Thomas Friedman Flunks Arithmetic Again, Demograhics Is the Cry of the Innumerate

While many of us learned arithmetic in third grade, apparently there are not enough people who retained this knowledge for the NYT to staff its opinion page. Hence they have Thomas Friedman warning us that the retirement of the baby boom cohort is going to devastate the country.

Now, if Friedman could do arithmetic he could turn to the Social Security trustees report and see that they project the ratio of workers to retirees to fall from 2.8 in 2012 to 2.0 in 2035. Is that scary?

Here's where Mr. Arithmetic can help us. Let's assume that retirees on average consume 75 percent as much as the working age population. That's not their Social Security benefit (SS benefits are less than 40 percent of the average wage), this is their total consumption. Remember, they don't have to travel to and from work every day, they don't need to arrange child care, or incur other work related expenses.

If workers are taxed or in some other way have their consumption reduced to support retirees, then they currently get to keep 78.9 percent of what they make. The rising number of retirees will reduce this to 72.7 percent by 2035. This means that if nothing else changes workers would see a 7.8 percent decline in their take home pay as a result of this demographic change.

Fortunately, something else will change. It is called "productivity growth." Currently productivity growth, adjusted for some index issues, is about 1.5 percent annually. Over the next 23 years this rate of productivity growth would imply an increase in average wages of 40.8 percent, more than five times the loss due to demographics.

What's more, 2035 is a low point on demographic spectrum. The ratio of workers to retirees is projected to be pretty much stable over the next three decades. Each decade productivity growth should raise wages by another 16.1 percent if we maintain the current growth rate. In other words, there is no reason to think that demographics will cause workers to see declining living standards in the future.

There are important issues here about future living standards. Because of our broken health care system an ever larger portion of compensation is being diverted to health care. This is a drag on living standards, but the problem is our health care system, not demographics.

There is also the problem of inequality. Most workers have seen few gains from productivity over the last three decades because such a large share of income has been shifted to those at the top. If this trend continues it also threatens the living standards of workers in the future.

But Thomas Friedman apparently doesn't understand these facts. Instead he is trying to get readers to focus on something that is not a problem, the aging of the population.

...
written by Kat, July 29, 2012 6:08

I am certain we can look forward to a follow up column describing the alarming growth in the rate of government dependency of defense contractors.

...
written by Jim A, July 29, 2012 7:18

Each decade productivity growth should raise wages by another 16.1 percent if we maintain the current growth rate. Bwahahahaha!!!! Not if rich and powerful have anything to do with it. Their goal is to return all the gains from productivity improvements to those who paid for them: investors rather than workers.

Help Me! I Fell and Can't Get Up! Seniors Saved by Upgrades in Emergency Necklaces
written by Last Mover, July 29, 2012 7:33

As Friedman writes of one of his sources (Daroff):

"That will require breakthroughs like remote diagnosis equipment in every home that can track a patient’s weight, blood sugar or lung capacity and dispatch it to a hospital, or clothing with sensors woven into the fabric that will be able track all physical indicators around the clock."

Friedman contradicts himself once again after writing The World is Flat proclaiming gee-whiz-wow wonders of global competition and productivity like advances in emergency necklaces that have already arrived in America.

Remote diagnosis of seniors alone can reverse the gloom and doom predictions of false trade-offs by Friedman. The additional productivity will free up the younger generation to work more rather than waste thousands of hours monitoring in person, the vital signs of the elderly. A $50,000 trip to the hospital is only a click away from anywhere, not to mention the spike in GNP growth from these events.

Contrary to predictions by Friedman, America can shift DOD resources from the Middle East to the Far East after all. Trade-offs are for luddites.

With the latest advances in emergency necklaces, America can have all three: national security, no cuts in pay to young workers for subsidies to seniors, and continued explosion of health care costs until everyones last dying day.

Mr Arithmetic indeed.

...
written by skeptonomist, July 29, 2012 3:14

Again, the important number is not the retiree/working ratio, but the percentage of working age in the population, since as Dean has often pointed out, children also don't work and have to be supported and educated. This percentage has not varied a great deal in the 20 century, and the projected working-age percentage for 2050 is slightly higher than that in 1900. The 20th-century low was in the 60's - not exactly a terrible time for working people.

http://www.skeptometrics.org/PopByAge.png

Data from the Census.

Dean, you got a plug in the comments section of Friedman's column
written by John Wright, July 29, 2012 8:24

Here is one of the reader comments:

From:

Scott Supak
New York

I'm sure this will all be better in 6 months. Or, maybe we should turn to an actual economist to explain this for us. Someone like, oh, Dean Baker?

http://www.cepr.net/index.php/blogs/beat-the-press/thomas-friedman-flunk...

"Currently productivity growth, adjusted for some index issues, is about 1.5 percent annually. Over the next 23 years this rate of productivity growth would imply an increase in average wages of 40.8 percent, more than five times the loss due to demographics.

"What's more, 2035 is a low point on demographic spectrum. The ratio of workers to retirees is projected to be pretty much stable over the next three decades. Each decade productivity growth should raise wages by another 16.1 percent if we maintain the current growth rate. In other words, there is no reason to think that demographics will cause workers to see declining living standards in the future.

"There are important issues here about future living standards. Because of our broken health care system an ever larger portion of compensation is being diverted to health care. This is a drag on living standards, but the problem is our health care system, not demographics."

*******************************************************
*

Now I doubt if Friedman reads the comments as he is too busy associating with the VIP's, but other NYTimes readers will read this.

The Wonder Of It All
written by Jeffrey Stewart, July 30, 2012 1:01

That's the problem with being an ideologue. It's a lead pipe cinch that Mr. Friedman won't ever learn anything new from Dr. Baker's critiques. New, accurate information just can't get in because it doesn't fit his preconceived notions given to him by his capitalist masters. Regardless of the facts, he'll still spout the capitalist class's line that the government can't afford the old and retired and the poor.

ratios
written by tew, July 30, 2012 6:18

While we're scolding people for forgetting elementary arithmetic, let's keep in mind how ratios work. A ratio expresses the number of item A per number of item Bs.

For example, the bowl contains 8 apples and 4 pears. So the ratio of apples to pears is 8:4 or, equivalently, 2:1.

So what does this statement mean? "... they project the ratio of workers to retirees to fall from 2.8 in 2012 to 2.0 in 2035."

The poor reader is left to assume that this is in relation to one retiree - that the ratio will decline from 2.8:1 to 2.0:1.

other taxes
written by tew, July 30, 2012 6:28

Minor note:

Re: "If workers are taxed or in some other way have their consumption reduced to support retirees, then they currently get to keep 78.9 percent of what they make. The rising number of retirees will reduce this to 72.7 percent by 2035."

This assumes that workers pay no other taxes. Let's assume various local, state, and federal taxes are an additional 15% of pay. This would make the after-tax income go from 63.9% to 57.7%, a decline of 9.7%.

As pointed out, if we continue to achieve modest productivity growth then absolute living standards will not go down - they'll increase, just at a slower rate.

paradox and perspective
written by Brian Coyle, July 31, 2012 3:07

Every crisis is an opportunity. Politics veers according to the recent index, because somewhere in human minds immediate events and long-term causality must fuse. For an economist, this poses paradox. One can "see" long-term processes with data, analyze their component "causes" with hypothesis, deduce possible change, and then ... Many eyes glaze, because the data, logic, thesis, and probabilities seem opaque, given human "bounded rationality".

Political animals sieze any crisis that can bend to what they consider their long-term interest. For some, that interest is ideological. For others, like Mr. Friedman, it's belt-way authority. If the crisis du jour is the deficit, and he hears chattering about aging, Mr. Friedman's political antennae quiver: if it's a wave, ride it.

However, when one does analysis, and determines certain probablities that spread over decades, how does that get distilled? Keynes said 'in the long run we're all dead' not to discount long-term analysis, but to explain political forshortening. At the 01% level, above the 56th floor, the long-term picture may be well appreciated -- and every twist and turn hammered for short-term impact.

But does a macroeconomist do the same thing?

You've got numbers in an incomplete context
written by Brett, August 02, 2012 9:57

I'm failing to see how Friedman isn't addressing the problem as the health care system AND the aging population?

"Add up all these trend lines and you can see why, over the next decade, we must get more consistent economic growth as a society and, also, adds Daroff, come up with more policy and technology innovations that allow us to provide a lot more elder care, in particular aging at home, for a lot less money." There is something called "Evidence-based" research/programs that many institutions, government agencies, etc. are introducing that have been shown to work. One commentator mentioned that using technology would be more expensive. In some cases maybe, but in light of the new direction some of the research is heading I would say it wouldn't be implemented if not proven to reduce costs. aarc.chess.wisc.edu

It seems Friedman is looking at the issue through a more holistic lens, seeing that most aging adults get care from family members, which can have it's long-term negative effects. If those same workers only lose 7.8%, but have to help out with their aging parents, then yes, they will experience a decrease in living standards.

Does your analysis include inflation? Rises in the cost of living? The strain that the aging population will put on the Health Care System? How much is already be dispersed in Medicare and Medicaid? You're saying "fix the Health Care System", but it needs fixing primarily because of the aging population. You also don't offer an alternative to Friendman, who I believe is also saying "fix the system," rather you refute him in childish terms of "he can't do arithmetic." If you want to do what you propose then do it, how can we fix the system? At least Friedman mentions the upcoming use of technology and a new area/market to explore for finding a solution.

Read the report for Wisconsin Aging Network and tell me a demographic shift and failing Health Care System don't go hand in hand. I know it's only Wisconsin, but it can give a broad overview of where we're heading and what Wisconsin is doing to try and fix the system, or ease it a little. http://www.dhs.wisconsin.gov/a...-24-09.pdf

Thomas Friedman Flunks Arithmetic Again, Demograhics Is the Cry of the Innumerate

About Beat the Press