Arnold Kling  

Science vs. Social Security

PRINT
Wal-Mart controversy... Comments on Science and Social...

In an essay called Will Science Save Social Security?, I write,


Overall, if events play out over the next quarter century as the technology optimists predict, then GDP will be so astronomical that the costs of Social Security and Medicare will be dwarfed. In such a world we may face difficult philosophical issues, but maintaining material living standards will not be a challenge.

I still believe that the safest thing to do is to reform Social Security and Medicare, in case the technology optimists prove incorrect. However, if we fail to rein in entitlement programs today, we might be lucky enough to have science bail us out tomorrow.


For Discussion. What constraints would impede the technological revolution from achieving the results expected by the optimists?


Comments and Sharing





TRACKBACKS (3 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/30
The author at Deinonychus antirrhopus in a related article titled New Economy Redux? writes:
    This is an interesting article on Social Security over at the American Enterprise Institute. The thrust of the article is [Tracked on October 30, 2003 4:21 PM]
COMMENTS (27 to date)
Boonton writes:

"Because computer processing power doubles roughly every two years (a phenomenon known as Moore's Law), computers will race past us. By 2029, Kurzweil speculates on a world in which, "[o]f the total computing capacity of the human species (that is, all human brains combined with the computing technology humans initiated the creation of), more than 99 percent is nonhuman.""

I wonder if this optimistic perspective takes into account the law of diminishing returns? A computer with a 4.3G Pentium chip doesn't seem to do much for me in terms of preparing reports, processing emails than a computer with a 2G chip. While 'computing power' may continue to double it is not at all obvious that adding more and more 'computing power' to the mix of capital stock will lead to everlasting increases in productivity.

Mcwop writes:

For Discussion. What constraints would impede the technological revolution from achieving the results expected by the optimists?

Simple: political constraints. There is ample food in the world to feed the malnourished. Funny how hard it is to get the food to those people. Biotechnology? Look at the resistence there. Global warming? Plenty of economically feasible energy solutions to cut greenhouse emissions. Just try putting up a windfarm in Ted Kennedy's back yard.

rvman writes:

Heres to hoping we have the sense to raise the eligibility age if we manage to "cure" aging. Since Soc.Sec. was founded, US lifespans have increased 10-15 years. Soc. Sec eligibility? Is in the process of moving forward 2 years. If you think paying out social security for the boomers is going to be hard, imagine when 90% of the population is over 65...and I'm sure some will oppose changes as destroying Social Security and denying seniors their rightful retirement.

David Foster writes:

1) The Moore's Law argument is silly. A modern PC may have 500 times the processing speed of a 1960s mainframe: how much better are the real business applications (inventory control, order processing, etc)? Maybe 2X-5X better, assuming you can put a metric on it at all.

2) As manufacturing--like agriculture--becomes a smaller and smaller proportion of the GDP, then improvements in the productivity of these fields will have smaller effects.

3) What about services--eating in restaurants, sending kids to school, medical care and nursing, etc etc? Where will 10X productivity improvements in these areas come from?

None of this is to deny that technology will continue driving productivity increases, but let's apply some realism.

I think that during the 1960s, it was commonly believed that "automation" would shortly bring about an age of leisure, in which everyone's problem would be finding something to do after their 3-hour work day was complete. Seen very many people in that situation lately?

Tom writes:

>3) What about services--eating in restaurants,
>sending kids to school, medical care and nursing,
>etc etc? Where will 10X productivity improvements
>in these areas come from?
*Robots*

At least under the scenario where science saves us. The Japanese in particular are trying to focus a lot of robot research on how to have robot care in the equivalent of retirement homes.

In thinking about robots and the future, a look at the recent past in instructive. A very interesting exercise is to compare current robot vacuums, like the Roomba, with the housecleaning robot predicted for circa 2000 in the 1989 book _Mind Children_ by Hans Moravec (http://www.amazon.com/exec/obidos/tg/detail/-/0674576187/qid=1067453755/sr=1-1/ref=sr_1_1/002-7985919-2786451?v=glance&s=books ).

Jim Glass writes:

Negative POV:

Social Security benefits are indexed to wages, so even if GDP zooms up benefits will too. It's still broke.

Positive POV:

"It is true that some of these developments, such as the ability to stop the aging process and potentially eliminate natural causes of death..."

Please, please, stop the aging process and eliminate natural causes of death! Then 20 years from now, when I start vacationing at taxpayer expense forever, I will *make* my damn kids pay whatever it takes to keep SS running. After it all, these kids owe it to us...

Steve writes:

I still believe that the safest thing to do is to reform Social Security and Medicare, in case the technology optimists prove incorrect. However, if we fail to rein in entitlement programs today, we might be lucky enough to have science bail us out tomorrow.

Right. I heard something similar from Prof. Ed Leamer a few years ago. I agree.

Boonton writes:

David hits the nail on the head. Windows 3.x was a real leap above DOS. Sometime around MS-Office 98 or Office-2000 life became really, really nice. Will Office-XP on a 10 Gigahertz computer be twice as nice as on a 4.5 Gig? No it will be about the same. Will the next version of Office increase productivity as when Word Processing and Spreadsheets were first introduced? I wouldn't count on it.

It's getting really cheap to add more of one type of capital, 'computing power'. The law of diminishing returns tells us that each additional unit of computing power added to the mix will have a marginally smaller improvement in return.

Eric Krieg writes:

>>The law of diminishing returns tells us that each additional unit of computing power added to the mix will have a marginally smaller improvement in return.

Yes and no.

OK, Office 2003 isn't going to change anybody's life.

BUT, don't discount that some people NEED that extra power. People who do heavy duty modeling can always use the extra horsepower. Financial analysis, engineering, animation, and gaming all need bleeding edge processors.

You could just as easily raise the retirement age on the existing system to deal with the nanotechnology case.

Arnold, I do think you're making an invalid assumption that I see elsewhere - that benefits are "flat" in real dollar terms. I think over the long run they'll naturally be kinda-sorta indexed to GDP.

Dave Sheridan writes:

For Discussion. What constraints would impede the technological revolution from achieving the results expected by the optimists?

One policy policy proposal has a potentially serious detrimental effect on the part of the technological revolution you propose -- Canadian or British-style government health care. It's ironic that single-payer health care will be sold in part to address the impending Medicaid crisis. Cost controls are likely to vastly curtail research and development, because the expected returns to these activities will decrease. Without R&D, your nirvana can't happen.

Eric Krieg writes:

>>One policy policy proposal has a potentially serious detrimental effect on the part of the technological revolution you propose -- Canadian or British-style government health care.

Yes! Also, allowing drugs to be imported from these countries to the US will also lower drug company profit margins, and thus, the impetus to develop new drugs.

Right now, the ONLY field in engineering that is "hot" (i.e. companies are making lots of money and are HIRING) is the medical devices field (things like stents, implantable defibulators, etc.). Socialized medicine is the biggest threat to that field.

Andrew writes:

Most of these comments have focused on technology and growth rather than on Social Security. Once you understand Social Security's finances, though, the economic growth argument basically falls through.

Social Security pays retirees a benefit based on their pre-retirement wages, targeting a 'replacement rate' rather than a real benefit level. If GDP grows faster so do their wages, all other things equal. Higher wage growth raises payroll tax revenues but, with a slight delay, also raises the benefits SS must pay. As a result, Social Security's finances are remarkably insensitive to wage growth.

Social Security's 75-year deficit equals 1.9 percent of present value payroll; its deficit in perpetuity equals 3.8 percent of wages. Over 75-years, there's roughly a one-to-one relationship between improvement in wage growth and in actuarial balance. So if the projected wage growth rate of 1.1 percent doubles, you'd still have a deficit equal to about 0.8 percent of payroll.

In the longer term, SS finances are even less sensitive to wage growth (this is due to actuarial methods that exagerate the gains in the shorter term). So you'd really need to more than triple the rate of wage growth to keep social security solvent in perpetuity.

How likely is that? Not very, in my view, though we can always be hopeful.

One way around this is to de-link benefits from wages. Bush's 2001 reform commision proposed doing this, but others were very much opposed. If you did this de-linking, higher economic growth woudl have a strong beneficial impact on SS finances. But it's making that policy change that's really hard.

Andrew

Lawrance George Lux writes:

Historical utilization of Innovation does not present such a rosy picture, as the Technocrats would portray. Computer technology may have produced all the Productivity gains it will produce already. Translation of future gains in the area could require Capitalization reducing the benefit substantially, while actually leading to drops in Productivity.

The Entitlements programs are breaking this Country. Since the 1960s when they were first basically introduced, Governments have been in a mad race to pay for the total cost, repetitively going into Debt. Entitlements overhaul will have to be conducted, whether there are Productivity gains or not. Technological gains in Productivity has only led to expansion of such Entitlements. There is not indication this pattern will alter, without serious Government rejection of the principle of Entitlements. lgl

Bob Dobalina writes:

"Yes! Also, allowing drugs to be imported from these countries to the US will also lower drug company profit margins, and thus, the impetus to develop new drugs."

Hogwash. If the drug companies want a free market, by God, we ought to give it to them. If they wish to discriminate against the US consumer, the US consumer ought to do everything possible to buy his drugs as cheaply as possible. We ought not to subsidize medicines for the rest of the world.

Eric Krieg writes:

>>We ought not to subsidize medicines for the rest of the world.

Bob, I agree. But is the answer to punish the drug companies by buying Canadian drugs at below market prices? Or is it to get our federal government to get involved and pressure other countries to pay realistic prices for drugs?

Boonton writes:

"One policy policy proposal has a potentially serious detrimental effect on the part of the technological revolution you propose -- Canadian or British-style government health care ... Cost controls are likely to vastly curtail research and development, because the expected returns to these activities will decrease. Without R&D, your nirvana can't happen."

Actually the health industry may be seeing diminishing marginal returns already setting in. There's been quite a bit of news recently that many pharma companies have fewer new promising drugs in their pipelines. Not withstanding the fact that technological innovations have allowed pharma companies to review thousands of compounds in a fraction of the time it used to take. I'm sure there are going to be a lot of innovations made in healthcare over the next few decades but the industry from an economic POV is goverened by the same rules that govern dog food producers, hot dog stands & every other industry.

"Bob, I agree. But is the answer to punish the drug companies by buying Canadian drugs at below market prices? Or is it to get our federal government to get involved and pressure other countries to pay realistic prices for drugs?"

Say I own two gas stations, one in a rich part of town and the other in a poor area. I price the poor area's gas a dime cheaper than the rich area. Am I being punished if I discover that some rich people were making the drive accross town to save the dime?

No one forced the drug companies to agree to Canada's rules. If the margin becomes too small they can simply not sell to Canada at all. Alternatively they could lobby the Canadian gov't to prohibit drug exports. Whatever the outcome, we shouldn't be cutting drug companies special slack because their 'investment' is more important than everyone elses.

Bob Dobalina writes:

"Bob, I agree. But is the answer to punish the drug companies by buying Canadian drugs at below market prices? Or is it to get our federal government to get involved and pressure other countries to pay realistic prices for drugs?"

The answer is indeed to punish the drug companies for rolling over to pressure from the Canucks. The problem belongs Pfizer/Merck/AHP, not to the Feds, and not to you or I.

Eric, you're suggesting that we solve a government problem with more government. Maybe if we're really lucky we can have a Bureau of Drug Price Management and Purchasing Power Parity Equalization.

I jest, but this strikes me as another case where there's inequality in a system where none should exist, and we can either ask the market to solve the problem, or ask the government. The answer, to me, is a no-brainer. I would think it would be the same to an avowed capitalist like you.

Eric Krieg writes:

Issues of trade are a constitutional power of the federal government. It seems to me that this is an issue of trade, that the Cannucks are throwing up a backdoor impediment to our drug companies selling their products at fair prices.

I also see what you and Boonton are saying. I hope that the drug companies DO get tough with Canada. But even so, it is asking a lot for any company to take on a soverign nation.

Boonton writes:

So what? If Canada demands prices that are too low the company can simply refuse to sell the drug. If Canada offers to prohibit exports to the US on the company's behalf, then the company can choose to sell at the lower price. If the price Canada is demanding still allows for sufficient profits even factoring in the US Sales lost through re-import then the company will go along.

The Canadian government has a desire (cheap drugs) and faces a cost (boycott by the drug producers). The drug company has a desire (drug sales) and faces a cost (loss of the Canadian market). There's no reason that these two players need any help from the US gov't to reach an acceptable bargain.

Steve writes:

I think it is a load of bunk. For one thing, people will tend not to be more productive simply because of a computer. People are more productive because they get paid more. You want me to work twice as hard, pay me more than twice as much!

These kinds of utopian predictions strike me as the flip side of the doom & gloom predictions. We are going to run out of oil and then we'll all die in a nuclear Hell! Computers will become so advanced Isaac Asimov's vision of the future is just a few years away.

We are either going to Hell or Heavan, and when the future arrives we find we are right here on Earth with similar problems we have always had. Not enough time in the day, cranky kids, bills to pay, etc. The only thing that seems to be heading towards Hell, IMO is television programming. Christ the shows on television these days suck. :)

Boonton writes:

Productivity isn't about how hard you work but how much output you produce per unit of work. For example, no matter how much harder you work there is only so many tons that you can lift with a crane in an hour. Now if a better crane was invented you can now lift more tons each hour. Your productivity has increased even though you are working no harder than before.

Eric Krieg writes:

Guys, what you are missing is the third option: turn a blind eye to reimportation from Canada (for political reasons) and simply accept lower profit levels, and thus, less drug innovation.

THAT is the reason for the Feds to get involved and at least stop reimportation, if not force the Cannucks to pay more for American drugs.

Boonton writes:

"Guys, what you are missing is the third option: turn a blind eye to reimportation from Canada (for political reasons) and simply accept lower profit levels, and thus, less drug innovation."

Yes, the market may drive drug prices lower and may also lower R&D investment (which isn't the same thing as innovation). The 'problem' here still belongs entirely to the drug companies.

How is Canada different from any large bulk purchaser? Say a drug retails for $100 per dose. A huge hospital chain wants to buy the drug in bulk for $75 a dose and the drug company accepts. The drug company has a risk that the hospital may turn around and sell surplus doses for $90. But there are ways to counter that:

1. The drug company could sell the hospital just enough to meet their needs. Then if the hospital resold the drug for a profit they would just have to buy it back at $100 to meet their needs.

2. The drug company could sign a contract with the hospital stating that they cannot resell unused supplies.

3. The drug company could agree to buy back surplus doses at $90.

Just substitute 'Canada' for 'hospital chain' and you see how this is really a market problem and not a regulatory one.

Eric Krieg writes:

>>The 'problem' here still belongs entirely to the drug companies.

Not just the drug companies. Everyone who is sick and could use some as yet discovered drug that isn't going to get developed because there is no profit in doing so.

Boonton writes:

"Not just the drug companies. Everyone who is sick and could use some as yet discovered drug that isn't going to get developed because there is no profit in doing so."

By this logic we shouldn't just have no price controls, we should have price controls in the opposite direction! Tax other products and use the funds to pay drug companies a bonus for every dose sold! After all that too would increase the profits of discovering a new drug.
Therefore Eric must ask himself how many have died because we failed to adopt this policy!

Lawrance George Lux writes:

The discussion about Drug Companies lacks some reality. A simple law can eliminate such deadlocks. This law would simply say Drug Companies must maintain a singular, universal Wholesale price for their product. The resultant price would pay for R&D equitably.

A second component is the statement Drug Companies vastly inflate their actual R&D costs of Drug development. A responsible IRS review of those tax deductibles would probably cut them in half, with a remaining high Profit ratio for the Drug Companies. The Profit ratios of the Health Care industry could even reduce to levels equivalent to the capitalization equivalent in other Economic sectors.

Previous discussion mentions Computer technology with it's higher Productivity at lower Cost. Why is the Health Care industry, especially the Drug Companies, the greatest Users of this innovation while having such ballooning R&D costs? There is a most remarkable skunk in the woodpile. lgl

Comments for this entry have been closed
Return to top