It's still not clear what mix of spending cuts and tax hikes Obama is focusing on, but we do know that Blankfein, like many other CEOs, thinks that an increase in the retirement age is something that we should be shooting for as a way to alleviate the perceived entitlement crisis.
This is actually common conventional wisdom (we're living longer, we have a debt problem, so let's modestly increase the retirement age), but there are some holdouts who disagree.
Economist James K. Galbraith of the University of Texas made the argument in early 2011 that if anything, we should be talking about lowering the retirement age.
We talked to Galbraith on the phone today to discuss this idea, as well as his assessment of the Fiscal Cliff talks and entitlement (a word he hates) situation in general.
He still likes this idea. With unemployment near 8%, he still thinks that it makes sense, at least temporarily, to reduce the retirement age, to let people get benefits earlier, and to clear up the job market.
My argument is that you have a phenomenon which is very well known called the Baby Boom which is out there and the Baby Boom is a portion of older workers who are approaching, but in many cases are not at, the retirement age. They are, particularly those who have been working in real jobs, I'm not talking about professors or journalists, but people who actually - you know, move boxes, inventory, or stand at checkout counters for a living. When unemployed, they have a very difficult time getting a new job and early retirement is intrinsically attractive.
Why aren't they taking it? Possibly because it's not attractive enough, possibly because they're a little too young. So the solution is to make the early retirement available for a limited period, let's say three years...and let the people who take it at 62 get a better deal than they get now so that a higher fraction of the working population will take it at 62.
But what about the general entitlement problem, and all the debt we're drowning in?
Galbraith calls this "propaganda" that's been pushed for decades by the same people, who have made predictions that have never come true. He specifically called out old writings (from the '80s and '90s) of anti-debt activist Pete Peterson.
The whole notion that there's this great deficit crisis which can only be dealt with by cutting SS, Medicare, and Medicaid, that's just - it's a relative recent front in a very old propaganda war. People who have been, for decades, blathering on about the disaster in SS, Medicare, and Medicaid. I highly recommend the back issues of the New York Review Of Books, which lists Peter G. Peterson, who prowled on about this.
If there is a problem, he says, it's not the government's expenses per se, but that costs for covering the elderly's healthcare are expensive regardless of who's paying for them:
If you're asking whether there are problems with Medicare and Medicaid, the standard answer on that is health care costs are the problem, and that is not dependent upon whether or not you are on a private or public insurance scheme. In fact, Medicare pays less to providers than private insurance does. The reason doctors accept Medicare patients is that unlike private insurers, Medicare actually writes the checks and pays people, which doctors like. I suppose you've encountered doctors who have had problems getting cash out of insurance companies, if you haven't, I'll say you haven't encountered a doctor.
The key point which he emphasized over and over again is that changing who pays for people doesn't change the burden. And if anything, if you're worried about generational dependency, you should be in favor of the current structure of Social Security, which makes workers set aside money for their retirement, so that they're not dependent on their children.
Galbraith also has a great rebuttal to those scary CBO charts showing entitlement costs surging, and swamping GDP, putting the US on a Greece-like debt-to-GDP ratio. Bunk says Galbraith. Those aren't macroeconomic forecasts, but just "CBO baselines" that are used for scoring laws. The reality, he says, is that there's no way for healthcare costs to surge and get so big while not also boosting nominal GDP significantly, meaning that the ratios can't actually get that bad.
Below is the full transcript of James Galbraith's Interview. Big thanks to Lucas Kawa for transcribing the interview.
BI: So one of the things that people are talking about as a Fiscal Cliff solution, or as part of the eventual Grand Bargain that they're going to reach, is an increase to the retirement age. I know that you've written, contrary to everyone, that we should do the exact opposite: Lower the retirement age. What's your argument?
JG: First of all, an increase in the retirement age is a benefit cut, and it's a benefit cut that is targeted at the most vulnerable, lowest income part of the population because what happens in Social Security is about two-thirds of the eligible population takes it at 62, and if you raise the so-called retirement age to 67 that means you'll get a deeper discount when you take it at 62. So it's a direct benefit cut. People take it at 62 because they're unemployed to begin with — that's a good reason, you need the income — or because they've been working for forty years in some nasty job that requires standing up all day with a back brace and they're tired out. Either way, they're targeting people you shouldn't target.
Social Security, for the moment, appears to be off the table. But one also hears harsh cuts on Medicare — increasing the eligibility age of Medicare is a partial privatization that requires you to retain your private insurance, if you have it, for an extra few years and that is a privatization. That's a kind of egregious maneuver.
My argument is that you have a phenomenon which is very well known called the Baby Boom which is out there and the Baby Boom is a portion of older workers who are approaching, but in many cases are not at, the retirement age. They are ... those who have been working in real jobs, I'm not talking about professors or journalists, but people who actually, you know, move boxes, inventory, or stand at checkout counters for a living. When unemployed, they have a very difficult time getting a new job and early retirement is intrinsically attractive.
Why aren't they taking it? Possibly because it's not attractive enough, possibly because they're a little too young. So the solution is to make the early retirement available for a limited period, let's say three years ... and let the people who take it at 62 get a better deal than they get now so that a higher fraction of the working population will take it at 62.
If you could work out a formula that would be attractive to a lot of people, they would move around in the labor force and those jobs would open up in the course of events and businesses would fill them with younger people who are all trying to get work.
But you have a situation in which the employment-to-population ratio has fallen by five percentage points from its peak in 2000, and there's no sign of its recovery. This would do two things: It would move people who are only staying in the labor force for financial reasons or because they're unemployed and need to keep looking for jobs to qualify for unemployment insurance, move them into retirement so they can plan their futures in a much more stable, comfortable way, and it would also open up employment for young people who are desperate to get it.
BI: So this is a temporary thing — do you think that the current age of retirement would be generally fine to keep?
JG: There's no reason to extend the current age of retirement. People don't actually have to retire — the notion that the age of retirement is the age at which you get kicked out is not correct. Now, there are people who want to work longer ... (or) employers who want to keep their older workers.
All they have to do is a get a little inducement. It's not difficult. We don't need to manipulate the Social Security scheme in order to provide workers for employers — if I've got a business and want to keep my employees from retiring, I'd give them a little bonus or promise them one. That's not difficult.
BI: I first read your piece on earlier retirement in early 2011. The economy has improved since then. Unemployment has dropped significantly in the past two years. But would you still think that, given the state of the current economy, that you'd like to see a temporary reduction in the SS retirement age?
JG: I still think that at 8 percent unemployment, it's worth looking at. Obviously, I suggested this as an emergency measure in the depth of the crisis, as it would have been even more helpful and pulled a lot of people out of unemployment much more quickly and made the whole adjustment much less painful. As time goes on, 20 years from now we'll all be dead, so the problem will be moot. But for the moment I still think it's worth looking at, yes.
BI: Bigger picture — does the U.S. have an entitlements problem?
JG: Well we have lots of people who feel that they're entitled — like the Republican who ran for the presidency last year — but I don't like the term. If you're asking whether SS poses a financial problem for the U.S. government, the answer is no. If you're asking whether there are problems with Medicare and Medicaid, the standard answer on that is health care costs are the problem, and that is not dependent upon whether or not you are on a private or public insurance scheme. In fact, Medicare pays less to providers than private insurance does. The reason doctors accept Medicare patients is that unlike private insurers, Medicare actually writes the checks and pays people, which doctors like. I suppose you've encountered doctors who have had problems getting cash out of insurance companies, if you haven't, I'll say you haven't encountered a doctor.
BI: From a pure fiscal standpoint, SS and Medicare are not things that we should be worried about?
JG: The whole notion that there's this great deficit crisis which can only be dealt with by cutting SS, Medicare, and Medicaid, that's just — it's a relative recent front in a very old propaganda war. People who have been, for decades, blathering on about the disaster in SS, Medicare, and Medicaid. I highly recommend the back issues of the New York Review Of Books, which lists Peter G. Peterson, who prowled on about this.
BI: What year was he writing about that stuff?
JG: Oh, all through the '80s and '90s, just go back to the back issues, you'll find Pete Peterson periodically appears on those pages with a long essay on the subject.
BI: As part of a fiscal cliff deal, is there anything that should be done on the spending side?
JG: The one interesting thing on the fiscal cliff was that it codified that defense spending is coming down, so it's an opportunity to really examine how to do this in an intelligent way. The defense budget is coming down; there's no way we're going to maintain the level of expenditures we've had, either for the Iraq and Afghanistan operations or for the procurement of fancy equipment that can actually never be used. The rationalization of the national security establishment so that ... what we pay for are things we actually use would be a very very useful thing to do. On the domestic side, I don't particularly know what the consequences of the sequesters will be, but I think that, depending on how they're handled, we may discover that, for example the air traffic control system gets jammed up and Congress will decide that maybe this is a pretty dumb thing to do.
BI: When people look at these CBO charts showing national debt-to-GDP soaring into the future if everything is left unchecked, obviously that prompts a lot of knee-jerk concern that this is inherently unsustainable for some reason. What is your response to that?
JG: First of all, I say read the fine print and you will see that the CBO itself says that these charts are not macroeconomic forecasts. They are baselines. Their function — the reason the CBO does them is to provide a common framework for evaluating legislation. The CBO's function is to cost-out legislative proposals. In order to do that in a fair way, you have to have a common baseline for everyone. And that's what the baseline is.
The baseline itself doesn't have to be a good macroeconomic forecast. But if you use it as such, and it's been sort of conscripted into that by a lot of people who, maybe, are negligent or irresponsible — then you have to ask: Is this baseline internally consistent? And obviously it's not. The fact that it shows that over a long period of time, health care costs rising to 30, 40, 50 percent of GDP, and then with their costs continuing, rising more rapidly than GDP, but overall inflation standing at 3 percent, even though the share of health care costs rises and rises and rises, is an absurdity. And it'll never happen.
BI: Explain that further.
JG: Let's flash forward half a century. If health care costs are 50 percent of GDP, then their weight in the inflation index will be 50 percent. And their rapidly rising costs will be reflected in inflation, in which case inflation will not be 3 percent. It's not difficult.
BI: Are you saying inflation will be much higher, therefore GDP will be much higher?
Inflation will be much higher, in which case nominal GDP would be much higher, in which case the effective GDP ratio will not be what the CBO is predicting. I'm not saying it's a good thing, but even before you reach that point, if medical care costs continue to rise the way the CBO projects, other costs will weigh up to that. But if your doctor asks for $50,000 for a tonsillectomy you're going to be asking your boss for $250,000 in salary. It's just not reasonable to think that the medical sector can get away with extracting a much larger share of our GDP than it does anywhere else in the world, and the reality of course is that it isn't. The more you see that the cost curve is bending, the increase in health care costs is much lower than the CBO is projecting.
BI: This is a crucial point, that there is no way for these CBO debt-to-GDP charts to actually be accurate because there is no way that you could have this one sector of the economy swamping everything else.
JG: Correct, correct, absolutely correct. And the second thing which is in there — and the CBO has adjusted this since four years ago — is the assumption that interest rates on the federal debt is going to go up higher than the growth rate of GDP. This is compounding over time, which drives up the share of debt-to-GDP in a very artificial way. Can't happen; won't happen.
BI: Let's wrap up on one thing. You make the argument that on the pure, fiscal, debt-to-GDP standpoint that the fear is mostly propaganda. What about the general idea of a generational burden — the idea that we'll have so many people retiring and, dollars aside, that not raising the retirement age will create this huge class of people who will be a burden on fewer and fewer workers, and that this is unsustainable? Just from a pure resources perspective.
JG: Okay. Two answers to that. One is that, of course, we don't need that many workers — the numbers that we need to support us in some level of comfort has been declining everywhere for centuries — agriculture first, manufacturing now. So this notion that we're not going to maintain the level of workers to support the population is belied by a very long history. Second of all, the so-called dependency ratio includes both the elderly and the young. The number of elderly goes up, the number of children goes down, which may not be a good thing... But the third point is that the elderly are there. The only choices you have are to support them or not support them. If you don't support them through a common insurance scheme, then where does the burden fall? It falls — to those who have families — it falls on them. For those who don't have families, it's a really tough situation. And the point about the social insurance scheme is that it spreads the burden, not in relationship to whatever your particular family situation happens to be, but in relationship to your earnings history. And it spreads the burden of paying for it through the payroll tax, not in relationship to whether you happen to have parents ... but whether you are working and in takes it out of your paycheck in the beginning. That's all it does. It doesn't do anything else besides that. The notion that somehow you can avoid the burdens of having successfully expanded human life span to such and such years is wrong. You can't avoid it. The question of what's the nicest, gentlest, most decent way [to care for our elderly population]. With Social Security and Medicare we did an awfully good job.
We've eliminated poverty and basically dramatically reduced the risk of medical bankruptcy amongst the elderly ... We also make for everyone who has elderly parents — we've relieved the burden on their kids enormously. The idea behind SS is that if you're a working parent, you focus on your children. That's who you put your money into. Your parents are taken care of.
BI: Thank you.
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