Sorry Kids, Thomas Friedman Is Not Very Good at Economics
|Wednesday, 16 October 2013 15:47|
Many young people may have been misled by Thomas Friedman's column, titled "Sorry Kids: We Ate It All," which implied that our children might somehow suffer because we are paying so much to seniors for Social Security and Medicare. The reality of course is that if our children and grandchildren do not enjoy much higher standards of living than do current workers and retirees then it will be because the rich have rigged the deck so that they can accrue most of the gains from economic growth.
This is easy to show. For example, if we look at the Social Security trustees report we see that average annual wages are projected to grow at more than a 1.3 percent annual rate between now and 2050. As a result, the average before tax wage will be more than 60 percent higher in 2050 than it is today. If our children and grandchildren get to share equally in these gains then they will be far richer than we are today.
It's true that we will have a higher ratio of retirees to workers in 2050, just as we have a higher ratio of retirees to workers than we did in 1970. Just as the increase in the ratio of retirees to workers over the last 4 decades did not prevent an increase in average living standards over this period, there is no reason to think it will prevent an increase in average living standards over the next four decades.
This is easy to show. Imagine that we saw an increase in the payroll taxes needed to supported to Social Security of 10 percentage points, far more than any plausible projections would imply is necessary. In this case, the average after-payroll tax wage would still be more than 40 percent higher than it is today. Should that make us apologize to our kids?
Of course these are averages. If we continue to see the pattern of the last three decades, in which the wealthy were able to secure for themselves most of the gains from growth, then our kids may not see a rise in living standards. But that would be a problem of upward redistribution, not an issue of the old benefiting at the expense of the young.
Furthermore, a large and growing cost of caring for our elderly is the cost of health care provided through Medicare and Medicaid. These costs are grossly out of line with costs in other wealthy countries. This is not due to our elderly getting better care, but rather due to the excessive payments made to doctors, drug companies, insurers, and medical supply companies. This is also a story of upward redistribution since the rich are the main beneficiaries of these excess payments.
If our health care costs were in line with costs elsewhere in the world we would be looking at huge budget surpluses and would have all sorts of money freed up for improving infrastructure, education, and research. (Of course this is a long-term story assuming we get back to something like full employment. At the moment the only thing keeping us from increasing spending in these areas is people with a bad understanding of economics.)
So kids, Thomas Friedman unfortunately may have misled you. There is no reason to worry about your parents or grandparents Social Security and Medicare putting you in poverty. The real problem is the money being redistributed from your parents, grandparents, and quite possibly you, to Wall Street traders, private equity barons, CEOs, drug companies, doctors, and others who are masters at gaming the system.