Yesterday's post regarding Laurence J. Kotlikoff's disturbing article in the Federal Reserve Bank of St. Louis Review was meant to get your neurons working, as are most posts here. However, there are problems. Maybe looking at these will get more neurons working.
Generational accounting, which Prof. Kotlikoff co-developed in the late 1990s, like global warming, is based on what's charitably described as spreadsheet knowledge. The only facts in such projections are what we already know; the rest, no matter how hard the numbers look, is speculation. With global warming, as anyone who has studied chaotic systems knows (and has known for forty years), the claim that any scientist, or any consensus (sic) of scientists, can project a century of detailed weather behavior is a political fiction; it has no basis in math or science. Could this also be true with generational accounting?
Kotlikoff's depiction of the near future has some problems.
1) There is a good chance that the need for labor in the production of goods will follow decades-long trends in the US, Europe and Japan and sharply decline. Numerous manufacturing plants in the world already operate without human workers. The dramatic uptick in Chinese factory employment, like that in Mexico and in India, may only be a temporary change. As has already happened throughout the developed world, Chinese, Mexican, and Indian factory operators may find it cost-efficient to rationalize the human element out of their manufacturing plants altogether. Try forecasting spending patterns, tax receipts and the problem of unfunded liabilities with fewer, maybe a lot fewer, workers. The current trend has favored cheap labor outside of Japan, Europe, and the United States. The advantages of low cost labor have been hugely amplified because there are far too many workers for manufacturing positions current or planned. If laborers are no longer required in the newly developed world because of the application of technological changes already in operation elsewhere, the real problem won't be paying for government-guaranteed liabilities to the retired, but how to distribute wealth not generated by human beings to sustain a rapidly growing population of the unemployed.
2) Kotlikoff's future, as so many economists's futures, does not include in the American savings rate the enormous funds held in private retirement acounts, including IRA's, TIAA-CREF, and similar, widespread programs. In mutual funds alone, these amounted to nearly two trillion dollars nine years ago, according to the report Fundamentals, prepared by The Investment Company Institute, and nearly ten trillion dollars altogether. These funds, as their enabling legislation for several decades, are a clear market signal that individuals have serious doubts about the ability of government-guaranteed benefits to uphold their standard of living. Further, his tax picture, which suggests that the retired population is essentially tax-free, is wildly inaccurate. As retirees spend down these funds, which have nearly doubled since 1997, they will pay federal, state, local and sales taxes on those distributions, taxes initially avoided by investing in the retirement plans. At an average, overall tax rate of 35% (for all taxes), that could be seven trillion (at the value of today's retirement accounts) to the various government treasuries. Social Security distributions are also taxed. Funding government liabilities to the retired, in fact, is substantially subsidized by taxes on retiree income from retirement accounts and Social Security. Even for retirees, there will be no free lunch!
3) Kotlikoff's projection regarding Medicare and Medicaid liabilities doesn't include market pressure on wages and benefits in the health care industry. In New York State alone, the difference between wages and benefits in New York and California makes Medicaid three times as expensive per average patient in the Empire State as in Arnold Schwarzenegger's state. These differences are upheld by New York State taxpayers, already hard-pressed. Politics is a part of market pressure. If the taxpayers can't afford to pay any more and then apply pressure to legislators, then the expectations of health care workers will be heavily impacted. We might see a resulting, dramatic shift in the use of office automation in the health care industry (much of which still operates as if we lived in the 1950s). If that shift occurred, and visits to hospitals (which this has author has made a lot of) suggest that it has already started, medical costs, at least those pertaining to administration, may flatten, and might sharply decline. Note also that a major direction in medicine for the past decade, accelerating year by year, and heavily influenced by insurance industry pressure, is to dispense with hospital stays, and to substitute new drugs for older, more expensive treatments. As this develops, and as new drug investment is amortized, procedural costs might flatten, and even decline. Another trend is increasing institutional unwillingness to support unlimited medical demand, which has emerged in sharply higher insurance costs. Market pressure from medical care consumers is likely to impact demand, with a potentially huge, downward impact on costs.
The point? Oftentimes, and economists are leaders in this, we take a picture of the present and cast it onto a future timeline as if every constituent of the present will carry forward for the next century. We should know from history that such an assumption is almost always wrong. For one, there's an odd thing about forecasting: assumptions, while stretching the present into the future, seem to be applying a political bias as a means of getting certain results. This is almost certainly the case with global warming, where, despite the best efforts of MSM and other institutions to suppress embarrassing, factual knowledge, we know that reports, including some very expensive ones from the UN, have been deliberately altered to make conclusions politically correct.
This is not to knock the brilliant work of generational accountants, who have applied knowledge far greater than this writer has to try to shape saner fiscal policy than the one that's obtained in Washington and in many other capitals for far too long. The old saw about spending within one's means is still utterly lost on politicians (and their economists). But, as in all things, one must proceed far more on the known than on the guesstimated.
Luther
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