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.