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Home Publications Blogs Beat the Press Robert Samuelson Never Heard of Productivity Growth

Robert Samuelson Never Heard of Productivity Growth

Monday, 06 December 2010 05:59

That is what readers of his column today must conclude. He insists that the United States and European countries can no longer afford their current welfare states because of an aging population.

This might be true if there was no productivity growth. However, unless something incredibly bizarre happens, the economy will continue to see productivity growth in the neighborhood of 2.0 percent annually. This means that in 2045 output per worker would be almost twice as high for each hour of work as it is today. This rise in productivity would allow large increases in both the generosity of the benefits provided for retirees and also the living standard of the working population.


Comments (7)Add Comment
written by Ron Alley, December 06, 2010 5:54
I like this part of Samuelson's piece.

Unfortunately, Bowles and Simpson ducked this political challenge. They performed an accounting exercise to shrink the deficit without trying to define what government should do and why. Their package of spending cuts and tax increases claimed to reduce budget deficits by $3.9 trillion between 2012 and 2020. Many of their proposals make sense: for example, simplifying the income tax by decreasing tax breaks and lowering rates. With a broader tax base, lower rates could raise more money; work and investment incentives would remain, because taxpayers would still keep a large share of any extra earnings. But what was missing was a moral rationale for change, except for some familiar platitudes: "American cannot be great if we go broke"; or, "We have a patriotic duty . . . to give our children and grandchildren a better life." The trouble with these pleasing lines is that they don't address the practical question of why existing recipients of government support - farmers, the elderly, local governments, for example - should lose it.

While Samuelson is correct in his assertion that one import role of government is to provide common defense, an even greater role is to provide for the general welfare. (Yes, I have read the Constitution, but in our federal system the states lack the effective sovereign power to provide for the general welfare of the population -- just compare California with Ireland and Greece.

The fundamental function of government is to provide the framework for collective action to meet common needs -- Social Security, Medicare fill those needs as surely as rail lines and airports.
A Very Interesting Paper
written by Ron Alley, December 06, 2010 7:19
Samuelson's Morality Play Demonizes Subsidies and Glorifies Rents
written by izzatzo, December 06, 2010 8:15
From the WaPo article, this quote by Samuelson:
Answers exist. It's not in the national interest to subsidize farmers, because food would be produced at low cost without subsidies. It's not in the national interest to subsidize Americans, through Social Security and Medicare, for the last 20 or 25 years of their lives because healthier people live longer and the huge costs make the budget unmanageable. It's not in the national interest to subsidize mass transit, because most benefits are enjoyed locally: If the locals want mass transit, they should pay for it.

Samuelson confuses the economic rent that government preserves by suppressing competition, with the economic rent that is already funded with subsidies and taxes. It's fine if the same surgery in the USA cost ten times the price available in India, just don't use the government to pay for it, followed by the false conclusion that the USA price will fall accordingly. It won't.

Reducing taxes and subsidies that finance economic rent doesn't mean that unit prices loaded with economic rent will fall. Samuelson ignores the obvious trade-off between less taxes necessary to support economic rent, versus the competition that would replace economic rent and taxes, then rails on as if the rent would disappear if only the subsidies would disappear.

The economic rent will remain as long as the market power remains and the competition is suppressed. It doesn't go away just because government stops subsidizing it with taxes, which may reduce its total volume, but not its market power to raise unit prices.

This is not the 1920s, for example, when there were thousands of small farmers instead of Big Agriculture raking in economic rent like it does today. Taking away its subsidies doesn't take away its market power and concurrent economic rent.

For example, it's not at all clear that 'food would be produced at low (lower) cost without subsidies'. If subsidies are pure gravy over and above econonic rent (and economic rent is already gravy over opportunity cost), then subsidies don't affect incentives and the price of food would not fall if the subsidies and corresponding taxes are removed.

In contrast, if subsidies are designed to pay prices in the government sector equal to economic rent earned in the private sector, like they are in health care, then removing them just denies health care to those who can't afford to pay prices in the private sector that include the economic rent.

Since economic rent itself doesn't qualify as a 'subsidy' according to Mr Samuelson, he doesn't have to explain why government is necessary to keep rents in place by suppressing competition, which is an entirely different question than using subsidies to fund economic rent that's already there.

For Samuelson et al, it's not about taxing Peter to pay Paul a 'subsidy'. It's more about Paul's taxes, and whether Paul earns huge economic rents that either should be funded by government taxes and subsidies, or in the interest of reducing the deficit, should not be funded and left to collect economic rent on their on, in the private sector ... from those whose taxes are 'reduced' ... but still forced to pay Paul economic rent either way.
written by JTM, December 06, 2010 10:51
It should also be pointed out that the cutbacks in Europe which Samuelson is trying to defend have nothing to do with an aging population. They are bailouts for bankers and creditors, at the expense of the ordinary taxpayer.
SS cannot contribute to the debt
written by dale, December 06, 2010 1:28
Why is it so hard to grasp that SS can't contribute to the debt. It has its own funding stream separate from the general fund and its debt.
written by PeonInChief, December 06, 2010 1:44
Well, it's true that governments can't continue to support the aged, the indigent etc. We need to take all the money and spend it on bankers and other capitalist types when they get themselves into trouble.
65 trillion dollar economy
written by bishophicks, December 06, 2010 3:47
Productivity gains won't allow us to cover benefits to our aging population if those gains aren't shared in the form of wage increases. Up until the 80's or so, workers received about 2/3 of productivity gains as wage gains. By the mid-2000's companies were giving out 1/3 and keeping 2/3. And over the past two years there have been huge produtivity gains, but (remaining) workers have received no wage gains.

So you need to revise your statement. Productivity gains over the next several decades will allow us to pay benefits to our seniors IF those productivity gains translate into higher wages, IF companies don't simply decide to keep the gains for themselves and IF Congress doesn't let them simply keep those gains via even lower corporate taxes.

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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.