Stimulus first, austerity later
Via Alex Tabarrok, a recent study by Richard Evans, Laurence Kotiloff, and Kerk Philips at VoxEU examines the effects of long-term large-scale redistribution of young Americans’ savings to the elderly:
[T]he young, because they have longer remaining lifespans than the old, have much lower propensities to consume out of their remaining lifetime resources. This prediction is strongly confirmed for the US by Gokhale et al (1996).
Hence, in taking from young savers and giving to old spenders, which Uncle Sam has spent six decades doing on a massive scale, the lifecycle model predicts a major decline in US net national saving associated with a major rise in the absolute and relative consumption of the elderly. This is precisely what the data show.
In 1965, the US net national saving was 15.6% of net national income. Last year, it was just 0.9%. And, according to Gokhale et al (1996) and Lee and Mason (2012), the secular demise in US saving has coincided with a spectacular rise in the consumption of older Americans relative to that of younger Americans.
As Feldstein and Horioka (1980) document, US net domestic saving tracks US net national saving. Hence, postwar intergenerational redistribution has not only lowered net national saving; it has also reduced net domestic investment, from 14.0% of national income in 1965 to just 3.6% in 2011. This decline in the rate of net domestic investment is, no doubt, playing a major role in the slow growth in US wages. Indeed, the level of private-sector average real earnings per hour, exclusive of fringe benefits, is lower today than it was 40 years ago.
Kevin Drum objects that the VoxEU study comes off as overly pessimistic. The study reports that simulations suggest that massive young-to-old redistributions take on average a century to reach 100% confiscation. To which Drum demurs: “Say what?”
Putting aside economic predictions of when it will be “game over,” it can hardly be denied that our present course is headed to ruin. We cannot expect the young to save and invest given existing structural political incentives to let the government worry about the future for you. “Stimulus now, austerity later” is a fine mantra if you can believe austerity will ever come. But our leaders have given us little reason to think so. As Garrett Jones puts it, “the best way to prove you’ll do something later is to do it now.” “Once your politicians have built a good reputation, you can do quantitative easing without setting off inflation, you can run massive deficits without scaring bondholders. But reputations get spent.” Like the budget, Washington’s credibility has long been running a deficit for some time.
The game, then, is finding new ways of pushing austerity out into the indeterminate future without looking like it’s because you’re unwilling to endure the harshness of fiscal reality. Just say, like Drum does, that we’re too reliant on foreign oil and we need to invest in renewable energy before we think about austerity. And education. And healthcare. And pensions. Just fix all that, then we’ll be austere. Promise.
It doesn’t take an economist to see this is the camel following its nose into the tent. Private decisions regarding spending and investing play a large role in whether banks lend, whether new businesses will begin and existing ones expand, whether new jobs will be created and employees’ compensation increased, and so on. Programs like social security that distort underlying private decisions upset the entire ecosystem. They warp incentives and deprive the marketplace of accurate signals. This in turn warps the predicates: frozen lending systems and stalled job markets are wrongly labeled “market failure” and subjected to new government programs.
The issue ultimately is one of a house divided. Can free market principles co-exist with planned economy aspirations? I don’t think we have to be all one thing or all the other, but we have to be presumptively one thing or the other.