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Home Publications Blogs CEPR Blog Do Wall Street and the 1 Percent Thrive at the Expense of Our Kids?

Do Wall Street and the 1 Percent Thrive at the Expense of Our Kids?

Written by Dean Baker and David Rosnick   
Wednesday, 19 June 2013 13:33

One of the most compelling lines put forward by those seeking cuts in Social Security and Medicare is that spending on the elderly is coming at the expense of our children. The people putting forward this argument typically point to the high percentage of children living near or below the poverty line. The argument is that if we could cut money for programs that primarily serve the elderly then we would free up money that could be spent to ensure that the young get a decent start on life.

There are many reasons this logic is faulty, most importantly by implying that there is any direct relationship between the money we spend on seniors and the money we spend on our children. Even if we were to cut funding for Social Security and Medicare there is no mechanism that ensures the money saved would go to helping children. It is entirely possible that the money would simply be diverted to tax cuts targeted to the wealthy or for some other purpose.

As a practical matter, if we look across countries we find that there is actually a positive relationship between spending on the elderly and spending on children. Countries that have been willing to commit a larger share of their output to ensuring that seniors enjoy a decent standard of living also seem willing to commit the necessary resources to ensure that their children have a good start in life.

While there may actually be no tradeoff between spending on seniors and spending on kids, there do appear to be other tradeoffs. For example, if we look at the share of GDP devoted to finance we find solid evidence of an inverse relationship with the willingness to support children.

Figure 1 graphs government spending per kid divided by per capita GDP against the share of GDP originating in the financial sector. There is a significant negative relationship, meaning the larger the share of the financial sector in the economy the less money is spent on kids.[1] (The countries are all the OECD countries for which data is available, excluding former Soviet bloc countries.)    


The chart clearly shows that countries with larger financial sectors are less generous to their children. While this hardly proves causation (it could be that if countries spend more money on their kids they won't go into finance), it certainly should raise questions as to whether financial interests are hostile to public spending on kids.

In fact, we also look at the question about the wealthy more broadly. Figure 2 shows government spending per kid divided by per capita GDP against the share of income going to the richest 1 percent. The chart includes all the countries for which data is available. In this case there is also a negative relationship with an even stronger statistical fit. The downward slope to the line is just slightly short of being significant at the 1.0 percent level.[1]

cepr-blog-baker-rosnick-06-19-2013-fig-2This chart again shows a clear negative relationship, this time between the share of income going to the richest 1 percent and the amount of money that governments are willing to spend on kids. This may suggest that the richest 1 percent are not happy about supporting other people's children through the government. In that case, the more money they are able to control, the less is likely to go to kids.
Of course these simple regressions are far from conclusive, but they do suggest that we might be looking in the wrong direction if we view spending on the elderly as coming at the expense of our children. Rather it may be the case that when wealth and power get concentrated in the financial sector and/or in the hands of the very rich that society will be less willing to spend money to ensure that children have a decent shot in life. If that is true, those looking to cut Social Security and Medicare in order to help our children are barking up the wrong tree.

[1] The coefficient on the percent of income going to the top 1 percent is –0.018 with a T-statistic of 2.98.  

The coefficient of the finance share is –0.55 with a T-statistic of 1.99, which is significant at the 10 percent level.

Comments (3)Add Comment
Gold Standard Accounting
written by Benedict@Large, June 20, 2013 5:00
The federal government does not have to "free up" money from one place in order to spend it in another. You only have to "free up" money when you are using gold standard accounting. We are not on the gold standard anymore.

Income inequality is robbing both the young and the elderly
written by rationalrevolution, June 21, 2013 10:02
As I show here, the real problem with Social Security funding is actually growing income inequality, which has reduced the Social Security tax base from 60% of GNI in 1983 down to 53% of GNI by 2009 (and probably lower than that now).

This is because a growing portion of Gross National Income is going to forms of income other than wages (primarily capital gains) and because a growing portion of wages are over the cap. (84% of wages in 2009 as opposed to 90% in 1983)

It is an absolute fact that this is THE cause of Social Security budget shortfalls. When Greenspan reformed Social Security in 1983 he said that his reforms would make Social Security indefinitely funded at 100%.

The reason that this didn't turn out to be true is because the distribution of national income changed radically after 1983, after having been stable for 40 years. Greenspan's calculated made the assumption that the distribution of income both between capital gains and wages and within wages would remain the same into the future, yet the other economic policies he advocated had the effect of radically changing income distributions, thereby undermining his Social Security reforms.

If the distribution of GNI were the same today as it were in 1983, there would be no project SS shortfall at all.

We don't lack the money to provide Social Security, Medicare, and child benefits as a nation, we lack the money to do this as a class.

See my blog post here on Social Security:

I'd link my other blog post on income inequality and education, but apparently you can only include one link here....
written by ainol, June 24, 2013 2:05
ainol professional brand website !

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