Borat Economics: Why do the Debt Hawks Want to Copy Kazakhstan?

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.