Borat Economics

From Dean Baker

The Washington Post and most of the important people in Washington want the United States to be like Kazakhstan. Unfortunately, this is not another Borat movie, this is about the central focus of economic policy in the United States today. 

Kazakhstan has a debt-to-GDP ratio of just 14.2 percent, one of the lowest in the world. By other measures, Kazakhstan doesn’t score so well. Its per-capita income is $11,800, just over one-fourth as much as the United States. Life expectancy for the people of Kazakhstan is just 68.2 years, putting it behind countries like Iraq and Honduras. By most measures, Kazakhstan looks like a rather unappealing place, but factors like the health and wealth of the population don’t matter to the policy elite in Washington. They care about budget deficits and debt, and by that standard Kazakhstan is golden. 

If there were ever any doubt about the absurdity of Washington economic policy debates, it was eliminated with the release of the 2010 Social Security and Medicare Trustees reports. Usually these reports do not differ much from one year to the next. They involve projections over a 75-year time horizon. Even a bad or terrible year, like 2009 or 2010, doesn’t make much difference in the context of a 75-year planning horizon.

However, there was a big change in the 2010 reports. The Trustees decided that President Obama’s health care reform would substantially lower the growth trajectory for health care costs. (The chief actuary for Medicare strongly disagreed with this assessment, but that is another issue.)

The change in projections has very direct implications for Medicare. The slower projected growth in costs eliminated more than 80 percent of the projected long-term deficit.

The shortfall in Medicare over its 75-year planning horizon is now projected to be just 0.3 percent of GDP over this period. This is roughly equal to the annual cost of President Bush’s tax cuts to the wealthy. If these projections prove accurate, then Medicare is very much an affordable program long into the future.

The assumption of lower health care costs also had implications for Social Security. In the last several decades, the portion of workers’ compensation that went to pay for employer-provided health insurance had been increasing at a rate 0.2 percentage points each year. This was the result of rising health care costs.

The 2009 projections assumed that the cost of employer-provided health insurance would continue to rise. The 2010 projections assume that the cost will actually decline at the rate of 0.1 percent a year. This makes a small difference in improving the solvency of Social Security, since wages are subject to the payroll tax, while employer-provided health insurance is not. Therefore the new numbers means the taxable wage base is projected to increase more rapidly through time. 

However, the change in the projected growth of health care costs also has another much more important implication that went altogether unnoticed. It means that workers in the future will be considerably wealthier than we had previously believed. In other words, if healthcare reform will effectively contain cost growth without jeopardizing quality, then our children and grandchildren will be far wealthier than in a world without health care reform.

The 2010 projections show the average worker’s wage will be 47.8 percent higher in 2040 than it is today. This is after adjusting for inflation, so the projections show that workers’ purchasing power in 2040 will be 47.8 percent greater than it is now. The new projected annual wage for 2040 is 6.3 percent higher than figure projected for last year.

To understand the importance of this change in wage growth projections, suppose we told our children and grandchildren that the payroll tax would have to be raised by 3.0 percentage points to support Social Security (an extraordinarily large increase). They would have more money in their pockets with the tax increase under the current projections, than with no tax increase and the wage growth projected in the 2009 report.

If the important people in Washington actually cared about our children and grandchildren and their living standards, then they all would have been celebrating the prospect of the higher living standards implied by the new projections. But that wasn’t the case. Not one of the big deficit fighters even mentioned the projected rise in living standards.

So, let’s be really really clear. The deficit hawks don’t give a damn about the living standards of our children and our grandchildren. They just want to take away our (and their) Social Security and Medicare. This is a class war where the wealthy want to take away anything and everything they can from the people who are not rich. The story about intergenerational equity is just a bad joke.

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Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of False Profits: Recovering from the Bubble Economy. He also has a blog, “Beat the Press,” where he discusses the media’s coverage of economic issues.