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The CEPR Fix for Generational Inequity

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Written by Dean Baker   
Monday, 21 March 2011 09:16

The NYT treated us to this column from a recent college grad complaining about the prospect that he will be faced with higher taxes to pay for his parents' and grandparents' Social Security and Medicare. The idea that our children and grandchildren are going to be poorer on average than we are is a regular theme of much of the budget reporting and advocacy work (think Peter Peterson funded enterprises) that we see regularly.

It is of course absurd on its face, as all economists and budget analysts know. Real per capita disposable income has risen at average rate of just under 2.0 percent year as shown in the chart below.

Book1_17431_image001

Source: Bureau of Economic Analysis.

 

All projections show that real per capita disposable income will continue to rise, meaning that future generations will on average be richer than we are today and much richer than our parents and grandparents' generations. Of course there is an issue of inequality, if most of the gains from growth go to the Goldman Sachs-Mark Zuckerberg types, then most today's children may not be much better off than their parents and grandparents, but that is an issue of inequality within generations, not between generations.

However there is a simple remedy for the sort of whining about inter-generational equity that the NYT treated readers to this morning. We can add a box on tax returns to allow for a generational equity adjustment. Anyone who feels that their generation has gotten a bad deal can check the box and indicate the birth year of when they think people got a better deal. (The year entered must be earlier than their actual birth year). They will then have their taxes adjusted so that they have the same after-tax income of someone at the same income percentile as the year they chose.

This means that if the 24 year-old featured in today's NYT thinks he has a bad deal in life and that people born 30 years before him got a better deal, then he just checks the box on his tax form and puts in the 1957. Suppose that he is in the 90th percentile of income for people who aer 24 in 2011. He would then have his taxes adjusted so that he would have the same real after-tax income as a 24 year-old at the 90th percentile in the income distribution in 1981.

In this case it would mean a large cut in after-tax income (those at the 90th percentile have done pretty well over the last three decades), but at least our NYT column writer will know that his generation has been treated fairly. This CEPR fix for generational equity will both help to reduce the budget deficit and silence the generational equity whiners. They just check a box on their tax returns and will have what they want. How's that for a win-win?

Comments (8)Add Comment
Per Capita Income Deceptive
written by Chris V, March 21, 2011 11:42
Looking at per capita income is deceptive given that most of the gains went to the highest 1% of income earners over the last 30 years. Median income would be a better measure.
...
written by Arjen, March 21, 2011 11:49
I believe it is of course absurd on its face that all economists and budget analysts believe that real per capita disposable income can keep on rising. It just confirms how economists and budget analysts are completely cut off from reality. There is no way that our incomes can keep on growing when the energy suppply stops increasing and there is absolutely no way that we can keep on increasing our energy supply. Inform yourself about the enrgy situation and we'll talk again...
...
written by Mara Fridell, March 21, 2011 5:41
Dean Baker (b. 1958) enters the intergenerational warfare fray...and uncharacteristically, forgets about how to use proper statistics (the median). And we haven't even hit the issue of contemporary asset price inflation that the younger and not the older generation is faced with. You are pulling an usually autistic economics move right now, Mr. Baker, and I am more than a little curious about why on this issue. Class relations are more determinative than intergenerational relations, but it's not clear at all that generational interests don't assist class warfare, in more ways than one: http://blogs.berkeley.edu/2010...t-page-1/. Better to be clear about how than to obfuscate.
A rare miss from CEPR
written by speedgraphic, March 21, 2011 7:20
Besides the obviously wrong choice of mean instead of median, that anyone from CEPR could call the plight of young Americans whining is beyond the pale. Mr. Baker, I will check the box - I am 25 and in the fourth quintile of personal income in the US. In fact, YOU can fill out the year - your choice. In return, I get the collegw tuitions that the people born in that year paid, and the job marlet they competed in. How does your piss poor thought experiment operate now?
Wage Trends
written by Dean, March 22, 2011 8:11
Folks are absolutely right that the distribution matters hugely, which is exactly my point. Insofar as young people are having a bad time now it is because the Peter Petersons of the world have taken all the money (and the economy is being ineptly managed). Of course even with the upward redistribution, income has reason at all points along the wage distribution.

Those below the 80th percentile certainly have not gotten their share of the growth, but they have gotten something. Here's the data from my friends at EPI[http://www.epi.org/page/-/datazone2008/wage comp trends/wagecuts_all.xls]. So, you probably do not want to pick an earlier year in this deal unless you want the government to increase your tax burden.
generation of vipers
written by coberly, March 22, 2011 1:06
Brave try, Dean.

You cannot convince some people that they are not getting a raw deal. They can always know that their sister got the biggest piece of burfday cake.
Get Off My Lawn / I Was In Labor For 13 Hours with You
written by O Your Various Decorative Scapegoats, March 22, 2011 3:14
Thanks to this thorough, convincingly-demonstrated blog post and coberly's emotion, I'm newly convinced. Forget all comparative historical political-economic data offered here in previous posts and elsewhere, this is truly the best and improvingest of all possible worlds, and let us salute the Greatest Generation, which is always the generation on the cusp of mass mortality. Are not the humiliations of aging and the horror of immanent mortality enough torment without younger generations of impertinent ingrates also insisting we recognize declining economic indicators? So bratty! No. Certainly, we leave this mortal coil a better place for our having been here. Here, here, my cohort, to us. And to us again.
Education: The Source of the Generational Inequality Problem
written by Dean, March 24, 2011 4:46
Let's try this one again. On average, people are much richer today than they were 30 years ago. And, all the projections I know of (this is from folks like the Congressional Budget Office, the Office of Management and Budget, and every private forecaster around) show that people will be on average much richer 30 years from now than they are today. We are on average getting richer, not poorer.

However, a growing portion of this income has gone to the richest 10 percent of the population and especially the richest 1 percent. This means that most people have seen very little of the gains from economic growth.

I don't know anyone who disputes these facts. What I have a hard time understanding is how someone -- say at the 50th percentile of the income distribution -- can think that they are poor because their parents or grandparents at the 50th percentile of the income distribution got such a good deal. This is so obviously not true, that I can't imagine how anyone can believe it. I know that Peter Peterson is spending lots of money to push this line, but i thought that people could recognize such transparent nonsense.

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