Social
Security Reform: Flows Matter.
The last posting, “Reality Nine: Class and Age: Marxis Dead, Bury Him,” started with the statement:
“A key element of many Marxist’s (and liberal’s) thinking is a conflict
between workers and capitalists…. At its extreme (among some Europeans and in
Social Security), the pursuit of the conflict has been carried to the point of
cutting-off-your-nose-to-spite-your-face.
They treat working as if being employed were antisocial (e.g., the
displacing workers nonsense in the last posting). But, that’s a side issue for another day or a
different posting. The point is: anyone
who is retired is living off of capital.”
This is that “another day.”
There is one of those inconvenient truths haunting
the Social Security discussions. It
concerns the interaction between capital and labor. Interestingly, many social scientists (including,
most disgracefully, economists) address the issue with an apparent total
ignorance of both the techniques of their discipline and the implications of
those techniques.
If quantitatively inclined, one can easily get lost
in issues surrounding multivariate analysis, the aggregate production function,
lag structures, multifactor productivity, and complexities surrounding variable
interaction. However, it’s easy to cut
through the clutter. Without getting
into the details, it’s a simple concept to understand. It can be illustrated with a simple saying:
“One can’t drive many nails without a hammer, but a hammer doesn’t drive many
nails by itself.”
The implications for discussions surrounding Social
Security are stark. To facilitate an
appreciation of just how stark, let’s assume away all issues related to the
relative effectiveness of public sector investment verses private sector
investment. That should eliminate a lot of the political
rhetoric. Granted, the efficient use of
capital is important, but any increase or decrease in the efficiency of
capital’s deployment is being overwhelmed by changes in the flow. Put differently, we are disinvesting
(liquidating capital) so fast and at such levels that any change in efficiency
doesn’t make that big a difference.
For example, consumer sector debt has an
unsustainable upward trend. What’s even
worse, it has grown most among people least able to manage it. People get credit cards before they have
established a savings account. They take on mortgages with no equity,
basically renting money instead of renting without the long term
liability. They borrow in order to buy
depreciating assets. What’s astounding
is that people who have previously displayed the ability to manage debt are
imitating this financial mismanagement.
Granted, consumer debt is an asset from the lender’s
perspective. The lender owns a claim on
an income stream, usually a bond.
However, as was unavoidably apparent during the financial crisis, the
asset was not backed by a reliable claim on equity in an output-producing
item. The loan didn’t contribute to the
stream of goods and services available. In
instances were one could argue that there was a real asset, new housing stock
for example, the value of the future ability to house people was far less than
the amount of the loan.
The US public sector is compounding the problem by
pursuing the same strategy. We’re
imitating the Greeks and their fellow Europeans. Of course, being Americans, we’ll do it
bigger and better. Interestingly, our
government has discovered the trick to annuitizing capital thus making the liquidation
that much harder to stop. While the
exact numbers are debatable, Dennis Cauchon of USA TODAY provides a telling
calculation. In “Federal Deficit Dwarfs Official Tally” he
reports an estimate that the “Federal debt and retiree commitments equal
$561,254 per household.” That’s quite
different from the official numbers reported by the government.
He
goes on to explain why the half a million plus per household is a more honest
estimate: “The
big difference between the official deficit and standard accounting: Congress
exempts itself from including the cost of promised retirement benefits. Yet
companies, states and local governments must include retirement commitments in financial
statements, as required by federal law and private boards that set accounting
rules.”
“The deficit was $5 trillion last year under those
rules. The official number was $1.3 trillion. Liabilities for Social Security,
Medicare and other retirement programs rose by $3.7 trillion in 2011, according
to government actuaries….”
As if a government annuitizing whatever
capital it can get out of the public isn’t bad enough, the rate at which
they’re doing it is both astounding and accelerating. For example, the article notes that under honest accounting practices, “the government ran red
ink last year equal to $42,054 per household ….”
Put
in plain terms, the government used capital at a rate that darn near equaled
all of household income. Figuring in the
tax bite on households, one has to wonder how government officials can fail to
understand why households are struggling.
As
we deplete our capital stock, the productivity of labor falls. That lost output is in addition to the direct
loss attributable to the smaller capital stock.
It is the reduced labor productivity as workers have fewer “tools” to
work with. With fewer tool, the worker
produces less. Since less is produced, incomes fall. In order to protect
current consumption levels, which many citizens and politicians confuse with
living standards, we consume more of our capital.
So
far, however, the focus has been on financial indicators of physical capital. Yet, we know output is the result of multiple
factors, not just physical capital. Human
capital is one of the terms used to refer to the skills and education. It’s convenient since it conveys the idea that
human capital is created as the result of purposeful effort. However,
the notion that education measures human capital is suspiciously self-serving
when advanced by educators. It’s
particularly suspect when viewed against a longer history. Yet, it could well be true of modern
economies. So, let’s consider it a
viable issue.
Historically
education made a major contribution to creating some basic social norms that
represent major forms of human capital.
In development economics, there is a greater appreciation for things
like regularly showing up, developing self-control, sticking to purposeful
activities, listening to instructions, measuring performance based on criteria
other than one’s own personal whim, recognizing the future consequences of
actions and decisions, and accepting classroom/community standards for
behavior. When those “skills” are
absent, the quality of human capital suffers.
Despite
the role education can play, education is far too broad a topic to treat as a
uniform ingredient. One doesn’t have to
look beyond the occupants of some of the tents of the “occupy” movement to
sense that we’ve educated some people in the fine art of contributing less to
society then if they never went to school.
The truth is education contains a large component of consumption as well
as investment. Learning can be, and
often is, great fun.
In
response, some observers focus on disciplines, as in the frequent lament that
the US graduates too few scientists, mathematicians, and engineers. Others focus on some other pet topics: prayer,
classroom size, military training (ROTC for example), research, or the silliest
of all, funding levels. Depending on
what ax one wants to grind, it’s always possible to find some spurious
correlation to support one’s position.
Without agreement on what education is supposed to accomplish, the
debate goes nowhere.
Fortunately,
when the issue is human capital as a factor of production (i.e., something that
contributes to the ability to feed, clothe, and house oneself; basically
support one’s own consumption) the issue is simpler. Once the criterion is clear, it is possible
to establish clear measurement of results. For example, Chinese government funds
for education are expected to improve employability. If the
education doesn’t result in a target level of employment upon graduation,
government funding is reallocated to different programs.
For
better or worse, we seem to have decided that preparing people to provide for
themselves isn’t the role of education.
It’s as if we are afraid that preparing people to provide for themselves
implies a value judgment we aren’t willing to make. Understand this is a very different issue
from the “scientist, engineer, prayer, classroom size, military training (ROTC
for example), research and funding levels debate.” It’s very fundamental. More oriented toward whether we are teaching
basics like “regularly showing up, developing self-control, sticking to
purposeful activities, listening to instructions, measuring performance based
on criteria other than one’s own personal whim, recognizing the future
consequences of actions and decisions, and accepting classroom/community
standard for behavior.”
If you think it is phony issue, a red herring,
consider these facts. A person can virtually assure that they and their family will
avoid poverty by accomplishing three simple goals. The goals are (1) complete at least a high
school education, (2) work full time, and (3) wait until age 21 before getting married
and having a baby. Census data shows
that people who followed all three of these rules had only a 2% chance of being
in poverty and a 72% chance of joining the middle class (defined as above
$55,000 in 2010). These numbers were almost precisely reversed for people who
violated all three rules. Ignorance of
these basic principles (or ignoring them) raised the chance of being poor to
77% and reduced their chance of making the middle class to 4%.
This simple recital
of Census data is confirmed by extensive social science research. It
isn’t ideological. One can find serious
social scientists from libertarians to liberals who only differ in
interpretation and prescribed responses, although each will add his or her pet
items to the list. From the perspective
of human capital, the facts leave little doubt that continued poverty in the US
is the result of a failure to teach some basic life skills.
So, neither human
capital nor physical capital is being added at a pace that can support Social
Security through the twenty-first century.
By contrast, it is very reasonable to argue that historically Social
Security succeeded during a period when the US was expanding both its human and
physical capital. The issue isn’t really
whether the capital stock is large enough.
The issue is whether Social Security can succeed when the capital stock
is shrinking. The unfortunate answer is:
Yes, if your time horizon is an election cycle, and no, if your time horizon is
the life expectance of an average American.
