Boomergeddon, by James A. Bacon. He sent me a copy after he saw my piece on guessing the trigger point for a sovereign debt crisis. Years ago, I read Boomernomics by William Sterling. That book also raised the issue of fiscal sustainability, but I recall it as being less alarmist.
Bacon’s book has many sections, one of which is on Washington, D.C. as “the imperial city.” He points out (p. 40) that in the 9 counties that make up our area Barack Obama defeated John McCain by a margin of 72.5 percent to 27.5 percent.
An excerpt from p. 153:
The United States may be in denial today about the inevitability of Boomergeddon, but impending disaster will be abundantly clear 10 to 15 years from now. The all-consuming focus of the media will be the out-of-control budget deficits, runaway interest payments on the national debt, debt downgrades, the declining dollar, bankrupts states and municipalities…Businesses will be failing. The health care system will be breaking down. Social Security will be on the edge of insolvency. Americans will be entering the crisis of the century, and there will be no hiding it.
I think this is overstating the case. For example, as you know, I do not think of Social Security as having a trust fund. By the same token, it cannot become insolvent. To me, it is a tax-and-transfer scheme. As the Baby Boom generation requires, either taxes have to go up or transfers have to be scaled back. This is basic arithmetic, that not even Paul Krugman can find away around. But I would not use a term like “insolvency.”
What I see as quite possible is a sovereign debt crisis for the United States. If a crisis comes, it will force the government to decide which promises to break. My guess is that we will see only limited cuts in payments to seniors. Instead, I suspect that in a crisis the U.S. government would try a combination of a capital levy (at tax that quickly confiscates financial assets) and rapid money creation. In any event, I think a lot of personal savings will get wiped out.
I think that the likelihood of a crisis over the next twenty years is high, in part because most Americans do not believe that a crisis is possible. I know many couples in their late fifties who are looking forward to retirement, even though they have no pension, less than $250,000 in savings, and average annual spending of more than $75,000. These people know enough arithmetic to be able to calculate that their savings will last them only about four years. They just put it out of their minds.
That is how the leading politicians and pundits deal with the unsustainable budget. They are perfectly capable of understanding the arithmetic. But they put it out of their minds.
READER COMMENTS
blink
Sep 6 2010 at 10:34am
If you believe that personal savings will take a big hit, what do you do about it? Does your analysis lead you do a different personal investment strategy than if you deemed a sovereign debt crisis extremely unlikely?
Yancey Ward
Sep 6 2010 at 11:32am
Arnold Kling wrote:
Then you know a wealthier class of people than I do. I know far more in the same age cohort with far less in savings while spending a similar amount.
Tom Ault
Sep 6 2010 at 12:31pm
A capital levy sufficient to address a sovereign debt crisis would be a “cure” worse than the disease, since it would not only cause capital to flee the United States even faster than a sovereign debt crisis alone would, but it would also stunt future capital formation for generations to come, since the United States would no longer be a safe place to invest. Such rapid capital flight would result in a liquidity crisis or hyperinflation accompanied by Great Depression or worse levels of unemployment and would ultimately doom any elected government that tried it. Not to mention that the holders of sovereign debt themselves may have significant assets within the United States subject to the levy, and they definitely will not like having these assets taxed away. That doesn’t mean that some demagogue won’t succeed in getting such a levy passed, but that it will make the problem worse, not better.
Keep in mind that the status quo of untouchable entitlements rests on the larger proportionate influence of the elderly on politics and the rational ignorance of younger voters. Even at the height of the boomers’ retirement, they will still be a minority of the population. Should massive taxation, sustained unemployment or an economic crisis cause younger voters to perceive it in their own interest to cut benefits to the elderly, they will have the political muscle to do so. Thus, I think large cuts to entitlements are more likely than you think.
Les Cargill
Sep 6 2010 at 4:10pm
Ignoring Medicare for the moment, projections I have seen move the percent of GDP in SS payments from 4% of GDP to 6% between 2010 and 2040, and it seems to level off there. In 2040, someone born in 1950 would be 90 years old. Since this is a transient (meaning temporary) phenomenon, I can certainly envision a scenario in which growth absorbs this.
If we’re not only post-industrial, but post-growth, then this is only one of a multitude of other problems we face.
I don’t see growth stopping any time soon. But the returns in wages being flat since 2000 present a much greater …demographics-econcomics challenge.
Jaap
Sep 7 2010 at 7:39am
the biggest problem is not money to fund the programs, that can be printed.
it is not employment: if a lot of people are not working anymore (retired), then there will still be demand for a lot of goods. plenty of jobs to go around!
what I perceive as the major problem, is the mismatch between supply and demand. with less people working and more people not working, there will be a great disparity between goods produced by the workers and goods received by the same workers. this is a de facto tax, translated into dollars or goods.
entitlements might still be there, but worthless. in nineties-Russia, the state continued paying out the pensions. however, inflation rendered those useless.
in the end, money is just a means to get to goods, and if there are less goods available, people will become poorer.
the only way to solve this is to jack up production, either through productivity-growth or more workers. people need to retire at a later age.
Jim Bacon
Sep 7 2010 at 11:21am
Arnold, actually you and I are not far apart in our predictions for the future at all. I agree with your, I should not have used the word “insolvency” to describe the future of Social Security when the federal government goes into default. Under any likely scenario, revenue from payroll taxes will suffice to continue paying SS benefits at 75% of scheduled levels. (However, there is a risk that Congress will siphon off some of that revenue stream to bolster other entitlement programs like Medicaid, food stamps, etc. that have no dedicated funding source).
I agree, too, with your characterization of what I call Boomergeddon as a “sovereign debt crisis,” and also your statement that, when it occurs, “government will have to decide what promises to break.”
One question that I would ask you is this: However the government responds to the “sovereign debt crisis” — cutting spending, raising taxes, repudiating all or part of the debt, cranking up the money supply, or some combination thereof — would it not trigger a massive *economic* crisis as well?
JD
Sep 7 2010 at 5:45pm
What happens if you assume that a lot more people keep working a lot longer, rather simply retiring at the pre-supposed retirement age? Those folks in the late 50s with little savings simply won’t be able to retire – they will have to continue working. Is that considered in your expectation of a crisis in the next 20 years?
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