Eakinomics: How Not
To Grow And Prosper
Economics is not complicated. Combine capital and labor to produce output
and generate income. Repeat. If you want more income per person – i.e., an
improved standard of living – increase the amount of capital and combine
with labor. Repeat.
How do you increase the amount of capital? Save. Put down that bag of
Twizzlers (or can of Diet Coke, or lavish dinner at P.F. Chang’s) and
save the money. The financial markets will channel those savings to a firm
that wants to purchase new equipment or expand its factory – the saving
finances the increase in capital. Saving is the essential activity
undergirding economic progress.
So, I found it distressing to read a recent column by Larry Summers arguing
for less saving in the United States, facilitated by expanding
government “social insurance” programs such as Social Security, Medicare,
and other entitlements. I wholeheartedly disagree.
As he puts it, “a generous and well-functioning society in which Social
Security meets retirement needs, appropriate unemployment and wage
insurance programs cushion economic shocks, adequate public funding holds
down college costs, and health insurance has generous coverage would
greatly reduce the need for most households to save.”
There are a lot of reasons to quibble in this single sentence. Social
Security was never intended to be the sole source of retirement income. It
was intended to supplement private saving and company pensions to provide insurance
against the risk that one would outlive these primary sources of retirement
income. Public funding of college is not insurance of any kind; it is a
flat-out subsidy of college that will raise the demand for
college and make college more (not less) expensive. Health
insurance is increasingly not insurance: As chronic conditions account for
the vast majority of health care costs, there is no uncertainty to insure
against – it is just pre-paid health care. I could go on, but there is no
reason to pretend that insurance risks are a justification for the
expansion he is proposing.
He then makes a fundamental error. He notes: “Suppose the government
expands Social Security by raising taxes on payrolls by, say, 2 percentage
points and pays the proceeds to the retired generation, then continues this
policy indefinitely. The generation currently retired would get a windfall
gain. And each subsequent generation would earn a return on the taxes it
pays equal to the economy’s
growth rate, which is well above rates of interest” (emphasis
added).
This is true as far as it goes. The problem is that his prescription for a
no-saving economy is a prescription for economic stagnation, a growth rate
of the economy that falls below interest rates, and the windfall generation
living well at the expense of the future of the country. No thanks.
There are also silly statements. “It is highly inefficient to rely on
individual saving rather than universal public programs to deal with life’s
contingencies. Social Security, for example, pays out close to 99 percent
of the revenue it collects in benefits. In contrast, individuals saving for
retirement or the proverbial rainy day can over a lifetime dissipate as
much as 20 percent of their savings in commission payments to financial
institutions. Similar, and probably greater, efficiencies are associated
with government provision of other forms of insurance.”
The 20 percent did not dissipate! It became the income of someone else in
the economy, and may very well have been saved as well. What matters in the
end is the economy-wide capacity to save, invest, and grow.
The paucity of private pensions, a low household saving rate, and
the unsustainable debt trajectory of the federal budget are
well-documented. Twisting the economics to argue for more unsustainable
federal debt and lower private savings is the wrong prescription for the
economy.
|
|
No comments:
Post a Comment