Baby boomers and the economy
By SCOT LEHIGH
New York Times News Service
As zero hour nears in our latest manufactured budget crisis, let’s ponder this question: What would policymakers be doing if the country were well and intelligently governed? I know, I know, that seems like an irrelevant hypothetical. But since pundits and pollsters aplenty stand ready to assess the fallout from the sequester, let’s take the less-traveled policy path.
Some of the most thoughtful answers I’ve seen come from Princeton economist Alan Blinder. No surprise there: Blinder, whose resume includes a stint on Bill Clinton’s Council of Economic Advisers and several years as vice chairman of the Federal Reserve, is one of America’s most thoughtful economists.
Blinder, who’s just out with a new book, “After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead,” has taken a refreshingly clear-eyed look at our fiscal plight.
His analysis leads him to a three-part conclusion. Right now, “with the economy still so weak, the case for near-term fiscal contraction is weak as well,” he writes. “We shouldn’t kick away the fiscal crutch until the patient is ready to walk.” Indeed, analysts have said that one of the major reasons the U.S. economy suffered a slight economic contraction in the last quarter of 2012 was cuts in government spending.
Over the next 10 years, Blinder tells me, we need a total of about $4 trillion in deficit reduction to bring deficit and debt to manageable levels. Here’s the good news: With the cuts already made and the taxes already raised, we’re two-thirds of the way there. Although he doesn’t support the impending across-the-board budget cuts, a balanced deficit-reduction package of the same size as the sequester would bring us most of the rest of the way, he says.
But now for the “oh, no”: Over the longer term, which Blinder defines as the 2020s, 2030s, and beyond, the picture gets considerably grimmer. Mind you, that’s not because of new spending by President Obama. Rather, it’s largely due to the increasing number of baby boomers who will be tapping Medicare or Medicaid, and to the growing interest payments on our burgeoning national debt. There are some lessons here for both sides of the political aisle.
Republicans often use the average post-war level of federal revenue — about 18.5 percent — as their guide for the proper level going forward. Problem: At 70 to 75 million, the baby boomers are, by historical standards, an anomalously large generation.
“The simple demographic fact is that for a long time we are going to have an older population than we have had in the past, and that means a lot more expenditures for Social Security and for Medicare,” Blinder says. “My basic view is that, because of demography, we need to add 2.5 to 3 percent of GDP in taxes.” There, he is in general agreement with the Simpson-Bowles recommendations. By way of comparison, the tax increase enacted in December clocks in at a little less than half a percent of GDP.
It’s also apparent that, as the various deficit watchdogs say, those revenues can’t all come from upper earners; some of the burden will have to fall on the middle class.
“I think we’ll need a broader source of revenue,” agrees Blinder.
If that’s one unwelcome reality Democrats need to face, here’s another: A substantial amount of the longer-term reduction will have to be done, one way or another, on the spending side.
The big culprit driving non-interest-payment spending is health care. Those costs are projected to increase markedly, both because of the growing number of baby boomers on Medicare and Medicaid and because, at least until recently, the price of health care has been rising rapidly.
Over the longer term, if we can’t curb those costs, health care spending obligations will go “so high that unless we decide to tax ourselves like Swedes and Norwegians and Germans and the Dutch, there is no way we can fill the gap with tax revenues — and we are not going to tax ourselves that way,” Blinder says.
Blinder’s smart analysis would be a big contribution in a sensibly governed nation. And who knows, if the partisan fever ever breaks in Washington, it just might be in this one, too.
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