Thursday, September 13, 2012

How Much Would You Pay Not To Be Nagged By Your Parents?

-- Posted by Neil H. Buchanan

In my new Verdict column, I add to my series of columns discussing life under a hypothetical Romney Administration. (The previous two columns in the series are here and here, and the respective Dorf on Law posts building upon those columns are here and here.) Moving beyond the broad political and macroeconomic questions that I covered earlier in the series, I address one of the core policy debates of the 2012 election, from a relatively unusual angle. Specifically, I ask how Romney/Ryan's desired cuts in spending on the elderly (especially the voucherization of Medicare, and turning Medicaid into a block grant program) would effect the children of the elderly, rather than the elderly themselves.

In tax-speak, my column addresses the question of "incidence." That is, when the government imposes a tax -- on, say, retail sales -- we know that the payer of the tax is not necessarily worse off because of the tax. A retailer who can get his customers to accept higher prices, for example, would be able to avoid bearing any burden of the tax. In that case, the tax hits the customer, not the retailer (who merely acts as a middleman between the customer and the government).

The story is the same for spending. Even if the government gives a person a check, that person is not necessarily going to be better off because of it. A minor child, for example, might have a parent who simply takes possession of any money that comes into the child's possession (but does not use it for the child's benefit). Merely receiving the check, therefore, does not automatically translate into benefiting from the money. Similarly, cutting off benefits does not always mean that the former beneficiary will be worse off, if she can find someone else to make up the difference.

In the case of benefits for the elderly, the too-familiar argument is that greedy Baby Boomers are stealing their children's birthright, lavishing Social Security and health care benefits on themselves, leaving the bill to be paid (in the form of public debt) by future generations. My usual response to this argument has to do with public investment (see, e.g., my post from last Friday, here on Dorf on Law). In today's column, I argue instead that the incidence of the benefit cuts for the elderly is not what it seems. Attempts to transfer money from older generations to younger generations will be largely defeated, with younger generations still ending up paying for the care of their parents and grandparents.

The basic mechanism is simply a financial transfer. When parents receive less money from Social Security and Medicare, the money that they spend to make up the difference ultimately has to come from somewhere. If there was going to be an inheritance, it will be smaller (or might disappear entirely). The family home might end up reverse-mortgaged, for example, leaving the survivors with nothing. Even while the elders are alive, they will be more likely to need money from their children and grandchildren. Different families will have different ways of handling these situations, but the net effect will be a transfer of money from younger to older generations.

The most potent part of the argument, however, is not financial. Rather, I invoke the image of Mom and Dad showing up at Junior's door, looking to move into the guest room. The open (but unappreciated) secret about Social Security and Medicare (and Medicaid, through payments for nursing home care by elders who must impoverish themselves to become eligible) is that they are an indirect (but extremely effective) way of keeping Mom and Dad out of the kids' houses.

The major social change in America in the last century, from the standpoint of intergenerational relations, is the increased amount of independent living of parents as they age. Is this something that people prefer, or was it forced upon them? Revealed preference theory would unmistakably suggest that it is strongly preferred, because there is nothing forcing people to have their parents live elsewhere. That so many families spend the extra money necessary to keep the generations in separate homes -- forsaking the obvious savings from combining households -- tells us that there is something very desirable about not having Mom and Dad too close, during one's adulthood. And, to hear aging parents tell it, they are delighted not to be a burden on their children.

Again, however, parents really are a burden, in a very basic sense. They have to be, because the whole point of retirement is that they are no longer working, which means that someone has to be making the things that Mom and Dad buy. Spending their money to continue to live in their own house -- and, even for many modest middle-class families, maintaining a second house in the winter -- reduces the aggregate wealth of the family. That everyone seems happy about this arrangement (even, in many cases, fiercely committed to it) tells us quite a bit about how unwelcome it would be to put elderly people in the position of having to spend all of their money to supplement the inadequate Ryan Vouchers to buy health insurance.

In my column, I suggest that the net transfer back to the older generations is larger than the taxes that would be avoided by "piling debt on future generations." That is, in the aggregate, it is possible that the economies of scale from running a nationwide health care program, along with a nationwide pension system, more than makes up for the increased taxes (or decreased GDP) that would come from running larger deficits to, in essence, keep the parents in their own homes and out of their children's and grandchildren's day-to-day lives.

Of course, from the standpoint of pure resource usage, the splintering of families is probably a net loser for society. More time spent traveling, more single-family homes in more new residential developments (in more and more fragile ecosystems), and all of the other aspects of the scattering of the modern family represent resources that would either be unexploited otherwise, or that could be used for something else.

This, however, is where willingness to pay becomes a powerful concept. Just because it costs us a lot to do something does not mean that it is a bad idea. If we are willing to pay for something, then standard microeconomic theory tells us that the subjective value of doing it is at least as high as the cost.

Which raises the question: How much more would younger people pay to keep Mom and Dad out of their houses? Even if someone were to prove that my supposition above is wrong -- that the net aggregate cost of scattered living is higher than the net aggregate cost of multigenerational households -- how much is it worth not to have to face on a daily basis the legendary tensions of family dinners at the holidays (and the increased tensions of grandparents telling their children how to rear the next generation)? My bet is that, if it were put to a vote by, say, those born between 1972 and 1987 (current 25-40 year olds), they would pay a lot more than they currently have to pay in taxes, to guarantee that their parents will never move in with them.

As cynical as this analysis is, of course, it does not require believing that all families are at each others' throats, all the time. My own family's holiday gatherings are joyous and harmonious. (Really!) Even so, we deeply appreciate the independence that separate households allow. It appears that many people in this country agree, and that they would worry about the emotional toll of experiencing too much of a good thing. As noted above, I suspect that enough people are sufficiently worried that, if put to the test (and if the choice was made crystal clear), we would likely see them gladly trade off a few dollars more in taxes to maintain their peace of mind.

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