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Borat Economics: Why do the Debt Hawks Want to Copy Kazakhstan?
Rising Wages and Lower Healthcare Costs Will Make Deficit Cutting Idiotic
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 the about central focus of economic policy in the United States today. Because Kazakhstan has a debt to GDP ratio of just 14.2% - 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 a rather unappealing place, but factors such as 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 was ever any doubt about the absurdity of Washington economic policy debates, it was eliminated with the release of 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, as 2009 or 2010 were, 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 Barack Obama's healthcare reform would substantially lower the growth trajectory for healthcare 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% of the projected long-term deficit.
The shortfall in Medicare over its 75-year planning horizon is now projected to be just 0.3% of GDP over this period. This is roughly equal to the annual cost of President George W Bush's tax cuts to the wealthy. If these projections prove accurate, then Medicare is very much an affordable programme long into the future.
The assumption of lower healthcare 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 of 0.2% each year. This was the result of rising healthcare 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% 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 mean the taxable wage base is projected to increase more rapidly through time.
However, the change in the projected growth of healthcare 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 jeopardising quality, then our children and grandchildren will be far wealthier than in a world without healthcare reform.
The 2010 projections show the average worker's wage will be 47.8% higher in 2040 than it is today. This is after adjusting for inflation, so the projections show that workers' actual purchasing power in 2040 will be 47.8% greater than it is now. The new projected annual wage for 2040 is 6.3% higher than the 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% to support social security (an extraordinarily large increase). They would still have more money in their pockets with the tax increase under the current projections, than they would have 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 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.