Wednesday, February 06, 2008

Mankiw's Wish

It's Greg Mankiw's birthday and he has an editorial in the NYT to celebrate the occasion titled, "My Birthday Wish: Not Burdening Our Children". Unlike the politicians on the campaign trail who invoke "the children" at every turn, Mankiw wants to make his wish come true through increased personal responsibility. He starts the column by talking a little about the current economy:

As I reach this particular milestone, it is hard not be worried about the economy. No, I am not talking about the subprime meltdown and the possible recession that looms on the horizon. I am confident that the team at the Federal Reserve can contain that problem.

Moreover, from the broad vantage point of history, the next recession, whenever it occurs, will likely be a minor blip. My guess is that it will be similar to the recession that was enveloping the economy the day I was born.

Don’t remember the recession of 1957-58? Most people don’t. It was a garden-variety slump — painful to those who lived through it, but short-lived and leaving few lasting scars. Today it is remembered only by the few experts who crunch the numbers in the study of macroeconomic history. My parents’ recession is not my problem, and our next recession will not concern our children when they reach adulthood.


Economic slowdowns, whether they morph into a recession or not, always seem like they will never end. Like Mankiw, I am not much worried about the present state of the economy - this too shall end. What Mankiw is worried about is the long run cost of Social Security and Medicare:

Long before I was born, Franklin D. Roosevelt established a compact among the generations. Families had long cared for their elderly members, but Roosevelt federalized that responsibility in the form of the Social Security system. Social Security is sometimes viewed as a pension plan, but it is mostly pay-as-you-go. The working-age population taxes itself to support its parents, in the hope and expectation that its children will do the same. On the day of my birth in 1958, the payroll tax to pay for this program, including both the employer and employee shares, was 4.5 percent.

Around the time I started grade school, Lyndon B. Johnson expanded the generational compact to include health care for the elderly. The Medicare system increased the payroll tax, but only modestly at first. Health care technology was far more primitive back then and, as a result, less expensive. By 1968, when, like my younger son today, I was in third grade, the payroll tax for both programs had risen to 8.8 percent.

Today, the payroll tax for these programs is 15.3 percent, far higher than the programs’ creators ever imagined. More worrisome is that this 15.3 percent is nowhere near enough to maintain solvency in the future. When my generation of baby boomers retires in large numbers and starts claiming benefits, spending on these programs will far outstrip revenue at the current tax rate.


Mankiw is right. If we don't do something about these programs, taxes will just keep rising and the cost to the economy will be enourmous. Mankiw makes some great points in this editorial. Read the entire thing.

1 comment:

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