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Home Publications Blogs Beat the Press Turning Class War Into Generational War

Turning Class War Into Generational War

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Wednesday, 30 January 2013 14:56

Bloomberg made a serious effort to turn class war into generational war using a column by Evan Soltas that was cleverly titled “Don't Let Class Warfare Turn Into Generational Warfare.” The basic story in the piece is that the baby boomers are skipping into retirement leaving the generations that follow with a huge tab in the form of their Social Security and Medicare benefits. There are a lot of items that are not quite right in the piece which drive this conclusion.

First, the idea that baby boomers have not paid for their retirement is driven entirely by the Medicare side of the equation. Standard calculations of the net tax payments for Social Security show that most baby boomers will pay more in taxes than they receive in benefits.

The imbalance on the Medicare side stems from the fact that we pay twice as much per person for our health care as the average for people in other wealthy countries. This is not the result of us getting better care; we don’t generally have better outcomes than people in other countries. It is the result of the fact that we pay more for our care. This means that our doctors get paid much higher salaries (our autoworkers and retail clerks don’t), we pay far more for our drugs, our medical equipment and everything else in our health care system.

This is a story of class war: rich people getting richer from the inefficiency and corruption in the health care system. Soltas and Bloomberg are turning reality on its head in trying to make it a question of generational warfare.

In the same vein, Soltas gives us the generational accounts from Larry Kotlikoff, an economist who has made a career of trying to foment generational warfare. The Congressional Budget Office decided almost 20 years ago that Kotlikoff’s shenanigans were not good enough for government work, a conclusion I reached a few months earlier in my classic, “Robbing the Cradle? A Critical Assessment of Generational Accounting."

Soltas falls for a couple of Kotlikoff’s tricks in warning us that net tax rates for those born in 2026 will rise to 73 percent. First, Kotlikoff uses a 4 percent real discount rate compared to the 2 percent industry standard. This is a bit technical, but making the switch raises his net tax burden figure by close to 50 percent.

Kotlikoff’s other trick is that he doesn’t count education as a benefit for future generations. In Kotlikoff’s accounting, if we closed down the schools and handed everyone a check when they turn age 21 for half of what we would have spent on their education we would substantially reduce their net tax burden. Wouldn’t this be great news for our kids?

If we can step away from the efforts to foment generational warfare and back to reality, let’s get our eyes on some simple facts. In 40 years per capita income and real wages will both be roughly twice as high as they are today. This will not be because the people alive in 40 years will be smarter than we are today or will have worked harder, this will be due to the fact that we have passed on more and better capital and infrastructure to them than what we have today. We will also have given them drastically improved technology. (A huge potential negative is global warming.)

These are the factors that will overwhelmingly determine their living standards. By comparison, whether they pay 3-4 more percentage points in taxes is not going to amount to a hill of beans. (For those who are really troubled by the prospect of higher taxes we can have an option where people get to pay their grandparents’ tax rates in exchange for getting their grandparents’ living standards.) This means that we should be focused on measures that will ensure that the economy grows through time.

We should also be focused on intra-generational distribution. If Bill Gates grandchildren get all the gains from economic growth over the next 40 years then our grandchildren will be screwed even if their generation is on average hugely richer than our generation.  

In short, getting the economy back to full employment (can you say stimulus?) and winning the class war for the majority are the policies that will most help the younger generation. Gutting Social Security and Medicare will simply deny our children and grandchildren security that they will desperately need if the wealthy continue to win the class war.

Comments (9)Add Comment
The crack
written by David, January 30, 2013 2:10
Seems like the greatest generation's first born want to screw those of us born 1958-1967. You know, when Democrats were Presidents.
Even Holocaust Deniers Cannot Deny Class Warfare as Explained by Dean Baker
written by Last Mover, January 30, 2013 5:32
This is a story of class war: rich people getting richer from the inefficiency and corruption in the health care system. Soltas and Bloomberg are turning reality on its head in trying to make it a question of generational warfare.


While Soltas and Kotlikoff are not outright hacks, their story line based on denial of class warfare is increasingly common in a media that thrives on economic scare stories driven by phony zero sum trade-offs manufactured between makers and takers.

The real trade-off is between the concentrated rich who make less and take more, versus everyone else who make more and take less, and its denial is getting as offensive and disgusting as denial of the holocaust.

Eisenhower knew there would be deniers of the holocaust and ordered photographers to make pictures and eyewitnesses to walk through the captured concentration camps.

In a similar vein, Dean Baker exposes deniers of class warfare by painting clear economic pictures worth a thousand words based on simple arithmetic.

Even a holocaust denier cannot deny that if health care unnecessarily costs twice as much as it should, that cannot possibly be grounds for claiming its use by one group requires another group to pay for it.

Even a holocaust denier can add and subtract. If both groups get health care at half the price based on true cost, both groups can pay for it on a stand-alone basis, which evaporates into thin air both the real class war and phony generational war in regard to health care.
Generational Warfare
written by H-Bob, January 30, 2013 5:40
The baby boomers (including me & the President) will be in their late 70s (at least) when the Social Security trust fund "runs out" -- any warfare will be between those in their 30s right now versus those in their teens. Of course an increase in the FICA tax of less than 4% total (2% employee & 2% employer) adopted in 2040 would make the "warfare" vanish entirely.
Intergenerational accounting is a holdover from gold currency accounting.
written by Benedict@Large, January 30, 2013 10:09
Kotlikoff's intergenerational accounting is not applicable in a fiat currency. In fact, there's probably not a single argument made by Peterson's clowns that does. That's why it's so critical to them that MMT not be allowed as part of the mainstream discussion.
Median health care costs
written by Charlie, January 30, 2013 10:17
We hear that health care is over 15% of GDP. But GDP is not uniformly distributed. What is the median health care burden? I'm thinking closer to 25% of a median income, or maybe 20% of pay for those lucky enough to have a generous employer contribution to health insurance; and more like 30% for self employed who make median incomes and don't have the benefit of a decent group health plan rate.
don't trust anyone over 30
written by watermelonpunch, January 31, 2013 1:22
Because nobody voting today ever intends to turn 65 themselves!

Gutting Social Security and Medicare will simply deny our children and grandchildren security that they will desperately need if the wealthy continue to win the class war.


I think most people realize this. They're just not working for newspapers.

In Kotlikoff’s accounting, if we closed down the schools and handed everyone a check when they turn age 21 for half of what we would have spent on their education we would substantially reduce their net tax burden.

Can someone point me to Kotlikoff's assertions referenced here? (Clearly this is written assuming the reader is familiar with it - but I am not.)

(For those who are really troubled by the prospect of higher taxes we can have an option where people get to pay their grandparents’ tax rates in exchange for getting their grandparents’ living standards.)


Brilliant! :o)

...
written by kharris, January 31, 2013 7:14
Benedict,

This - "Kotlikoff's intergenerational accounting is not applicable in a fiat currency." - depends too much on money and so misses the entire issue of real resources. Governments that print their own money never have to default, but government policy does change resource distribution. Money and debt management can have an effect on the availability of resources, but at any given time, the amount of stuff available to consume is fixed. The guy who borrows or is taxed less can consume more of the fixed amount of stuff, the guy who lends or is taxed more consumers less. The currency system doesn't change that. There is still a decision about who gets what imbedded in all fiscal policy.
class warfare?
written by pete, January 31, 2013 10:23
Lets see, 1968, peak income equality for the U.S., then we have a war on poverty with AFDC etc. 1973 break Bretton Woods treaty, doubling the inflation rate for the next 40 years. End result, capital gets the rents, low end suffers, and so forth. What will stimulus do? More shift to the upper end. That's the way it works. That's the whole plan, make companies more profitable so they hire more people. More profitable means higher returns to capital...why is everyone surprised by this Keynesian outcome?
...
written by Calgacus, February 04, 2013 8:29
Pete - you live in a different, and worse world from the rest of us. Inflation did not double in the 40 years after 1973. The 70s were inflationary. The 80s to the 2010s were not, nor was the postwar era. If you bracket the long non-inflationary periods differently, you can make as bad a story for Bretton Woods being disinflationary.

The Keynes of your world was also different, and worse. Keynes is not about lowering wages. It is about keeping them up, and the free lunch of increased production, increased employment, preferably directly through government employment, lower inflation etc. The free lunch is provided by commonsensical, intuitive Keynesian economics that makes sense, rather than economics that fuddles the mind with nonsense.

Kharris: Wrong (or misleading). Consumption & production is not fixed. OK, maybe it is in the ultra-short run. If we put a reanimated Keynes in charge of our economy, it might take a few days for the benefits to be seen. But the smart money would almost instantaneously start investing, consuming and hiring because they knew JMK was smarter than they.

Yes, there is a decision about who gets what embedded in all fiscal policy. But these decisions can quickly change how much there is in toto for everyone to get. When unemployment is high, due to extreme government mismanagement, as now, making good or even mediocre decisions provides a free lunch - the free lunch provided by deciding to not destroy colossal amounts of resources. So everybody can get more in short order.

Benedict is misleading only because there is no such thing as a non-fiat currency. Money is fiat money, always was, always will be. There isn't gold-standard accounting or fiat money accounting, there is only correct accounting, and correct understanding of its meaning, something Kotlikoff doesn't understand.

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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.

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