. The year 2037 that your refer to in the fourth point has no significance to the greater federal budget.

The other point I question is your very rosy picture of future generations, who will experience a 45% increase in real income over the next 25 years, in contrast to the experience of the last 25 years where real wages have stagnated. Now perhaps the Baby Boomers have truly been the most selfless generation in history, foregoing their own consumption in favor of investments that will yield a bonanza over the next 25 years. It won't surprise you that I am rather dubious on this picture of Baby Boomer selflessness.

The last point is whether the generational measure is a right one. I certainly do not mean to say that wealth transfers across income groups is not a relevant consideration of fiscal policy. But when you are talking about deficits--which by their nature involve spending and payment at different times--it seems that the genernational angle is hard to dismiss entirely.

Paul Scott said...

On the generational element, if right to consider at all, much of the deficit goes the other way.

As only one prominent example, Obama's possibly too little, too late proposal to spend $50B on infrastructure is a deficit expenditure that largely inures to the benefit of future generations.

The nature of the government is such that it is well situated for long term planning. Almost all of what it does acts to the benefit or future generations.

The $2T alluded to by Neil for the wars in Iraq and Afghanistan, for example, are all huge present day costs. I am not convinced that either will result in a future benefit (and I am reasonably convinced that Iraq will have resulted in negative future consequences), but if their was any benefit even imagined it was to those future generations that will live in a safer world.

The same, frankly, holds true for Social Security vis-a-vis the deficit aspect. People are going to get old, they are going to retire (by choice or otherwise) and when this happens future generations will have a problem to deal with. There may be legitimate arguments as to why Social Security is or is not the best program with which to deal with this problem, but if so that is independent of the deficit itself.

Neil H. Buchanan said...

The Baby Boomers do not have to have been selfless, much less the most selfless generation ever, for the long-term growth rate to be positive. The point I made in the post is that the source of all the angst about Social Security's finances (the annual Trustees' report) actually shows these large increases in living standards -- under anything but "rosy" scenarios.

It is true that real wages have been stagnant for the past generation, but that has absolutely nothing to do with deficits. GDP per capita has grown by more than 60% since 1980, but most people have not done better. That has affected both the Boomers and their kids, to the benefit of the tiny upper slice of society. That's not a generational problem; it's a distributional problem. Given that we're set to see real GDP rise so smartly in the coming decades, the problem is not that deficits are making the future economy smaller. It's that the future economy might be as poorly distributed as the current one.