Sorry... I see a social security crisis

The typical criticism of deficit spending is as follows: Deficits let current generations off the hook for paying the bills. Thus, consumption rises while rate of savings and investment declines. This leads to there being less capital per worker, and therefore lower growth in productivity. Since capital is scarce, the rate of return rises, which leads to a rise in interest rates. These high interest rates attract foreign investors which, by definition, cause our trade deficit to widen. However, there has been almost no correlation between the budget deficit and the interest rate, productivity growth rate, or the savings and investment rate. Some economists, such as Robert Barro of Harvard see this as absolute proof that deficits don't matter. To them, the typical criticism of deficit spending is nothing more than a scary story to tell in the dark. If only it were just a "story". Like economists Robert Eisner and Michael Boskin (chairman of the President's Council of Economic Advisers under George H. W. Bush), I believe that correlation between the deficit and other economic variables is so low because the deficit has been defined incorrectly. The official debt is only a measure of our government's liabilities; it completely ignores our assets. In layman's terms, its akin to calling the owner of a $1 million property a debtor, by mere account of his large mortgage. There are fierce arguments amongst academia and government officials on how to measure our debt. Those are beyond the scope of this post, but we can conclude: The deficit is not a well-defined economic concept The real problems with deficit spending are not measured by our current federal deficit figure. Most notably, we should be worrying about transfers of wealth between generations (or maybe just me, since I'm 22).

This point is best illustrated in Franco Modigliani's life-cycle model, which won him a Nobel prize in 1985. According to his model, a policy which redistributes wealth from young to the old will cause an increase in national consumption and a decline in national savings. This is because older people have larger propensities to consume than younger people. Since they are closer to the end of their lives, they have a tendency to spend their remaining resources more quickly. The bumper sticker in Florida which reads "I'm spending my kids inheritance" sums it up best. In effect, transferring wealth from younger to older generations causes a rise consumption, trade-deficits, and interest rates, while lowering savings and investments. In other words, everything bad that is associated with deficit spending. Our current measure of the deficit does not take generational transfers into account. Neoclassical economics offers an alternative to our shaky deficit measure: generational accounts. Generational accounts measure what a member of a generation will pay the government minus benefits from the government. The burden on future generations is measured using the "intertemporal budget constraint." The constraint states that government spending on cannot exceed the sum of three items:

1. The government's net wealth. 2. The present value of net payments to the government by current generations. 3. The present value of net payments by future generations. An analysis of our current spending using generational models indicates that the U.S. economic policy is extremely out of balance. (ya’ll are going to love this) It’s not difficult to find the perpetrators, they are the pay-as-you-go programs: Social Security, civil service, and military retirement programs. These programs are not measured by our deficit, because again they are "pay as you go". Within the next few years, 77 million baby boomers are going to start collecting Social Security. By the year 2030, the United States will have doubled the number of elderly, but there will only be 18 percent more workers to pay for their benefits. Do the math. The budget shortfall amounts to roughly $45 trillion. That figure is twelve times larger than the official debt. So, will it be possible to pay for social security? If we started today, paying the bill would require one of four options from "the menu of pain":

1. A raise in income taxes (individual and corporate) by 69 percent. 2. A raise in payroll taxes by 95 percent. 3. We could cut Social Security and Medicare benefits by 56 percent. 4. We could cut federal discretionary spending by more than 100 percent. The Bush Administration's approach to this impending disaster was what Bush Sr. called "voodoo economics". With an impending fiscal crisis on the horizon, they passed not one, but three tax cuts; “if a boat is sinking, why not punch a bigger whole in it and get it over with?” seems to be their thinking.

In the real world, taxes raise consumption, lower savings. etc. Some might argue that some of the cuts, like dividend taxes, will give people an incentive to save. However, in the real world economics, that's neither how people behave, nor are predicted to behave. So indeed, Bush is fiscally insane. Here is how I see it: Our government will be unable to pay entitlements without taxing my generation to death. At the same time, there will be powerful coalitions who wish to defend their entitlements. Simply pretending that this crisis will work itself out will not make it go away. The fact is that most people receiving social security checks during retirement are not exactly going to complain. So if things remain the way they are, I’ll go ahead and predict that there will be a rather pronounced political war between generations in the coming years. Do I support the president’s plan? Of course not, I never trust a word out of his mouth. However, I suppose what I’m saying is, I’m unconvinced that there isn’t a crisis. Perhaps its my age.