by L. Randall Wray, New Economic Perspectives
Editor’s note: This is a continuation of the discussion that Prof. Wray has been having with John Carney of CNBC. The prior installment was posted 
yesterday.
yesterday.John Carney agrees with me that supporting our elderly is not an “affordability” problem, but he claims that I fail to see the “real” burden—the dependency ratios and all that. Actually I’ve been writing about that since the early 1990s. The “real” burden is the only thing that matters.
Here’s just a short list of easily accessible things I’ve written at www.levy.org:
- Public Policy Brief No. 98 | February 2009 The Case Against Intergenerational Accounting: The Accounting Campaign Against Social Security and Medicare
- Working Paper No. 468 | August 2006 Global Demographic Trends and Provisioning for the Future
- Policy Note 2006/5 | July 2006 The Burden of Aging
- Policy Note 2005/6 | September 2005 Social Security’s 70th Anniversary
- Policy Note 1999/8 | August 1999 More Pain, No Gain
- Public Policy Brief No. 55 | August 1999 Does Social Security Need Saving?
This is just a small sample; the last one listed (PPB 55) and WP 468 are probably the best things to read first, then do PN 2006/5.
Now to be sure, I think that while his argument that paying benefits to great grandma somehow makes young women infertile is bit of a stretch, there is a tiny bit of truth in it. Research shows that the best form of birth control is the rising status of women. If you liberate women from the drudgeries of subjugation, you kill two birds with one stone, so to speak. They choose to have fewer kids (better for the environment and long run sustainability of the species—although I suspect Carney and the other Austerian Austrians don’t accept the results of science) and they get to enjoy greater equality with men.
There could be some impact from Social Security as well as all the other progressive government programs that increase women’s security so that they do not feel so dependent on boorish husbands who just want to knock them up and keep them barefoot in the kitchen. So, OK there is a loose link. As I said, the “public purpose” is inherently progressive. Government has an important role in promoting gender equality. And that’s good for the environment, too. I consider both of those to be important roles for government to play.
Carney and I agree 100% on the MMT conclusion that we can always “financially afford” grandma. I think there is a bit of a disagreement on taxes and Social Security spending, however. We make the benefit payments by keystrokes. The purpose of that is to move resources to grandma—we credit her bank account so she can shop at a store rather than dumpster dive.
Now, why do we tax workers with the payroll tax? Not to pay for the benefits (Carney agrees on this, I think). Rather, it is to prevent current workers from buying up all the output, competing with grandma’s small benefit checks for scarce goods and services. That would of course cause inflation once we exhaust capacity.
(I want to be clear here: I’ve always opposed the payroll tax as a poorly designed way to achieve the goal of ensuring demand doesn’t exceed capacity to produce. Better to have a progressive tax that hits everyone. And John would probably agree with Warren Mosler and me that payroll taxes improperly reduce the incentive to work—which is exactly the opposite of what we need if the problem is that production is too low!)
So the worry is about the real resources. The question is about capacity to satisfy workers, their kids and other dependents, and all the grandmas and grandpas and people with disabilities who collect Social Security. Clearly there is no problem today, and has been no problem in the postwar period. (WWII was a different matter as we had to shift half of all production to the war effort.)
We’ve always operated way below capacity (US capacity plus the net imports foreigners want to sell to us). Indeed, our economy would have performed much better if we’d paid all the grandmas more—to raise aggregate demand, to increase employment, and to let entrepreneurs produce and sell more so they could get more profits encouraging ever more investment and creation of capacity.
Carney and other enemies of Social Security always claim the problem is in some distant future—not today—when dependency ratios rise, when we will have fewer workers per grandma. They say the “fact” is that the burden will become too great.
OK NEP has two responses.
1: He’s got his facts wrong, as we have demonstrated in many publications. There are two important issues here. First the total dependency ratio (old + young) peaked around 1965 and will (likely) never reach that level again. Remember that workers had to support 3.7 kids on average back then—so there were fewer grandmas but more Biffs and Buffys. The kind of support needed is different (and yes, grandma support might possibly be more “socialized” than support of kids—but even that is questionable, and that is a political not economic consideration). But kids are a “burden”, too. (Believe me; I’ve got some. There are times I’d trade them for a few grandmas.) Second, on all projections (even pessimistic ones) the real living standard of workers will continue to rise even as workers are called on to support more old geezers. In real terms, they will be better off than today’s workers.
(As an aside, the presumption always is that gramps and grandmas do nothing to contribute to production. False. Even if they do not work for pay, they help out. Indeed, most of the care for the extremely old people is done by women over age 65—and most of that unpaid. The idea that elderly people are nothing but a burden is false. I’d go ahead and pay them for some of that work. Can anyone say Job Guarantee?)
2: But more importantly: what is the alternative? Soylent Green? Support ‘em or eat ‘em, that is Hamlet’s question. Even if we eliminate Social Security entirely the real burden remains.
And indeed it most likely gets worse. Here’s why. Workers of each generation will need to set aside more saving (to avoid being turned into canned food or reduced to dumpster diving or living with ungracious kids who are resentful that they got stuck supporting parents who live too long) over their whole lifetime. So consumption out of wages will be chronically insufficient for firms to recover costs. Sales will chronically fall short due to the “sinking fund” of worker saving. The inducement to invest and innovate would be much lower. AND THEN SAVING WOULD BE LOWER! (Investment creates saving, you know. Trying to save more does not actually mean you get more saving—paradox of thrift. So unless budget deficits or trade surpluses rise to fill the gap created by lower investment, we end up with less saving to take care of elders thrown off the safety net of Social Security.)
And we know from experience (think 1930s before Social Security) that workers never really saved enough (surveys at the time showed that huge portions of the elderly had no visible means of support)—so many will be reduced upon retirement to living on the fringes of society supported by handouts and fighting with stray dogs for scraps of food.
I know that some Austerian Austrians actually relish such a dystopian future. They love the movie A Boy and His Dog, or Mad Max. It is just the sort of free market society they are trying to create.
But the problem is that it can only be implemented undemocratically. As Carney and others lay their proposals out on the table so that we can see what kind of government they want, the reaction by most people is sheer horror.
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About the Author
L. Randall Wray is a Professor of Economics at the University of Missouri-Kansas City, a Senior Research Associate at the Center for Full Employment and Price Stability, as well as a visiting Senior Scholar at the Jerome Levy Economics Institute of Bard College. He is a past president of the Association for Institutionalist Thought (AFIT) and has served on the board of directors of the Association for Evolutionary Economics (AFEE). A student of Hyman P. Minsky while at Washington University in St. Louis where he earned his Ph.D. in economics (1988), Wray received his B.A. in Social Sciences (1976) from the University of the Pacific, Stockton, and his M.A. in economics (1985) from Washington University in St. Louis. Professor Wray has focused on monetary theory and policy, macroeconomics, and employment policy. He is currently writing on modern money, the monetary theory of production, social security, and rising incarceration rates (Penal Keynesianism). He is developing policies to promote true full employment, focusing on Hyman P. Minsky’s “employer of last resort” proposal as a way to bring low-skilled, prime-age males back into the labor force.
Longer bio and partial list of publications are here.
