After digesting several hours of debate and news coverage over the weekend, it occurs to me that this affair fits rather nicely into my concept of the global macro theme at work: the US economy, with adverse demographics and now so tightly integrated into a global economy which is slowly but inexorably leveling living standards, is simply having to respond in some appropriate way.
The debate is ostensibly about the near term problem of the Federal government’s operating deficit and accumulated debt, but quite a lot of the contention revolves around social security and medicare. Now, if I recall correctly, SS/MC are a separate trust fund, so they aren’t even a part of the operating budget calculations. That being the case, we have two separate debates going on here but they are being combined in a way that does make sense in seeing the long term fiscal picture, but is probably lost on a good number of US citizens.
On the operating budget side the problem we have, and I don’t see anyone framing it exactly in this way, is that the economy is fine, labor is highly productive, but we have about 15 million people too many that the economy doesn’t need to produce the output it produces. We’re simply not going to get mass production industry back from China and other offshore countries because we can’t push compensation low enough to be competitive, period. The debate resolves down to how we are going to carry the extra 15 million.
Democrats for the most part see it as a moral duty to provide some maintenance level of living standard for them, either by direct employment or by public spending run through the private sector. Republicans for the most see this (correctly I believe) as a drag on the economy. The reason we aren’t having a coherent debate is that we have a moral argument on one side and an economic argument on the other. The are each having a one sided debate so there is nothing much to agree on. If we can get to a place where we can figure out how to employ them productively through government policy, fine. If not, then the market needs to be allowed to sort it out. As an optimist, I don’t see the outcome as necessarily bad.
As for the SS/MC dimension of the problem, it looks like the classic failure of a ponzi scheme, which is literally what those programs are. So long as the working population was growing faster than the retired population, the system worked fine. Now that the demographics have shifted (we have seen data about the shrinking size of the workforce) it collapses. Plain and simple, no debate needed. We’ve known about this for a long time.
Strip out the disability part of social security, set the retirement age to 70, means test the benefits, and we are good to go. Medicare and medicaid should be shut down, period. Too much opportunity for waste and fraud, and there is no credible way to police it effectively. Health care is an area where market discipline is really the only way to go, and a Paul Ryan type plan is a sensible way to approach it. Insurance companies get a lot of criticism, much of it deserved, but they generally do a decent job of pooling risk and controlling cost.
Hmm…that sounds dangerously close to a political post, and we said we weren’t going to go there. I’m sticking with the economy category on this one.