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Home Publications Blogs Beat the Press Fareed Zakaria is Unhappy That "The American Left" Chooses Arithmetic Over Peter Peterson

Fareed Zakaria is Unhappy That "The American Left" Chooses Arithmetic Over Peter Peterson

Sunday, 23 December 2012 01:25

Fareed Zakaria is very unhappy that "The American Left," by whom he means the vast majority of people across the political spectrum who oppose cuts to Social Security and Medicare, insist on taking arithmetic seriously. They are refusing to join Peter Peterson and his wealthy friends in the Campaign to Fix the Debt in their crusade to cut these key social insurance programs.

Zakaria tells readers:

 "The American left has trained its sights on a new enemy: Pete Peterson. The banker and private-equity billionaire is, at first glance, an obvious target—rich and Republican. He stands accused of being the evil genius behind all the forces urging Washington to do something about the national debt. ...

The facts are hard to dispute. In 1900, 1 in 25 Americans was over the age of 65. In 2030, just 18 years from now, 1 in 5 Americans will be over 65. We will be a nation that looks like Florida. Because we have a large array of programs that provide guaranteed benefits to the elderly, this has huge budgetary implications. In 1960 there were about five working Americans for every retiree. By 2025, there will be just over two workers per retiree. In 1975 Social Security, Medicare and Medicaid made up 25% of federal spending. Today they add up to a whopping 40%. And within a decade, these programs will take up over half of all federal outlays."
Yes, the facts are hard to dispute. That is why those of us on "the American Left" try to use them wherever possible. As Zakaria points out, apparently without noticing, we have already seen most of this aging disaster story. As he says, in 1960 there were about five working Americans for every retiree. Currently the number is less than three. It is projected to fall to around 2 workers per retiree by 2030 or "just over two" if we prefer Zakaria's 2025 date. And the big three programs grew from 25 percent of federal spending to 40 percent between 1975 to 2010, they are projected to rise another 10 percentage points in a decade.
Apparently Zakaria missed it, but this sharp decline in the ratio of workers to retirees did not prevent us on average from enjoying a substantial rise in living standards over this period. Of course the gains were not evenly distributed because of policies that redistributed income to people like Peter Peterson and his friends in the Campaign to Fix the debt (e.g. trade policy, anti-union policies, deregulation of the financial sector -- the fuller story is available here). However per capita after-tax income is more than twice as high today as it was in 1960, in spite of the scourge of a growing elderly population.
The reality known by arithmetic fans everywhere is that even modest gains in productivity growth swamp the impact of demographics. Here is the story for the years from 2012 to 2035, the peak stress of the baby boomers retirement.
                                       Source: Author's calculations.
Note that even in the most pessimistic productivity story, the slowest rate of productivity growth of the post-war era, the impact of productivity in raising living standards is more than three times as large as the impact of demographics in reducing them. Furthermore, this takes 2035 as an endpoint. After that year there is little projected change in demographics for the rest of the century whereas productivity will continue to grow.
Of course it is worth noting that our broken health care system can impose a serious burden on the economy. We already pay more than twice as much per person for our health care as do people in any other wealthy country with little to show for it in terms of outcomes. If the gap rises to a factor of three or four to one as some projections show, then it will impose a serious problem for the budget and the economy. However the answer is to fix our health care system, not to get angry at people for growing old.
The American Left is very willing to face the facts and look at the arithmetic. Unfortunately Mr. Zakaria and his editors at Time Magazine don't have the same interest.
Comments (17)Add Comment
written by bobs, December 23, 2012 3:10
What I find baffling is that apparently Zakaria does not read Dean Baker, who's made this point about arithmetic before. Regardless of his political affinities, isn't it Zakaria's professional duty to keep informed about the views of major economists/ public intellectuals whether he agrees with them or not.
"He stands accused of..."
written by JDM, December 23, 2012 3:16
"He stands accused of..." is classic New Journalism. Pete Peterson doesn't "stand accused", he has been spending large amounts of money pushing his ill-informed ideas for twenty years now. This isn't secret information; is Zakaria really unaware of this?

If Zakaria is not unaware of it, he's being dishonest; if he is unaware of it, he is incredibly uninformed about the subject he's writing about. Either way, Zakaria is showing that his thoughts on the matter are useless. At best.
http://j.mp/YAM2WB (and well worth reading)
written by jhmccloskey, December 23, 2012 6:37
Since Paddy McTammany had more fun scribbling than others will have reading, and anyway, the scribble is hardly economics, let's just say

http://j.mp/VXslS8 .

Happy days.

Best guest on "Up" in weeks if not EVER
written by Michiganmitch, December 23, 2012 7:43
Off topic but if anyone saw Dean on "Up" this a.m., he was great and Chris Hayes ran him off leaving conservative Dylan Igotmyasskicked sitting there for another segment speaking conservative economic mythology.
Social Security and the Deficit
written by John Glover, December 23, 2012 9:09
I saw Dean on Chris Hayes this morning and, while I agree with him on most points, I disagree with the point (a point made by many other progressives) that the Social Security does not contribute to the deficit.

The argument that social security does not impact the deficit is that the trust fund has assets that can be drawn upon to make up the difference between payroll tax revenues on the one hand, and benefit payments and administrative costs on the other, for the next 20-plus years. But right now we have reached the point where we have that shortfall: payroll tax revenues are less than the sum of benefits paid and administrative costs.

Now the “assets” in the trust fund are treasury obligations. Drawing on these assets means that funds have to be transferred from “the rest of the government” to the trust fund in order to pay benefits.

As I say, this is new. From the time of the big fix in 1983 through 2009, payroll tax revenues have been more than enough to pay benefits and administrative costs, and the excess was invested in treasuries - meaning that is was transferred to "the rest of the government" to fund other programs. Over that 26 year period, the trust fund built up a balance of $2.5 trillion. But now we have reached the turnaround point, and money must start flowing in the other direction.

I would argue that this is the real reason Pete Peterson and his crowd are so up in arms about entitlements. We have reached this turnaround point. As long as the trust fund kept growing, they were happy as clams. Shrinking the trust fund means that money has to be moved back, and that money has to come from somewhere. Either it comes from more government borrowing, or higher revenues.

Of course, the fact that we have reached this point is no big surprise. When they did the big fix in 1983 they projected this would happen - although back then they projected it wouldn’t happen until 2025. There are basically two reasons why it’s happened sooner. One is that general economic conditions aren’t what they predicted - our economy has not grown as much as they projected, and in particular the portion of the economy that is wages subject to the tax is smaller than they projected. The second is the payroll tax cut enacted by the Obama Administration - by law, the loss of funds from that cut has to be made up from other sources. If you look at the most recent trustee’s report, you will see that they have credited the trust fund with reimbursements from the “general fund” related to the payroll tax cut.

What is really happening now is that Peterson and his crowd want to break the deal was cut in 1983. We knew back then that a turnaround point would be reached, and now that we’ve reached it they don’t want to live up to their end of the bargain.

To me the most insidious part of this story is what in fact the government has done with the $2.5 trillion. The workers’ part of the deal in 1983 was to increase payroll taxes to build up the trust fund balance. If you count both medicare and social security taxes, that increase was from 9.35% to 15.3%. That’s a tax increase of over 60%. A scant three years later, in 1986, the highest marginal income tax rate was cut from 50% to 28%. This on top of a cut in that rate from 70% to 50% that happened in 1981. That’s a cut in income tax rates of 60%. Now some of that has been given back - now the rate is only 50% lower than it was in 1981.

But the main point is that the 1983 deal was really part of a larger deal - a huge shift in the tax burden from income taxes to payroll taxes. A huge shift from the rich to middle class and working class Americans.

That’s why I like to refer to the 1983 deal as “the big fix.” The fix was in alright.

Peterson and his crowd have reaped huge benefits over the last 30 years from the deal that was cut in the 1980s. Now that their end of the bargain is coming home to roost, they’re dead set against living up to it.

But given other things that are going on in our politics and economy right now, why should anyone be surprised?
What are "Entitlements"?
written by Ethan, December 23, 2012 9:57
Why are Social Security and Medicare called "entitlements"? When I pay for my groceries, do you say I am "entitled" to take them home? Of course I am so "entitled", but only because I paid for them. I have been paying for Social Security since my first real job in 1958. I have been paying for Medicare since it came into being in 1974. In fact I am still paying for Medicare. Yes, I am "entitled" to these programs, but to call them "Entitlements" demeans them. My share of them are the fruits of my labor and payments and my half of a bargain I had with my government. Why should my government back out of its half of our bargain? Particularly now that I really NEED what I bargained and paid for.
American Left willing to face facts about health care? Or as bad as the Right?
written by Rachel, December 23, 2012 10:24

It's rare, in my opinion, to find people on either side who are both informed AND honest about health care costs.

In fact, in California, we now have a Democratic super-majority. But who in this very blue state admits the facts about the monopoly power in medicine? (Not to mention the biases in the tax code.) It's almost unheard of to admit such things, despite all the it is costing us.

So cities go into bankruptcy, and there is no informed discussion about why. Just people on the right complaining about the teachers union.
Why do these opinion writers not understand capital investiment?
written by John Wright, December 23, 2012 10:43
Underlying the productivity increases in the USA is the accompanying capital investment in infrastructure.

One could view this capital investment as shadow workers who will not be requiring Social Security/Medicare as they age (depreciate in this case).

So the citizenry should be insisting their government and USA businesses invest well, this will allow the USA to build up the capital infrastructure to support productive workers in the future.

Some suggestions are to seriously downsize the military, homeland security, the financial industry, agricultural subsidies, the war on drugs and government subsidized insurance programs that benefit business interests such as flood insurance, TBTF insurance for the bloated financial sector.

In an optimistic moment, one might hope the free market, business oriented conservatives would agree with this list of ideas to improve the USA economy.

But all their ideas lead back to "gotta cut entitlements".
Egg on Faces
written by A Populist, December 23, 2012 12:08

Glad to see you on UP.

I agree that getting egg on the right peoples faces would be a great thing - in terms of our national economic "debate", such as it is.

I assume you meant that those who are screaming warnings of doom will be embarrassed and discredited. Of course, we both know there will be no real consequence to the reputation of the "establishment consensus" types - just as there was no consequence to missing the obvious (to many) housing bubble - but at least we can try.

I think that the real opportunity to change the conversation, would be if (assuming we go "over the cliff"), that after Jan 1, the military cuts stay in place - or even that "restoring" them would become an actual fight. Such cuts (or a fight about these cuts), could be one way to force an actual discussion about the fact that the problems with the real world economy are mainly about: lack of demand; unemployment, and inequality of income. The reason is, that the main urgency that they would give for restoring the military spending, is to keep jobs, and avoid contraction of the economy.

If we could ever force a discussion leading to consensus that lack of demand is what is wrong with the economy, in my opinion that would be a huge step towards a rational discussion of where we need to go.

One other point: I heard one of the Republicans on George S's show, implying that, (assuming we go over the cliff), that in January, President Obama will offer them the same exact deal that he just offered them. I hope they are just being fooled...But I fear not. After the cliff, Obama has the chance to leave the Defense cuts and high-end tax increases in place, and just ask for restoring the middle class cuts.

I fear, however, that President Obama is not interested in the economic discussion which could be triggered by threatened military cuts (nor is he interested in protecting SS and Medicare), and so, will snatch defeat from the jaws of victory by cutting SS and Medicare anyway, under the guise of some deal to avoid deficit ceilings, or something. I hope I am wrong, but I doubt it.
written by PJR, December 23, 2012 12:35
Seems to me that we didn't have an economic problem in the 1960s when the age dependency ratio was at record highs (higher than currently forecast) PLUS women weren't participating very much in the labor force. Plus workers had to support a lot of young working-age men in the military. (Why don't I ever see an historical graph of employment levels as a percentage of population?)
Zakaria is a disgraced Plagarist Hack
written by jz, December 23, 2012 1:36
I'm not sure why anyone would listen to him. He does however , fit right in at CNN.
written by Nick Batzdorf, December 23, 2012 9:58
Having just watched Zakaria's show from this morning (we recorded it), I came over here planning to request that you take down his ridiculous nonsense. Happily you beat me to it.

Chrystia Freeland didn't really get a chance to talk, but the rest of the panel he had on -Glenn Hubbard, Peter Orszag, and that English woman from The Economist - caused my blood pressure to soar. It was just assumed as a basic fact that we need "entitlement reform" for business confidence...and that's for openers.

I guess I shouldn't be surprised that anyone who could be obsequious to James freaking Baker would be so annoying, but still: grrrrrrrrrrrrrrrrrr!
written by David, December 23, 2012 10:48
Social Security and the Deficit
written by John Glover, December 23, 2012 10:09
I saw Dean on Chris Hayes this morning and, while I agree with him on most points, I disagree with the point (a point made by many other progressives) that the Social Security does not contribute to the deficit. ...

Interesting points, John. But SS still doesn't contribute to the deficit. The deficit contributes to SS, now. PP is just mad that SS is a higher priority bond holder than he is. The ghost of 1983 has come to haunt him into his grave.
written by Matt, December 24, 2012 10:39
Leave military spending ALOOOOOOOOOOOOOOOOONE!
Zakaria: Part of the Moribund Liberal Class
written by Mark L. Bail, December 24, 2012 12:39
Zakaria serves at the pleasure of the powerful and privileged, and his job is to make it look like we have a functioning democracy, free from the moneyed interests that guide our governmental choices. His job is to build consensus for them. He wouldn't recognize the Left if it spit in his eye.

Zakaria may have something to contribute on foreign policy, but he's never right on economics. Case in point: he thought Bowles-Simpson was a great idea.
written by Noam Sane, December 24, 2012 1:09
"The banker and private-equity billionaire is, at first glance, an obvious target—rich and Republican."

They hate us for our freedom.
Oh no, 40%!
written by TK421, December 24, 2012 2:28
Mr. Zakaria wrote "In 1975 Social Security, Medicare and Medicaid made up 25% of federal spending. Today they add up to a whopping 40%." This is bad news why?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.