Mercury Rising 鳯女

Politics, life, and other things that matter

Memo To Social Security Scaremongers: Productivity Gains Trump Demographic Change

Posted by Phoenix Woman on December 24, 2012

Dean Baker chart showing productivity growth trumps demographic change

Oh, dear. Fareed Zakaria doesn’t understand (or is paid not to understand, in finest Upton Sinclair fashion) why we silly liberals don’t understand that Grandma must be put out on an ice floe so Pete Peterson can have a few more swimming pools:

The American left has trained its sights on a new enemy: Pete Peterson. The banker and private-equity billionaire is, at first glance, an obvious target—rich and Republican. He stands accused of being the evil genius behind all the forces urging Washington to do something about the national debt.

[...]

The facts are hard to dispute. In 1900, 1 in 25 Americans was over the age of 65. In 2030, just 18 years from now, 1 in 5 Americans will be over 65. We will be a nation that looks like Florida. Because we have a large array of programs that provide guaranteed benefits to the elderly, this has huge budgetary implications. In 1960 there were about five working Americans for every retiree. By 2025, there will be just over two workers per retiree. In 1975 Social Security, Medicare and Medicaid made up 25% of federal spending. Today they add up to a whopping 40%. And within a decade, these programs will take up over half of all federal outlays.

Too bad that Zakaria’s much-touted facts are irrelevant to the discussion at hand.

In the course of spanking Zakaria, the CEPR’s Dean Baker points out a key fact that is quite relevant, which is that even modest gains in productivity growth far outweight the impact of demographics:

Note that even in the most pessimistic productivity story, the slowest rate of productivity growth of the post-war era, the impact of productivity in raising living standards is more than three times as large as the impact of demographics in reducing them. Furthermore, this takes 2035 as an endpoint. After that year there is little projected change in demographics for the rest of the century whereas productivity will continue to grow.

See also the chart above, from his article. The calculations backing it up are here.

If anyone out there still reads Time magazine, feel free to send this to the editors thereof.

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5 Responses to “Memo To Social Security Scaremongers: Productivity Gains Trump Demographic Change”

  1. Charles II said

    There are two issues: productivity growth and income inequality. Productivity growth makes the pie higher, as Dubya would say, and better income inequality makes sure that the wealth is shared around.

    A very recent Fed letter (via SJ Leeds) argues that

    We show that there has been a dramatic reduction in the rate of growth of [multifactorial] productivity across almost all advanced economies over the past ten years. Moreover, this reduction began prior to the onset of the global economic crisis and, hence, it appears to reflect a fundamental decline in the rate of growth of efficiency of economies, not simply declines in factor utilization.

    Basically, starting in about 2006, US productivity growth collapsed, went negative, and has yet to recover. The authors don’t know whether this is a measurement issue, an exhaustion of the [information technology goldmine, a decline in government investment in people or plant, or an aberration. But I think the answer is pretty obvious: there are several factors at work, but the trade pattern has to be considered as well as the factors the authors propose.

    Productivity is measured by output relative to input. So, if you produce 100 widgets with 10 workers in year 1 and 110 widgets with the same number or workers in year 2, productivity has grown. But according to BLS, they don’t measure widgets. They measure value added. So, if most of the value is added in low-tax countries, then productivity will seem to fall. Make auto parts valued at $1,000 (from materials worth $500) in the US, ship them to Mexico, where they are assembled and sold back at $5,000 to the manufacturer, and Mexican productivity will seem to be vastly greater than in the US.

    And value-added , at least in manufacturing, has grown in places like China, Mexico, South Korea, and Brazil at the expense of countries like the US, Japan, Germany, and Italy. So it seems to me that trade has to be an important issue in measurement. It should be noted that if wages in low wage countries rise, productivity falls (the cost of inputs rises)– but living standards also rise. In the US, we have managed to have falling wages and falling productivity.

    I think the remedies for productivity growth are also fairly straightforward: improved education, infrastructure, and require low-wage countries to improve worker conditions, even if it means they lose some growth and Americans have to pay a little more. This great rebalancing will occur naturally, but with much more pain than if we guide it.

    I should note that a lot of people, including many liberals, think that if we try to raise growth too far and fast, inflation will result. But there is a simple way to avoid this: raise productivity in areas of the economy where productivity is the poorest. That means address poverty in the US, since poorer neighborhoods are where we can increase output at the lowest cost of input.

    And even if we do all this, we still need to address income inequality, since the very rich are in many ways the least productive members of society, inhibiting necessary change and aggravating social problems.

    • The very rich are rentiers at heart. They don’t grow anything or spend any of their own cash unless it’s absolutely unavoidable — certainly not on innovation, because that costs a lot of money and might not pay off. They prefer instead to buy up their competitors.

      The pernicious effects of income inequality on a particular society are in a way best understood by watching what happens when that society sees its income inequality suddenly undone. In the cases of Russia and China, both nations went from being feudal laughingstocks — Russia had just lost a war, and rather embarrassingly, to Japan, while China’s sovereignty was violated at will by various Western powers — to modern global superpowers in the space of a few decades, and improved the overall lots of the majority of their respective peoples. Unfortunately, neither nation was able to sustain their progress, for a variety of reasons.

  2. Charles II said

    PW says, “Unfortunately, neither nation was able to sustain their progress, for a variety of reasons.”

    Well, the ruthless homicidal dictators weren’t a help.

    • The bloodthirstiness wasn’t their innovation, but one inherited from the cultures they tried and ultimately failed to totally supplant; the main difference between Peter (or Catherine) the Great or any other imperial ruler and Stalin in terms of brutality was the power of the tools at their respective disposals. (Stalin wasn’t very fond of his sons, but at least he didn’t execute them, as Peter did his own heir Alexei. Yet Peter the Great is revered as the Great Westernizer.) Just as they really didn’t give the riches of the nobles directly to the people to do with as they saw fit; they essentially swapped boyars and mandarins for commissars.

      (And as most any Native American can tell you, it’s not as if the predecessors of the people who now run the other world superpower were particularly gentle in their genocidal actions.)

      • Charles II said

        The purges in both the USSR and China were not only extensive, but they targeted some of the very most productive members of society. Some of this sort of thing is inevitable, since scientists, doctors, and engineers tend to be better paid and therefore tend to decamp when the leadership says things like:

        We have to devise some way to get rid of the bourgeoisie, the upper classes. They won’t let you make economic changes during a revolution any more than they will before one; so they must be driven out. I don’t see, myself, why we can’t scare them away without killing them. Of course they are a menace outside as well as in, but the emigres are not so bad. The only solution I see is to have the threat of a red terror spread the fear and let them escape. But however it is done, it has to be done. (VI Lenin, as recorded by Lincoln Steffens)

        Certainly the targeting of kulaks was a fatal mistake in the USSR, one that not only caused famine, but led later to the easy conquest of the Ukraine because of the enmity created by the purges. And under Mao, in the Cultural Revolution, the scientists and engineers who were so desperately needed for modernization were sent to work in the fields as peasants. There, they were worked 18 hours a day at tasks for which they were simply physically unequipped.

        I know. A friend of mine was one.

        As for the Native Americans, I am deeply opposed to body stacking to decide who is the worse of those who commit genocide. There’s no doubt that the US had its own monsters… and this continues even in the modern day with Iraq. But the Native Americans were not skilled engineers, scientists, or even advanced farmers. While I think the US would have done very well to have studied the methods of Native Americans rather than slaughtering them and ghettoizing them in the most hostile terrain in the United States, their deaths did not greatly inhibit the economic growth of the US. In discussing productivity, it matters who you kill.

        Also, modernization can be a deceptive measure. It’s relatively easy to catch up with modern powers by simple imitation or outright theft of intellectual property. Also, high growth on a low base is easy: if you sell one pair of shoes this year, it’s easy to sell two next year. Much harder if you sell 1 billion shoes this year to sell two billion the next. The modernization of the USSR and of China are not very remarkable. It’s hard to get solid economic data, but hereis a reasonable source.

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